The real estate market is cyclical – filled with periods of solid appreciation and periods of stagnation or decline. The cycles are generally long because the process of buying and selling real estate takes time.Despite the current downturn in the real estate market, buying a home is still a great investment. The tax benefits of deducting mortgage interest and real estate taxes provide a great incentive for home ownership. A recent study showed that owning a home continues to be a solid way to build wealth over the long-term. Homeowners almost always get a positive return on investment within 10 years.Although the rates of return vary by market, following are some common findings:
The longer you own your home, the more your investment will increase.
Your rate of return will stabilize over time, even in volatile markets.
For a positive return on your investment, the timing of your home purchase is less important than the length of time you own your home (the longer you own your home, the more stable its return will be).
Following are additional observations for buying or selling a home in a cyclical real estate market:
Buy when the market is soft – not when prices are rising. In this scenario, you get more for your money in a less competitive environment. The majority of home buyers tend to follow the crowd and wait until it is obvious that the market has turned.
Use seasonality to your advantage. For example, the middle of winter is a great time to buy a lake house in northern climates. There will be minimal competition and sellers that are anxious to make a deal.
Focus on the local real estate market. National statistics refer to statistical averages. Therefore, it’s important to focus on the real estate market you are buying or selling in. Don’t be distracted by generalized reports. While some areas of the country are experiencing price increase, others have turned around with falling inventories. And, while some areas have price declines of a few percentage points, others are in double digits.
Search for greater affordability. Lower prices mean houses are more affordable and, thus, this increases the market of potential buyers and mitigates the effect of tighter credit standards. This also reduces the risk of further price declines.
Conduct research on pricing for the current market. If selling your home, be sure to compare the price of your home with similar properties on the market and ones that have been sold. Buyers are looking for bargain prices and won’t bother negotiating with someone they feel is asking too much.