Good Time to Look for a Second Home?

Though the housing downturn is straining many people, this might actually be good news for buyers -- particularly those looking for a vacation home, condo or a home in the center of the country, some experts say.

Home prices fell 4.5% from a year earlier in the third quarter, marking their sharpest decline in the 20 years since Standard & Poor's began tracking prices through its S&P/Case-Shiller® Home Price Index.

All 20 of the top metro areas tracked by the index saw declines in September over August, including the five metro areas that still have positive annual growth rates (Atlanta, Charlotte, N.C., Dallas, Portland, Ore., and Seattle).

Tampa and Miami saw the greatest year-over-year home-price declines at 11.1% and 10%, respectively. Detroit and San Diego followed with a 9.6% decline each and Las Vegas had a 9.0% drop, its lowest recorded annual decline to date.

"It is a great time to seriously think about the attractive prices," says Lawrence Yun, chief economist for the National Association of Realtors. "Home prices are lower than they were last year, and people can possibly negotiate for an even lower price."

The national median existing-home price for all housing types was $211,700 in September, down 4.2% from September 2006 when the median was $220,900, according to the NAR.

Excess inventory has contributed to the home-price declines. In fact, there are about 5 million homes currently up for sale in the U.S.. Some of the inventory buildup is due to the rise of people defaulting on mortgage loans and tighter restrictions on who can afford a loan, as well as overbuilding in many markets.

One reason potential buyers may want to act quickly: Historically, when home prices fall, they don't fall for long, says David Blitzer, chairman of the S&P Index Committee.

"If we go back to 1990, 1991 and 1992 and prices were falling, the reverse came very fast and very suddenly," Blitzer says. S&P data show that by the second quarter of 1993, prices were again rising.

Although Blitzer says no one knows for sure when exactly housing prices will make a positive turnaround, there is some indication that the time period might be shorter than it was in the 1990s.

For one, the job market is actually still fairly strong today and the jobless rate low, contrasting with the rising unemployment rate in the early 1990s. NAR forecasts that home prices will be on the rise again before the end of 2008.

Tom Lawler of Thomas Lawler Economic & Housing Consulting in Vienna, Va., is one of many market watchers, however, who aren't calling for a turnaround in housing prices anytime soon. If they're right, it might be better to wait before buying, to get an even better deal on prices.

"Home prices will continue to decline through most if not all of 2008, especially in those areas where speculative demand and easy credit fueled a surge in home prices relative to incomes that exceeded any previous housing boom," says Lawler.

"Many potential home sellers in those areas are still listing their homes at unrealistically high prices, and as a result, home sales have plunged and unsold inventories have continued to increase."

That does not mean, however, that there aren't good opportunities out there right now for buyers to negotiate prices massively below the list price, he says, especially for buyers with a hefty down payment and stellar credit.

S&P/Case-Shiller U.S. Home Price Index

Click here for larger image.

People willing to hold properties for a long time could be well served by starting to look at potential purchases now, because over the long term home appreciation usually pays off. Even when prices were, in the third quarter of 1992, below their levels of the third quarter of 1990, they were up from the same period five years earlier. And despite the recent declines in the market, which began in the third quarter of 2006, according to the Case-Schiller data, national home prices are up 80.5% over the first quarter of 2001.

"Investors should have a three- to five-year minimum hold period in mind," says Kraig Kast, CEO of Atherton Trust, a Redwood Shores, Calif., outfit that provides financial planning services for real estate investors. He adds that, "It is best to buy an investment home beginning near the end of the first quarter of 2008. Our economists project interest rates will still be at historic lows, and mortgage lending will loosen up a bit."

Lowest Mortgage Rates by City
Boston, MA	6.07%
Miami, FL	5.75%
Washington, DC	5.75%
Chicago, IL	6.13%
New York, NY	5.75%
Source: BankingMyWay.com Rates are for a 30-year fixed mortgage below $417,000 for purchase of a single-family, owner-occupied residence. For more rates, go to BankingMyWay.com

Yun maintains that Florida, for one, is a strong long-term prospect. "It is down currently, but for those with a long holding period, Florida is a great buy," he says. Also, investors who know how to research metro areas for job-growth trends, taxes, new building permits, housing affordability index, etc., might be able to figure out where the long-term potential is and invest there, some say.