NEW YORK (CNN/Money) -
Record low interest rates and double-digit price appreciation proved too hard to resist. So you took the plunge and bought a house in the last few years.
Now, though, you can't quite quell that nagging fear: "Did I pay too much?"
If by that you mean, "Did I agree to a higher price than others paid during the same period for a comparable house nearby?" -- well, the housing sales data for your area should tell that tale. (You might begin your search on the Web. Some sites, such as Domania.com, offer comparable sales data.)
But if you're wondering whether you bought at the top, setting yourself up for a loss if prices fall or stagnate, that's more complicated. And it's a question you won't be able to fully answer until it comes time to sell. Because, let's face it, the true value of your home is fundamentally what the market will bear.
Nevertheless, there are ways to satisfy your curiosity.
What would your home rent for?
Real estate expert Gary Eldred, author of "Value Investing in Real Estate," suggests you start by comparing the cost of owning your home with the cost of renting it.
One characteristic of a speculative boom in housing, he said, is an ever-widening gap between what you pay to own a home versus what you'd pay to rent it. The risk to homeowners is that potential buyers will be less interested in buying if it's cheaper to rent or unable to buy, especially if interest rates tread higher, making your house more expensive to them than it is to you.
A wide gap, however, does not necessarily imply housing prices will fall. It may just mean they will plateau for awhile. Either way, that profit you were banking on may not be in the bag if you're planning to unload the house in the short-term.
To determine how much your house would rent for, check the real estate listings in your local newspaper or ask a rental broker. If renting is not permitted in your neighborhood, find the nearest comparable rental, then adjust the price accordingly. For instance, add to the market rent if your area is more exclusive than where the comparable rental is located.
If the monthly cost of owning your home -- including your principal, interest, property taxes, insurance, homeowner's association fees and maintenance -- exceeds what your home would rent for by 25 percent to 35 percent, "that's speculating," Eldred said.
By that he means you're likely to need a historically high annual rate of price appreciation to turn a profit -- or just to break even -- if you plan to sell your home within the next five years. Conservatively speaking, a home appreciates by about 1.5 percent above inflation each year. But you'll need much more than that, Eldred said, if you're paying 25 percent or more than a renter would for your home. (For this year, the National Association of Realtors forecasts homes nationally will appreciate 6.8 percent, but only 4.1 percent next year.)
(For more on the price-to-rental gauge as well as a broader discussion on the potential for a housing market bubble, read Fortune.com's "Is Real Estate Next?")
Is your income keeping pace?
Another possible indication your home stands some chance of losing value in the next few years is if home price appreciation in your area has been outpacing income growth by a wide margin.
"It's not a situation that can persist over a long period of time," said David Stiff, manager of economic research for Case Shiller Weiss, a home-price research company. Nevertheless, Stiff noted, historic lows on interest rates combined with more flexible lending requirements -- which have made pricier homes more affordable to more buyers -- may allow the ratio between price appreciation and income growth to remain wide for a longer-than-usual period without a deleterious effect on pricing.
Generally, though, a big spread between price appreciation and income indicates that home prices are due to cool off, said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard.
Among the 25 largest metropolitan areas in the country, CSW found that home price appreciation has most vigorously outpaced income growth in Oakland, Calif., San Jose, Calif., San Francisco, and to a lesser extent the Nassau-Suffolk area in New York. And indeed, since 2001 home prices have declined in San Jose and San Francisco, according to the second quarter 2002 House Price Index report from the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac.
But the agency noted that declines in areas that have exhibited bubble-like behavior in the past "have almost always been much smaller in absolute magnitude" than the increases that occurred during the preceding housing boom. Put simply, areas where homes have enjoyed great price appreciation are not likely to give up all those gains should the market decline, which is why housing is traditionally considered a good long-term investment.
Today's top is tomorrow's trough
And once a down cycle is over -- they typically don't last more than a few years -- the next upswing in prices is likely to make today's top prices look like bargains in tomorrow's market.
For that reason, "the time to buy is always five years ago," said Ray Brown, coauthor of "Home Buying for Dummies."
So if you're planning to stay in your home for many years, you should be less concerned with the prospect of a potential downturn in the near term.
"Your risk is mitigated if you plan to stay long enough to ride out the cycle," Retsinas said. Generally speaking, that means at least five to seven years.
Indeed, Stiff said, "If you can hold on seven to 10 years you can almost be assured your home will increase in value." Whether that increase outpaces inflation is another matter, but at least you're not likely to end up owing money to the bank. And you can never underestimate the intangible value of having a place to live in the meantime.
If, for some reason, you can't wait out a housing downturn should one occur, there may be a small consolation, Brown said. The bad news is you may not get as much as you paid for your house. But the good news is if you're staying in the same area you won't pay as much for your next house either.