Basics To Buying In A Hot Market

Buying a home can be a scary experience. Often buyers imagine the worst. Will I know a good house when I see it? What if I'm not able to re-sell the house that I buy? How can I make sure I'm making a good investment? What if I pay too much and home prices drop? How do I know that the market is going to stay hot?

After years of hefty home-price appreciation’s, it's natural to wonder how long the good times will last. The truth is that real estate markets are cyclical - prices go up and they go down. On the bright side, over the long term, prices have tended to move higher in this country. While thinking of buying - especially in a "hot" market -take into account some of these factors to help you figure out if you should buy.

Length of Ownership

To protect yourself when you buy a home, adopt a long-range horizon. If you are truly worried about depreciation, then think more seriously about waiting to buy until you plan to hold the property for at least 5-10 years. This way you can ride out any downturns in the market and sell when the market improves. Try to avoid getting into a situation where you are forced to sell in a down market. If you are unsure about how long you might want to stay in the area, postpone your buying plans until you are more certain of where you want to reside.

Examine How Length of Ownership Affects Your Loan Options and Interest Payments

Be careful in predicting what the market will do as it relates to interest rates and future housing appreciation. No one can predict with certainty what the market will do. However, Greenspan and certain economic forecasters have had some reliability in the past. Having a forecast of what interest rates are going to do can be helpful. Judging world events and the volatility of the market can also help.

Keep in mind that a shift from the traditional loans whereby people pay down a 30 year mortgage, hoping to get to the payments that eat away at the principle faster, is falling by the way side. Option type loans, like a five year arm or interest only loan (to name a few) are replacing these. One advantage might be in having a low-fixed rate to begin with, which some may have. Be warned though, because later it jumps to a variable rate (depending on the market, it might be a high interest rate). When the average person moves every 4 to 5 years, an option loan may be fitting. Then when selling the house, the appreciation is put into equity into the next home. It is important to realize that all of this assumes house price appreciation.

Building Equity

What if interest rates go way up and stay up? Those with low fixed rates for the life of the loan will be in the best situation to, then, want to stay where they are through sticking things out and building equity that way. This is not so much the case in a hot market. So, building equity through the moving process seems to be a shift in mind-set, at least with some people. For a lot of people, especially the one's moving from California and Las Vegas, this has been a huge benefit in their lives.

Local Market Speculation

Well, perhaps St. George will be the next Las Vegas and we will all regret not having invested more into real estate in this area. Yet, no one can predict for certainty what will happen with our markets. It is Brian's belief that people will continue to "flock" to St. George as they already are, because it is centrally located, the winters are mild, it is community-values-oriented (and for those with families - family-values-oriented too), and the atmosphere breeds a lower crime rate.

While local people are really surprised that prices have almost artificially risen, there is some preoccupation by those coming from where real estate prices are even higher, leading them to still see St. George as a good "hot market" to buy in - see The Next Hot Housing Markets.

Bigger is Sometimes Better

For you to be able to hold on to your new home for the length of time it might take for the home to appreciate, you need to make sure that the home you buy will suit your long-term needs. This translates into: don't buy a home that may end up being too small. Many first-time buyers make the mistake of buying a little starter home because it's charming, it's in the right neighborhood, or they think that's all they can afford. But a one-bedroom condo on the fifth floor or a two-bedroom, one bath house on an itty-bitty lot does not leave a lot of room for growth. A better approach might be to buy on the outskirts of a prime neighborhood where you can buy a 3-bedroom, 2-bath home for approximately the same price. You might not have the most prestigious location today, but you could experience good appreciation over a period of time; and not only will it finance your trade-up move, you will also be more comfortable in the meantime.

On the other hand, it is not good to have too large a home if one cannot afford the mortgage. Much more could be said about this perhaps, than planning ahead for growing room. Also, remember that when it comes to square footage, bigger does not necessarily mean better. A buyer might complain that they can only afford a 1,500 square-foot house in their price range, and while it's nice to have more square feet to a certain extent, a well-designed 1,500-square-foot home can be a very comfortable place to live. To sum it up - choose a home you can afford (a modest one if that applies) with a little growing room.

Floor Plans

It's true that some floor plans are better than others. Ideally, there should be good flow between the rooms - one that is conducive to your natural living habits. A home with a central hall that leads to many rooms is usually easier to live in than one that's laid out like a train where you have to pass through one room to get to other rooms. Good indoor/outdoor living can also make a big difference. A deck or patio off the kitchen, family room or dining room provide additional usable space and make the home feel larger.

In the end, don't be scared! Some buyers put off their home-buying plans for fear that the real estate market will fall. The chances are slim and in fact, this seemingly sane strategy can be risky if prices don't drop. Regret could kick in next year when the market appreciates and you haven't bought and the home prices, in turn, have been pushed further out of reach. Then again, there's usually no need to rush to buy in a market that's bloated with inventory, particularly if new housing developments are in the works. Just remember that an oversupply of housing relative to buyer demand puts a downward pressure on home prices. Keep up with your research and plan accordingly.