Business Math in Action

Reading a Fickle Housing Market

The biggest investment most of us will make during our lifetime is buying a house. Traditionally, home ownership has been a wise financial move: Over the past 37 years, since the National Association of Realtors began keeping track, the median price of homes nationwide has only gone up. Don’t grab the classifieds too quickly, though-things may be less certain in your local housing market.

Before you decide to buy a home, it’s a good idea to get a sense of whether prices in your area are rising or falling. Naturally, you want to buy when they are rising so your home will improve in value. However, it’s not always bad to buy when prices are declining. If you buy at the bottom of the housing cycle and stay in your home for a few years, you may gain more equity than if you buy in the middle of an upward-moving cycle. (Equity is the difference between the current value of your property and the amount of your mortgage.)

Here are some questions that will help you determine the direction of your local housing market. The statistics can be found on various Web sites or with the help of a realtor who has access to the Multiple Listing Service.

Are prices going up or down? This is an obvious place to start, but be sure to compare prices only among houses that are alike in square footage, location, and style. Track prices for the previous four to eight months.

How long are homes staying on the market? If the time between listing a home and completing the sale is getting longer every month, sellers may start to lower their prices.

How many homes are for sale in your area? Find out how many homes were for sale last month and how many sold. Compare those figures for the past four to eight months. If there are more homes for sale and fewer selling with each passing month, it could point to an eventual decline in home prices.

How many homes have sold? If fewer homes are selling each month, prices may drop.

Is it cheaper to rent than to buy? It makes sense to think about this both in terms of what you can afford and how good an investment home ownership will be. You’ll need to figure out how much your mortgage payment would be on the type of house you want, and compare that to the typical rent on a similar house in a similar neighborhood. When an area has a surplus of appealing, cost-effective rental properties, it means the housing prices may soon drop so renters will be convinced to buy.

While you’re contemplating your move, keep in mind that maintaining a house is expensive. First-time home owners are often stunned at the amount of money it takes to replace a broken water heater, clear clogged drains, or repair a roof. The amount you will have to spend on maintenance depends on the age and condition of the house. Pay very close attention to the home inspector’s report, and get estimates for every major repair job before making the final decision to buy.