Signs Point to Continued Slowing
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William C. Wheaton
Professor of economics and research director, Center for Real Estate at the Massachusetts Institute of Technology
Should you buy a house now? All around the country, prices are stalling or falling. In theory, the answer could vary depending on your situation. Here are the most common ones.
· First-time buyer: Here the question is whether the potential buyer should try to time the market. I would argue that while it is not possible to perfectly time the market, housing is not like stocks: There is some predictability to the market and right now all signs point to continued slowing. In fact, prices have just flattened and started to fall. At a minimum, I would expect them to drop 5 percent to 10 percent with a possibility in some markets of a more severe decline, as much as 20 percent. Rent for another year and then reconsider.
· Homeowner who has already sold a house: Families moving to other cities sometimes sell, rent and then buy after they have figured out their new area. In most respects these (fortunate) folks are in the same situation as first-time buyers. My advice would be similar: At this point, there seems to be little danger and potentially some significant savings to be had from waiting.
· Homeowner contemplating a discretionary move: This situation becomes complicated in the current market. On one hand, housing is a little bit like "funny money" -- the house you buy may be cheaper, but so will the house you are selling. It could just be a wash.
However, there are several risks to trying to move in a falling market. First, because you buy before you sell, your current house could be priced further down in the cycle. Second, in a down market, liquidity becomes more difficult as the rate of sales drops and the inventory of units for sale rises.
This means it will take longer on average to sell your existing home. You could be holding two houses (and a big loan) for a longer period. On net, I feel that these risks can be significant. I would discourage households from making discretionary moves unless they absolutely have to.
Once again, postponing a move seems more prudent. Hence, in all situations, it looks as if waiting wins.
