All across the country, home prices seem to be inching up, even despite the annual holiday-season lull in home sales. For many of us, that means this is the time to get into a new house, and it can be tempting to get something workable, even if it isn’t exactly the home of your dreams. However, the upward trend in home prices doesn’t necessarily mean we’re entering a new bubble, so homebuyers should plan to live in the home they buy for a good long time.
Why isn’t it a new bubble?
First, the dynamics of the market are different. The crazy market of the early 2000s wasn’t actually a real-estate bubble. It was a securities bubble that drove home prices up because the securities in question – home mortgages bundled and sold to investors – were connected to homes. When that securities bubble burst, lending changed, buyers dried up, and home prices plummeted.
In fact, home prices fell below a fair value – and in most parts of the country that’s still where they are. The increase in home prices is still bringing prices up to where they should be. There are very few analysts out there who think it’s going to push prices higher than that. In other words, we’re rebounding, not entering a bubble.
What’s the difference between a bubble and a rebound?
When you buy in a bubble, when home prices are increasing 15% to 20% in a single year, you can buy a home one year, sell it the next, and make money from the deal. Rebounding markets might grow, but the rate of growth tends to be slower. (For example, Zillow estimates that homes in Thurston County, where I live, will appreciate by about 1.6% in 2014. Selling a home costs between 8% and 9% of the sale price, so your home must appreciate at least that much for you to break even.
Rebounding markets also tend to be harder to read. Bubble markets go up and up and up until the bubble bursts, like a mad game of musical chairs, with buyers in a frenzy to get in and get out before the inevitable happens. Rebounding markets tend to fluctuate more, rising gradually over time, but with many hills and valleys, and with greater seasonal impact.
How does this affect homebuying?
When a market supports short-term ownership of a home, you can buy the place that works for you now, with the goal of moving into a new home when your needs change. Buying in today’s market, on the other hand, means you need to think for the long-term.
Although every market is different, homebuyers need to be cautious about their choices. When you look at a home, think in terms of living there for seven to ten years. Can the home grow with you? Can it accommodate changes you plan for – like having children – as well as changes that you don’t plan for – like accidentally having children? Are other factors like neighborhood trends, area economic indicators, and urban planning likely to support value or curb it?
In reality, the market is pushing us back toward a more classical perspective on homeownership. Instead of looking at a house as an asset we can live in, we need to look at the same house as a home we can invest in for the long term. Probably, that’s a good thing.