Money Management and the Economy

Saturday, January 31, 2009

Is Now the time to Buy a House?

You aren't smarter than the market. It really is that simple.

The real estate industry is putting on a full court press for the notion that real estate is now a bargain. But the reality is that housing prices still have a long way to fall before they reach historic norms. And there are plenty of reasons to wonder even once they hit those norms, whether that will be the bottom of the market. The bad economy, huge amounts of other consumer debt, the tightening of credit and the hangover from the binge of new houses built at the height of the bubble would all argue that the immediate future is likely to see prices stay well below those historic norms for several years even once the current price bubble has fully deflated.

So if you are renting and thinking about buying, you are probably better off waiting until at least 2010 and probably 2011. Buy now and it may be 5 years or longer before your house gets back to the current price you paid for it.

On the other hand, if you already own a home and are unwilling to move into a rental, you are going to be on the hook as values fall regardless of what house you own. And one thing that real estate has going for it right now is very low interest rates. If you already own a home, those interest rates make moving up in the market both possible and attractive. The new home will fall in value, but probably not much more than your existing house.

If you are buying a house to live in, not as an investment, then there is a real opportunity right now. You will need good credit, a stable job and equity in your existing home to take advantage of that opportunity, but you can probably take on a bigger mortgage on a nicer house with the same payments as your existing mortgage. So if you want another bedroom, a larger yard or a lakeside location now may be the time to get a house that gives you those improvements.

Of course the worm in that apple is that you have to find a buyer for your existing home. With the smart new money sitting on the sidelines, that means finding someone in the same situation as you who sees your home as a step up. And has good credit, a stable job and equity in their existing home. With housing prices and the economy in freefall, those buyers are going to be increasingly hard to find. Which is another reason why housing prices are not likely to stop falling any time soon.

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