Washington is doing its very best to give you “warm ‘n fuzzies” when it comes to buying a home right now – from historically low interest rates, to literally giving you money when you buy a home. Has it worked? I think so as there has been a recent uptick in activity. So is it time to jump in and buy while the “gettin’ is good”? Perhaps, but if I were thinking about buying a home right now, here are a few things I’d consider first.

1. Mortgage rates will rise.

Mortgage rates are at historic lows, but this won’t last long. Rates have dropped considerably as the government gobbles up mortgage-backed securities and injects capital into Fannie Mae and Freddie Mac. This has caused a sharp increase in the money supply, and a weakening of the dollar, and although we don’t feel it now, inflation will become a threat, and inflation is mortgage rates arch-enemy.

Even if Bernanke can succeed at keeping inflation at bay once it arrives, I believe mortgage rates will still increase in reaction to even the slightest hint of inflation. So what does this mean for you? Jump on the home-buying train? Perhaps, but a few more considerations first.

2. Home values aren’t dropping in all areas.

Low post 9/11 interest rates and easy mortgage qualification made everyone a homeowner and sky-rocketed home prices. The good news? Although not totally immune from the housing bubble, Texas home prices didn’t surge as dramatically as other parts of the country, so we shouldn’t see as steep of a decline (see figure below from the Dallas Federal Reserve). As for Austin, sales of single-family homes have dropped 36% in February 2009 (compared to February 2008), but the median home price is holding strong at a 6.1% increase.*

However, it’s still good practice to scrutinize the sales price of the home to protect yourself against any over-valuation, and hopefully hedge against any future value drops IF they occur. Recent comparables are used to establish the sales price of your home, but all it takes is one over-valued house to sell to raise the sales price of your home.

Therefore, look at sales over a longer time horizon to make sure your house is experiencing healthy appreciation, and not just a quick jump. Your Realtor has access to all this data; therefore, choosing a Realtor you trust to properly analyze the market is extremely important.

3. What if you buy a home and home values STILL fall?

First off, remember current low rates provide you a much lower payment than normal, even if the price is higher today. Look at the Austin-area statistics below. Although the single-family home median sales price for February 2009 is 13% higher than February 2006, lower 2009 interest rates make the principal and interest payment equal to a home purchased in 2006.

Feb. 2009

Single-family home median sales price: $193,848*

Average 30 year conventional mortgage rate: 5.13%**

Principal & interest payment ($193,848 with 20% down): $844.86

Feb. 2006

Single-family home median sales price: $171,600*

Average 30 year conventional mortgage rate: 6.25%**

Principal & interest payment ($171,600 with 20% down): $845.26

However, if you’re worried about “taking a bath” on your home when you sell, ask yourself how long you plan to stay in your home. See what your mortgage balance would be on that future date (your Loan Officer can provide this), then add reasonable fees associated with selling your home to your future mortgage balance (your Realtor can provide this). This is what you need to sell your home for in the future to break-even. Discuss with your Realtor whether you believe selling the home for the break-even amount in the future is possible.

I know, this negates any tax benefits you may enjoy, but let’s keep it simple for illustrative purposes.

4. Make sure you’re financially prepared to buy a home.

Examine your personal financial situation to determine if it’s a good time for you to buy a home. Most importantly, make sure you have a few months of living expenses in savings AFTER incurring the cost of buying a home. An emergency fund, especially as a homeowner during these turbulent times, is vitally important.

Also, consider the total cost of moving (i.e., movers, cleaning, appliances, etc). and make sure you can pay this in cash – now is not the time to go into credit card debt to buy your home. Lastly, make sure your mortgage payment is a reasonable percentage of your income. There are plenty of opinions on what is considered “reasonable”, but in my opinion 30% is a healthy number.

*Multiple Listing Service, via Jason Aleem, Broker/Owner of Greylux Group

** www.federalreserve.gov