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Buying in a Bad Real Estate Market

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It's been a bad real estate market in many ways for years now (this is being written in June of 2010). As a result many people are hesitating to buy a home. Fortunately there are ways to protect yourself and still purchase that house. If these tips are coming too late for your current situation, at least remember them for next time you buy.

At the end of the biggest real estate bubble in our lives - my wife and I bought a home (May 2006). We had been renting in Tucson, Arizona, and we decided to move to Canon City, Colorado. Although we had never been there the weather statistics and photos we saw on the internet convinced us it was a good place to live. One day we got in the car and drove the 800 miles in about twelve hours or so, and the next day we bought a house.

We paid the full asking price, closing in the first week of June - arguably within a few weeks of the top of the real estate market. Then, in February of 2009 we decided to move to a bigger home, despite my suspicion that prices would fall another 5 percent or more before the bottom. Our first Canon City home sold in May for 11% more than we originally paid for it - not bad for buying at the top and selling near the bottom. The rest of the story follows, and contains some lessons about bad real estate markets and how to buy in them.

Our Little House

In 2006 we bought one of the cheapest ready-to-live-in homes in town. We didn't want a home that could fall in value too much, but also didn't want a fixer-upper. With about $2,000 worth of minor improvements we had added while we were there, our $65,000 house sold for $72,500 after three years when real estate prices continued to fall.

That gets us to lesson number one: The lower end of the market never loses as much in value as the high end. Our experience indicates that the cheapest homes may not go down at all even as prices drop on other homes. It makes sense. Buyers don't need to live in a big house with fine cabinets, but they need to live somewhere, so the market for lower-priced homes has more support in a bad real estate market.

Bad real estate markets often comes with bad economic times, so there may be even more people looking for the small cheap homes. Just about anyone can afford a home like that one we had. It cost less to buy it than renting a two-bedroom apartment after all. Another possible lesson is to clean the house up and leave some furniture in it when selling it - we think that helped a bit.

Buying as Prices Fall

Who can predict when a bad real estate market is going to get better? Not me, but in early 2009 I guessed that in our little town in Colorado, prices would fall another 5 percent or more. Now, why would we buy a home that cost more than twice as much as the first one we bought when we anticipated prices falling even further? We liked it, and we had to live somewhere.

Really it was a decision based on many things. The house suited us perfectly, was cheap to heat and maintain (it was newer than the other), and we didn't plan to move for many years. Due to the latter factor we were less worried than before about where values went short-term. But what really made us feel good about our decision was the loan we got. It has a 4.5 percent fixed interest rate, and it's a 30-year mortgage. If we waited for good times, we might have faced a higher rate of interest.

Suppose we saved seven or eight thousand dollars on the price of a home by waiting. If interest rates had ticked up to 6.5 or 7 percent during that time, we could easily pay twenty thousand dollars more over the course of the loan. In other words, why wait when we could afford the house we were looking at, and had no guarantee that we would save a penny by waiting for a better price?

That is lesson number two then: The cost of home ownership is not just in the price of the house. Our home won't need major repairs for years, it is very energy efficient (it already saved us $200 in the first year versus the other home),it's in a town with very low property taxes and insurance rates, and with very low payments thanks to the interest rate on that loan. Besides, the bottom may already be here - who knows? In any case, if you are careful, buying a home during a bad real estate market can be a good idea.


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