Worry More About Interest Rates
Attempting to time a home purchase with the bottom of home prices is a dangerous game. As explained earlier, interest rates are expected to rise over the next few years. As they do, purchasing power will decline. A recently bought home's price falling by 10% could turn out to be better a better outcome than waiting to buy if interest rates rise 2% or more over the ensuing period.
Yet when the market does hit the bottom, it isn't likely to rally. The sort of home price gains we saw during the bubble were not normal. In most cases, home prices follow inflation, so the real annual return on a home is pretty small. When home prices do hit the bottom, you won't have to get in quick, as they aren't going to suddenly jump.
Banks have tightened their lending requirements since the housing bubble burst. As a result, it's much harder to qualify for financing now than it was several years ago. These days, your credit history matters more and banks will likely require a bigger down payment. They might even demand a higher interest rate, if they worry about the risk you pose as a borrower.
But will financing become even harder to get? Usually, as a recession recedes, banks slowly begin to loosen their grip on their funds and create more loans. We've been seeing that to some extent. As Congress considers how to reform housing finance policy, however, the financing picture could change considerably.
The government will likely slowly back away from owning or guaranteeing over 90% of the mortgages in the market, as it does now. As that process occurs, we can expect to see interest rates rise, as mentioned. But we will also likely see down payment requirements rise. If the government isn't standing behind a mortgage, the private sector will demand more collateral to ensure that a default won't lead to a deep loss. Moreover, new proposed regulations encourage banks to require down payments of 20% or more for some mortgages.
Your Economic Stability
Another very important factor to consider when determining whether or not it's a good time to buy a home is your personal situation. A home should be viewed as a long-term purchase, not a disposable asset. Over the next few years, the housing market will continue to be relatively soft, so selling a home won't be a quick, easy process. Make sure you will be happy staying put.
You should also be very comfortable with your financial situation. If you are worried about job security, for example, then buying a home is a terrible idea. Over the past few years, thousands of foreclosures have been driven by job loss.
Control Your Appetite
At a time when the economy is expected to grow just modestly for probably a decade, most Americans shouldn't expect much real wage growth. In other words, it's important to buy a home that isn't a stretch to afford. If you can barely manage your mortgage payment and don't get much of a raise for the next few years, then owning a home will feel like more of a burden than a joy.