The answer to the question, “Is it time to buy a house?” is not simple, but let’s start with my own personal experience.
I bought a home in the early ’80s in Arlington, Texas, for what we thought was a fair price; but the mortgage was back-loaded, so I was not buying back much equity, just paying a lot of interest. But we had a growing family and the need for space, so we made the move. I must confess I was not the savviest loan customer 30 years ago. I am now aghast.
About eight years later we had the savings and loan crisis in Texas. Real estate became cheap, in some cases real cheap. Our family was growing again and we needed more room. One home we looked at was large and on a golf course. It had also been abandoned for a year and had some damage. The RTC (Resolution Trust Corporation) owned it (the government agency that took all the debt from the failed savings and loans). At one point, it was appraised for $810,000. The loan was (I think) about $690,000.
I had been watching friends buy apartments and loan portfolios from the RTC for a dime on the dollar. True story. The RTC would set out piles of manila folders of loans on a table. You could look the folders and then bid on them. Some of the folders had actual checks from the people who had borrowed money and were still trying to pay on cars, boats, condos, whatever. There were people who would bid the value of the actual “cash” in the folders and get the bid, as the people running the RTC were just trying to get through the mess as quickly as possible. Of course, the taxpayers made up the difference.
If you had cash, you could get apartment buildings and be on positive cash flow on day one. One friend would buy older apartments, turn them into government subsidized homes for the elderly, and get his money back within a few years. For active entrepreneurs with cash, it was a good time. If you owed money or needed money, it was very bad. 
In Houston, they were auctioning off homes from the courthouse steps and people were paying for them with credit cards, they were so cheap (some 3-bedrooms went for like $6,000). The economy in Houston was imploding. The joke was, “Will the last person to leave Houston please turn out the lights?”
Anyway, we fell in love with the house in Arlington. My business had (finally!) started to do better and we could afford to “move up.” But given the real estate crash, I was still under water after eight years of making payments on my current house, by about 15% or somewhere in the mid-$20,000 range (I try to forget, as it is painful).
The home we wanted to buy was up for bid. As I said, it needed lots of work. Fire ants had eaten most of the outside wiring. There was no lawn on an almost one-acre property, as it had died the last summer from lack of water. The pool was green slime. And so on.
I put in a bid for $285,000, which was much less (maybe half) than it had cost to build, but I put down a large cash deposit with the bid and offered to take it “as is, where is.” My realtor told us we would not get it, as there were bidders who were offering as much as $50,000 more, but with some requirements. I decided to hold my ground. While this was a dream home for a country boy from a small Texas town, there were other houses going on the block regularly.
As it turned out, the next week we got a call saying the RTC had accepted the bid. When we asked why, we were told they simply did not have the time or people to oversee any “fix this” bids. Even though by a financial analysis there were better bids, it had become a matter of moving that folder off the desk, as there were roomfuls still be dealt with. And having been burned once on a mortgage, I was a lot smarter this time about interest rates and terms. (I had also been in the investment world for nine years, so had learned a few things.) About ten years later, for personal reasons, I sold the home at a nice profit, and this time had paid down the mortgage quite a bit, so I had some equity.
Since then I have leased homes or condos, and still do. I now lease because it makes sense for me, given where I am in my life. I am not sure where I’ll be in five years, or what my business will look like. The world is changing so fast. (Although I could have said that at almost any time for the last 60 years and been right.) Also, the home I lease is quite nice but would cost me about three times in monthly payments to buy it as to lease it. Does the lease price go up at renewal? Of course. But it is still a lifestyle and cash-flow decision.
Buying a home is a personal and lifestyle choice. The owners of the villa we are staying in here in Tuscany have five homes, all over the world. They buy homes that need a lot of work, make them spectacular, and then rent them out, which more or less covers their costs and return on capital; and then they stay in them when they want to. They get people to do the work, other people to pay for it, and they “live large.” Nice life.
Jeremy and Carol Leonard are friends from Canada who are here with us this weekend. He bought a home in Hawaii, where one of his businesses is. He got it for a lot less than it would cost to build, so he was not too worried about the price. He and his family now live there, and he commutes back to Edmonton from time to time for his other business (more on that later).
All that to say is that if you are in a place where you want to buy a home, now may be the right time to start thinking about it. The banks and government are simply overwhelmed with homes that have been repossessed, and it looks like there might be as many as 2 million more homes to come onto the market. Prices in many areas are going to continue to fall, and if you can get credit, mortgage rates are quite low.
If I were buying, I would want to meet agents or bankers who are in the “deal flow.” The anecdotal stories of people getting homes for what seem like very good prices, in this depressed market, are all over the internet. There are homes that are certainly below replacement costs in some areas (and not just in the US but in certain parts of Europe as well). While I think home prices should go somewhat lower, we are out of bubble territory. There are starting to be values in the housing market for savvy shoppers. Which of course is what help creates a bottom. Which I have been writing for many years should happen in 2012-13. So you can be patient, but if you want a home, put in a bid that will make you smile if you get it accepted. No rush. And there are certainly deals for people who can use a little leverage and buy rental property.
And I must admit, if there is another crisis in Europe and prices of vacation homes like the one I am staying in drop a lot? I might just jump in. I like owning stuff. But at the right price.
RELATED LINKS:
Housing Market Still Needs Government Support (The Fiscal Times)
Fixing the Mortgage Market Could Hurt Consumers (The Fiscal Times)
The American Dream Has Shifted (The Fiscal Times)
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