Home buying more than an investment question - Chicago Sun-Times

Q. Home prices keep falling and we’ve been waiting to buy our first home. We’ve saved up enough for about a 15 percent down payment. But now we’re beginning to wonder if we should buy at all — or keep renting.

A. Well, you’re right about home prices. The most recent Case-Shiller Home Price Index shows that prices fell 3.1 percent, year over year, compared with January 2010. The 20-city composite index, as of January, has fallen 31.8 percent from its peak in July 2006.

In fact, there’s talk of a “double-dip” housing recession, which would be defined by the Case-Shiller 20-city price index hitting a new low — even lower than the bottom made in April 2009. As of January, the 20-city index was only 1.1 percent above that low point.

The decline in home prices, combined with previous lenient lending standards, has resulted in nearly 25 percent of homeowners having a mortgage that is larger than the current market value of the home. (Keep in mind that nearly one-third of the homes in America are owned free and clear, without a mortgage.)

You don’t need to be an economist to realize that homes have not been a great investment for the past eight years. And you don’t have to have a crystal ball to predict that this situation could continue for quite a while, since there are so many foreclosed homes on the market, along with desperate sellers, all combining to push prices down.

But the real question is: Why were you thinking of buying a home? If you ask your grandparents, if they’re still around, they would probably never mention “price appreciation” as one of the significant reasons they bought a home 50 or 60 years ago.

They probably would have said something about wanting something that was all their own, that they could “fix up” the way they wanted it (unlike rental housing in those days). They planted trees and expected to be around to see them mature, along with their children.

Your grandparents would have talked about “raising a family” in this home, and about the memories they would build — not the equity. In fact, their goal was to have the mortgage paid off before they retired, so they could live in this home for most of their lives without the burden of a monthly payment in retirement.

That was the American dream of home ownership. If you share that dream, to any extent, then there’s no reason not to buy a home right now. You said you have the down payment money, and, I presume, the good credit to qualify for a mortgage.

Mortgage rates are low, and so are prices. And if you’re pretty sure you’ll be living in the same area for at least five years, and pretty sure that the home will fit your growing family, then this is a wonderful time to buy a home.

But if your question is whether buying a home now is a good investment — well, that depends. It depends on the price you pay, and on your time horizon, and on the rest of the economy. The price of a home reflects more than supply and demand; it reflects the availability of financing and the mood of the public as it evaluates whether future inflation will make assets, including houses, more valuable.

Right now Congress is deeply in the mode of “locking the barn door after the horse is out.” After years of pushing for credit availability for low-income home buyers (Rep. Barney Frank) and easy mortgage standards so banks could profit by making loans (Sen. Chris Dodd), the game has changed.

Now the Dodd-Frank banking reform bill named after these two Washington insiders has reversed the playing field. New “standards” are likely to make it more difficult for first-time home buyers. A 20 percent down payment will be required to get the lowest rates. A more limited financing market could impact the demand for homes, and the prices sellers can expect to receive.

I think this is a good time to buy a home for both financial and lifestyle reasons. No one ever picks a “bottom” — but despite (or because of) all the negativity, we could be close. And I do believe in the American dream of home ownership as a place to raise a family and build a community.

But just in case I’m wrong about that evaluation, there’s one other good thing about buying a home: This is the one investment you can live in , if you happen to make a mistake in your timing. And that’s The Savage Truth.

Terry Savage is a registered investment adviser.

Home buying more than an investment question - Chicago Sun-Times