NEW YORK In the wake of the just-announced landmark $25 billion settlement over dodgy mortgage practices, is it time to buy a home?
While it's laudable that those facing foreclosure may gain the ability to refinance or write down principal, there are still a host of unanswered questions about the U.S. housing market -- which may not improve much at all in the short term.
Home buyers want security -- the reassurance that their real estate investment will at least act like inflation-adjusted bonds and track the increase in the cost of living. During the bubble years, though, many mistakenly believed they were buying into the equivalent of bullet-proof stocks, paying both dividends and capital appreciation. Housing is neither.
A home is more like a derivative -- that is, a vehicle based on a host of complex variables. Notice I didn't call it a sure-fire investment.
It's volatile commodity, but there's a way to predict how it might perform -- if you're willing to be diligent.
You'll have to be more selective than ever and look at a broad range of local and national indicators before making a decision. Bear in mind that local information is more important than national statistics. Some markets may be stabilizing while others are still depreciating. The more information you cull, the better off you'll be down the road.
In the latest S&P Case-Shiller home price survey, for instance, nearly all of 20 major markets surveyed showed declines. (here). Only the Washington, D.C. and Detroit areas showed modest gains.
Here's how you can construct your own housing-health gauge:
* Employment and Economy are two main drivers: What is local employment like in the area? Where job creation is strong, housing demand often thrives. Are local businesses hiring or firing?
* Supply & Demand: Is your area overbuilt? Are there a large number of unsold or foreclosed homes on the market? Huge housing inventories put downward pressure on prices; information is available from your local National Association of Realtors affiliate.
* Demographics. Baby Boomers are starting to retire and downsize. Their parents may have already moved out of once-stable neighborhoods. Are young families, who can drive prices higher, coming in to replace them in the areas you're considering?
* Cost of Financing: Mortgage rates are still at generational lows. Under normal conditions, buyers would be purchasing en masse. But high inventories, foreclosures and unemployment are curbing the market.
* Mortgage Qualifications: Many homeowners may not qualify for the lowest rates, due to restrictive lending standards that were enforced after the bubble burst. High credit scores are essential. Leverage is what you borrow and equity is your stake in the property and what you put down. Having more equity is better in terms of getting the best rates. Keep in mind that the amount of leverage you use will magnify or diminish your loss or profit if you have to sell.
* Relative scarcity of land. In coastal areas, building is restricted, often keeping prices for the best properties high. This is not a problem in the Midwest and South, where there is still plenty of land for building.
Weighing all of these factors can aid your decision. You also need to consider one more factor: Market psychology. While this is notoriously difficult to measure, you need to know if potential buyers are seriously looking at homes and signing contracts.
I like to monitor the National Association of Realtors' "Pending Home Sales Index," which is designed to be a leading indicator of homes sales. It fell in December, after hitting a 19-month high the previous month. (here)
The most troubled markets generally have the highest inventories of unsold homes combined with flagging economic conditions. Atlanta, Cleveland, Detroit and Las Vegas all have average home prices below their 2000 levels, S&P reported. Atlanta led the pack of losing markets with a negative 11.8 percent return in the latest survey.
Like most derivatives, the only thing guaranteed with real estate is what it's not: a not a blue-chip stock with a steady dividend. No matter how the terrain shifts, the risk never seems to go away.
(Editing by Beth Pinsker Gladstone and Andrea Evans)