Is Now a Good Time to Invest?

A few weeks ago two people in my life—a female co-worker and a male relative, both nearing their 30th birthdays—woke up feeling a strange new urge: each wanted to buy a house. Besides being around the same age, they both live and work in metropolitan areas. (He's in Washington, D.C.; she's in Boston.) They're tired of renting, and they've been watching prices of homes decline to the point where ownership feels within reach. So each began cruising real estate Web sites, attending weekend open houses—and periodically asking me for advice. But is now a good time to get into the market, especially for first-time homebuyers?

April is traditionally the beginning of prime house-hunting season, and with home prices falling across the country, it makes sense that a growing number of buyers would be seizing the day. Last month the National Association of Realtorsannounced that sales of existing homes jumped nearly 3 percent in February, as prices slid an average of 8 percent. The news led some optimists to wonder if it might be a sign of a market bottom.

That's probably wishful thinking: today the NAR announced that existing home sales in March were down 2 percent from February—and off 19 percent from March 2007. The inventory of "For Sale" properties grew slightly over the last month. Realtors attributed the fallback to lenders continuing to tighten lending standards in the wake of the foreclosure crisis.

The March numbers are nothing to cheer about, and the data reaffirm the prevailing wisdom that this bust won't turn into a boom anytime soon. Still, when my friends who have been lifelong renters ask me if prices have slid far enough to make this a good buying opportunity, I usually say yes. Home prices in much of the country have already dropped by 10 percent. They may keep dropping, but as with the stock market, there's no way to know when the market is going to hit absolute bottom. Better to find a house where you'll be happy for at least five years, I tell advice seekers, and take satisfaction in building equity, saving money on taxes and no longer delivering profits to your landlord. If values fall even more in 2009, as many expect, so what? You don't plan on selling anytime soon.

In the wake of the foreclosure crisis, I also encourage friends to take a hard look at the numbers to be sure a mortgage payment won't leave them crimped. Finally, I typically urge friends not to get too hung up on their house as an investment. If you're lucky you'll sell it someday for more than you paid for it, but most of the benefit you'll get from your house is living in it each day.

There is a bit of good news in the March home sale numbers: prices continued falling, with the median existing home price down 7.7 percent for the month. Ultimately it's these falling prices that will bring more people, like my co-worker and relative, into the market, attracted by the growing sense that houses have become a good deal again. Writing in the Wall Street Journal in 2006, economists Karl Case and Robert Shiller described the delicate psychology of homebuyers that can lead the housing markets to suddenly turn. As Case and Shiller wrote, the great real estate boom of the early 2000s was driven partly by demographics, low interest rates, lax lending, foreign buyers and the relatively poor performance of the stock market. "But beyond all these factors there is the simple psychology of expectations that is part of any speculative boom market," they wrote. They attributed the bust partly to a shift in buyer mentality—and it's a mind-set that could reverse itself abruptly too.