Is Now a Good Time to buy a House?

I recently wrote about how the mortgage crunch is playing out among homeowners in my area. In response, some readers wanted to know if they should buy a home now or wait in case prices fall lower.

It's not a decision to be taken lightly. Prospective homebuyers who aren't likely to be in their homes long enough to weather the downturn could end up "under water" -- owing more on a mortgage than a home's market value.

My husband Gerry faced a similar decision 16 years ago. He started shopping for homes in early 1991, after the late '80s housing-market implosion. Gerry was sitting on $50,000 in a low-interest savings account and older friends whom he respected were urging him to invest in a house. Prices were still declining from the bust and interest rates on a fixed 30-year mortgage were hovering around 9.5% -- not bad when compared with double-digit rates in the '80s.

Gerry's parents urged him to wait -- they felt home prices would go a lot lower than the $120,000 listed for three-bedroom, one-and-a-half bath homes he had his eye on in our central New Jersey community. Because Gerry was such a diligent saver, he had a substantial down payment and didn't worry so much about being underwater on his mortgage.

We talked it over and despite his parents' concerns, Gerry decided to buy a home. Because he intended to stay put for at least seven years, he decided not to worry about where prices were heading. It worked out: After eight years, when he sold the house to buy his father's home, he walked away with about $75,000 in profit.

So how likely is it that Gerry's scenario will play out for today's would-be home buyers? It's tough to say, since the housing market is facing a downturn that is steeper than we experienced in the early '90s.

Indeed, recent data on the housing market paints a stark picture. Home prices are declining in many regions nationwide. Last month the National Association of Realtors projected, that existing-home sales will fall 6.8% this year, while new-home sales are likely to fall 19%.

At the same time, foreclosures are soaring. According to data provider RealtyTrac, foreclosure filings are up 93% in July from the previous year -- or one foreclosure filing for every 693 households.

Foreclosed homes are hitting many housing markets already saturated with unsold inventory. Inventories of homes for sale in July rose 5.1% to 4.59 million, or about 9.6 months of supply at the current sales pace. A six-month supply of homes for sale is generally the norm in a balanced market.

For homeowners trying to sell, the news is expected to get worse. Wall Street has been burned by bad subprime loans and is curtailing new investment in mortgage lenders. As a result, consumers without stellar credit may be unable to get mortgages at reasonable rates.

All of these factors combined are expected to continue to weigh on home prices.

So what does this all mean for buyers sitting on the fence?

If you're unsure whether you're ready to buy, first consider your outlook. Conventional wisdom says that homeowners who are likely to be in a home for at least seven years will see prices rise. If you're going to want to (or have to) sell the home in the next three years -- when some markets may still be suffering the mortgage mess fallout -- consider renting.

It's true, renting has its own costs. But you won't pay closing costs, real-estate agent fees and myriad other expenses incurred when buying, owning and selling a home. Renting also may allow you to save for a larger down payment, potentially eliminating the need to pay for private mortgage insurance when you're ready to buy. (Get help with the rent vs. buy calculations here.)

If the only way to afford the home you want is to finance it with an adjustable-rate mortgage, I'd be wary of buying now. Some readers over the years have taken me to task for being overly conservative by recommending fixed-rate mortgages. ARMs worked for many during the housing boom, when home-price appreciation built enough equity to allow homeowners to refinance. Amid the bust, many ARM holders are finding they can't refinance because they're underwater with their mortgages. Sadly, many are losing their homes in foreclosure because they used ARMs to buy homes they really couldn't afford. (Before shopping for homes, figure out how much home you can afford here.)

If your finances are solid and you can afford the home you want with a conventional mortgage -- and you're buying for long haul -- the time may be right. And for some buyers, the market is secondary to the reality of family life -- the impending arrival of a new baby may be the deciding factor to whether now is the "right time" to buy. (One big factor in Gerry's decision to buy a home was the desire to start building our lives together.)

When shopping for homes where the market is weak, consider buying a newly built home. Home builders are hoping to lure buyers with discounts of as much as 20% and other valuable incentives, such as granite countertops, luxury appliances and in-ground pools. The National Association of Home Builders reports that 56% of builders are offering financial incentives, up from about 45% a year ago.

The best deals will often be found where home price declines are the worst. But given the severity of the conditions behind the current downturn, the regions that saw the most heady gains during the housing boom -- particularly Arizona, California and Florida -- may take more time to rebound. In other areas of the country, most notably Detroit, the local economy is contributing to home price declines. In these areas it's particularly important to know whether you'll need to sell quickly or not.

There are markets where home prices continue to show steady growth, including Seattle, Atlanta and Dallas, according to Standard & Poor's. If you're shopping in these regions, you'll find the best values if you prove yourself to be a qualified buyer who can quickly close the deal. That means getting your mortgage pre-approved, where you have a written guarantee that you'll get the loan for the amount you need. Also it would help to avoid placing contingencies on the sale, such as the need to sell an old home before closing on the new one.

There are enough contingencies in the market right now without adding too many more.

By Terri Cullen