For years, we have heard that the three most important things in real estate are location, location and location. A client recently commented that, really, the most important factor is timing. We have come to agree. In looking back at major drops in our real estate market, the late 1980s and 2009, clearly timing was critical for success in buying or selling real estate.
First, let's define success. Typically, one hopes a property will appreciate 3 percent to 5 percent a year. A property has to have some level of appreciation to keep up with inflation, cover fair wear and tear, and offset interest payments. You can even accept a balanced market and not losing money for some time. Since you have to live somewhere, owning a property becomes a hybrid investment because part of owning property is for personal enjoyment and use.
Timing can be defined as the art of regulating your actions in relationship to others to produce the best effect. Timing is also taking advantage of what you may not be able to control, as well as what you can. For example, you can't control the economy, supply, demand or interest rates.
The economy, on a personal level, depends on where you live. Are you in Detroit, where the city is facing bankruptcy? In California, where the state has huge debt? Or in Alaska, with 4.7 percent unemployment (below the national average of 7.6 percent) and a Permanent Fund worth more than $40 billion?
Supply and demand varies with whether you are a buyer or a seller. A seller's market is when the supply (properties for sale) divided by average monthly demand (buyers in the market) is less than four months of inventory (months to sell the current number of homes). A balanced market is four to six months of inventory. A buyer's market is when there is an excess of six months of inventory. Of course, these calculations vary within price ranges.
Keeping interest rates low was one of the federal government's responses to the 2009 financial crisis. All indications are that these historic lows are coming to an end. If you are selling, you should realize that every percentage increase in interest rates means a potential buyer loses 10 percent of his borrowing power. Higher interest rates decrease the number of buyers who can qualify for a loan for your home. This will affect your selling price.
So what can you control as a seller? The property condition, the price you ask and when you put your property on the market. Additionally, keeping an eye on the economy, competing properties and the amount of demand can help you determine when is the best time to try to sell your property.
So what can you control as a buyer? Know your financing options and protect your credit score. Unfortunately, many buyers let emotions rule their search. They enter the market for a home before they know how much they can afford or before they have found the best loan program to fit their financial needs. They find a house that they fall in love with, then hurry to find the financing. They may end up accepting the first financing program offered before exploring and understanding all possible options with different lenders.
Why is your credit score important to control? Previously, lenders focused on two aspects when qualifying a potential buyer: the appraised property value and the buyer's current ability to pay. All borrowers got the same interest rate as long as their credit score was above a certain number.
Now lenders use your credit score to help evaluate the risk of lending you money. Your credit score is a numeric value of your past borrowing behavior based on a composite of information gathered from a variety of sources (lenders, banks, credit cards, etc.) using a very complicated formula. Depending on your credit score, a sliding scale of adjusters is added to the base interest rate. The lower your credit score, the greater the risk that you could default, so the higher the interest rate a lender charges you. It can also increase the amount of closing costs you pay and what type of loan program is available.
So the key to success in today's real estate market truly may be timing the actions you can control by watching the actions of others you can't control.
Barbara and Clair Ramsey are local associate brokers specializing in residential real estate. Their column appears every month in the Daily News. Their email address is info@ramseyteam.com.
Barbara and Clair Ramsey
Housing