When is the right time to buy? (Part 1)

Realtors® are notorious for always claiming that “now is a great time to buy.” The website of Andy Weiser, a Fort Lauderdale Realtor® proves this point perfectly. It’s actually quite hysterical.

In a post on August 20, 2006, Mr. Weiser explains:

“Some people shopping for homes in Fort Lauderdale have been waiting to buy, hoping home prices will drop, hoping the state legislature would alter the property tax system or hoping for some dramatic change in property insurance rates. None of that is going to happen any time soon and prices are not going down.”

“If you are ready to buy a home in Fort Lauderdale, I urge you to go ahead and buy now.”

Then, on December 20, 2006 on the same website, Mr. Weiser completely contradicts himself when he declares:

“There is no doubt that the residential real estate market in Fort Lauderdale has undergone a price correction. More homes are on the market and prices are increasing less dramatically than in the past five years.”

“All of this is good news for home buyers in Fort Lauderdale. If you have been waiting for the market to slow down and for the selection of homes to expand, this is your opportunity to buy.”

Like most Realtors®, Mr. Weiser thinks consumers should buy when prices are going up as well as when prices are going down!

However, regardless of the views of certain Realtors®, there are times that consumers should never buy a home. I believe now is one of those times. In fact, I think “now” is one of the worst times in South Florida history to buy. In the coming weeks, I will post a number of arguments to show that all consumers should remain on the sidelines, at least for now.

To set the stage, let’s look at how buying “now” could have a long-term negative effect on your finances. To illustrate, let’s use the same numbers I used in a previous post entitled, “Should I buy or should I rent.”

Suppose we have two consumers, Joe and Susie. Joe is convinced by a Realtor® to “buy” this particular townhouse “now” for its asking price of $254,912. Susie, on the other hand, decides to wait and continues to rent the same townhouse next door. If a job transfer forces Joe to sell his townhouse after two years, who comes out ahead? Buyer Joe or renter Susie?

Joe and Susie's success depends entirely on what happens to the price of the townhouse after two years. Here’s the potential profit (loss) for Joe's investment:

In other words, if the townhouse doesn't change in value at all, Joe will end up spending $25,900 more than Susie over the two-year period and he will have to come up with $9,405 in cash when at the closing.

In my opinion, the most important part of the table is the last column because it shows the massive risk Joe took when he bought his townhouse. Under the worst case scenario, if the market drops at a 15% rate over the next two years (as I fully expect), Joe will have to pay $75,899 cash just to get out of his “investment.”

This table shows why it is so important for a consumer to avoid buying during a falling market. Doing so could potentially make the consumer a long-term prisoner to his mortgage.

In later posts, I will show why I believe the South Florida market drop by at least 15% annually during over the next two years.