Q: I am in my mid-20s and make a six-figure salary as a medical professional. I bought my first major purchase as an adult — a condo in the East Bay Area outside San Francisco — about six months ago. I got a great price on a great place using a 30-year fixed-rate mortgage I can easily afford, and plan to keep my place for at least 10 years. But now I’m seeing interest rates fall, and prices of other condos in my complex are lower than what I paid. Where does that leave me? Should I have waited?
A: Dictionary.com defines a fool’s errand as "a fruitless mission or undertaking." Your question brings to mind the two most common fool’s errands I see being performed in the context of today’s real estate market: (a) wondering whether a past transaction was timed correctly, and (b) trying to time the bottom. These are both fruitless — or even counterproductive — in that the timing of a past transaction cannot be undone, and timing the bottom with precision is simply not humanly possible, except in retrospect. Asking the right questions will empower you to discern between using information to fuel good future decision-making and torturing yourself with a real estate data obsession.
Mindset Management
When you bought six months ago, you decided to be a contrarian investor — buying when everyone else is selling. Another way to say this is to say that you chose to buy in a buyer’s market, because the definition of a buyer’s market is a time frame in which buyers have superior bargaining power because sellers/supply outnumber buyers/demand.
Buying in a buyer’s market seems like a no-brainer — clearly, a time when market conditions are favorable to buyers is a better time to buy than when market conditions are favorable to sellers. However, buying in a buyer’s market requires crystal clarity about your goal and a very strong mentality. When you buy in a buyer’s market, you are basically swimming upstream, against the force of popular opinion; against what those around you may be doing; and in the opposite direction of the headlines you see and read in the news every day.
I give kudos to my buyer clients who have bought in the last 18 months and are buying now, even though I spend hours every week doing "real estate therapy" with them around the contrary messages they face from their friends and family, and media reports. Like you, they are all buying for the long term, at times that work well for their own finances, and they know they are getting deals that never would have been available to them two or three years ago, and may not be available to them ever again. Also, unlike buyers a few years ago, all of these buyers are taking very predictable 30-year-fixed-rate mortgages and buying homes priced very conservatively vis-à-vis their income. Nevertheless, it takes some major mental fortitude to withstand the chorus of "you must be nuts" that they hear from their circle of acquaintances, who are actually giving voice to their own economic fears. It may take years for the market to bear their timing out as wise or unwise, but I coach them to view the wisdom of their decision based on how it worked for their own personal circumstances and finances, rather than based on the fate of the overall American real estate market.
On a daily basis, I talk with real estate consumers all over America about their emotions and mindset around the real estate transactions. Those who have regrets typically regret not buying sooner, or regret their mortgage decision-making. Few, if any, sorely regret buying too soon.
Need-to-Knows
No one — not even Warren Buffett — can time the bottom of the market to the second in advance. In that way, you’re in great company! So, take the fact that buying in a buyer’s market is ideal, and add it to the fact that no one knows the precise moment when prices in your area on your type of property are at their very lowest. The result? If you buy in a buyer’s market, you necessarily take the risk that your property’s value will drop after you buy. While that sounds awful, it’s actually just an underrecognized element of homeownership — owning an asset that will rise and fall in value. The risk is very much tempered by the potential upside you stand to gain in long-term appreciation, made more likely by the fact that you didn’t buy anywhere near the top of the market.
In the East Bay Area in particular, there are few neutral market cycles — most of the time, it’s either a buyer’s market or a seller’s market. So, the alternative to buying as you did is to wait until you’re in a seller’s market — when you can’t buy as nice of a place (or can’t buy anything at the price range you just paid); you face multiple offers that can add $50,000-$100,000 to your price in the blink of an eye; or you may not be able to successfully get a place at all.
There’s not a thing wrong with reflecting on your decisions. But the question you should be asking is not whether you should have waited. The useful questions are:
(a) Did you buy at a time which made sense for your life and your finances?
(b) Did you buy at a price you could afford? and
(c) Did you buy with a mortgage that is sustainable for you over the long term?
It sounds like your answers to all three of these questions are "yes!" If your job hasn’t changed and you still plan to stay put, your situation presents no cause for alarm or for staying fixated on the moment-to-moment fluctuations of your home’s value during this volatile period. The one reason you might want to keep an eye on the current value of your home is that you may want to consider refinancing at the super-low rates we’re seeing today, which is tough if your home’s value is lower than when you bought. But, even if it has dropped, it sounds like your worst-case scenario is that you keep a low-interest, fixed-rate loan that you can easily afford. Not bad.
If you make a six-figure salary, you haven’t seen it yet, but the tax deductions you’ll get for mortgage interest, points and property taxes you paid in 2008 probably outpace any paper "losses" you’ve had in the value of your home this year anyway!
And one more thing — in the current East Bay condo market, lots of those super-low-priced listings are short sales that have been on the market for months and months because the sellers’ mortgage lenders refuse to allow them to be sold that low. Definitely pay attention to the difference between list prices and sold prices when you look at comparables to evaluate the current value of your own home.
Action Plan
This is one of the only times you’ll ever see me give a plan of inaction. STOP obsessing about the market. Go on a selective information diet — only read the things you need to for work, etc., and to stay in a state of basic, functional awareness about the world. Follow the suggestions of Tim Ferriss in "The Four Hour Work-Week" — get your news by reading the headlines at a newsstand or a bank of newspaper vending machines, but don’t actually BUY the papers. Do not allow an overdose of economic headlines and information (much of which is useless or inapplicable to you in your recession-resistant profession, anyway) rob you of the blessing of enjoying the home you worked so hard to get.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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