Should I buy a property in 2009?
That is a great question and there is probably no correct answer. Well, maybe once everything turns around all the experts will come out of nowhere and state that you should’ve bought. They are great with hindsight.
I have commented on Warren Buffett’s quote numerous times “Be greedy when people are fearful and be fearful when people are greedy. He learned this from his mentor Benjamin Graham who wrote the book “The Intelligent Investor” which is an incredible book and I recommend reading it.
My point is to do the opposite of everyone else and don’t run with the herd. This is very hard to do especially when emotion and the media takeover our rational thinking. It is very rare that a buyer is in the driver’s seat like they are today.
The Census Bureau said the average amount of time someone stays in there home is about 14 years. I bet if you bought during the recession in 1991 when I am sure no one thought was a good time to you ended up doing pretty well.
The average increase on real estate is 6% over time. So let’s do the math on say 3% appreciation. If you bought a home for $100,000, put 10% down ($10,000), 3% is $3,000, so your return would be 30%. This is because you use leverage to buy a home. Not only do you get that type of return you also get a tax break and get to live in the home.
Here is another good example on why to buy now. Rates are at a 37 year low and currently at about 4.875% on a 30 year fixed mortgage. If you bought a home today for $100,000, putting 20%, at a rate of 4.875% your principle and interest payment would be $423.37. If you waited 6 months and home prices dropped by 7% on that same house the purchase price would be $93,000 but say rates went up 1% to 5.875%. Your principle and interest payment would be $440.10 which is more per month. The bottom line is that interest rates will not stay this low forever and once the market does turn around interest rates will go up. Notice I didn’t say interest rates will skyrocket which is something that can happen. Even 5.875% is an incredible rate. A drop in value of 7% is very large and you also need to keep in mind that you are most likely buying a property today that is worth more than you are paying. This means you have some equity to work with already if values drop more than 7%.
CNBC was talking about what we can expect in 2009 yesterday and one of their comments was that we will see increased sales in Florida and California due to the amount of foreclosures. This is because everything is on sale down here.