Wednesday, October 14, 2015

Buy Now or Buy Later? [Analyze This]

by Osman Parvez
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Jackson Waits for the Market Dip
One of the toughest questions my investors ask is whether they should buy now or keep powder dry for the coming downturn.  


There are no easy answers and of course, nobody has a crystal ball, but data is something we can provide. 

Remember, intelligent real estate investment decisions are based on a deep understanding of local market conditions.  

At the moment, one of our buyers is focused on bi-level homes in Table Mesa. This part of Boulder has the best rated schools, easy access to trails and to major commuting arteries, and has an ever-improving neighborhood retail mix (Southern Sun, Sweet Cow and Lucky's, anyone?).   

My buyer is willing to wait a year. We're committed to helping him find the right house at the right price. We're doing the usual MLS alerts but we're also aggressively searching off MLS using our Plan B strategy. Thus far, this approach has turned up three potential sellers (not listed) for this buyer but the asking prices have been stratospheric - well beyond any measure of fair value. So the search continues. We're patient. 

To provide guidance, we recently analyzed the market performance of bi-level homes in Table Mesa over time. This isn't an analysis of Boulder real estate in general. It's very specific to our buyer's search and an example of the type of analysis we love to do. Why? Because it's how we help our clients make a smarter real estate decision.

Take a look. 






The chart shows that the appreciation rate over the last three years has more than doubled each year, from 3% in 2013 to 13% this year (to date). That's impressive performance.   2010 and 2011 also saw strong performance after a jaw dropping 10% drop in 2010 (i.e. the bottom).  

The scatter plot shows just how much variability exists in prices for these homes. This year, we've seen $/SQFT range for $250 to over $500! Take away: some buyers are getting bad advice and perhaps out of sheer desperation, overpaying. Don't be that guy.   

When Will the Downturn Begin?
The analysis shows 5 years of appreciation for bi-level houses in Table Mesa. How many years lie ahead before a downturn?    

From How to Use Real Estate Trends to Predict the Next Housing Bubble by Teo Nicolais

Perhaps the most stunning aspect of the real estate cycle is not its inevitability but rather its regularity. Economist Homer Hoyt, through a detailed study of the Chicago and broader US real estate markets, found that the real estate cycle has run its course according to a steady 18-year rhythm since 1800.


With just two exceptions (World War II and the mid-cycle peak created by the Federal Reserve’s doubling of interest rates in 1979), the cycle has maintained its remarkable regularity even in the decades after Hoyt’s observation.


As of this writing, we are about 9 years after the peak and only 5 to 6 years past the bottom - specifically for Table Mesa Bi-Level houses. For the broader market, we are probably 10 years after the peak and 7 years from the bottom. Meanwhile lending standards have tightened, the vacancy rate is at or near zero on the front range, and although economic uncertainty lies ahead (rate rise, coming soon?), the US is better positioned than most other developed economies.    

In my opinion, we are clearly still in the expansion phase, a period of declining vacancy and rising construction. My prediction - crystal ball not withstanding - is that the market may cool somewhat in the face of rising rates or economic uncertainty, there will likely be dips, but we will not see a sustained decline for at least several more years.   

Strategy
For the individual buyer - it's not whether you pursue a buy now or buy later strategy.   That's a false binary. The better strategy is be prepared to pull the trigger at any time by closely tracking the market, looking at each and every potential home that becomes available, and buy opportunistically. The key: Know which houses are worth the premium and which are only marginal assets.   

Our advice? Before you shop houses, shop Realtors. Choose a seasoned, experienced, and market savvy Realtor with a proven track record of success (here's one option). Your agent needs to know local negotiation norms and have a reputation for great communication and integrity. Most importantly, they need the skills to outwit and out-negotiate competitive offers because for desirable homes at competitive price points, bidding wars have become the norm.  

Good luck. It's a jungle out there.

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

2 comments:

  1. Good looking dog... Oh, I mean great analysis. Thank you for continuing to provide information that is not available anywhere else.

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  2. I enjoy these posts, and particularly this one since I recently bought a house in Table Mesa after a housing search targeted exclusively on that area (because schools, trails, and commute). I learned a few things about the Table Mesa market that may be informative to others:

    (1) There is a wide variation in the quality of lots and maintenance within Table Mesa that explains a lot of the price per square foot variation. Below the 850K range (which seems to be the current asking price point for flips or larger, older houses with very good locations), we found far more houses that needed substantial work than those that were move-in ready. Many of the houses were former rentals. Any house that is maintained, has a good lot, and is priced reasonably will likely have a bidding war. Exceptional lots carry big premiums, and also seem more likely to have a bidding war resulting in a substantially higher sales price if they are initially priced on the lower end.

    (2) We also employed unlisted strategies, and similarly found that potential sellers of off-market houses wanted prices that were quite high. Sellers in this area are extremely confident and aware of factors such as the Google expansion that are impacting the market. I wouldn't count on finding a deal this way.

    (3) Given the likelihood of a bidding war, it's helpful to think not only about comps, but also about what a house is worth to you given the facts of your life. Weigh the costs and time of continuing the housing search (which can be high given the low inventory) and the costs of renovating a less desirable property. It's not overpaying if you make an informed decision that these factors weigh in favor of offering a bit more than the comps may suggest.

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