Seller's market will drive up house prices

STARTING OUT

May 08, 1994|By Dian Hymer

When is the best time to buy?

The principle of supply and demand applies to real estate as it does to the economy in general. When there are more buyers in the marketplace than there are sellers, a high demand for houses is created, which usually pushes up prices. Such a market is referred to as a seller's market. A buyer's market is one in which there are more sellers than there are buyers, inventory is plentiful and home prices are usually soft.

There are advantages and disadvantages to buying in a buyer's market. The advantages are that there are plenty of houses to choose from, prices are low and there's less competition from other buyers. Also, many of the fees associated with buying a home (title fees, transfer taxes, real estate commissions) and property taxes are calculated based on the purchase price. When prices are low, these costs will be less than they'd be in a stronger seller's market when prices are rising.

The main disadvantage of buying when the market is slow is that the value of your new home may actually drop before it rises again. For this reason, it's not a good idea to buy in a buyer's market unless you plan to stay in your new home for four or five years.

Many buyers feel more comfortable buying when everyone else is, even though this may mean paying a higher price. A strong demand for houses puts the seller at an advantage. In a hot seller's market, buyers may find themselves in stiff competition with other buyers for houses that end up selling close to, or even over, the asking price. But it's easy to rationalize paying a little extra when you're sure you'll make the money back after several months of home price appreciation.

FIRST-TIME TIP: Be wary of following the herd and buying when the market is booming. If the market has experienced much appreciation for several years, it may not be a good time to buy because the market may be due for a correction in the downward direction. In contrast, when home prices have appreciated at a rate less than the rate of inflation for several years, the market may be ready for a rebound. This could be a good time to buy.

Like home prices, interest rates tend to be cyclical and they affect a buyer's ability to buy. The lower the interest rates on home loans, the easier it is for buyers to qualify. An increase in demand for financing tends to push up interest rates. Financial markets can change quickly so don't let yourself fall into the trap of waiting for an interest rate cycle to bottom out if you can qualify to buy and rates are already relatively low.

THE CLOSING: It's important to carefully investigate local market conditions when considering whether or not it's a good time to buy. Many real estate markets have not moved in perfect synchronization with the national real estate market in recent years. You'll even find variability within an area where homes sell more quickly in one neighborhood than they do in another.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif. 94618.

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