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Amid Falling Home Prices, 4 Tips If You Want to Buy Now

NEW YORK (MainStreet) – Recent data on the pace of mortgage foreclosures has some experts warning that home prices could continue to decline for several years. But some buyers want to seize bargains now, and people who are forced to move for a new job or other reason may feel they have no choice but to buy now despite the risks.

All of which affects a key issue in a home purchase: How long will it take to break even, or sell for enough to cover all your costs? If you won’t keep the home that long, you could take a bath on a sale.

Traditionally, experts have said it takes four or five years for rising home prices to offset costs like the title search, application fees, transfer taxes and realtor’s commission incurred in the purchase and subsequent sale of a home.

That assumes appreciation of 2% or 3% a year, and costs of 10% to 15% of the purchase price. The sales commission, for example, generally comes to 6% of the sales price, but that equals a higher percentage of the purchase price if the home has appreciated.

Recent figures from the National Association of Realtors show that foreclosures, short sales and other “distressed” sales now make up more than a third of sales. Millions more homes are likely to tumble into the distressed category, continuing the flood of sales at fire-sale prices, depressing all home values.

If prices were to fall another 10% to 12%, it would take an additional three to six years for a home purchase today to break even, assuming 2% to 3% appreciation. But if that appreciation did not begin until after the price decline ended two, three or four years from now, a 12% price drop could add 10 years to the traditional breakeven period of four to five years, for a total of up to 15 years.

That’s just an example, of course, as no one knows what prices will do. Conditions are sure to vary around the country.

Fortunately, over a 15-year period, the homeowner’s payments will reduce the outstanding balance of the loan. That might make it easier to sell without having to plunder other assets to close the gap between the loan balance and sales proceeds. But that would not change the fact that a home that was sold for less than the purchase price plus costs would saddle its owner with a loss.

What can a buyer do to minimize the risks and consequences of a price decline?

Seek a home in a stable neighborhood that has a minimum number of foreclosures. An area that has not suffered severe price declines in the past few years would be less likely to suffer big declines in the next few years. Typically, these are places that did not have skyrocketing prices during the real estate bubble.

Think about adding “sweat equity” – significant do-it-yourself improvements. Studies consistently show that new kitchens, bathrooms and other major improvements do not add as much value as they cost. But since labor can be 50% of the cost of a major improvement done by a contractor, the homeowner may be able to make an improvement pay off by contributing labor for free.

Consider buying the least expensive home that serves your needs. That will minimize the damage if home prices do continue to decline.

Think about renting. Though demand has pushed rents up in many places, and may continue to do so, a renter can get free on short notice, while a homeowner cannot.

Read More:   buying a home, real estate
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