Buying in a Cooling Market

By Amy Hoak From Marketwatch ( 7/31/2006

Residential real estate, a shining star of the national economy that seemed unflappable over the past couple of years, has hit a speed bump.

Nationally, home price appreciation is slowing down from the rapid pace experienced by many markets over the past few years. Mortgage interest rates are on their way up. Is this any time to be thinking about investing in a home? Of course it is –– if you’re buying it for a place to live, not as a speculative investment, and can afford to take the leap.

…People now are "buying for the right reasons," said Diana Bull, a Realtor in Santa Barbara, Calif., and a regional vice president for the National Association of Realtors. Sellers no longer hold all the cards, she said, which is creating a more balanced market.
Below are several benefits of home shopping in a cooling real estate market –– the silver lining to news predicting the residential real estate party is over.

More selection

In a growing number of local markets, buyers have more time to think about a home before they make a decision on whether to purchase it. Last year, that often wasn’t a likely luxury.
"Once you as a potential buyer found a house that met your needs, you had to jump on it right away," said Frank Nothaft, chief economist for Freddie Mac. "One thing that we’re seeing nowadays –– compared to six or 12 months ago –– is many markets where homes are staying on the market longer."…

More room to negotiate

Current conditions in many markets also afford consumers a better opportunity to negotiate.
"This market is forcing everybody to slow down and take their time," Bull said. In that time, buyers have more of a say at the bargaining table.
In fact, getting a fair deal is even more of a priority for homeowners who can no longer bank on high appreciation rates to save them if they pay too much, Drinkwater said. If you slightly overpaid in a bidding war at the height of the real estate boom, high appreciation rates helped correct the error, he said. In many markets there is now no such safety net.
Interest rates are still relatively low
It’s easy to get caught up in the upward scooting of mortgage interest rates. But take the northward movement with a grain of salt.
Some people act like "Chicken Little" and feel as if the sky is falling when interest rates go up a quarter of a point, said Gaines of the Real Estate Center in Texas. Instead, keep it in perspective.
Interest rates are still way below what they were five or six years ago, Gaines said. Even if the 30–year hits 7% by the end of the year, investors should keep in mind the double–digit rates of yesteryear.

A home is still a good investment

If you’re in it for the long haul –– that is, buying a home with the intention to live in it for years –– a home is still a decent investment.
Consider this piece of information from the National Association of Realtors: Since record keeping began in 1968, the national median home price has risen every year. In a balanced market, home values typically rise at the general rate of inflation plus 1.5 percentage points. That’s to say nothing of the tax benefits that come with owning your own home.