Q: I live in the Tampa, Fla., metropolitan area and am planning to buy my first house. I've been hearing a lot of talk about the real estate bubble and have a couple of questions.
Should I wait to buy a house until the bubble has burst? To reduce the risk, should I buy a smaller house than what I can afford? I have two kids and prefer to buy a single-family house rather than a townhouse or a condominium.
Finally, I've heard that even condos and townhouses are overpriced due to the bubble. Is a single-family home, condo or townhouse the best investment?
A: You talk about the "real estate bubble" as if it's a known and accepted fact. Unfortunately, while some economists - including Federal Reserve Chairman Alan Greenspan - believe that home prices are a little too high in some areas, it's unclear what's going to happen next.
If you're waiting for the real estate bubble to burst like the stock market bubble of 2000, and expect that real estate prices will fall by 50 percent to 75 percent, as did the value of some stocks on the NASDAQ, you might be surprised.
While it's possible that homes will come down in value somewhat, this will mostly likely be tied to a dramatic rise in mortgage interest rates. While the Federal Reserve Bank has raised the short-term Federal Funds rate nine times in the past year or so, mortgage interest rates have remained, as we went to press, below 6 percent for a 30-year fixed-rate loan.
Super-low interest rates mean more people can buy homes and spend more money on them. That demand is what keeps real estate prices spiraling upward.
Should mortgage interest rates rise significantly, then you can start worrying about home prices coming down.
I don't know what's going to happen in Tampa over the next few months, let alone the next few years, but I don't think you should put your home-buying plans on hold. Instead, you need to be smart about what you're doing, and plan to stay in the home you buy long enough to ride out any short-term real estate cycles.
If you want to protect yourself, look long and hard for a home that will allow you to build in value. Homes that are in less-than-perfect condition, also known as "fixer-uppers," tend to sell for less than homes in perfect condition. That's because people have a limited amount of time, cash and patience. After spending gobs of money to buy a property, they typically don't have the cash reserves or patience to tackle a fixer-upper.
It's quite possible you can find a home in relatively good shape with truly awful decorating that you can fix up, live in, and later collect a nice profit for your labors.
Another good strategy is to shop for a home in a neighborhood with excellent schools. Homes in great school districts areas typically are a bit more "bubble-proof" or "recession proof." Should the boom continue, they will appreciate faster in value than homes in mediocre or poor school districts.
Finally, it's always a good idea to be conservative when buying a home. If you can spend a little less, you'll have extra cash to use for your children, to fix up your home, or to save for retirement.
By being conservative, thoughtful and savvy about the next house you buy, you'll put yourself in good shape should a recession occur or the real estate bubble burst.
Ilyce R. Glink's latest book is 100 Questions Every First-Time Home Buyer Should Ask, 3rd Ed, Three Rivers Press. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-12p EST. You can also write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022, or contact her through her Website: www.thinkglink.com
© 2005 by Ilyce R. Glink. Distributed by Tribune Media ServicesCopyright © 2015, Los Angeles Times