Opinions are all over the place on this one! I'm watching the Homebuyer's Tax Credit and it looks favorable to be extended, if not increased with some 20 different bills in the works.

I found a house I really like and can see staying there for 5-10 years. The price has just been cut another $10k. Sellers are trying for a short sale prior to foreclosure but it's already vacant. Some home prices seem to be holding steady and some are tanking. In the same area!

So what's your crystal ball say? Stay and rent for awhile (rents are now tanking as well)? Go for it! Wait until the spring?

What's it like in your area?

There are many methods for predicting the future. For example, you can read horoscopes, tea leaves, tarot cards, or crystal balls. Collectively, these methods are known as "nutty Methods." Or you can put well-researched facts into sophisticated computer models, more commonly known as "a complete waste of time."
-Scott Adams

I don't need to look into a crystal ball. That's an easy one.

If you want to buy at the bottom, wait at least until next year. The second wave of foreclosures are just now ramping up to swallow many of the middle and upper-middle class. No matter what, don't be lured in by a rather lame "tax credit."

I would be more concerned with how solid your future employment prospects are.

Our area here in Texas still looks relatively good on paper, and some homes are even selling for decent prices, but that isn't how to gauge the game because there are plenty of people running out of the funds necessary to maintain the illusion. You need to consider what you could afford with only half of your income and buy accordingly. In other words, if you take home $1200/wk, budget what you could afford assuming your take home was only $600.00. And even then only move forward once you have 20% to 30% down and 6 months worth of reserve funds. The new rule is that people who are laid off or otherwise lose a relatively decent income are being hired (if at all) with a (usually significant) reduction in pay.

Have a nice day.

Good first round of pessimism!

ITA, that prime mortgages will begin to tank as those who were laid off (myself included) aren't able to stay in homes they can afford. The entire job hunting game has changed. I'm keeping my resume polished and writing Christmas cards to my contacts, just in case!

The house is an affordable purchase. My salary is roughly the same at the positiion I accepted. The job is about as solid as I could hope for. I had a nice nest egg to fall back on when I lost my previous job, but even that wasn't enough!

Ha. Ha. Yeah. I've been quite the little burst of sunshine lately. I would like to be optimistic, but I have been right on the money far too often over the years to change now.

Remember, most people remained employed during the Great Depression as well, yet their buying power was tanked. And the roughly 30% unemployment rate back then was based on all able bodied persons 16yrs or older. We are currently at a federally reported 9.8%, which is more realistically around 18% and aren't even considering 16yr olds as part of the equation. Throw them in and where does that leave us? And how's that dollar doing these days?

Nope. I definitely wouldn't buy just yet. First quarter 2010 would be my gauge.

it's hard to give specific advice since price also depends on the features of the property, local economy etc but my gut sense is similar to caffeinekid, the market has not yet bottomed in many areas since unemployment numbers are still looking bad and real wages are more or less flat; low rates aren't doing the trick

I also agree with his point about your work outlook; is your job and income on that job is economy-proof (is there such a thing anymore these days?), which could make a mtg too much of a liability should your hours get cut (you can't downsize to a smaller rental short of a loan mod but you can downsize your rental with relatively no loss to keep afloat)

also, you mentioned staying in the same area for 5-10 years, a rule of thumb I heard is 5 years + in the same home to be more certain of not losing too much on closing costs; if your employment changes, are you considering up and moving, or will you be looking in the same area? by tying yourself to that house, keep in mind that you are also tying yourself to that job market, or facing selling at a possibly bad time and paying closing costs

In my opinion -- none of us can predict the future of the home prices in your area. If you want the house and can afford it, help yourself. If you can't afford it, don't buy it in any case.

And in my opinion, you can only afford it if you can put 20% or 25% down, be left with a mortgage no more than 25% of your income, AND you already separately have some thousands of dollars socked away in savings that you won't touch. Of course, the politicians and real estate agents would hate me... but if everyone had followed my advice we'd be in much better shape now.

I mean of course, a mortgage payment no more than 25% of monthly income... IMHO

I've got about a stable a job as I could hope for. Same line of work I was in previously, but now I serve a LOT of unemployed people so I'll be secure for the near future I'm not blind to changes at work. While we did hire 8 people, we also upgraded some software in our office which could lead to some outsourcing one day. We are actually trying to bring some outsourced work back in house. I do keep my resume polished.

Home prices here are low compared to a lot of other areas. I can buy this home with FHA and have the same mortgage payment as rent. Rents here are beginning to tank as well.

I'm not sure about the hefty downpayment theory. If you put 20% down and housing tanked further, what is the benefit to you? I would think minimal down and if you had that much additional cash, use it as reserves to keep you afloat. But maybe I don't see the advantage to having more downpayment?

radi's crystal ball says that housing in a specific area will continue to fall as long as unemployment continues to rise, and in the area you are in, there is no good news on the horizon regarding employment. I love the state, but unfortunately it looks like things are just going to keep getting worse over there.

If you like the house, can afford it, and are relatively certain your job is stable, that wouldn't necessarily keep me from buying if the price was right. The gotcha will be if you do need to move at some point before the prices have stabilized. Might be impossible to unload the house. (ask me how I know that, lol)
So yeah, you are making a bet that you'll have continued employment in the area and won't need to move anytime soon. You are in a better position to judge that than we are.

Couple of reasons for a big downpayment. Buying on leverage is great for an investment that goes up, but it kills you on an investment that goes down. To take an extreme, if you finance (say) a $200,000 house at 100%, like one could a few years ago -- and then the house loses 25% of its value, you are now upside down by $50,000. If you had to sell the house, assuming you even could do that at all, you'd sell it for $150K and still owe $200K on the mortgage, so you'd lose 50K. You'd have to pony up that cash somehow. Or, in reality, no one does that ... they just walk away from the house and still owe debt they'll never pay, and take a beating on their credit. The down payment is the cushion to help you ever from being upside down, or keep you upside down less severely.

In theory you might have put $50,000 into savings that you could then tap to settle the debt. But I'm thinking few would actually do that. You'd walk away.

Yes cash liquidity is always good ... which is why I advocate the no-fun approach of having plenty of cash savings even on top of your down payment -- and if you can't do that, stay in the trailer park til you can.

That's the microeconomic reason. The macroeconomic reason is that if the culture encourages everyone to buy with little or nothing down, it's inevitable that the economy will suffer a bubble, falling housing prices, a credit crunch, and an economic meltdown and possibly a horrendous depression.

Well ... that's clear in hindsight anyway!

As if that could ever happen.

Generally, 20% down allows you to avoid PMI also.

Yup. And let's not forget the psychological effect of having to let go of that money that it took so long to accumulate. It is almost a given that this alone will impact the level of diligence on your part. It is almost always easier to put up money that you never even see based on (often times delusional) projections of a prosperous future.

Imagine what it would be like if the Fed wasn't allowed to pull off payroll deduction and people had to actually see the money that is extorted or otherwise swindled from them. It would literally be a different country.

Some say this is exactly *why* we have payroll deduction... so we won't get as upset when we pay our taxes.

Kevin, ITA with cash reserves and living in the trailer park. I had been saving for a down on a house when I had to use the $ because of job loss. I wasn't in trouble financially for awhile but even savings wasn't enough. I've noticed rents beginning to tank a few months ago. Yesterday there was a news story that confirmed for the first time in history, rents are going down. It used to be when you lost your home and job, you moved in with your relatives in the trailer park. Seems now, the trailer park is emptying out as well. Which is scary!

Radi, I read your post earlier and started to cry. It just sux, when you love something and are pretty much forced to leave.

That said, I got my Kleenex and then gathered my uh.........well you know, brass ones. They say if your heart believes it, you mind will find a way to do it. I know the realities of the area. If I face job loss and funds run out, it will be bail out because you know nothing sells quick here.

Okay, so now I'm off to get some fudge to console myself while I figure this all out.

leaving aside emotional/personal gains from buying a home, and just if you think of a house as an investment, it's about

Return
Has the market bottomed?
Is the local economy sufficiently strong to support jobs, growth?
Are there enough people moving into the area and buying to support growth in prices?

Risk
Real estate is risky (if you can't deal with 20% price drops in a single year, rent and put liquid reserves into bonds or CDs)
A house is not like a diversified stock portfolio, things happen (structures fail, termites, crime in the neighborhood, town/city could go through a recession whatever, get re-classified as a house in a flood zone, HOA could get on your case, raise dues, the town/city could decide to build a sidewalk on your land, some developer could get approval for an ugly structure next door, the houses next door could get foreclosed which would hit your home's value)
You don't know nearly as much about the property as the seller. You could end up with a lemon and not realize it until a year later. Inspections, title insurance, H/O insurance cover the basics.
Debt. Even a traditional mortgage (not talking about those very thinly stretched FHA DPs) requires a lot of leverage (4:1). In a recourse state, if you are underwater and walk away, you're stuck with a suit for the difference.* The math in non-recourse states like CA is different. There is still a loss, just not as big as it is in a recourse state.

Liquidity
Houses are illiquid. If your income changes, if you want to move to another area for a job, if you want to downsize to a smaller house (empty nester), if you want to upgrade to a bigger house (more kids, pets, whatever), if a better house in a better neighborhood comes along - you can't usually sell a house on short notice without a loss of value and closing costs and a few months or more of searching for a buyer.

If you think price growth (return) is high enough to cover risk and illiquidity, go for it.
If you think monthly cost is substantially lower (mtg payment, higher H/O insurance, higher maintenance, utilities) to offset above, go for it.

Otherwise, rent and put your liquid reserves into some mix of CDs and bonds and invest the remainder for stocks to have growth.

can't edit the earlier post, so here's the addition

total return on an owner-occupied home comes from

1. price growth

+

2. home owner's pmt (after-tax mortgage interest if you're itemizing and not phased out, after-federal tax property taxes if you're itemizing and not hit by AMT and not phased out, H/O insurance, HOA, lawn care, house maintenance, utilities) minus renter's pmt (rent, renters' insurance, utilities, maint - last three usually lower since renter's ins doesn't include coverage of damage to structures and there's maintenance done by property mgmt company gains from scale)

over period of ownership.

If price growth is expected to be positive in your area (could well be), you could still be losing per month on house payment versus rent payment, so total return could be negative.
(% rates are low but counties/districts squeezed by recession could raise property taxes and appraisal values could increase even if properties' market values have tanked;
tax breaks on mtg interest may not be fully captured if the taxpayer is subject to itemized deduction phaseout, property taxes aren't deducted under AMT)

got signs reversed , part 2. should say renter's pmt minus home owner's pmt (home owner's savings are realized if renter's pmt is more than the home owner's pmt)

I understand the economics of the area well. I don't see job growth or home prices going any where in pretty much any city nationwide anytime real soon. I am looking for a home more than an investment.

If you've ever rented for a substantial period of time...........and when you moved out and didn't even get to keep the mailbox key after spending tens of thousands in rent. A home purchase seems a good choice.

I understand ya gotta live somewhere. I put the cash on the kitchen table now for my landlord. Then I look at that stack of cash, get a money order and give it to him. To live in a trailer park with not so safe living conditions because my credit was a mess after job loss and losing all my savings. There is the emotion.


That said, I had a good cry after reading Radi's post because he understands current market conditions.

Then I remembered what Jack would say:
Never give up, Never give in, Never back down.

There are times when a girl's gotta get her bitch on.

The long and short of it is, housing values don't matter if you are looking for someplace to live long-term.
The value of your home could plummet to $1.95... once you've paid it off you have somewhere to live, with no additional monthly payments. Creating an asset out of it is a nice little extra.
In that scenaro, 30 years later you still come out $1.95 ahead of renting (which always has a residual value of zero) - plus each month you live for "free" in your paid-for home.
The only gotcha is needing to sell in a bad market. That's the judgment call, whether or not you'll have to.

that's true mtg is probably the biggest part of HO pmts, and after the mtg is paid off, the HO no longer owes anything or monthly pmts to the bank, but HO is still liable for property taxes, maintenance costs, HOI, HOA dues if applicable.... property tax lien can lead to loss of the home even if mtg is paid off
property taxes aren't deductible on fed taxes if AMT scale applies or if itemized deduction phaseout occurs; they can range 1-3% of house value annually

I've said it before and I'll say it again, I've had friends who were paying more in property taxes than I was paying rent. And while rent is not in fact a waste of money -- it pays for something profoundly useful and necessary, which is why renters pay it -- property taxes are indeed a true and complete waste to the household, a pure cost serving no benefit except in terms of an abstract public good, and something no individual would pay except for the threat of government force.

Well, I sorta like my streets plowed and garbage picked up, lol. Sorta nice having a fire department too.
True though that property taxes could be a lot less without hurting the essential services. There's a lot of junk tacked on.

I'll also add that general "home prices" bottoming is significantly less important than the house you're looking at bottoming. We looked for about a year, before we found a house that we liked.

We found a house in a bad situation. They had a toddler, the wife was 8.5 months pregnant, the husband had gotten a job out of state, with relocation assistance. They didn't have the time to do immediate upkeep, although the historical upkeep had been good. There was some debris around the house and the landscaping needed work (mostly it just needed to be mowed). They'd missed the summer home-buying season, and it was a time when "housing values plummet!" made the headlines every day. So we negotiated very aggressively. Currently our house is up about 20% from what we paid (based on in-neighborhood comps).

But, buying a house is like buying any other investment. While we made the best choices we could, there's a large element of luck/hoping for the best and being willing to live with the potential downsides.

I looked at the housing market back in 2004 (I was still in school) and decided there was no way the price escalation at the time was sustainable. We studied the housing market a bit in one of my macroeconomics classes, and housing prices weren't in line with historical household earnings. That's a pretty serious red flag.

I discussed this with a friend when he was shopping for homes. He was looking to get into a place and look for a quick bounce when the housing market turns around. I told him not to expect a big bounce. He's used the downturn to get into a home that was in the process of being renovated when the owner's money ran out, and he bought it from the bank for a song. Its a great property he can be happy in for a long time.

Why shouldn't he expect a big bounce? For one, we're pretty well protected from the downturn here, since the Federal Government is 8 miles down the road. We haven't seen the price correction that people have seen elsewhere. Also, when the real estate market peaked, it peaked at a homeownership percentage that was far beyond the level that's historically sustainable. We peaked around 69% in 2004. Historically, about 60 - 65% of Americans own their homes. That has been pretty consistent for about 5 decades. The jump in homeownership was caused by a combination of low interest rates, and creative lending by banks.

Many of the loans that got people into homes over the last decade aren't going to be around during the recovery. NINJA loans, and 0% down interest only home loans are a thing of the past (there's also an argument to be made that if you put 0% down, and you're paying an interest only loan, you really don't own your home at all, you're just renting from the bank). The cheap money that helped fuel the real estate boom may be around for a while, but I'm not sure how long that will last. There are certainly inflation risks on the horizon, and whether they'll materialize into threats to the economy that need to be addressed by the Fed only time will tell.

In any case, if you pull out only the 4% of homeowners that, in my opinion, represent bubble buyers, the housing market holds far less promise as a near term investment than it did 5 years ago.

Of course, there is something to be said for homeownership. There are tax benefits, plus, you need a place to live, better to pay yourself than a landlord. But I look at a home as a long term investment, and I'm not about to rush into a half million dollar investment. The way I see it, its an uncertain market, and if it turns south, I stand to lose a lot. If it turns up, I missed an opportunity, but I don't see explosive growth on the horizon, so the potential upside I miss out on I predict will be minimal.

As always, the market will vary significantly depending on your market. I wouldn't buy in Vegas or Miami right now at almost any price, but many blue collar towns have been hit hard, but I think we'll see them recover. There may be some good values around those places. People will always need a place to live.

My take, in short: its a big decision. Best to shake out all the possible scenarios in your head before diving headlong into the biggest investment of your life.

Two things. Area of course has everything to do with it. I am in San Diego. I see signs of a bottoming here. I think we lead the nation both on the upturn and the down turn. While I see signs of a bottoming I do not see signs of a quick turn around. I suspect where we are today is where we will be 5 years from now. I don't see the plummet continuing but I see a long flat bottom.

second MAJOR consideration. Todays interest rates are where they are because the Fed is printing money wily nilly and using TRILLIONS of it to buy Treasuries and mortgage backed securities. The Fed is printing money and then loaning it to the federal government. Does anyone see the flaw in this plan and it's lack of long term sustainability? Mortgage rates will have to rise, allot, at some point. I figure 5 years from now the price for a house may be the same but the payment will be much much higher. Me personally, in my area, I am buying now, not in hopes of a quick bounce in property values but as a hedge against rampant inflation and runaway interest rates. When property values come back it will not be due to an increase in the value of the property. It will be due to a decrease in the value of the dollar.

5% mortgage rates. Get while the gettin's good.

If interest rates climb substantially, home prices aren't going to stay the same. If interest rates are high to combat inflation, and the high rates are successful in curbing inflation, home prices will go down. If John and Jane doe make $100,000 a year, they can afford a mortgage payment of ~$2,000 a month. So they can afford to borrow about $375,000 @ 5% or $230,000 @ 10%. Now, if we realize inflation at such a level that John and Jane now earn $150,000 then they can afford a $3,000 mortgage payment, or about $350,000 @ 10%. In order for John and Jane's wages to increase due to inflation by 50%, you'd be looking at 4 1/2 years or so of 10% inflation.

Inflation on that scale would be akin to living through the 1978 - 1981 era all over again. If that happens, the economy will be so screwed that housing prices will tank again anyway. In order to get inflation back in check in the early 1980s the Volcker Fed kept the federal funds rate at 10% or more (it peaked at about 20%) for about 4 years, the Federal funds rate was over 8% for about 7 years.

The best deal, generally speaking, will be to buy a home when interest rates are high, and refinance into a lower rate when mortgage rates drop. Ceteris paribus when mortgage rates are high, home prices are generally lower (since your mortgage payment is generally much higher due to the higher interest rate you're paying), when interest rates come down, home prices tend to climb (by paying less interest, you can afford a larger loan, and thus a more expensive home).

There's a reason they call Economics "the dismal science."