Real Estate Prices Will Drop. And Rise. And Stay Stable.

Across the nation potential homebuyers have sat on the sidelines in fear or waiting for home prices to drop more. And in many real estate markets I get that. Prices have been dropping. And jobs remain a concern for some people. Those are issues not to be ignored. However, there are several issues I take with sideline sitters.

Real estate prices are sticky

One, prices in most markets are very sticky, meaning prices do not correct downward 30% overnight. If you are expecting a big drop you had better plan on waiting a long time. That means many years, not one year. And that means being a renter a long time. You’ll lose out on tax breaks a long time. You’ll also be subject to the whims of your landlord, with possible multiple moves thanks to being a renter.

Is more price drop coming?

Two, we have already seen big drops in many markets. What if you are waiting for a 30% downward price drop, and we have already seen 20% – 25%? Do you really think you can be a brilliant market timer and nail the timing perfectly to get the last 5% – 10%, if its even coming?

Some markets are more stable than others

Third, there are some markets that are stable. And a few that are even positive! Yes, the Case-Shiller national home price index decreased between 1.1 percent and 1.2 percent in 2011. House prices have been falling in general for about 5-6 years. However, Detroit and Washington, DC posted increases in house prices in 2011.

Detroit’s good news is likely due to the fact that its real estate values were pummeled by 45%, and possibly have nowhere to go but up at this point.

Washington DC has good news more based on the reality of the strength of its local economy, jobs market, etc. You’d have to believe the federal government is going to magically and voluntarily downsize, and dramatically, for real estate to begin to have a gloomy outlook in Washington DC. And there are numerous other positive things going on in Washington DC besides the growth of the federal government.

Look at the job market

Real estate values are driven in part by average annual salaries. And salaries were not hyper inflated from 1999-2005 during the real estate boom like real estate prices were. Any rookie economist could have told you the real estate boom would not end well. There was no basis in reality for real estate prices to do what they did. And I said this every year through the early and mid 2000’s, and was told I was a fool.

So did real estate prices have to correct?

Yes. Are all real estate prices local? Yes. Do you need to analyze lots of different data, like job growth, population growth, etc? Yes. Should you buy in a market that has shown strength, or at least stability? Yes. Should you avoid buying in some markets still? Possibly. It depends on how badly you need a house. If you are a family renting is not a good option. So being a market timer and waiting longer may be foolish. Maybe you should make sure you buy the right home for you and can stay for the longer haul if needed, to wait out market moves.

Bottom line

The bottom line is that there are a lot of moving parts to deciding if buying a home is right for you. In a weak market that clearly has more room to fall you may be a genius by waiting. It may be time to dive in if you are in a stable market or a market that has already been beaten up. Strong markets, like Washington DC, you will be a renter for a long time if you try to be a market timer. And you may end up looking foolish if you decide to wait.