For the record, I’ve never suggested to anyone that buying a home is a good “investment.”  You can do much better in the stock market and probably even in bonds.

However, I am beginning to think that if you’re going to shackle yourself to a home, now may not be a bad time to buy.  And I think the NY Times article supports my position.

Why do I think so?  Most of the articles I’ve been reading suggest that the worst is over in terms of price declines, this article included.  That doesn’t mean that prices couldn’t drop another 5 to 10%.  But it’s a fool’s errand to try to predict the bottom (or top) of any market.

At the same time, the consensus seems to be that interest rates have nowhere to go but up, given the huge stimulus that the government’s been giving to prop up the economy.  One can argue whether and when the government should choke off the spigot of easy credit, but when it does, rates are going to have to go up.

Here’s the takeaway from the NY Times article:

“Instead of betting on home prices, you make a bet on whether money will become cheaper or more expensive, allowing you to buy more or less house.”

Now  it’s true that increasing interest rates ultimately lead to declining prices as tighter credit drives down demand.  That’s the theory anyway.  But after the huge declines we’ve already seen, it’s anybody’s guess as to when, where, or how that will happen.  As the article says, “don’t go there. Maintain your focus.”

Here’s a graph from mortgage-X.com on historical blended (ie. fixed, arms, etc.) mortgage rates.  Should make people who can qualify for a mortgage in this still-crazy market feel pretty good, no?

A front page article in the Business Section of last Wednesday’s New York Times, grimly entitled “An Upturn in Housing May be Reversing,” pulls together recent and contradictory data from various sources, including Case-Shiller, Moody’s, and The National Association of Realtors.  The conclusions are sobering.

There is a growing consensus that the positive national sales data that we’ve seen over the last few months is faltering.  Much of the recent activity, for example, was stimulated by the anticipated expiration of the “First Time Home-buyer Tax Credit,” originally set to expire in November, and now extended through April of next year.  Essentially, this means we’ve “borrowed” from future sales.

Also, despite some positive economic news and decent sales volumes, there’s been little improvement in sales prices because inventory levels – read “foreclosed properties” – remain so high.   Mary Maitland, VP of the S & P Index that publishes the Case-Shiller Index foresees a “W” pattern for the housing market, with prices this winter testing the lows we saw earlier in the spring.  Am I allowed to say “I told you so?”

The NY Times article has a cool interactive chart for specific MSA areas including “San Francisco” — remember this covers 5 of the 9 Bay Area Counties.

That was the title of an October 27 article in the New York Times, and, as one of my readers and clients pointed out, it’s what I’ve been tentatively suggesting as a possible scenario for this winter. See here, for example.

And, ironically, the gloomy head-line announced yet another “positive” month of data from the Case-Shiller Home Price Index. The little up-tick in the index from last month’s July data that I discussed as a possible “dead cat bounce” continued in August.

“San Francisco”  — remember, this is a Metropolitan Statistical Area (MSA)  consisting of 5 of the 9 Bay Area Counties — improved 2.6% on a seasonally adjusted basis from July 09.  The New York Times has a cool inter-active chart that shows the CS Index for various MSA’s here.

So why so glum?  The NY Times article points to a number of factors that suggest the improvement may not continue:

• an unexpected fall in consumer confidence in October.
• the end of the stimulus provided by the first-time home-buyer tax credit (though there’s pressure to extend this).
• doubt about how long the The Fed will keep interest rates so low.

Especially troubling for California is “strong evidence that foreclosures may be spreading from sub-prime inland areas to the more exclusive coastal region.”

My view hasn’t changed.  If you’re thinking about buying, this is probably a good time to be out there looking, with a view to buying some time during the winter months when activity slows and prices tend to soften somewhat.  Nobody knows how long interest rates are going to remain low — and some economists think that they may well remain low for a while — but with the government having thrown so much money at the economy to keep us from the brink of disaster, it’s hard to argue that the long-term trend is going to be anything but up.

As for whether we’ve hit bottom yet, it’s anybody’s guess.  While Mr Case of Case-Shiller continues to think that the worst is over, the NY Times article quotes another eminent economist who thinks that the recent improvement in the CS Index is an aberration and who wouldn’t be surprised by another — if limited — down-leg.

It’s a fool’s game to try to time the market to the nth degree.  And in this environment, with so many contradictory signs pointing in so many directions, you might as well flip a coin, or an economist, and see whether he lands on his head or his arse.

Me, I’m dusting off my magic 8-ball.

• First-time home-buyers presumably have the down-payment sitting in the bank, so they can benefit from the drop in home values without having to worry about selling their own home in a depressed market to raise the downpayment.
• Mortgage interest rates are currently pretty low by historical standards and could go lower if the federal government decides to try to drive them lower.  If you can lock in a low rate for 30 years, that seems pretty smart.
• The best deals may be in “new” housing, where developers are desperate to get out from under bloated inventories.  Those inventories, however, are falling as construction of new projects has come to a halt.  With winter being a traditionally slow time to move houses, now may be a particularly good time to buy.

Along these lines, a loan officer recently told me that he’d heard of a downtown high-rise condo that was listed for $1.1 million and was sold by the developer for $770,000 — just enough to pay off the loan amount attributable to the unit.

There are words of caution, of course:

• Numero uno — as I’ve said here as well — first thing to do is to make sure you can qualify for the loan you need.  Check your credit score — you can do it for free at the consumer protection site, annualcreditreport.com — and start paying down your credit card bills now to up your score if necessary.
• Make sure your jobs and income are stable in this scary environment and that you’re not going to be too stretched to make your mortgage payments (obviously he’s not talking about buying in San Francisco, where most mortal folk are still paying a huge portion of their income to pay for their mortgage).
• Some markets, including the San Francisco-Oakland-Fremont Metropolitan Statistical Area (how’s that for a mouthful), may suffer further declines, based on a missmatch between historical rental rates and housing prices.  Lieber links to an article that discusses this further — but I advise caution.  The San Francisco-Oakland-Fremont MSA is huge.  Sure, prices may decline further in San Francisco, and if they do, it doesn’t take much of a percentage drop to result in a big dollar drop when you’re talking about median price homes of $800,000.  But SF is not Fremont, and there’s every reason to believe that SF will do better than the outlying areas where there are less constraints on building new product and where jobs are arguably more at risk.  Certainly, that seems to have been the consistent conclusion of the big brains at the Fisher Real Estate Conference I attended a few weeks ago (see below).

So is now the time to buy?  I tend to be a contrarian.  I like to buy when things look bad, and sell when the sun is shining, a philosophy I admit I put into practice only imperfectly.

However, my view is that if your time horizon is at least 5 years and preferably longer and you feel comfortable about the stability of your job/income, now is not a bad time to buy.  Good properties still get multiple offers, but it’s no longer an insane seller’s market; interest rates are pretty low, if you can qualify; and as Yogi Berra said, they aint making any more land — especially in San Francisco.

As Lieber points out, people don’t buy homes for investments — there are better ones — they buy them for the primal satisfaction of having a cave you can call your own, that you can decorate with your own cave paintings without having to consult the cave-lord.  If that’s your motivation, it might be time to start looking at those open houses — after checking your credit score.

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