A Different Spin on the Old "Location" Theory

By Suze Orman

Today’s crazy-hot housing market makes that old saying “Location, location, location” a risky rule to follow.

The conventional wisdom is that the smartest real estate move is to buy a home in the best neighborhood you can afford, in the most desirable town in your area. Home buyers are bombarded with advice to buy into the best location possible, even if it means stretching their housing budget.

In normal times I would tell you that is perfectly fine advice. But let’s face it, real estate ain’t normal these days. In some of the hottest markets the annual appreciation rates have been 10 percent, 20 percent, or even 30 percent and higher. And, no surprise, the biggest appreciation tends to be in those major metro areas that are deemed the “most desirable” locations: New York City, San Diego, San Francisco, Miami, Boston, and so on. Those markets are too hot, if you ask me. I am not suggesting that home values in those areas are going to plummet. Homes are not stocks. They won’t go into a steep swoon like you saw in the technology market a few years ago, for the simple reason that everybody has to have a place to live. Hey, when you sell a stock you never ever have to buy another one. Sell your home, however, and you either have to rent from someone else who owns one, or you have to buy another. Real estate usually serves a dual purpose, being both a home and an investment. That makes the housing market a lot more stable than the stock market—which is why, long-term, I still think real estate is a terrific investment. It’s just that I also think there’s no way it can continue at this torrid pace. So forget projecting double-digit gains out into the future. Over the long-term, you should be pleased with 4 percent or so average annual appreciation.

Moreover, there are a few reasons why I think this adjustment in the housing market is going to happen sooner rather than later. First, too many people are starting to talk about the “bubble,” “froth,” and “irrational exuberance.” When it comes to markets, if there’s enough talk about something, whether or not it’s entirely accurate to begin with, people start to believe it and end up making it come true. Next, too many people are buying homes they can’t really afford, out of fear of “missing out.” I have said it over and over again: that fear is the number one psychological obstacle to wealth. It causes you to buy at the wrong time, sell at the wrong time, and generally make moves that are losers. One particular loser move I see being made quite often today are these “interest-only” loans. I will explain more about why I think they’re losers in a moment, but first let me just say forebodingly that if the number of interest-only loans continues to grow at the current pace, I expect trouble. The reason is that when these loans convert from the smaller payments that are being made, to the true payments that are owed, the potential inability of many investors to make those payments could have a significant adverse effect on the entire real estate market—not just on the folks who can’t pay their notes. The bottom line is that we all should start being careful with our real estate investments.

Having dropped this ominous prognosis, let me explain exactly how these interest-only loans make it so much more likely that an individual investor will default. more...

Which brings us back to the location puzzle. If indeed you dearly want to buy a piece of real estate in a location you can’t really afford, rather than taking out an interest-only loan, my advice is to change your location focus. Instead of aiming for today’s hottest location, aim for tomorrow’s great location. Look in neighborhoods that are on the fringe of the hotter areas. Or towns that are next to the ones where bidding wars break out at every Sunday open house. more...

If you have any desire to get the most out of your housing dollars, you need to buy smart. Overpay today and you will be harder-pressed to make a profit when you sell. Overlook problems with a home you are bidding on, and you could find yourself in a serious financial fix, due to the high cost of home repairs and upgrades. The absolute worst thing you can do is let the frenzied atmosphere cause you to move so quickly to “grab” a home in a hot market that you end up making a lousy investment. more...

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Suze Orman has been called “a force in the world of personal finance” and a “one-woman financial advice powerhouse” by USA Today. She is the author of four consecutive New York Times bestsellers, including The Road to Wealth. Suze Orman, a Certified Financial Planner Professional®, directed the Suze Orman Financial Group from 1987-1997, served as Vice President of Investments for Prudential Bache Securities from 1983-87, and from 1980-83, was an Account Executive at Merrill Lynch.

Watch Suze every Saturday night on CNBC. Check www.suzeorman.com for TV listings. More great advice on Suze's blog.