House hunting: Is this the best time to buy?

June 8, 2011: 8:09 AM ET

NEW YORK (Money) -- My fiancé and I are saving up to buy a house in the not-too-distant future. We want to take advantage of the housing market, but he's skeptical about whether this is the best time to buy. When do you think prices will go up? -- S.R., Los Angeles

I can understand your fiancé's reluctance given that house prices continue to weaken. The S&P/Case-Shiller Home Price Index released last week showed that prices fell nationally in the first quarter of this year.

That's the third quarter in a row prices have dropped, taking them back to mid-2002 levels. Meanwhile, at the end of March the monthly index that tracks 20 large metro areas dipped below its previous low of April 2009, essentially confirming a double-dip in home prices for much of the country.

As for your city, Los Angeles, the stats weren't quite as bad as those of the 20-metro area index of which it's a part. Prices in L.A. still remain about 5% above their trough of May 2009, although they fell again in March, the eighth month in a row.

On a decidedly more positive note, though, your hometown did make our list of the Top 10 Turnaround Towns. Whether that turnaround will be in progress by the time you're ready to buy is anyone's guess.

But given the recent lackluster jobs report and the million-plus homes in foreclosure, I don't think anyone is expecting a robust about-face anytime soon. But that doesn't mean you and your hubby-to-be shouldn't be out scouting the market for a house to buy.

Desperate for a housing rebound

Just as people learned who bought a house at or near the peak of the housing market back in 2006, what really matters isn't what house prices have done in the recent past, but what they'll do in the future.

And despite all the gloom and doom, I think it's reasonable to expect that prices will eventually stabilize and begin climbing again.

Why? For one thing, even though this housing bust has made many people rethink the once widely (and erroneously) held notion that house prices are immune to major setbacks, it's not as if consumers no longer aspire to own a home or view one as a good investment.

In fact, a recent Pew Research Center report found that the overwhelming majority of people still consider a house the best long-term investment one can make. They just don't believe it quite as fervently as they did a decade ago.

And when current renters were asked whether they would prefer to rent or buy in the future, 81% said they would like to buy a house at some point. This tells me that the fundamental demand for housing is still solid.

Granted, it may take a while for this underlying demand to nudge prices upward, considering the weak jobs climate, the overhang of housing inventory and the fear that your husband and others have that someone who buys now could see prices go even lower.

But eventually house prices should become attractive enough to lure enough buyers to raise prices. That's the way markets work. If you'd like an example of how that dynamic has operated in the past, you need look no farther than your own city.

Winners of the rental economy

After a big run-up in the 1980s, house prices in Los Angeles peaked in early 1990 -- and then dropped 27% over the next six years. But after hitting a trough in 1996, prices began to climb, and by the beginning of 2000 had risen 37% and regained their former peak.

We all know what happened next. Prices more than doubled over the following six years as Americans (abetted by all-too-eager lenders) went on a housing feeding frenzy that culminated in a bust.

But the point is that even after sharp declines, housing markets can recover (assuming an area's underlying economy is sound), and prices do resume their upward trend. So getting back to you and your finance, it seems to me that this is a pretty good time to be in the market for a house.

Is it possible that prices might go lower still from here? Sure. But it's unrealistic to expect to call the bottom of the market and time your purchase just right.

What you can do, though, is take advantage of the depressed market to do an extensive search for a house you like -- and then use the leverage of a weak market to negotiate hard on price.

As a buyer, you're in the advantageous position of having time and market conditions on your side. Before you do anything, though, you need to make sure you've got realistic expectations.

Prices in Los Angeles really popped after the market recovered from the 1990 crash. But with the experience of this unprecedented housing debacle seared into the minds of buyers and lenders, I expect we'll see much more muted appreciation potential in the future.

I think there's an increasing sense that a house is first a place to live and then an investment, not the other way around. After a period where people became serial house flippers, there's also a growing awareness that owning a house is a long-term commitment.

In years past, the rule of thumb was that you should consider buying only if you planned on living in an area at least five years. Today, I'd say you probably shouldn't even think of buying a house unless you plan to stay in it more like seven to 10 years.

That's not to say you might not come out ahead for shorter periods, especially if you don't buy at the height of a bubble. But given the large transaction costs of buying and selling and a more subdued appreciation outlook, I'd err on the side of planning for a longer stay than a shorter one.

For more info on how to navigate today's tricky housing market, you can go to our Real Estate section. And if you're not totally wedded to the City of Angels, you may also want to check out our recent story on the least expensive housing markets.

The bottom line, though, is you and your betrothed should be approaching the prospect of becoming homeowners much the same way that, ideally, one enters into a marriage. You take your time, give it the serious thought it deserves -- and then move forward only if you plan to be in it for the long haul. (send Walter Updegrave a questionTo top of page

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