Timing the market

I've had a number of people--both active clients and casual acquaintances--express an interest in buying but also trepidation about purchasing a home in an unstable market. Their reasoning is centered around two ideas: 1) housing prices may continue to fall so they will lose money on their investment and 2) if they wait just a while longer, prices will fall and they could get a better "deal." On the surface, this line of thought might appear sound, if not prudent. However, there are several holes in these theories--at least as they apply to the Chicago market.

First, for those concerned about their investment: real estate is a flexible market and while we are currently seeing a dip in yearly appreciation, the long term prospects of investing in a home are good. Neighborhoods throughout the city have seen wonderful appreciation rates over the past 5 and 10 year periods. Unless you are planning on selling your new home in the next 1-3 years, you will most likely see it appreciate a respectable amount: at least enough to not lose money on your initial investment.

Secondly, trying to "time" the market can be a risky proposition. Remember that your monthly mortgage amount is determined by your interest rates as much--or more than--the purchase price. If rates begin to rise in the spring (as they typically do,) they could offset any price reductions offered by sellers. Quite literally, a seller might decrease his asking price by $10,000 but if rates rise even 1/2 a point the buyer's monthly payment actually increases. It can be a lose/lose proposition that leaves neither party happy.