Home seekers' big dilemma: buy now or wait?

Risk of price declines keeps many from dream homes
By: Dian Hymer: Inman News
During the last couple of years, new listings sold in a matter of weeks in many areas. Home prices escalated at a record pace. Financing a home purchase was rarely a problem - money was easy and interest rates were low. Few buyers wanted to miss the opportunity to make fast money in a market that seemed to defy gravity.

What a difference a year makes. Now, the appreciation rate is running at a snail's pace, and declining in some areas. According to the National Association of Realtors, the median home price nationally declined a little over 1 percent in August from a year ago. This trend is expected to continue through the end of 2006. Consequently, many buyers who were anxious to buy last year are standing on the sidelines, waiting to see what happens next.

Remarkably, there are still areas where the demand for new listings still exceeds the supply. In the desirable Claremont area of Berkeley, Calif., for example, there were recently nine offers on a listing competitively priced at $1.25 million. Another listing in neighboring Rockridge listed for $1.45 million sold with multiple offers for $1.5 million.

Regardless of whether you live in an area where there's plenty for sale or if you are still battling other buyers for too few listings, it's time to return to the basics when considering a home purchase.

HOUSE HUNTING TIP: Until recently, home buyers bought not with an eye to a quick profit but in order to gain control over the place where they lived. As a homeowner, you don't need the landlord's permission to make modifications to the property to suit your needs. You aren't at the mercy of a landlord who might raise the rent or ask you to move. Now there's no guarantee that you'll find a place to rent in a neighborhood where you'd like to put down roots. Also, rents are rising after years of lackluster performance.

Additionally, homeowners tend to take a serious interest in preserving and enhancing the quality of the neighborhoods in which they live. Renters tend to be transient.

The tax benefits of home ownership shouldn't be overlooked. While restrictions do apply, homeowners can claim a deduction for mortgage interest and property taxes from their federal income tax returns. This effectively lowers the cost of home ownership for taxpayers who itemize deductions.

There are several other good reasons why this could be a good time to buy. One is that there is, in general, less competition from other buyers than there was a year ago. It's now possible to negotiate with sellers if the list price seems out of line. Another factor in your favor is that interest rates have recently eased and are still at historically low levels.

Of course, a risk of buying now is that home prices could decline from their current level. David Lereah, NAR's chief economist, recently speculated that we will "probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory."

So, why not wait to buy until home prices start climbing again? That's certainly an option, if you can find a suitable rental. However, it's impossible to time the market. We'll know that prices have bottomed out for the cycle only after they have resumed their ascent.

Buying for the short term is risky in the current market. But, this could be a good time to buy for buyers who plan to stay put for the long term, particularly if what they're looking for is not readily available.

THE CLOSING: Some buyers look for years before they find the right place to buy.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.