So is it time to buy a house? Has the market bottomed out?
Home values declined more than 16 percent from 2007 to 2008, according to the S&P Case-Shiller Home Price national index, which compared the third quarter of each year. And while that is upsetting news for homeowners, it could be very welcome news to those who were shut out of the American Dream because prices were too high.
I am neither a market analyst nor a fortune teller. I can't tell you whether today's prices are fair. But as a consumer reporter, I can tell you how to figure out what you can afford. The question of whether you're ready to buy is so simple -- and yet so complicated -- that it makes my head spin as I sit here trying to write about it. I'm going to give you the simple version.
The first consideration is how long you plan to own the home. Say you do well and buy it at precisely its current value. On top of that, you have to pay closing costs. So, of course, if you sell the home two years later for the same price you paid, you have actually lost money.
You really want to keep the home long enough for it to appreciate to the point that you make a profit that covers those closing costs. (The other key is to keep your closing costs down in the first place and I talked about that in a previous column.)
I'm going to go out on a limb here and just pick a number. I don't think you should buy unless you plan to stay in the place for at least seven years. Lucky seven.
In the current economic climate, it's quite possible property values will go down some more. What if I'm wrong and, after seven years, you still haven't recouped your closing costs? If you really need to move, you could just kiss them off. After all, when you rent you give away your money month after month anyway. But there's also a simple strategy some people used after real estate values went down for a time in the 1980s.
It's a no-brainer: rent the place out for a few years to give it more time to appreciate. I rented from a woman in that situation once. There are two disadvantages to that plan. One, being a landlord is often a nasty experience. Two, your money will be tied up in the property, making it harder to buy another place for yourself. On the other hand, some people who were forced into this situation ended up becoming mini real estate barons because they scrimped and managed to keep their rental place and buy a place for themselves -- and then buy more.
But back to the present. To figure out what size monthly housing payment you can afford, you could use an online calculator, but I think many of them are designed by people who want to sell mortgages and may overstate what you can afford. So instead (or in addition), I say start with your rent. Let's assume you make your monthly rent payments without any strain. You'll actually be able to afford a higher payment when you own because of the income tax benefits.