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Related topics: homes, home prices, interest rates, mortgage, Liz Weston

Home prices are falling again after a brief respite, and respected Yale economist Robert Shiller predicts values could drop up to 25% further before markets stabilize.

High unemployment plus a huge "overhang" of foreclosures and potential foreclosures don't bode well for residential real estate. Neither do higher lending standards, as banks remain tightfisted about granting mortgages. Lenders are demanding better credit scores and bigger down payments than in the past.

For example, the median down payment for home purchases in nine major markets has doubled in the past three years to 22% of the sale price, according to a Wall Street Journal analysis of Zillow.com data.

So would you be nuts to buy a home now?

Some people don't think so. Although the S&P/Case-Shiller Home Price Indices showed that home values fell 3.9% nationally in the fourth quarter of last year, home sales have actually been rising -- driven in part by investors snapping up properties and people who don't need mortgages to buy. Investors accounted for 23% of all sales in January, up from 17% a year earlier, according to the National Association of Realtors (NAR), while all-cash deals constituted 32% of sales, up from 26%.

Besides, many economists aren't as bearish as Shiller. They note that prices are rising steadily in a few markets, and some expect a nationwide recovery to begin by next year.

Liz Weston

Liz Weston

Should you join the optimists? Or wait safely on the sidelines until the real estate bust is clearly over?

Well, here's the thing about trying to time the real estate market: You really can't. Even if you had a crystal ball that would tell you the exact moment your particular market hit bottom, conditions may have changed significantly by then. Interest rates could very well move higher, meaning you'd have to pay more for a loan or settle for less house. Mortgage underwriting standards could change, meaning you might need to accumulate a bigger down payment than is required now or accept a riskier loan. We even might see a return of bidding wars, as other would-be homeowners, conscious of the turning tide, raced to buy.

Then again, it's no fun to buy a house that loses value. Ask the 20% (or more) of homeowners who owe more on their homes than they're worth, or the millions who have already lost their houses to foreclosure. An "underwater" home can be a horrible trap if you lose your job or need to move.

So when should you buy? My advice today is the same as it was before the boom, during the boom and ever since the bust: Buy when you're ready. That means:

  • When you really want to be a homeowner.
  • When you're financially ready for all the costs.
  • When you're prepared to stay put for a while.

Let's drill down into each of these three situations:

When you really want to be a homeowner

The idea that home ownership is always a great investment should have died with the real estate boom, but unfortunately many people still cling to the notion that there's gold in them thar subdivisions. In reality, home price appreciation has always been something of an illusion.

Even real estate cheerleaders like the NAR concede that home prices in the past only slightly outpaced inflation. Consult Shiller, and you get an even dimmer view. He found that except for a brief period after World War II and the boom between 2000 and 2006, the inflation-adjusted return on housing has been zero. Zilch. Nada. And Shiller's analysis didn't factor in the considerable costs of maintaining, repairing and modifying a home.

A couple of things are true about homeownership, however. Homeowners do tend to be wealthier, with 10 times the net worth of renters on average. Whether this is cause or effect isn't clear. Also, there's the forced savings aspect. Pay down a mortgage over 30 years and you'll wind up owning, free and clear, a property whose nominal value is probably much higher than what you paid for it. If you don't think about all the money you shelled out for property taxes, insurance, new roofs and remodeled kitchens, you might even feel rich.

But home ownership also offers plenty of intangibles -- and to me, these intangibles make a far better case for buying than bogus arguments about tax breaks (oh, please -- you're paying far more than Uncle Sam is giving you back) or "throwing money away on rent" (you're buying freedom, honey).

I feel more rooted in my life and in my community than I did when I was a renter. Plus I like being able to have pets and to paint the walls any shade I want. (Rather than convince a reluctant landlord, I just have to get the kid and the husband on board, and they're pretty amenable.)