When is a Good Time to Buy a Home?

No one wants to purchase a home only to see its value decline. But should you wait to buy a home until prices bottom out? A quick web search will yield a number of articles and opinions for and against timing the real estate market, but beware of those in favor of market timing who also want to sell you a how-to book or system. 

Many people who have tried to time the market miss out on the chance to build equity by waiting to buy until prices rise again. The chart below shows the gradual increase – along with typical ups-and-downs – of home values over nearly 40 years. The arrows indicate market low points when home values dipped before continuing their historical rise.

The problem? Market cycles only become clear in retrospect. In the midst of a market slowdown, it’s very difficult to predict when housing prices hit their low points. In addition, this trend line represents home prices at the national level, which may be very different than housing prices in your neighborhood. Broad national indicators may lag the market by months – meaning the actual price floor would not show up in reports until weeks or months later.

The best way to protect against buying at the wrong time? Sell at the right time. In many cases you can’t control when to sell, but you should plan on keeping your home at least six or seven years. The longer you own your home, the better chance you have of building wealth and protecting yourself from the market’s ups and downs.

Getting nervous buyers off the fence is one of the toughest challenges facing real estate pros right now. People are rightfully concerned about buying a home that will drop in value in the coming months. But buying a home is a long-term investment, and there’s more to consider than the just the purchase price.

Depending on the rate and the amount financed, the price of financing can easily exceed the price of the home. In the example below, it’s easy to see how mortgage costs can exceed a home’s purchase price. What’s more, the total cost of buying a home rises more than $70,000 when interest rates rise a single percentage point.

Rates have risen in the first half of 2008, but in historical terms, mortgage financing is still a great bargain. From 1980 to today the 30-year fixed rate mortgage has ranged from more than 18 percent to less than 6 percent, says Jim Elfelt, a mortgage banker in Virginia Beach, Virginia.  If you’re waiting for home prices to come down another $10,000, you may pay more in the long run if mortgage rates rise in the meantime.

For example, suppose you’re applying for a 30-year, fixed-rate $300,000 mortgage. Note how a small change in rate makes a major difference in monthly payments and overall cost: 

When you’re looking for a bargain, don’t lose sight of the big picture. If you try to time the market to save a few thousand on the price of a home, you could end up with a higher monthly payment and total overall cost of home ownership.

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