The Housing Bottom: Are We There Yet?

Just one year ago I was finishing up my transitional year in the Midwest and moving out to Arizona. During that time, home prices had fallen, but few had foreseen the imminent housing crash. In fact, with home prices slightly down and great interest rates available, there were many, both expert and lay people, who claimed that it was "finally" a good time to get into the housing market.

One year and 20% loss in value later, graduating medical students preparing for their next stage of training are asking yet again, is it time to buy? There is no simple answer for a question with so many conditions. Depending on what part of the country you live in and how long your residency will be will greatly influence whether or not you should buy.

For many residents, renting now is the financially smart move. The pre-bubble bursting days of residents buying a home and then selling after residency to make $100,000 profit are nevermore. In fact, there are many markets where renting is significantly cheaper than buying.

To figure out if your area is one of them, calculate the P/R ratio (price to rent ratio) by dividing the average price of the home you're thinking of buying by the annual rent you would pay on a similar home. The historical average has been around 15. If your area's P/R ratio is near or more than 15, I'd seek the peace of mind that comes with renting.

As the history of home values chart above details, the bubble has popped, and we still have a long way before we reach the historical equilibrium. The way I see it, there are three ways this housing crisis plays out:

• (A) Best case scenario--we hit bottom soon and things start heading up.
  
• (B) More likely--the credit crunch, job losses, foreclosures, lack of confidence, and overall fear causes an exaggerated and overcompensated depression in home prices which takes a long, long time to recover from.
  
• (C) Very plausible--our government's meddling with multifarious "bail out" packages leads to a slow and painful death of the housing economy, thus preventing what could have been a fairly quick recovery.
  

And then there are the intangibles to ownership, some of which we've discussed in "Renting vs Buying."