I got a PM from another MMM reader with a question about waiting until prices drop before buying.
He said:
I'm in Nevada too (Sparks). I have a few properties and I'm wanting to buy at least one more. This AB284 thing has screwed up the Reno RE market. It is shooting up now but I expect it to drop once the AB284 dam breaks. What do you think? If you had $80k cash would you be looking now or waiting 6 months or a year for prices to drop? If I'm wrong I could end up paying a lot more.
I didn't put this on the forum because it's only a NV issue.
(Small background: AB284 is a law passed in Nevada that went into effect last October which has made it very difficult for banks to foreclose. Consequently, inventory has dropped, leading to rising prices.)
After replying to him, the answer seemed to apply to more than Nevada residents (I'm sure there are people all over wondering if they should buy now or wait), so I decided to go ahead and post it here as well.
The following is what I responded back.
I'm not sure that AB284 will be resolved in 6 months. The next legislative session won't even begin until next February, and it certainly won't be resolved as soon as they do. It could take another year, or more.
That being said, I do think we will see an increase in inventory nation-wide (including Nevada) after the election. I think banks are holding back some inventory to create some false house appreciation for political reasons.
I'm still buying right now, though I do expect prices to go down. I'm not a big fan of market timing in general (even slow moving markets like real estate) and I'm not sure what will happen in the future. All of the above are my predictions, so take them with a big grain of salt.
Furthermore, I like to leverage and get mortgages, and interest rates will rise at some point. Even if home prices drop, I may be paying more monthly due to rising interest rates, so trying to time the bottom of the interest rates as well as the bottom of home prices is doubly tricky.
I also think of it as dollar cost averaging - the house I buy today may cost slightly more than the one I buy a year from now (and will have declined in price some), but since I don't know when the bottom is, if I keep buying now, and then, I'll dollar cost average into some very good prices.
Also I ran some calculations once and determined that buying now (or rather, at that point) was better than waiting, even if prices fell, due to benefits (cash flow, among other things) gained in the meantime. For example, say I buy a 70k home today. Cashflows $250/mo. Say prices decline 5% over the next year. In a year, I'll have gained $3000 cash, and lost 3500 in equity. Seems like I lost $500. But with mortgage interest writeoff and depreciation I'll have likely gained more like 2,000. Having your money sitting in cash (to keep it liquid while waiting for a bottom) versus investing it now and getting an immediate double digit return. I'll generally take the latter, even if the asset value is going to decline a little more.
If you are just purchasing an investment home as a one-off thing (i.e. not to build a portfolio of multiple rental properties), and you strongly feel the market is going down, wait a bit. Even after the election for winter time, when prices sag a bit seasonally. That's fine. Waiting for AB284 to be completely resolved or repealed is probably not worth it, IMO.
And last: a deal's a deal, regardless of the market. I wouldn't pass on a great deal, personally, I'd make it happen.
tl;dr summary: Due to a number of factors (inability to time market, potential of rising interest rates, dollar cost averaging, gains made even on an asset declining in value, and I don't like passing on a good deal), I'm still buying now. Waiting a bit isn't a terrible play if you're only purchasing one.
Hopefully that helps someone or gives someone something to consider. Thoughts?