Playing the Housing Slump
Time to Make Your Move?
By Jonathan Clements
From The Wall Street Journal Online
Financial lore says you should buy when there's blood in the
street -- which suggests real estate is a bargain, because there's blood all
over the neighborhood.
Time to invest? I
wouldn't be surprised to see home prices drop sharply this spring, as
long-suffering sellers in hard-hit areas throw in the towel and slash their
asking price.
That could spell opportunity for this year's buyers. But what if
you already own a home -- and have no desire to become a landlord? Here are
three ways to play today's battered housing market.
Trading up. If you're
hankering after a larger home or a house in a better neighborhood, this could
be your chance to trade up on the cheap.
To be sure, when you go to sell your current home, you will likely
get a modest price. Since 2006's second quarter, real estate has fallen 10.2%,
as measured by the S&P/Case-Shiller U.S. National Home Price Index. But
your new, grander house will also be relatively inexpensive, so you're
effectively cranking up your real-estate exposure when the market is well below
its peak.
That said, I wouldn't think of this move as an investment. Your
new home will probably mean not only a bigger mortgage, but also higher ongoing
costs, including homeowner's insurance, property taxes and maintenance
expenses. These ongoing costs will offset a large chunk of any future
home-price appreciation.
In other words, trading up to a larger home or a better
neighborhood is really about wanting to consume more real estate. Still, like
any thrifty shopper, you want to buy when there's a sale -- and that is what today's market offers.
"It's like going from a Honda to a Mercedes," says
Charles Farrell, a financial adviser with
Doubling down. Instead
of trading up, you might be eyeing a vacation home. If you don't plan to rent
the place out, the same logic applies: Once you subtract the annual costs from
the price appreciation, you likely won't make very much money -- which means
the property won't be much of an investment.
On the other hand, maybe you're two or three years from retirement
and are toying with buying a second home that could become your sole residence
once you quit the work force. Does it make sense to purchase now, given the
decline in home prices?
Buying today is no doubt appealing, because it'll give you a
chance to vacation in your future home. But whether it turns out to be a wise
financial move depends on what happens to property prices -- and that's tough
to predict.
Still, I wouldn't bank on a rapid bounce back in home prices. At
the current sales pace, it would take a whopping 10.3 months to clear January's
backlog of unsold homes. By contrast, in January 2005, the supply of unsold
homes was at a mere 3.6 months, according to the National Association of
Realtors.
The bottom line: If you think you'll get a lot of use from a
second home, go ahead and buy. But if you view the purchase as a bet on rising
home prices, I would hold off for now.
Helping hand. While
buying more real estate for your own use probably won't be a great investment,
you could help your adult children make good money -- by transforming them from
renters to homeowners.
To that end, you might give your kids an advance on their eventual
inheritance, so they have enough money to make a down payment. Yes, that means
they will start to incur the housing costs I mentioned above, including
property taxes and maintenance expenses. But your children will also replace
their monthly rent check with a monthly mortgage check, and that will allow
them to start building home equity.
"If you have kids who are first-time buyers in markets that
are relatively depressed, this could be a good time," Mr. Farrell reckons.
"These days, they might need to make a 10% down payment. You could make a
gift to them of the down payment or make a loan to them."
Email your comments to rjeditor@dowjones.com.