Buying A House In A “Bad” Housing Market

05.23.2011

I read, watch, and listen to a lot of financial material and one question that comes up over and over again goes something like this:

Hi, we currently own a home and are looking to purchase a larger one for our growing family. Should we buy now or wait until the bad housing market is over?

When it comes to buying and selling homes, “bad” is a relative word. If you’re trying to sell your home and you’re underwater in your mortgage (owe more than the home is worth) then, yeah, it’s a bad market. But mortgage financing aside–if we’re strictly talking house prices–it’s very possible you have a good housing market and a great time to buy!

When buying and selling a house in a fluctuating market, it’s important to understand the idea of price compression. The concept is very simple and is illustrated below:

For both houses, you’ll see the price before the housing market crash on the left and the price during the housing market crash on the right. Notice that both houses drop 20% or, in other words, they “compress” at the same rate. Although in reality they don’t always compress at exactly the same rate, they’re usually similar enough to be used as a general rule. They dropped by the same percentage but different dollar amounts because of how much the houses were originally worth.

With this in mind, if you currently own the small house and are looking to purchase the large house, you could in essence say you’re losing $20,000 but are simultaneously saving $60,000. It’s a great time to “trade up”! On the other hand, if you’re looking to “trade down” then the opposite is true: you’re losing $60,000 but saving $20,000. If you’re not looking at trading at all but instead are going from renting to owning, it’s a relatively good time to buy. If you’re going from owning to renting, it’s a relatively bad time. This all assumes, of course, that you believe we’re near the bottom of the housing dip and don’t have farther to go. Good luck!


Comments

05.23.2011 / Jonathan said:

You said it brother. “Bad” is all relative.

05.23.2011 / Hyrum said:

I don’t know if you think this is relevant, but one of the challenges with making a move in a “bad” housing market is that the bad housing market suppresses the appraisal value of your current home. This can result in negative equity which in turn makes it very difficult to sell your current home without affecting your credit. You probably won’t be able to get the loan for your new house if that happens. So your stuck.


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