In the kitchen, it's common wisdom that you don't try to catch a falling knife. But in real estate markets that have recently seen double-digit declines, many buyers are anxious to catch the equivalent of a falling house.
They're betting they can buy property at or near its cyclical bottom by scoping out distressed but fundamentally desirable neighborhoods, floating lowball offers and focusing on bank-owned homes.
It's easy to understand why, given the property values in some of the nation's hardest-hit real estate markets. Home prices in the five worst-performing major metropolitan areas -- Las Vegas, Miami, Phoenix, San Francisco and San Diego -- are down more than 40 percent from their peaks, according to the S&P/Case-Shiller Home Prices Indices. With interest rates for government-backed mortgages at record lows, monthly payments for owner-occupants are at their most affordable levels in years.
Nonetheless, economists and veteran real estate investors say market timing is a risky proposition.
"The odds of you timing the bottom perfectly are pretty low," says Rick Sharga, vice president of marketing at RealtyTrac, a foreclosure data provider. "If you're that good, you should be playing the stock market every day."
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Although the current buyer's market may look attractive, rising unemployment rates and persistently high foreclosure rates add pressure on the battered housing sector. Housing Predictor, a forecasting Web site, predicts that 25 housing markets, from Las Vegas to Seattle, will see declines between 14 percent and 27 percent this year.
Sharga sees little reason for prospective owner-occupants in most markets to back away from buying an affordable property. Prices could drop further, he says, but the worst has probably passed. Additionally, historically low mortgage rates and tax incentives for new buyers probably won't last much longer.
Still, real estate is the ultimate local commodity, and some markets will be closer to bottom than others, so prospective buyers looking to protect themselves against further price declines need to consider local economic conditions. Before finalizing a purchase, real estate experts advise that price-sensitive buyers check these five critical factors.
Look for positive indicators: Rising prices are the most obvious indicator of a market recovery, but they’re also evidence that the cycle has already passed its low point. In still-declining markets, however, you can still find other positive indicators. David Kendall, a Realtor in Oakland, Calif., says he's encouraged to see a rise in sales volumes in some hard-hit ZIP codes, indicating that buyers are comfortable with current prices. Other potential turnaround signs include a drop in the number of days that homes sit on the market and an uptick in competitive bidding for compellingly priced properties.
Be aware of "shadow inventory": Banks often don't want to put their entire real estate inventory on the market at once. Doing so can depress prices, particularly in neighborhoods that have not yet seen a high number of foreclosure sales. Because of several factors -- including the recently expired moratorium on home repossessions and anticipation around new federal mortgage assistance programs -- banks have been allowing such "shadow inventory" to build up, says Chris Matty, marketing director at ForeclosurePoint, which publishes foreclosure data. "There's a huge pool of inventory and distressed homes that have not made it to the market yet," he says. "But eventually that has to come."