The Best Time To Buy a Home
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.