It has long been thought that if you buy in the right location, the value of your home will increase more during good markets and fall less during down markets than it would if you bought in a less coveted area. But choosing a desirable location in which to buy doesn’t guarantee the value of your home will never fall. In a severe downturn, all markets are affected.
In today’s market, we’re seeing the location factor exaggerated to extremes in some areas. Areas with good employment and not enough housing to supply the demand are experiencing rapid appreciation. Buying in one of these areas may mean paying significantly over the list price. This is where you need to consider other factors that should influence a purchase decision.
Most buyers should buy a home in such competitive markets only if they plan to stay in the home indefinitely. This means you have job security, you’re sure you won’t be asked to take a job transfer elsewhere and the home will suit your long-term needs.
In a volatile market, like what we’re experiencing now, you could pay a high price that is supported by the sale prices of similar homes in the area at that point in time. But when the market cools off, which it’s likely to do, the market value of your home could slip. As long as you don’t have to sell, you shouldn’t be hurt financially, unless you’re planning to refinance your mortgage.
You might not feel good about a decline in value, but as long as you can stay put and the home works for you, enjoy your home and look at the big picture. Home prices go up and down over time. Don’t buy if you think there’s a chance you’ll need to sell within the next 10 years.
HOUSE HUNTING TIP: Condition and affordability are intertwined and should be carefully considered before making a home purchase. Most buyers want to buy a home they can move right into without having to do a lot of work. There’s a premium to be paid for a home like this, and there may be competition from other like-minded buyers.
Buyers who can afford to buy often don’t have time to fix up a house in order to put it into top condition. Others, particularly first-time buyers, may not have the expertise to tackle a home that needs work. This is where affordability comes into play.
Is a $425,000 fixer-upper really a good deal if it costs you $200,000 to update the kitchen, baths and cure deferred maintenance? It might be less expensive, and certainly less of a hassle, to pay $600,000 for a home that has already had the work done.
A caveat about buying a fixer is that it’s often difficult to determine upfront exactly how much it will cost to put it into the kind of condition you want. For example, you may not know the condition of the wiring or whether there is an old brick flue that needs to be removed until the walls are opened up. A seller is unlikely to allow this sort of invasive inspecting before the home is yours.
Another factor to consider is the floor plan. Spend some time at a home you’re thinking of buying and see if you can imagine yourself living there. Don’t be fooled by a good staging job. Some floor plans provide for easier living than others. Before buying a home with an odd floor plan, consult with an architect who can tell you whether the floor plan can be improved at a cost you can afford.
THE CLOSING: Do your due diligence carefully before you buy. Selling soon after buying could cost you.
