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Ask the expert: Should I hold out for the bottom in housing prices?

July 25, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I'm thinking of buying a house, but wondering if I should wait for home prices to keep falling. Should I be waiting for home prices to bottom out?

A: Investors sometimes refer to buying into a falling market as trying to catch a falling knife; sometimes it is safer to wait until the market stops falling before you buy. When it comes to buying a home, though, it depends greatly on whether you are buying the home as an investment, or as a long-term residence.

As an investor, you need to be concerned with trying to maximize your rate of return. If you are looking for a residence, then you are concerned simply with finding a home you can afford that meets your needs. The advantage of looking at this from a resident's point of view is that it makes it relatively unimportant if home prices continue to fall after you move in.

Indeed, you can turn this around and say that from the point of view of someone trying to secure a residence, the bigger risk is that prices will rise out of your price range before you buy. This was the big concern during the housing boom: people felt they had missed the opportunity to buy a home, and prices would never come back to an affordable range again. Now, according to the S&P/Case-Shiller Home Price Index, home prices are back to mid-2002 levels. The peak of the housing boom has effectively been erased, giving people another chance to buy at more affordable prices.

Another factor in all this is mortgage rates. Current mortgage rates are well below 5 percent. So, not only are housing prices down, but current mortgage rates are unusually low. You have to be concerned that if you hold out for the bottom in housing prices, you'll miss the opportunity in mortgage rates.

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