Deciding When It’s Right Time to Buy a Home

After several years of slumping prices and sales, the residential real estate market is beginning to show signs of life.

A recent survey by the National Assn. of Realtors shows that median prices for existing homes rose in 109 of the 127 markets surveyed nationwide. Demand for housing also rose, the trade group said. And several industry consultants note that prices are firming even in some areas where real estate values have been declining year after year.

“We’re seeing more than just a few isolated housing markets getting back on their feet,” said Almon R. Smith, executive vice president of the association. “It looks more like a full-blown housing recovery.”

Few new homes have been built during the past couple of years because the recession dampened demand and made credit hard to get, added Sanford R. Goodkin, president of a San Diego real estate consulting firm that bears his name. Ultimately, that could lead to rising housing prices.

“A recession tends to keep a lot of people out of a marketplace. But once it is determined that the recession is over, demand will come back,” Goodkin said.

“The supply (of houses for sale) will have evaporated, and that is always the formula for rising prices,” Goodkin said.

All this may mean that now is the time to buy.

The other factors that have aligned in favor of buyers are interest rates and housing prices. The multi-year slump in the housing market has slashed selling prices in many areas. Meanwhile, mortgage rates are lingering near historic lows.

The average 30-year fixed-rate mortgage goes for about 8.7%, versus 9.5% a year ago and 10.4% in 1990, according to HSH Associates, a Butler, N.J., firm that tracks mortgage rates. Starting rates on adjustable mortgages are averaging about 5.8%, HSH reported. That compares to 7.2% a year ago and 8.5% in 1990.

Lower prices and mortgage rates, working in concert, can dramatically reduce monthly mortgage payments, making houses affordable to far more people.

“This is the best buyers’ market I have seen in the past seven years,” said Chuck Lamb, president of the California Assn. of Realtors.

But to make sure you get a good investment as well as a home, you’d also better evaluate the pros and cons of buying versus renting.

To do that, consider how your mortgage payment would compare to your rent payment; what kind of tax benefits you’d get by buying, and what kind of appreciation you can expect on the property.

To illustrate, compare what would happen to a couple with joint earnings of $50,000 annually who opted to buy a $150,000 house. Assuming a 10% down payment and an 8.5% interest rate, the mortgage, property taxes and insurance would cost about $1,200 a month. Assuming a similar home could be rented for $800, this couple would be paying $4,800 more each year to buy.

They can recover some of that difference through tax breaks. Homeowners can deduct mortgage interest, for example. According to the California Assn. of Realtors, our couple would save roughly $2,270 annually in federal taxes.

And they’d recognize additional savings in state taxes as well. Assuming that the combined tax breaks amount to $3,000 annually, our couple would still be $1,800 richer had they continued to rent.

But if their home appreciated 5% a year for the next five years, the home buyers might gain the advantage. That’s because they’d earn 5% on the entire cost of the home, even though they’d only invested $24,000. (That’s the $15,000 down payment, plus five times their $1,800 annual negative compared to renting.)

After accounting for a 6% realtor’s fee when they sell, this couple would walk away with a $29,950 before-tax profit. To generate a similar profit in the stock market would require about a 20% annual return.

The problem is that no one knows whether a house is going to appreciate. And even standing still badly hurts real estate investors.

If this same house didn’t gain any value over the five years, for example, this couple would have lost more than $18,000 on the deal--$9,000 in brokerage commissions, plus the $9,000 negative ($1,800 times five), plus the use of their money, which could have generated a consistent annual return.

Realtors say those who buy carefully can increase their chances of making money on their property.

The best bets are “cosmetic fixers”--a well-constructed house that may need new paint and wall paper--in quiet neighborhoods with good schools. But make sure to scrutinize comparable home-sales prices to avoid overpaying.

Some buyers say that buying a home is not just a dollars-and-cents decision anyway; there’s a psychological benefit to home ownership. And certainly it makes sense to pay for things that have such value. The question is, how much?