As the media continue to report an improving real estate market and rising prices, it may be putting some pressure on those who have been sitting on the sidelines. Interest rates are still low, and rising price news could be pulling some buyers into the market just to try and get ahead of even higher prices in the short term.
Buying a home is a major decision that rarely can be undone without financial harm for five the eight years or longer. Rushing into today's market just because of fear of further price increases is probably a mistake. The reason I believe this is true in today's market is that the main reason for price increases right now is mostly due to historically low inventory.
Supply and demand rules markets, and the supply of new and existing homes is low by historical standards. Home builders haven't been building at anywhere close to rates in the past. Most new construction for the past few years has been in the multi-family and apartment markets. That's the reason for a low inventory of brand new homes.
When it comes to existing homes, there are not nearly as many homeowners willing to put their homes on the market right now for a couple of reasons:
1. Mortgage debt versus value: Some estimates put homeowners underwater on their mortgages at around a million or so. They owe more than their home is worth, even after recent price advances in many markets. Millions of others have come out of negative equity, but they aren't back to levels pre-crash, and they are waiting to see how much equity they can recoup.
2. Lingering hangover post-crash: The "American Dream" isn't as alluring as it once was, with a lot of people simply not expecting home ownership to be the great investment enjoyed by previous generations. So, those who would be sellers aren't excited about buying into another home with doubts about market performance in the near future. If they don't want to buy a replacement home, they will stay in their current one.
Rushing into a market simply because of fear of price escalation could result in major buyer remorse. I'm not trying to discourage anyone from buying a home if that's what they want and need. However, there should be other reasons for the purchase that are at least as strong or stronger than getting in front of price increases that may not come.
The fact is that at some point price increases across the board should draw sellers back into the market. If homeowners flock back to the market and list, it could put significant downward pressure on prices quickly. Plus, it will provide a lot more choice for buyers. Choice is pretty limited at this time, so balance concern over prices with your other motivations for buying.