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I've been pondering this question for a while.

If I buy property when the market is in a downtrend the property loses value, but I would lose money on rent anyway. So, as long I'm viewing the property as housing expense I would be ok.

If I wanted to sell and upgrade to a larger property, the larger property would also be cheaper in the downtrend.

However, if the market is in an uptrend, selling the property would gain me more than what I paid, but larger houses would also have increased in price.

Do both of these scenarios negate the pro/cons of buying in either market?

  • Is it an investment or a place to leave? – littleadv Dec 14 '11 at 22:43
  • As a place to live, with the future possibility of it being an investment. – jaffa Dec 14 '11 at 23:30
  • The larger property would be cheaper in a downtrend, but when you sell your current house, you may not have any money leftover in order to have downpayment on the larger house. – Andy Wiesendanger Dec 20 '11 at 20:34
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If all the property is going up and down at the same rate, it's probably a bit of a wash. However, there are markets (e.g. the Front Range of Colorado, where I live), where property at different price levels and locations has performed very differently.

For a place to live, I think it's most useful to look at housing as a consumption decision, like buying a car, rather than an investment decision, like buying art (since it is similarly illiquid). Consider what you need and want (features, location), how important the "own vs rent" tradeoffs are to you (including the risk of losing your equity), and what you can comfortably afford. Then don't worry so much about price trends.

This, it seems to me, is the lesson of the recent housing bust.

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As an investment, the trend doesn't really matter, what matters is the price which you buy the house, and the price at which you sell. Say you buy a house for $250k today. In general, it doesn't matter if the house is worth $200k or $300k tomorrow (neglecting things like refinancing and home equity loans). What matters is the price when you sell. The longer you plan to stay, the less the current market conditions mean.

Of course there is a lot more that goes into the decision to buy a house, since you are going to live in it. You also need to take into account things like how long you plan on staying in the area, the stability of your job, and future family size.

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If I buy property when the market is in a downtrend the property loses value, but I would lose money on rent anyway. So, as long I'm viewing the property as housing expense I would be ok.

This is a bit too rough an analysis. It all depends on the numbers you plug in. Let's say you live in the Boston area, and you buy a house during a downtrend at $550k. Two years later, you need to sell it, and the best you can get is $480k. You are down $70k and you are also out two years' of property taxes, maintenance, insurance, mortgage interest maybe, etc. Say that's another $10k a year, so you are down $70k + $20k = $90k. It's probably more than that, but let's go with it...

In those same two years, you could have been living in a fairly nice apartment for $2,000/mo. In that scenario, you are out $2k * 24 months = $48k--and that's it. It's a difference of $90k - $48k = $42k in two years. That's sizable.

If I wanted to sell and upgrade to a larger property, the larger property would also be cheaper in the downtrend.

Yes, the general rule is: if you have to spend your money on a purchase, it's best to buy when things are low, so you maximize your value.

However, if the market is in an uptrend, selling the property would gain me more than what I paid, but larger houses would also have increased in price.

But it may not scale. When you jump to a much larger (more expensive) house, you can think of it as buying 1.5 houses. That extra 0.5 of a house is a new purchase, and if you buy when prices are high (relative to other economic indicators, like salaries and rents), you are not doing as well as when you buy when they are low.

Do both of these scenarios negate the pro/cons of buying in either market?

I don't think so. I think, in general, buying "more house" (either going from an apartment to a house or from a small house to a bigger house) when housing is cheaper is favorable. Houses are goods like anything else, and when supply is high (after overproduction of them) and demand is low (during bad economic times), deals can be found relative to other times when the opposite applies, or during housing bubbles.

The other point is, as with any trend, you only know the future of the trend...after it passes. You don't know if you are buying at anything close to the bottom of a trend, though you can certainly see it is lower than it once was.

In terms of practical matters, if you are going to buy when it's up, you hope you sell when it's up, too. This graph of historical inflation-adjusted housing prices is helpful to that point: let me just say that if I bought in the latest boom, I sure hope I sold during that boom, too!

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