Ask Money

Buy a home?

Chris Farrell Nov 18, 2008

Question: My fiancé and I are trying to decide whether or not it is a good time for us to buy a house. I am a PhD candidate earning a stipend and have savings for a down payment. He has a full time job as an analyst with a large aerospace manufacturer. We will definitely be in the Seattle area for another 2 years but aren’t certain where we will go after that (once I graduate). We have heard mixed things about how long you have to live in an area for buying a house to be worth it and whether or not now is a good time to buy a house. Do you have any advice? Amanda, Seattle State: WA

Answer: Many people are wondering when it makes sense to get into the housing market again. After all, there have been double-digit price declines in most major markets. For instance, over the past year ending in August home prices are down 31% in Las Vegas and 27% in Los Angeles, according to figures compiled by the S&P/Case-Shiller Home Price Index. In comparison, Seattle has held up relatively well with a mere 8.8% decline over the same time period.

That said, I think there are more price declines to come. We’re in a recession, and it took a turn for the worse in October. As far as I can see the economy in November is certainly no better than last month and probably worse. I can’t imagine many people will extend their finances to buy homes until the scale and scope of the recession is clearer.

What’s more, as a recent post on the Business Week Hot Property blog points out, by two common measures the housing market is still overvalued. Comparing the median cost of a new home to median income suggests that home prices nationwide could drop another 15% to 20%. The home prices to average rent ratio is predicting a 20% to 25% decline.

But here’s the main reason I wouldn’t buy a home right now: You say you might move out of town in two years. I wouldn’t buy unless I knew I was going to live somewhere for at least 3 years and preferably 5 years. Even with prices down, a home is an expensive investment. The down payment will absorb savings. Then there are all the closing costs associated with taking out a mortgage. Closing costs can include points, taxes, appraisals, credit reports, title insurance, survey’s underwriting fees, and document preparation. The price-tag for all this stuff can range somewhere between 3% and 6% of the mortgage amount. What’s more, anyone who has bought a home could tell you that the money spigot doesn’t end with ownership. I would save my money and wait to buy a home. That is, until you know where you’ll be putting down roots.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.