The old mantra buy low and sell high doesn’t apply to real estate if you’ve bought in the last few years. However, for anyone thinking of moving “up” to a more expensive home I would suggest they consider a new paradigm, Sell Low and Buy Low.
When it comes to real estate there is no shortage of experts telling us the sky is falling. On the flip side, real estate professionals and the National Association of Realtors (NAR) seem to always be pushing a positive message regardless of the state of the market. So who are you to believe and what’s really happening in our backyard?
Real estate, especially one’s own home, has long been considered a good investment—the American dream many would say. But every investment has risks and as often stated in investment advertisements, past performance is no guarantee of future results. The tumultuous economic events of the last few years sparked by the loss of confidence in sub-prime mortgage backed securities are unprecedented. No one can say with certainty what the future holds for the real estate market, lending practices and the state of the economy.
However, we can take a look at an index that measures home values and develop a hypothesis of our own.
The Standard & Poor’s Case-Shiller Home Price Indices arguably are the most frequently cited measure of the U.S. housing market. Developed by two economists, they measure the value of like homes over time. The housing market goes through different product cycles affected by the economy and consumer demand. At times there’s lots of new construction, at other times large houses were in vogue, today people are leaning toward practicality. When comparing homes over decades it becomes a case of apples and oranges.
If a ranch was built in 1955 in Katonah can its percent of value appreciation be accurately measured against a large contemporary colonial built in 1982? Mr. Case and Mr. Shiller thought not and developed their indices comparing repeat sales of the same homes in an effort to study home pricing trends as opposed to market averages that until then was the norm.
The most often cited S&P/Case-Shiller index is the U.S. National Home Price Index. But Case-Shiller also publishes individual indices for the large metropolitan areas and even provides data within home value tiers. In the case of New York, Case-Shiller includes the communities in the tri-state area that are commutable to NYC and they exclude condominiums and cooperatives as well as new construction. For the purpose of trying to understand what market values have done in the Bedford area we will look at the $449,048 and above price tier, the highest price value tier in the Case-Shiller index (See Attached Graph).
Its no surprise that what the index shows is in keeping with the general understanding of what the market has done. Home prices for decades rose in the United States at a healthy rate of return until 2000 when prices catapulted into the stratosphere. Beginning in 2006 home values began their decent and appear to still be in a downward trajectory. However, it’s the long-term trend line that I’m most encouraged by. What it shows is that we are currently well below where home values would have been had we not experienced the unrealistic price gains of the past decade. In other words, prices today are artificially low similarly to when they were artificially high a few years ago.
When to buy a home depends on each person’s individual situation. However, if you plan on being in your next home for at least 5 years the evidence seems to point toward buying now being a good idea. Some are looking for the bottom, wouldn’t we all like to know when that is? Others feel we have reached it. As with most investments, once the bottom has been determined, the majority of the upside value appreciation opportunity has been missed.
If you're contemplating buying up to a more expensive home you'll likely be selling your existing home at a loss from its market-value highs, however, the appreciation that we are likely to see in the future as the market once again approaches its long-term trend line should justify a move today.
Lastly, interest rates today are at historical lows and a future rise in interest rates would eliminate the potential benefit of waiting for prices to possibly go lower.
Nelson Salazar is a real estate agent in Northern Westchester with Coldwell Banker Residential Brokerage. You can find him on Facebook or visit his website or email him at Nelson@NelsonSalazar.com.