It’s back! Housing fever has reemerged, and it is hitting home.
My husband and I have two children looking at houses right now – first time homebuyers. Our kids are solidly into Generation Y– the Millenials – and hold down respectable jobs, so the move from being renters to owners is not surprising. They are part of a much larger demographic of pent-up demand that has recently been unleashed. But while opportunities abound, I see sales pressure tactics and outright greed on the rise as well. I fear the early reincarnation of a buying frenzy, which ensnared so many during the housing bubble.
Case in point: my son called the other day about purchasing a piece of property that combined a fixer-upper home with four small plots of land in a part of Philadelphia on the cusp of gentrification. “So if I buy the land and hold it for a few years, I am bound to make money,” Peter surmised, “even if the house isn’t in great shape.”
“Whoa,” I said. I don’t doubt that Peter has sized up the neighborhood pretty well, but I felt the need to add a note of caution. “There are no guarantees here.” Land tends to be highly illiquid, and Peter’s future plans could involve a major move at some point. “What if gentrification takes a lot longer than you anticipate?”
Eyeing the property from a different numerical perspective, Peter had a gut-check moment when he drove by the next day. “Yeah, the math doesn’t add up,” he noted, sensing an element of greed by the current owner. Still, Peter worries about timing. “My agent says that things are getting a little nuts in Philly, so hopefully it all calms down and I didn’t miss the bottom entirely. I just hope that patience will be a virtue this time around.”
I do believe that we have reached a bottom in the housing market in most locations, but we are crawling – not racing – out of it. Prices are rising, especially for vacation properties. Housing starts and permits are increasing, inventory has shrunk and fewer people are upside down on their property values. With mortgages still being affordable, and the threat of rising interest rates in the future, it is a good time to buy.
Just not any house.
I think many of us long for that home-buyers’ high of the previous decade, when we believed our homes were destined to become castles. We claim to be much smarter this time round, but the urge to get in at the bottom and to secure the bragging rights for the best price remains powerful.
Here are three pieces of advice I give clients about purchasing a home now:
1. Follow your instincts, not your emotions. Emotions guide you by fear and greed; instincts tell you when to listen to your rational side.
2. Distinguish between a smart purchase and a bargain. This house is going to be your home; pick one that you can learn to love.
3. Make sure the numbers work from the start. The less you like the property, chances are the more money you will want to sink into it to make changes and the higher the risk that it will become unaffordable.
Even if you don’t buy at the bottom, you will likely be able to get a reasonable price. The housing market has a long way to go before it recaptures its peak. There may be plenty of opportunities. Don’t be afraid to pass up the early ones.
Betsey Purinton, CFP® is Managing Director and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. The information contained in this report is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein.