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Real Estate: Buying In Buyer's Market

Praful Thakkar
08/21/2006

Question: What is buyer’s market?
Simple Answer: When there are more homes available in market than buyers, it is buyers market.
Little complicated answer: While selling the home, if it stays on market without selling for more than 6 months, it is buyer’s market – as per some real estate practitioners.
Difficult Answer: What is what?

It is assumed that winter is buyer’s market. If you look at the ‘simple’ answer, in winter, there is less number of buyers in real estate market, but at the same time, the inventory of available homes is not that high, either. So, you draw the conclusion.

Of course, if you ask a realtor® the same question, this is what you’ll get as an answer. (You do not have to go too far, ask me, I am a Realtor®, too. Alternately – how about ask.com?). Here’s the answer: There have been five straight years when the prices of the homes went up and number of homes sold during this period also went up. So, it is ‘COOLING’ market, softening a bit, and leveling off from the record sales of last few years!

How strange the real estate market is – weather its buyers or sellers. Just little over a year ago, mortgage rates were historically at the lowest - in about four decades and inventory of available homes – single family, town homes or condominiums – was at the low end. A home for sale would hit the market and if the buyer was not sharp enough, it would be under agreement in no time – perhaps, at full price or over the asking price, because there were more than one alert buyers.

And, in a matter of time (obviously, in a year), there are 50% more homes available in the market, compared to last year. According to National Association of Realtors, the supply of homes in today’s market is highest in about 8 years.

At the same time, mortgage rates are almost 1% more compared to last year, making it more difficult for a buyer to buy a home they can fit in their budget. As you know, your purchasing power shrinks, when mortgage rates climb up.

So, now it’s very well known fact that it is buyer’s market. Are you ready to buy a home?

If you are ready to buy home, do not make these mistakes – and get carried away by the fact that it is buyer’s market.

DO NOT STRETCH TOO MUCH! IT WILL BREAK!!!
As advised by your friends and family, you are likely to bargain on price of the home you want to buy. Now-a-days, even realtor® would tell you that you can bargain. But make sure, you know the limit. If a home is sold at $350,000 in a community and you expect a home under $300,000 – perhaps, it’s a stretch. The seller may have other options. One of them is – waiting for next spring – or for next time when market heats up again. The main purpose of your getting home at a good price is lost in this bargain! Specially, when mortgage rates have leveled a bit recently.

DO NOT ALWAYS START YOUR PRICE 25% OFf ASKING PRICE!!!
Again guided by the friends, family and relative, you are likely to start the negotiation at 25% lower than asking price! Is this a thumb rule? When I asked the same question to some of my buyers, they said – ‘Yes!’ ‘Why?’ was my next question – and the answer was – “Well, it is buyer’s market and we must bargain!” So, if a home is priced at $400,000, the first offer should be $300,000, true? Let’s analyze this. There are some homes that are ‘overpriced’ even in the eyes of realtors®. And it could be, as much as 30% overpriced. (Let me make a small note here – ‘overpricing’ is subjective term!) So by offering a price that is ONLY 25% off the asking price, you are doing a great favor to the seller. The seller may accept your offer without any negotiations. Now let’s take another scenario: Two identical homes – one priced at $400,000 and another at $360,000. Making an offer of $300,000 to the first one may be justified, but making an offer of $270,000 to the right priced home may not work! (Again, pricing is subjective)

DO NOT EXPECT DEPRECIATION IN REAL ESTATE!!!
There are some buyers who very strongly believe that like cars and electronics, real estate also depreciates! Sounds funny? But we should not blame them. It’s just the environment they live in – or the background they come from. They bought a car two years ago. A new model is out and they want to trade-in the car for the new model. When they hear the trade-in price from the dealer, they are ‘WOW’ed! And dealer explains them that the moment the car is out of the showroom, it depreciates. And so is true for their Hi-8 camcorder. Now they want to buy the new model (no trade-in here, though) and when they look at the price of the model own, they know, the big factor is – DEPRECIATION. Well, if this phenomenon is applicable to cars and camcorders, why not to the house? What do you think? Do you believe that value of a home depreciates? (You can send your opinion about this to me at Lokvani@iPraful.com).

DO NOT COMPARE PRICES OF THE HOMES IN DIFFERENT TOWNS!!!
Yes, real estate has softened a bit. Yes, the prices of the homes have come down – and are coming down. Yes, there is a lot more negotiation power in the hands of buyer. But, there are buyers who believe that they can buy a home in one of the best neighborhood at the price that prevails in another town. Historically and statistically, the median price of the home in Lexington is higher than that of Lawrence – just as an example. But, because it’s buyer’s market, it is irrational to expect that you’d get the home in Lexington at Lawrence price! (I know someone will try to misconstrue this idea.) The prices of the homes still depend on the town, neighborhood and community. It may not be wise to assume that you’ll get a bargain because neighboring town has lower prices!

We looked at the opportunity for the buyers, so far. What do you think if you were wearing the seller’s shoes? Of course, sellers must be asking this question to themselves – is it too late to get out of the real estate market? Or, if you think positive, perhaps, some adventurous investor and a potential buyer (a future seller) must be thinking – is it too early to get into the real estate market?

However, most of us do not belong to the ‘class of Donald Trump’ – so we have to live with what the market has to offer. No matter however we put it – it is buyer’s market!

So take advantage of this time. Do not let this opportunity slip by your hands. Make hay while sun shines. Contact a real estate agent who can help you buy at best possible price and at best possible terms – and get some incentives thrown in while you buy. Because, in a real estate rollercoaster ride, there are many ups and only few downs!

Alternately, extrapolate the graph of number of homes sold each year to the next decade and make an educated guess for the time when it will be buyer’s market, again. May be, you can wait for next wave of the buyer’s market – that may be as soon as early spring of 2007 or perhaps as much late as 2016. Who knows?



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