Renting Is Now an Option
In a down market, buying a home is no longer a sure thing
Not long ago, the decision to rent or buy seemed like a no-brainer. With interest rates near historic lows and home prices still rising, last year more than a million new homeowners ditched their landlords and bought into the American Dream. But all that has quickly changed as home prices reverse course and rising mortgage rates make buying a home less affordable than anytime since the mid-1980s. Even worse, with sales skidding and inventories surging in many areas, what felt like a sure bet a year ago now seems like anything but.
That, however, hasn't stopped Suzy Buckley from trying to persuade her friend Candise Shanbron to take the plunge. Buckley bought in three years ago, snagging a new condo in Miami for a preconstruction price of $324,000. When she moved in earlier this year, it appraised for nearly double that price, a fact she didn't neglect to needle her friend about. "But she keeps insisting, 'I'm going to wait until the market crashes and get a place in South Beach for half price,'" says Buckley. "I tell her that's just not realistic."
Leverage. Maybe not. But Miami's residential market--especially for condos--has strongly turned in Shanbron's favor. Although prices remain high, home sales have fallen by more than 30 percent from a year ago--just as a glut of new inventory hits the market. The trend is echoed in places like New England, Southern California, and Las Vegas, where anxious sellers are reducing their asking prices and home builders are coughing up a range of freebies, from granite countertops to reduced closing costs. "This is actually the best time to be a buyer in five years," says Florida real-estate analyst Jack McCabe.
The question is: Will it be an even better time to buy in six months or a year from now?
The short answer is yes, although much depends on where you plan to live. If the local economy is strong and jobs are plentiful, any recent (and likely temporary) surge in the housing stock could give you the upper hand in negotiating a deal you can live with. That is, if you plan to stay put for at least four or five years.
"You may not see much appreciation in the next couple of years," says McCabe, who expects the downward cycle in South Florida, for example, to play itself out over the next three years. "But buying is still an excellent investment in the long term. And in the meantime, you'll have your own place and get all the tax advantages that go with it."
It may be a particularly good move given the alternatives. In an ironic twist, the very affordability issues that are putting the brakes on the for-sale market are pushing down vacancy rates and increasing rents in many areas, as more and more would-be buyers are forced to sit on the sidelines. Nationally, rents are expected to climb 5.3 percent this year, according to the National Association of Realtors, and even more in strong labor markets like Washington, D.C., where rents have climbed by 7 percent over the past year.
Signs. That could change, however, as the home-buying market continues to cool. Rather than trying to sell into a glutted market, some condo builders are adding new inventory to the rental pool, instead. Frustrated home sellers, too, may take their houses off the for-sale market, "which could mean a lot more 'For Rent' signs popping up," notes author June Fletcher, who thinks rental prices could reverse course in areas where unsold home inventories are high.
Shanbron tested her landlord's resolve recently, asking him to go month to month when her one-year lease expires this month. "He was like falling all over himself to keep me here," she says.
She may have even more leverage with sellers. With unsold inventory up by more than 300 percent in Miami over the past year, "she can go out and really bargain them down," says Robert Bruss, author of The Small Investor's Guide to Real Estate.
One key to doing that is to look for homes whose sellers stand to come out ahead even if they have to sell at a reduced price. "Find out how much they paid, then negotiate up from there," says Bruss. "And if they paid what the place is worth today, then forget them because their threshold for pain is too low."
That strategy might well work with people like Buckley, who recently conceded the market's new reality to her friend for the first time. "She told me, 'If I take a hit, I'll still make money,'" Shanbron says of the last time she visited Buckley's apartment.
So is she ready to make Buckley an offer?
"No, not just yet."
This story appears in the August 7, 2006 print edition of U.S. News & World Report.