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Buy a home?

Question: My fiancé and I are trying to decide whether or not it is a good time for us to buy a house. I am a PhD candidate earning a stipend and have savings for a down payment. He has a full time job as an analyst with a large aerospace manufacturer. We will definitely be in the Seattle area for another 2 years but aren't certain where we will go after that (once I graduate). We have heard mixed things about how long you have to live in an area for buying a house to be worth it and whether or not now is a good time to buy a house. Do you have any advice? Amanda, Seattle State: WA

Answer: Many people are wondering when it makes sense to get into the housing market again. After all, there have been double-digit price declines in most major markets. For instance, over the past year ending in August home prices are down 31% in Las Vegas and 27% in Los Angeles, according to figures compiled by the S&P/Case-Shiller Home Price Index. In comparison, Seattle has held up relatively well with a mere 8.8% decline over the same time period.

That said, I think there are more price declines to come. We're in a recession, and it took a turn for the worse in October. As far as I can see the economy in November is certainly no better than last month and probably worse. I can't imagine many people will extend their finances to buy homes until the scale and scope of the recession is clearer.

What's more, as a recent post on the Business Week Hot Property blog points out, by two common measures the housing market is still overvalued. Comparing the median cost of a new home to median income suggests that home prices nationwide could drop another 15% to 20%. The home prices to average rent ratio is predicting a 20% to 25% decline.

But here's the main reason I wouldn't buy a home right now: You say you might move out of town in two years. I wouldn't buy unless I knew I was going to live somewhere for at least 3 years and preferably 5 years. Even with prices down, a home is an expensive investment. The down payment will absorb savings. Then there are all the closing costs associated with taking out a mortgage. Closing costs can include points, taxes, appraisals, credit reports, title insurance, survey's underwriting fees, and document preparation. The price-tag for all this stuff can range somewhere between 3% and 6% of the mortgage amount. What's more, anyone who has bought a home could tell you that the money spigot doesn't end with ownership. I would save my money and wait to buy a home. That is, until you know where you'll be putting down roots.

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