Time to buy? -- Debate on about whether market is ripe for buyers

By: ZACH FOX - Staff Writer | Saturday, February 9, 2008 10:05 PM PST ∞

Buy now or wait? That is the question many potential homeowners face as the region continues to trudge through a housing depression that leaves them wondering how much further home prices will fall.

Industry insiders and academic analysts agree that the answer depends on who is doing the asking. For families, most Realtors and real estate professors concur that those looking at a house as a home should start shopping now.

Historically low interest rates and falling median prices mean the average mortgage payment in Riverside County was about $350 a month less in December than in July ---- a 17 percent decline to $1,756 per month, according to prices from DataQuick and interest rates from the Federal Housing Finance Board.

But for those looking at a house as an investment to sell for a profit a few years later rather than a home to live in for 10 years or more, opinions differ wildly on when home prices will stop depreciating.

"I think we've already seen the bottom," said Susan Anderson, manager of a Coldwell Banker office in Vista, basing her opinion on an uptick in the number of buyers looking for homes. "This market's got good employment, good interest rates and availability of product. Nobody has a crystal ball. But when it turns, it will turn on a dime."

Anderson's view of the market contrasts with predictions by many analysts, as well as some other real estate agents, that the region's home prices will continue to decline through this year and possibly longer.

"I wouldn't believe anything a Realtor says unless they have data," said Jim Klinge, owner of Klinge Realty in Carlsbad. "You can't just say (the market has hit bottom) based on a feeling. You're playing with people's lives. ... You can't just have a vision when you wake up in the middle of the night and say, 'I know it's going to get better this year.'"

Anderson acknowledges that recent data does not indicate home prices have stopped sliding but says today's activity will not show up in the statistics until March or April because of the time it takes to close a sale.

Klinge disagrees, saying it will take two years to work through foreclosures in the region, which have recently hit new highs.

Finding a dream home
For some buyers, like Albert Shrive of Dalton, Pa., the fact that prices will continue to drop does not matter as much as finding the perfect home.

Shrive said he was worried about buying and then losing value on his property.

"Absolutely. But I don't know when the market's bottom would arrive," said Shrive, an audiologist who just bought his third home in Carlsbad. "I didn't think we'd find an ocean view (condominium) for the price we're paying. So I don't want to wait for the bottom of the market because I don't want to lose this property."

The property, still in escrow, was listed between $550,000 and $625,000 and similar properties have sold for as much as $685,000 recently, said Shrive's Realtor, Deborah Harper.

For those waiting for that bottom, taking a historical look at real estate data offers no clear answer to their buying question.

Interest rates on mortgages are near all-time lows. Average fixed interest rates on 30-year loans have dropped to about 5.6 percent, according to the Mortgage Bankers Association. That is only the second time the interest rate has dropped below 6 percent since 1965, according to data from the Federal Reserve, the nation's central banking system.

Real estate agents have been pointing to the low interest rates as a reason to buy now. Though a fall in the price of a home makes it easier to see the savings, a change in interest rates can have a more dramatic effect on the actual cost of the home.

For example, a buyer who purchases a home for $500,000 and puts 20 percent down on a 30-year mortgage ---- typically the recommended amount for a down payment ---- with a fixed interest rate of 5.6 percent would pay about $2,300 a month.

With a 6.6 percent interest rate, the average in July, the same home would cost about $2,550 per month, tacking on an additional $93,000 over the life of the loan.

On that same home, the 1 percentage point increase to a 6.6 percent interest rate would negate a price discount of $35,000.

Though the interest rates are near all-time lows right now, they also appear to be here to stay, said Orawin Velz, senior director of economics forecasting for the Mortgage Bankers Association.

"I think because we expect the economy to slow significantly in the current quarter ... we're going to have aggressive Federal (Reserve) interest rate easing," Velz said.

The Federal Reserve determines what is known as the "discount rate," which is the interest rate at which banks borrow money from the Fed. Though this does not directly affect mortgage rates, rate reductions typically encourage banks to offer mortgages at lower interest rates.

Prices harder to predict
For buyers looking for the lowest cost on a home, the data on local home sales prices presents an even cloudier outlook than interest rate projections.

Pessimists point to the last local housing recession, which saw home prices decline for six years in the early 1990s before recovering, according to DataQuick numbers. Riverside County median home prices have so far declined for just one year, so there is clearly at least another year to come, they say.

Optimists say this recession has been sharper, meaning it will recover quicker. The median home price, compiled by DataQuick, shows the six-year, 1990s recession brought about a 20.3 percent drop in home prices from peak to trough. Through December, the latest month available, prices have already tumbled 18.5 percent since a December 2005 peak of $432,000.

Though both groups say the region's housing market is more stable than much of the county, it also has areas that will take time to recover.

And one trading market thinks San Diego County will take a long time to recover. The Chicago Mercantile Exchange has a futures market where investors can bet on home prices for the 10 original cities in Standard & Poor's Case-Shiller Home Price Index. Riverside County is not included on that index.

Traders in that market expect San Diego home prices to drop through 2012, predicting a 22 percent fall from November's index, the latest month available.

Even if the traders are right and San Diego experiences a seven-year, 35 percent decline from its 2005 peak, prices would only return to their May 2003 levels. Starting in 2000, home prices jumped 150 percent in about six years.

That shows the need for a correction and relative durability of the region's housing market, agents and analysts say.

And even those who think prices will continue to decline also think families should look for deals now.

"I don't think (waiting for the bottom) is a particularly smart thing to do because nobody has the crystal ball. Nobody knows when prices are going to go up again. You have to think of it as shelter and a place to live," said Tracey Seslen, a professor with the University of Southern California's Lusk Center for Real Estate.

Seslen expects prices in the region to drop until the middle of 2009.

"If you find the dream home," she said, "I don't think it's worth it to wait and quibble over 10, 20 or 30 thousand dollars."

Contact staff writer Zach Fox at (951) 676-4315, Ext. 5412, or zfox@californian.com.

First name only. Comments including last names, contact addresses, e-mail addresses or phone numbers will be deleted. Attempts to misrepresent your identity or impersonate any person will not be approved. All comments are screened before they appear online, so please keep them brief. Comments reflect the views of those commenting and not necessarily those of the North County Times or its staff writers. Click here to view additional comment policies.