Now's the Time to Buy a Home

This spring, opportunity is knocking hard for home buyers. Aside from the soon-to-expire tax credit worth as much as $8,000 (you must have a contract by April 30 and close the deal by June 30), affordability has returned to pre-boom levels and mortgage money is cheap, with the 30-year fixed rate hovering around 5%.

Before you leap, you'll have to weigh the risk of further price declines in your market. The median price for single-family homes is $163,600, according to the National Association of Realtors -- about what it was in 2002. Fiserv Lending Solutions, a research company in Cambridge, Mass., forecasts that it will fall another 6.4% in 2010. But the price trend varies a lot by city. For example, prices in Washington, D.C., could fall another 12%, while prices are predicted to rise 1% in Pittsburgh, Pa. The biggest predictors of further price declines in most markets are joblessness and distressed sales. More foreclosures and short sales (properties sold with the lender's okay for less than what's owed on the mortgage) are coming, but they'll ease their way onto the market instead of hitting it like a bomb.

Unless your area is rife with foreclosures that promise to drag down prices, there's little reason to wait to buy. Mortgage rates are likely to head higher -- the 30-year fixed rate may hit 5.7% by year-end, according to Freddie Mac -- which may negate any benefit you'd get by waiting for lower prices. Suppose you buy a home with a $300,000 mortgage now and lock in a 5% rate. Your monthly principal and interest payments would be $1,610. If you wait until prices drop 6% and borrow $282,000 -- but have to pay 5.7% on the loan -- your monthly payment would be $1,637.

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The supply of homes for sale nationally has drifted downward from its peak in 2008 but is still stacked in favor of buyers -- although in many cities the inventory of entry-level homes has dropped quickly, as first-time buyers and investors have scooped up bargains. On the new-home front, most builders have burned off their existing supply of homes and reduced or eliminated concessions and incentives. They may pay closing costs, but later this year Federal Housing Administration (FHA) rules will limit the seller's contribution to 3% of the purchase price. You can still get upgrades, but you'll pay for them upfront, says Jody Kahn, vice-president of John Burns Real Estate Consulting.

If you need to sell a home before you can buy again, your best strategy is to price it realistically to move it fast (see 3 Keys to Selling Your Home). That was Andy May's strategy when he sold his condo in Rochester, Minn., for a loss before he and his fiancee, Lexi Davis, moved to Salt Lake City. In their search for a home, the couple started their shopping on the Internet. Once they began to tour homes, they discovered that many properties that had looked good online didn't cut it in person -- because of unappealing floor plans or unacceptable commutes. In home buying, what you want -- or not -- evolves after you actually see the homes, says May.

After visiting at least 20 houses, they put a bid on a home with four bedrooms, three bathrooms and a big yard for their dog. The home was listed for $250,000 and had been for sale for six months. The couple offered $230,000, and after negotiating settled on a price of $238,500 with $3,500 in seller-paid closing costs -- including a home warranty and a year's worth of homeowners insurance. They put down $7,000 and took out a 30-year, fixed-rate FHA mortgage with a rate of 4.75%. As a first-time home buyer, Davis qualified for a tax credit of $8,000.