Recently a buying frenzy began for what many investors consider a good deal. Consider the housing auction that took place weeks ago at the San Mateo County Fairgrounds. Many investors bought properties at great discounts, such as $100,000 less than what similar properties fetched last year. Yet ask yourself, “Does great discount equate to good buy?” As you ponder the question, consider: the price dropped $100K in one year. Or perhaps I can phrase it another way: the price dropped $100K in one year.
Buying a home at a $100K discount: good buy or not? Hopefully you’re thinking no, it isn’t. If a property dropped $100K in only a few years or less, then the area obviously doesn’t hold values well. In fact the area is likely experiencing a market correction (as opposed to market cooling). When homes depreciate at double-digit rates, technically the market is correcting. In most correcting markets, economists predict continuing corrections throughout 2009 and possibly into 2010. So what is $100K discounted from last years prices may be bought at a $200K discount next year.
Over the last six to seven years, nearly all Northern California markets experienced high single and double digit growth. Areas traditionally considered slow growth markets exploded with high growth. Consequently the same markets implode with high depreciation. On the flip side, consider Burlingame, Menlo Park or Palo Alto. Were these good buys before 2000? If good buy means steady appreciation over time, then yes. The growth in these markets either flattened or cooled. Many still experience appreciation, only the numbers are much smaller.
Before buying in any area, ask yourself: was it a good buy before 2000? If yes, then expect steady appreciation over time. If the answer is no, then expect at least two years of depreciation or more.
See next week’s follow-up: When buying in a correcting market makes sense.
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