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dwot (99.57)

The Best Time To Buy a Home

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November 27, 2007 – Comments (7)

I was reading an article estimating what the decline in the LA housing market will be and the one economist is estimating 25% down, bottoming in 2009.

Somewhere on my Making Sense of My World blog I've written about timing for entering the housing market.  As the single largest investment more families make, when you enter the housing market is critically important.

I have seen the housing market decline a fews in my life and I have the experience of working in banks from 1979 to 1984, a period when people lost their homes when the rate on their mortgages reset higher.  In Canada you renew your mortgage terms as often as every six months and few go for a mortgage term longer than 5 years.  Indeed, it is hard to find mortgages offering terms longer than 5 years.

I know that the Vancouver housing market had a decline in the 70s before it ramped up to a peak around 1981.  The housing market declined and then was flat until 1986.  After people lost homes in 1981 and people saw the housing market decline, well, there was no rush to buy a home.  From 1986 to 1993-94 housing more than doubled and tripled in some places.  It was lower around 2000-2002.  Since then it has had another run up, about doubling from the low, but not quite doubling from the last peak.  There is an enormous difference seeing a double in 5 years compared to 15.  There is an enormous difference in mortgage carrying costs with just a 10% difference in home purchase price.

I lived in Toronto for a while and their housing market got very over heated in 1988-89.  The woman I was renting from talked about how much she wished she could get another place and how much money she thought she could make.  I told her she was lucky she didn't have a down payment as she'd lose it.  By 1991 that housing market was down 10-20%.

I also had a boyfriend whose father had been a home builder of sorts.  He built one home at a time and sold it, I guess building around 10 homes over the years.  His stories included one time when he lost terribly because of the housing market going down.

You simply can not predict a top or a bottom, but every "top" I've seen has a bottom in the range of 4 to 7 years later, well except for Japan's top which declined for about 10 years.  Well, 2009 is 4 years after LA's top.

I haven't studied all housing markets, but enough to say if you are considering buying a home, go back and look at housing prices for the past 10-20 years.  If it is on an upward ascent, rent.  If you can see a top, wait at least 4 years after the top.

One of my other thoughts on this, the more unrealistic the top, I suspect the more years it will take to reach a bottom, like what happened with Japan.  Also, for Vancouver it was 5 years for that first bottom in the 1980s, and then about 7 years for the second bottom around 2000-2001.

Mish has an excellent graph of the Japan housing market, to which he projects where the US is in its housing bubble unwinding.  Have a look. 

7 Comments – Post Your Own

#1) On November 27, 2007 at 10:07 AM, capsoregime (77.66) wrote:

It's an interesting question to say the least.  When I purchased my first place recently, my mortgage broker explained in great detail to me what everyone was doing with the crazy loans.  I was even offered a few by some banks.  I decided to buy an incredibly small place, which has done me well, as most of my peers are on the verge of losing their homes.  We're now looking at purchasing a new home, and are hoping to buy near the housing bottom in our area.  Many of the sellers here are willing to take a 10-15% cut off their list already, since they have some anxiety about where the market is going, but I haven't seen the list prices themselves fall too much. 

Of course, the problem with trying to purchase at bottom is either missing it entirely, or purchasing at a false bottom and having the value decrease even more.  We're not in the position for an incredibly long term investment (30+ years) in our home buying yet, so I'm trying to figure out when to pull the trigger.

Thanks for the information!

 

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#2) On November 27, 2007 at 11:46 AM, abitare (99.42) wrote:

dwot,

Another great post. Take a look at BIDZ, Citron wrote them up: http://www.citronresearch.com/ and they are getting slammed.

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#3) On November 27, 2007 at 2:33 PM, dwot (99.57) wrote:

Capsoregime, the way I look at it is about 4 years after a peak a good chunk of the decline has happened.  In Vancouver our housing bull run from 86 to 94 was about 8 years.  I'd say you'd have done well in our market even 4 years into that bull run.

With the last one, our housing market was not cheap when the bull started.  It truly was barely affordable with double income households. 

You also have to look at affordability.  I don't think finding an absolute bottom is of critical importance, but avoiding a top is.

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#4) On November 27, 2007 at 9:12 PM, abitare (99.42) wrote:

Quote me: 

30 - 70% decline in real estate from 05 / 06 highs.

stock market sell off, yes, severity? unknown

I cannot believe you like Mish too, it is funny. Do you follow Jim Rogers?

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#5) On November 27, 2007 at 11:18 PM, dwot (99.57) wrote:

Abitarecatania, I think declines will depend on affordability and degree of speculation.  I also think it will depend somewhat on the degree of printing money.

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#6) On November 28, 2007 at 8:00 AM, abitare (99.42) wrote:

dwot, 

Concur, but I think the FED has reached a point where it cannot "stimulate" the economy any more by printing. The US FED risks losing Worlds Reserve currency status if continues to over print.

Citibank is borrowing at 11% from Abu Dhabi. But the FED funds rate is 4.5%? 

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#7) On November 28, 2007 at 6:04 PM, dwot (99.57) wrote:

Yes, the absurdity of the rate Abu Dhabi is charging compared to to the bank rate did not escape me...

But even at that rate I think it is not enough for the risk. 

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