Buying From 'Properly Seasoned' Sellers

Posted by: Peter Coy on March 30, 2006

GUEST BLOG FROM TIM MULLANEY

BusinessWeek’s Tim Mullaney writes:
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Like my story in this week’s magazine says, the one thing I do know is that if I’m a home buyer right now, I have my hand out. For concessions from the seller, from the broker, from everybody. When I bought my first house in 1991, my wife and I joked that we only wanted to see houses that had been on the market for months, because their owners were “properly seasoned.” It’s not nearly as tough now as that market was. But oh, those little signs of the times that pile up in your head. One that’s in my head now: ZipRealty has added a feature to its most excellent Web site www.ziprealty.com that lets you modify a search so you see only those houses in a cute little neighborhood of Dallas, say, that have been through at least one price cut. And God knows that when housing inventory is up 35% and the number of agents nationally is up about 60% in the last few years, the supply-demand balance is shifting. So let the tenderizing begin.

BTW, no one in the media gets much pleasure from slagging the housing markets – we reporters usually don’t own stocks thanks to conflict-of-interest policies, but we usually do own houses. And we don’t know how tough things will get – I lean toward the not-that-bad side, thinking that in at least half the country housing is pretty well priced and in the rest the correction will, for most people, simply make them temporarily give up the paper gains of the last year or two. But journos can’t resist the ambiguity of the market now – no one really knows what’s happening, so everyone’s guess is equal. On the Internet, no one knows you’re a dog, and all of that. We love that. What do you think?

Reader Comments

sidelined_in_oc

April 1, 2006 1:24 PM

To me it is a matter of basic cost vs benefit and simple math. When I look at what the costs are to own a home in SoCal are versus renting right now renting wins. I am not adding in the forecasted "appreciation" simply because I do not have a crystal ball and I do not believe anyone else does either. I do, however, see inventory rising and median prices falling. To me that does not bode well for future prices.

So before I jump in and buy prices will need to come off enough to roughly re-align with rents. And as rates increase that will depress prices further. For those who have a good cushion of equity this means less profit. For those who must sell with little or no equity it unfortunately means a short sale. I would not like to be in that position and that is precisely why I will not try to catch a falling knife, but rather wait it out until I see rent=buy or mean reversion. As I wait I can save more each month toward a decent down payment and know that buying at a lower price also means lower taxes. I wish no ill will on owners, I simply choose to be conservative with my money.

Danny

April 3, 2006 11:35 AM

For quite awhile, I was pulling my hair out in the attempt to make the best financial decision in whether to continue renting or buying. I live in metro Chicago where prices, in the area I'm looking at, have appreciated for the last 20 or so years. I've been troubled with such thoughts as, "Will I buy at the peak only to watch the 'investment' decline?" In the process, I have searched a number of websites to find an appropriate rent vs. buy calculator. Most of these calculators are misleading and usually favor buying, ignoring the true opportunity cost for those funds saved when not buying and invested in other markets (such as stocks, bonds, commodities, etc.). I decided to create my own calculator simply using Excel. Rather than trying to guess at the appropriate appreciation rate (which seems nearly impossible, even for economists from Yale), I created a "break-even" point. Entering certain data, including rent per month, average rent inflation, savings/investment rate of return, purchase price, downpayment, mortgage rate, realtor costs, assessments/maintenance/insurance, property taxes, expected number of years to hold on to the property, closing costs, and tax bracket, I was able to come up with the amount I would have to sell my house, based on the length of time I expected to hold the property for, in order to break-even if I rented for that same time period. With the spreadsheet I've created, I'm able to change any variable listed above and see how the break-even changes. I even included an input for roommate subsidy in case you can have a roommate assist with the mortgage for two years, but not the entire length of ownership. The break-even analysis brought me an entire new perspective on whether to rent or buy. What were my findings? In my particular case, if I can get my friend to rent out one of my rooms for two years, I feel very comfortable making the purchase based on the lower break-even sale price.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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