Wall Street Journal: A good time to buy a house -- with caveats

It's one thing when the real estate agent who sends you those calendars each year tells you that it's a good time to buy. It's another when the Wall Street Journal's Real Estate Journal section echoes that same sentiment. Still, such an endorsement comes with its own set of caveats:

For years rapidly rising prices kept many first-time home buyers out of the housing market. But as home values slide further downward and interest rates hover at relatively low levels, it may be time to start looking to buy that first house.

That is, if you have a secure job, can afford higher down payments than were required a few years ago and can meet lenders' much stricter income and credit requirements...

The U.S. median home price was $201,000 in January, down 4.6% from January 2007. The S&P/Case-Shiller national home-price index for the fourth quarter was down 8.9% from a year earlier, the biggest drop in its 20 years. Prices have plunged 10% to 12% in troubled markets like Florida and California, and many economists predict an overall slide of 20% or more before the housing market bottoms.

There was a 10-month supply of existing homes for sale in January, up from just under five months during boom times.

If you are about to get into the housing market, this is all good news. But before you begin visiting open houses, recognize that the old home-buying rules no longer apply. You want to approach buying your first house with a financially realistic point of view.

Remember: You're investing in a place to live, not speculating in the stock market or even putting money into a savings account. So keep it simple. Buy smarter. Buy cheaper...

Determine what you can afford...Mortgage lenders have tightened their standards and are requiring larger down payments. Typically, they want buyers to spend no more than 28% of their gross monthly income on mortgage payments, real-estate taxes and home insurance...

Know your market...Now more than ever, location is crucial, down to the neighborhood and street level. Focus on good school districts, crime statistics and any impending construction or public works that could increase or decrease the value of a home. Conduct preliminary research online at Web sites like Zillow.com, Trulia.com and greatschools.net...

Make your dollars count. Although conditions vary by market, look for a home that is significantly lower than its 2004 price. (You can ask real-estate agents for information and check estimated historical values at Zillow.) "From the peak to trough, home prices in some markets will drop 35% to 40%," says Christopher Thornberg, a principal at Beacon Economics, a consulting and research firm in Los Angeles...

Haggle. Don't assume the seller is even in the right ballpark with his asking price. Most real-estate agents and sellers only look at comparable sales prices, or "comps," of similar homes in similar neighborhoods. Take a lesson from property investors and appraisers instead and check out prices from other angles as well...Also compare your estimated monthly costs for the mortgage, taxes and other expenses with the cost of renting a similar place nearby. If you can rent virtually the same house for a much lower cost, the seller is asking too much.

Another good reason to gauge the rental market for a property is to plan for a worst-case scenario: if you lose your job, have a medical catastrophe or get divorced, you can cover your costs while you wait for the market to rebound or plan for other options. Since many real estate agents don't have that information, you may have to do it yourself by using Internet sites such as rent.com or craigslist.com (which is good for both apartments and houses).

Buy for the long haul. "Most first-time home buyers don't buy the house they're going to end up in," says Ilyce Glink, author of "100 Questions Every First-Time Home Buyer Should Ask." But experts suggest that in a downward market, people should purchase a home only if they intend to live there for seven to 10 years.

"Historically, housing bubbles have taken several years to deflate, but it's hard to tell if we'll see prices drop a lot in the next two or three years or see moderate drops over the next 10 years," says Mr. Newport, the economist.

If you're not planning to stay in the house for long, he notes, "it may be wise to watch from the sidelines."

Which is probably something speculators who ill-timed the market wish they had done.