Anyone who is about to purchase a new home or anyone who did it in the past knows how big an investment it is. In fact, official figures easily confirm that buying a new place to live is a truly significant financial venture: the Federal Reserve Bank of New York’s February 2013 quarterly report on household debt and credit states that mortgages represent 71% of the aggregate debt balance of American households. This striking fact speaks to the importance of carefully weighing the pros and the cons of a given property before actually purchasing it.
Most future homeowners are well aware that they ought to cautiously scrutinize every single aspect of the property they covet in order to avoid bad surprises. This is why many if not most buyers actually have their future home inspected by a professional. Still, buying a new home is not only tantamount to adopting new walls and a new roof. It also means adopting a new neighborhood or a new city. Unfortunately, when it comes to settling down in a new area, many future home owners fail to rationally ask themselves whether or not the location of the home has a good long-term price appreciation potential. Such negligence could lead to disappointments.
Are you sitting on a bubble?
Nobody has forgotten the real estate crisis that hit the United States a few years ago and caused the world’s economy to totter. Years later, the world still has not fully recovered. Although we would like to think that such a crisis will never take place again, real estate values greatly vary from one market to another, whether it is within the limits of a single state or within a given city. This means that there still are homes whose value is growing at an alarming rate, while others appreciate at a rate 1 or 2 percent above that of inflation, which is much more sustainable in the long run.
Therefore, one has to be careful when purchasing a new home in order to avoid thinking that current home-price growth in a given neighborhood is indicative of what will happen two or three years from now. In effect, slow appreciation in a town can lead to surprising results in the long run depending on how the neighborhood develops while steep value growth can lead to a bubble that will eventually blow out.
Nobody wants to be sitting on a bubble, especially if a mortgage was just contracted: if the market plummets and home value starts decreasing, ending up with a mortgage that is bigger than the value of the property itself could go from fiction to reality. One step in the direction that will minimize the risk of getting into such a situation is to look at construction rates, demand, and urban planning projects in the city and neighborhood where the desired home is located. This can greatly help future home owners to make an enlightened decision.
Leafing through stats and facts
Construction rates are good indicators of how well a given neighborhood is doing. In effect, if there is construction around, it is likely that this part of town fosters a good demand. If the city or the neighborhood is working on long-term urban development projects that will either keep up or improve the town’s attractiveness, efficiency and amenities, chances are that home value will increase at a decent rate. Looking at the kind and number of private businesses that settle down in the area also is a good way to get a sense of how lively that part of town is.
On the contrary, if a given neighborhood is saturated but continues to foster very high demand, home prices are likely to grow very rapidly and to become unforeseeable at some point. Although it can be very inviting to buy a home where home value is increasing quickly because of the neighborhood’s reputation, one has to be careful not to get carried away. Carefully looking at the state of the market in that part of town is the best way to avoid bad surprises. The home itself certainly is important, but the area in which it is built should also be carefully examined to assess its potential for growth.
About the author:
Alexandre Duval is blogger for Standard Life, a company offering various quality retirement products.