The Benefits of Buying a Home In a Cooling Real-Estate Market

A house is still a good investment, if you plan on staying a while. Four reasons why now might be the time to make that purchase.
By: Amy Hoak: The Wall Street Journal Online
Residential real estate, a shining star of the national economy that seemed unflappable over the past couple of years, has hit a speed bump.

Nationally, home price appreciation is slowing down from the rapid pace experienced by many markets over the past few years. Mortgage interest rates are on their way up. Is this any time to be thinking about investing in a home? Of course it is - if you're buying it for a place to live, not as a speculative investment, and can afford to take the leap.

"Owning a home is still financially not a bad deal, as long as you have the income to support the cost of homeownership," said Jim Gaines, research economist for the Real Estate Center at Texas A&M University. Another caveat: "You better figure on living there five or six years to make any kind of profit on the thing."

Investors who hope to profit quickly on home sales, known as property flippers, for the most part have come and gone from the market, said Raymond Sierka Jr., vice president and regional sales manager with Harris Private Bank.

At the height of the real estate boom, people would buy houses before they were built at preconstruction rates only to sell the homes for a profit a short time later, often before construction was even complete. Speculators in some markets could often sell the property for a 20% to 30% yield, he said.

A normalized real estate landscape boots out those speculators, said Anthony Hsieh, president of online lender LendingTree.com. "It's just too risky to speculate now," he said.

People now are "buying for the right reasons," said Diana Bull, a Realtor in Santa Barbara, Calif., and a regional vice president for the National Association of Realtors. Sellers no longer hold all the cards, she said, which is creating a more balanced market.

Below are several benefits of home shopping in a cooling real estate market - the silver lining to news predicting the residential real estate party is over.

More selection

In a growing number of local markets, buyers have more time to think about a home before they make a decision on whether to purchase it. Last year, that often wasn't a likely luxury.

"Once you as a potential buyer found a house that met your needs, you had to jump on it right away," said Frank Nothaft, chief economist for Freddie Mac. "One thing that we're seeing nowadays - compared to six or 12 months ago - is many markets where homes are staying on the market longer."

Home sales are expected to decline in 2006, yet the year should finish as the third strongest on record, according to a midyear report given by Nothaft earlier this month. With fewer sales, more housing inventory is sitting on the market.

It's a change of pace for agents who not long ago didn't have many properties to show their clients, said David Drinkwater a Realtor in Scituate, Mass., and regional vice president for the National Association of Realtors.

"Two or three years ago, there was a great deal of reacting in the marketplace because we had a smaller inventory pool to work with," Drinkwater said. That's not to say that a well-priced property won't move quickly in this environment, he said, but buyers need to educate themselves so they can recognize a housing gem when they see it.

More room to negotiate

Current conditions in many markets also afford consumers a better opportunity to negotiate.

"This market is forcing everybody to slow down and take their time," Bull said. In that time, buyers have more of a say at the bargaining table.

In fact, getting a fair deal is even more of a priority for homeowners who can no longer bank on high appreciation rates to save them if they pay too much, Drinkwater said. If you slightly overpaid in a bidding war at the height of the real estate boom, high appreciation rates helped correct the error, he said. In many markets there is now no such safety net.

Average home value appreciation nationwide should be around 7% for the year, and is predicted to slow even further to 6.2% in 2007, according to Freddie Mac. Local markets vary, however, and even as some markets are cooling, others are still on an upward climb.

Even if you, as a buyer, have the benefit of being more of a haggler than you could have been last year, still remember to look for a place that meets your needs and your budget, Nothaft said. Do the calculations and lay the groundwork before your house hunt ever begins.

Interest rates are still relatively low

It's easy to get caught up in the upward scooting of mortgage interest rates. But take the northward movement with a grain of salt.

Some people act like "Chicken Little" and feel as if the sky is falling when interest rates go up a quarter of a point, said Gaines of the Real Estate Center in Texas. Instead, keep it in perspective.

Interest rates are still way below what they were five or six years ago, Gaines said. Even if the 30-year hits 7% by the end of the year, investors should keep in mind the double-digit rates of yesteryear.

The annual average for a 30-year fixed-rate mortgage was 16.63% in 1981, and worked its way down to 9.25% in 1991, according to Freddie Mac records. Homeowners may not get rates quite as low as what they could secure in 2004, when the annual average for the 30-year fixed was 5.84%. But relatively speaking, it's still a deal.

A home is still a good investment

If you're in it for the long haul - that is, buying a home with the intention to live in it for years - a home is still a decent investment.

Consider this piece of information from the National Association of Realtors: Since record keeping began in 1968, the national median home price has risen every year. In a balanced market, home values typically rise at the general rate of inflation plus 1.5 percentage points. That's to say nothing of the tax benefits that come with owning your own home.

A look at the volatility of the stock market also proves the benefits of real estate as an investment, said Sierka, of Harris. "The downside of real estate is better than the downside on just about anything else," he said.