Looking into my crystal ball (since I am currently trying out making some extra money as a fortune teller) I predict that housing prices are going to keep going down. How did I come to this conclusion? Let me lay out my thoughts:

  1. Housing prices are down. There is a great diagram showing the effect across the US located here. As housing prices go down, then people’s homes are worth less money–sometimes less than what they paid for them.
  2. Sub-prime loans are just the beginning, there are even more prime loans that endanger of foreclosure. There was an article about this here. Mortgage companies are worried now about the prime loans.  This is compounded (in my opinion) by the fact that people who had ARM loans are not going to be able to refinance their homes and their payments will end up more than they can afford.  This will mean more families behind on their payments, more foreclosures, and consequently more inventory.
  3. Inventory isn’t moving.  Many homes have been on the market for many months and the amount of inventory is increasing.  That is going to force people to drop prices to sell their homes continually driving prices downward.
  4. There aren’t many people who are buying.  They have revised a lot of the mortgage loan package and the days of 80/15/5 gone.  This means that you either bring in a down payment or get PMI on your loan.  While some people may opt for PMI, it increases their mortgage payment and they will not be able to afford as high of a price tag on a home.  This pressure will also drive down home prices.  In addition mortgages are undesirable investment vehicles so interest rates are high despite the low Federal funds rate.  That means that as a buyer you aren’t getting a particularly great deal with regard to your loan rate.  This will also serve as a disincentive to buyers.

I wouldn’t recommend to any of my friends to get into real estate now (what you do should depend entirely on your own situation though!).  Even if the government employs a new stimulus and we start to see prices rebound, there is enough evidence to believe prices will continue to decline (or at a minimum stay flat for long time).  This may not be a bad thing to some, especially if they are renting and can get a good interest rate on a mortgage–with the high inventory there are deals to be had (there are places in the US where you can literally buy a home for less than it would cost to build).

However, real estate is not like a stock; it is unlikely that a home will double in price overnight the way a stock might.  The real estate market is more gradual and rises and falls in weeks and months–not hours or days.  The last thing you will want to do is buy into a home that could go down in value.  I know for my situation, where I am thinking about an investment property, it is best to wait for the market to shake itself out and stabilize. How do you know when to buy?  It is hard to time the market (even real estate) but if you wait until prices start to increase then you know things have turned around.  If you follow the market you will start to see prices increase, and the downside is that you may end up spending a little more, but at least you can feel more confident in your investment (this is particularly true if you plan to live in your home less than 5 years).  Waiting until after the bottom is much easier than trying to time your purchase with the lowest prices, which I believe are still to come.

* BTW, this is just my opinion.  There are many things about your situation that may change your decision, such as the availability of a certain home in a certain neighborhood (those things don’t come up often), your life circumstances (new child, new job, school district), loan conditions, or even your emotional state.  🙂

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