Make a move while market is down?

Question

I'm a first time buyer and have seen a decrease of i'd say 40,000$ in this property value around here, Theres a house for sale and I think if I bought and held it for a year or two the return could be pretty satisfying.  What do you guys think about this?  When the market was good i think it would sell for 160-170 easy, now its down to 120-130k, suggestions or comments please?

Jon Holdman · Answer

This is a pretty interesting graph:
http://agebb.missouri.edu/mgt/landsurv/05landgraph.htm
It shows MO farm land prices since 1950.  They hit a peak in 1982.  Then, they went back down.  It took six years for them to bottom out.  They didn't get back to that peak until about 1997.  So, yes, they did come back.  But, if you bought at the peak (about 2005 in this latest boom), or even a few years later, you had to wait a long time to make you money back.

Jon

Sean Gallagher · Answer

good points, i'm understanding a better outlook on how the market works.  I was under the impression.. ok it just went down ahh it has to go back up soon.  But really we dont know for sure when it will change or how. This is helping me to "know the market" though.. which is good.

Jon Holdman · Answer

Crazy,  Are you saying that a house that would have retailed for 160-170 now retails for $120-130?  And are you asking if you should buy that?

Then I'm with these guys, too.  You can't make money as an investor paying retail.  You need a discount off the current retail price for it to be a money maker.  So, you would need to buy these houses for something around $85K for them to perhaps be a good deal.  Even then, you would have to look for other factors such as ability to resell it at 120 or what rent you could get.

You're saying prices have fallen about 25%.  Could they fall further?  Absolutely.

Here's my sort of baseline value calculation.  I look back over sales history and find what similar properties sold for in 99-01.  Then, I adjust that for inflation (http://data.bls.gov/cgi-bin/cpicalc.pl).  I use that as a reference point, since the long term trend for house prices is inflation.  If prices are about there, then I think there's limited downside.  If prices are still well above the computed value, then more decline is possible.   2000 to now is about 22% change.  So, if these houses were selling in 2000 for about 98-105K, then I tend to think they're not going to drop a bunch more.  If they were selling for less, then you have more downside risk.

Now, I have no real evidence this is an accurate way to look at this problem. If you look at the Case-Shiller data, prices do jump up and down over the short term.  If we go into (or are in) a recession, jobs get scarce and banks won't make loans, prices could fall below the long term trendline.  I am, however, pretty confident that if your prices are 20+% over that inflation adjusted value there is significant risk of more declines.

Jon

Jason Cummins · Answer

the problem is we just dont know.  To me it sounds like you want to buy the house for the possibility of equity in the future.   I never buy a house unless it has atleast 30% equity at todays appraisal value.

Some people do invest in future equity, but I don't, doesnt seem to smart to me.

Sean Gallagher · Answer

yeah I understand where you guys are coming from, I was going to move into the place but I don't need to move out of where i currently am so i dont need a place to stay.. i wouldnt just buy and hold and let it sit un-occupied, but it just shocks me that this house a year ago could have gone for 160-170 and now its down to 120-130, so what yous are saying is this could back fire on me?  Think the market it going to proceed its downfall in value?  I wonder how much longer and how worse its going to get. thanks for the input!

Christian Malesic · Answer

What is not clear from your original post is if YOU would consider living in the house.  If not, I am with Mike and Tim.  If so, the rules all just changed.  Please advise.

Timothy W. · Answer

I second Mike.  An associate of mine just bought a house that was originally appraised for about $60,000.00.  His purchase price?  $2,872.00.  You read that right.  When you've seen a market where prices truly can go nowhere but up, then you understand where Mike is coming from.

Michael Rossi · Answer

In my opinion, this is not a wise move.  The market could still have a LONG way to go - DOWN!  In addition, even if the market has bottomed within 1-2 years, that doesn't mean that the price will rocket back up in that time period.  Finally, what would you do while you're waiting for the price to recover - rent it and allow the tenants to destroy it?  Not me!

Good Luck,

Mike