Buying a Home in a Down Market

Couple in garden looking at house
•••

Westend61 / Getty Images  

It's never easy to time the market for the optimal price when buying a home. If the real estate in your area is in the middle of a down market, it is normal to wonder if you should wait to buy a home. When home prices decline, it's tempting to watch and wonder just how low they will go.

What Is a Down Market?

A down market is when real estate sales are sluggish and prices fall. It could mean that interest rates are low, too so you could buy your dream home at a lower price and smaller interest rate. However, it could also mean that if you already own a home, you're less inclined to put it on the market out of concern that you'll lose money on the sale.

Strategies for Buying in a Down Market

You might want to buy in a down market if:

  • You want to move up to a more expensive home: A down market could be the best time to do just that. But the timing is tricky. The longer you wait to sell your home, the lower the price of it could fall, which means you'd get less for selling your home, making the more expensive home out of reach.
  • You can arrange for alternate housing: This is another strategy where you sell now, move somewhere temporary while you wait a few months to see where prices go, and then buy your new home.
  • You sell and buy simultaneously: This could help you still be ahead of the game if the more expensive home is being sold at a greater bargain than the loss on the sale of yours.
  • You believe the home will be a long-term investment: If you have a stable income and would enjoy a consistent, guaranteed monthly living cost, and believe that buying now could result in a profit in the long term (say 20 or 30 years from now), then buying a home in a down market could be a good idea.

Selling Your Current Home in a Down Market

Say your present house is worth $300,000, but because of high inventory in the area and few buyers, you must reduce your price by 10%. So, instead of receiving $300,000, you would get $270,000 and "lose" $30,000.

But let's say you bought this home 10 years ago and paid $150,000 for it. You're still ahead $120,000, less the costs of sale.

If you are planning to move up to a $500,000 house located in the same distressed market, you could probably buy that house at that same 10% discount, or $450,000. That would mean you could save $50,000 on buying that home.

So, if you sell your home in a down market and buy a new home in the same down market, theoretically you could come out on top:

  1. You "lost" $30,000 on the sale of your home.
  2. But you "made" $50,000 on the purchase of your new home.
  3. That puts you $20,000 ahead, not counting the costs of sale.

Interest Rates in a Down Market

Which way are interest rates moving? Are they moving up or moving down? If interest rates are near an all-time low, with the potential to start inching upwards, waiting could cost you. You might not be able to afford to buy a home at any price if interest rates increase.

Here's what happens with each incremental increase in interest if you're looking for a home loan of about $400,000.

  • A 0.5% increase would cost you over $31,000 extra for the home over the life of the loan.
  • A 1% increase means paying over $64,000 extra for the home over the life of the loan.
  • A 2% increase would mean paying over $130,000 extra for the home over the life of the loan.

On the flip side, buying a home while mortgage rates are low could mean saving thousands of dollars in interest over the life of your home loan.

Purchase Prices vs. Interest Rates

Let's say you're debating between buying a home in a down market that is $425,000 and one that's $525,000. If you have enough money saved to put down 20% and qualify for an 80%, 30-year conventional loan, it's important to look at how your monthly payments (only principal and interest) would compare:

Home Price Interest Rate Payment (Principal and Interest Only)
$425,000 5.5% $1,930.48
$450,000 5.0% $1,932.56
$475,000 4.5% $1,925.40
$500,000 4.0% $1,909.66
$525,000 3.5% $1,885.99

The payments are all in a close range. However, if you can afford the $425,000 home at an interest rate of 5.5%, you can also afford the monthly payment on the $525,000 home with a 3.5% interest rate.

Now imagine if home prices also decline at the same time that interest rates decline—you could get more home for less money. If you wait and rates increase, you could end up losing out on that bigger home.

The Bottom Line

A good strategy is to weigh all the pros and cons of homeownership before making the decision to buy in a down market. Don't panic over headlines and take the time to make an informed decision. Run your own numbers to understand what you can afford. And consider working with an experienced real estate agent who will put your interests first.