Fact – Most home buyers purchase their home when home values are rising.
A recent comment left to me by a potential home buyer has left me pondering the above fact. I had just published a very “bullish” quarterly market report saying home values were stable or rising. Good news! But a comment in the FB thread reminded me that home buyers didn’t think this was such a good thing.
What it really boils down to is human nature. To get a better picture of how this plays out in the real world we need to look at how “potential” home buyers behaved during the great housing recession. Note that I qualified my buyers from that period as “potential” buyers, because the vast majority didn’t purchase anything. In 2011 I worked with 27 qualified buyers, some of whom I took to over 40 homes. NOT ONE bought a home.
It was amazing to see “potential” home buyers turn their noses up at prices and terms that would have had buyers crying with joy just two years before. Prices were almost in fire sale territory, the terms were so sweet the contracts were dripping honey. None of that mattered. Whatever the price or terms, my buyers wanted “more”. Eventually, there was no “more” the sellers could or would or even should give, and another buyer would walk away bewailing the injustice of it all.
There was a bottom line that most buyers from this period couldn’t wrap their heads around. It was that 95% of the bargain they were getting was already baked into the price and terms. They were getting a home that was essentially selling at a 25% discount. THAT was the bargain! Trying to beat down the price an additional 25% wasn’t going to fly.
I often wondered what these buyers were hesitating for? All through the end of the bull run, buyers were hoping for just a reasonable break. Now they had the bargains galore, yet nothing was good enough.
Certainly, some people were being just plain greedy. Some buyers were looking to kick a potential seller when they were already down. When this happened it was not a pretty site. There was some small mercy in the fact that these bully tactics seldom worked. If it was a short sale, the bank was not going to accept unreasonable terms. Ditto a foreclosure.
The fear in that market was understandable. The market had been through a violent shake out. And prices were not yet rising. No one was certain that the declines had ended. In 2011 the markets were mostly drifting sideways. The knife had fallen and any further declines looked to be minor. Once prices started rising, the sweet deals were going to be a thing of the past. But there is no announcement at the end of a bear market that sounds the “all clear” telling people it is safe to buy again. People were still afraid of another shoe falling and many were demanding unrealistic reductions and sweeteners to protect themselves from further shakeouts.
Buying into an appreciating market gives home buyers a feeling of security. If home values rose 4% the year before, it’s a sign that the market is strong and that they will do the same thing or better the next year, and the year after that.
But with safety comes a price. The home is going to be more expensive. The assurance that markets are rising attract more buyers and this brings competition. Prices rise and sometimes there are bidding wars.
Most of us just aren’t gamblers at heart. At least not with something as expensive and life-changing as purchasing a home. Unless you know housing markets up and down and study them daily, it takes nerves of steel to buy into a bear market. The fear of potential loss outweighs the desire to snag a bargain.
If you are prudent and like to sleep easy at night, don’t try to time the markets. This housing market shows no signs of the crazy bubble territory we were in 10 years ago. The price increases are due to high demand. They aren’t at the eye-popping double digit figures that we saw back in the bubble days. New inventory is not being built anywhere near fast enough as more people start looking for homes.
Do I KNOW this market is not going to change. Of course not. I don’t own a crystal ball. But I do know that the price increases are orderly and in line with market demand. I also don’t see any economic levers to reverse this trend in the foreseeable future.
So, one of the things I have said to prospective buyers who are on the fence because prices are going up: Rising prices are only bad when you are looking to buy your home. Once you have bought the home, it’s all good.
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