The Basics - Buy a Vacation Home in a Buyer's Market
Price Reductions Everywhere
In real estate, most experts and investors take note when there are more properties on the market than buyers. This can give buyers an edge when negotiating sales contracts. Price reductions become common, as sellers realize they're not going to rake in the high profits they planned on when they first put their property on the market.
For a long time, warnings came regularly about the coming burst of "The Real Estate Bubble". This has definitely occurred in some of the hottest markets, where new construction far outpaced demand, and where appreciation was mind-numbing. But, in many markets, that weren't quite so hot and over-hyped, developers refrained from building more than one or two model homes, and the remainder of their developments contained vacant lots, with building approvals. In these markets, some homes are still appreciating.
New and existing home prices have leveled off or fallen during the last year. But another phase will begin to work in. Most sellers will either remove their properties from the market, or refuse to lower the asking price. In distressed sales, where there's no choice, and the property must be sold, is where buyers will find the best bargains. They're often due to divorce, bankruptcy, estate settlements, developers that overspent their resources, or other reasons.
Look For Real Estate Inventory to Start Falling
Right now, the inventory is very high and it's a good time to buy as an investment over the long term. When the inventory starts falling, that's usually an indication that the real estate market is turning around, and is either at the bottom, or close to it. That may be the best time to buy your vacation home.
Many Buyers Lose Strength and Resources
Once a long-term buyers' market sets in, several economic factors can also creep up. Banks begin tightening credit. The housing industry is a huge sector of the economy, so when a major slowdown occurs, it is frequently followed by recession. If there is no recession, then inventory will begin to fall off, and real estate prices may start rising again. If there is a recession, and you can recognize it before it becomes official, then it may be more prudent to wait: further price decreases may follow, and even a depreciation of 2-3 percent can make a substantial difference in value over the years.
In a recession, particularly one caused by a downturn in the real estate market, builders and contractors come to a halt, injecting more unemployment into the economy. Building suppliers experience reduced sales, and must trim their inventory and work force. With home sales slumping, financial institutions begin to feel the crunch and begin downsizing. Durable goods like refrigerators, cabinetry, boilers, well pumps and everything else that would go into a new home become stagnant and unprofitable without cutbacks in employees and inventories. And it begins to filter its way through the economy in such a way that paycuts and layoffs can also begin to add fuel to the fire. Qualified buyers become fewer and fewer.
Make Your Move
If you've prepared well, this is the time when those who still do have a stable income, and money to invest, will jump in and buy. If you're looking for a vacation home, and you've been gathering your resources, this would be the time to start looking more seriously. No one knows when the market will hit bottom, just like no one knew when it would top out. Widespread reporting about a "real estate" bubble contributed heavily to creating a buyer's market. But no one can say with any certainty when it will return to a seller's market.
Over the years I've seen some incredible upsweeps, but no downturns of equal proportion. During the late 70's, mortgage rates were running as high as 14 percent. Homes sold slowly, and appreciated very little. When the interest rates came down, home prices shot up. By the mid 80's, many homes were selling for 2-3 times the value of what they were worth just 5 or 6 years earlier.
Why? Because when the interest rates came down, mortgage payments became more affordable. A $100,000, 30 year mortgage at 14 percent interest would cost $1184.87 per month. At 9 percent, which is the approximate rate common in the mid eighties, that same mortgage would only cost $ 804.62. Buyers could now afford a $147,000 home for almost the same monthly payment. Not only that, but during those years, salaries also went up substantially, making it possible to buy an even more expensive home. And, to top it off, everyone wanted to invest in real estate because it had gone up so dramatically, with no end in sight.
By the late eighties all the hype suddenly stopped and everything came crashing down. No one was building. Foreclosures on homes and developments were common. But, despite all the gains, most markets saw very little retreat on home prices in comparison to the gains. If you bought at the top and sold at the bottom of the market, the average loss would have been 10 - 15 percent, depending on the market area-some places continued to appreciate, while others saw greater losses. This doesn't include "distress sales" where properties were put up for auction.
At the same time, these losses are nowhere near the gains that occurred prior to the downturn. And, even if you bought at the top of the market, if you held on until the next upswing, you would have realized a substantial return on your investment.
Watch the inventory levels and home prices closely in the area where you'd like to buy a vacation home. Once you notice a dropoff in available properties, and stabilizing of prices, or even a slight increase, it may be the best time to buy. Obviously, there will still be risks, as with any other investment. One of the most important things to look for is a recession. They're difficult to spot because they're the result of two consecutive quarters where the economy is shrinking rather than growing. And, they're often not reported until after the fact. A recession can result in further price reductions with even fewer buyers in the market for real estate. But if you're investing for the long term, lulls and downturns in the real estate market can be the best time to buy. If you've been planning to buy, and have the resources, keep your eyes open.