Is Now the TIme to Buy a House?

Housing prices have gone down across the United States in the last 5 years.  In some areas, prices are down by 50% or more.  Of course, other areas have seen smaller declines and there might even be a few areas that haven't seen declines.  But where will housing prices, in general, go from here?

This analysis is a generalization as housing prices can vary and do different things from region to region.  For example, I wouldn't recommend buying a house in Detroit, regardless of what the overall housing market does in the U.S.

There are a lot of pros and cons for buying a house today.  There was a huge bubble in real estate and we have seen the bubble pop.  The question remains if the bubble has completely deflated yet.  It is hard to say because the government has worked hard in trying to prop up prices or at least decreasing the rate of decline.

There are a lot of people underwater in their homes now.  They owe more for their mortgage than what their house is worth.  There a lot of short sales and foreclosures.  A good portion of these need to be cleared before housing prices will go up again.  In addition, it is hard to say how many people would like to sell but aren't even trying right now because of the depressed market.

There are certainly a lot reasons to be bearish on housing right now.  With that said, there may be one very good reason to be bullish.  That reason is the Federal Reserve's monetary policy.  While it is the Fed's policies that caused the original bubble in the first place, the Fed is creating new money like never before and it will continue at least through June, unless they cancel QE2.

If you are looking to buy a house as your primary residence, I don't think you should be too concerned about the short-term outlook on housing prices.  Instead, you should be asking yourself other questions.  Can I afford the payments each month?  Do I have money for a down payment?  Can I afford all of the other expenses with home ownership?  Do I plan to stay in the house for several years?

If you are answering yes to all of these questions, then perhaps you should buy a house for your primary residence, as opposed to renting.  Interest rates are not quite as low as 6 months ago, but they are still very low by historical standards.  If you can lock in a 30-year fixed rate mortgage, then you will pay it back in depreciated dollars.

If you are looking to buy an investment property, then the most important thing to look at is your payments vs. the rent.  When you consider your payments, you have to factor in the mortgage, the property taxes, association fees, homeowners insurance, repairs, and possibly a management company.  If you add up all of these things and average them on a per month basis and you can collect rent that is higher than this amount, then it is probably a good investment property if it is in a decent area.

The biggest indicator of a bubble five years ago was rents vs. prices.  You could rent a place for far less than your monthly mortgage payments on a similar place.  It meant that prices either needed to come down or rents had to go up.  In a situation where rents are higher (as we are beginning to see in some areas), then either rents will go down or housing prices will go up.

I think we will see some more in the way of price decreases in the near future.  But interest rates are a wild card right now and there are more signs of price inflation.  Even if housing prices don't go up in real terms, they may go up in nominal terms due to the falling dollar.  This will be good for people with a fixed rate mortgage.  You can pay off your lender in money that is worth less and less each passing day.