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Buy a home now?

Question: Is now a good time to purchase my first home in Santa Cruz, California? Buying in this area has never been an option until now. I have watched closely as house prices drop. Some properties, not particularly nice ones, have dropped to just about where my husband and I can afford to buy. My husband and I are worried that house prices in general will continue to fall, thus causing the fixer-upper we can buy now, which is already a financial stretch, to lose much of its value in the future. Lindsay, Santa Cruz, CA

Answer: More and more people are asking themselves: Is this the time to buy? Home prices are down sharply over the last two years, and mortgage rates have recently trended lower, too.

Take California. The Golden State's housing boom earlier in the decade was phenomenal, and the subsequent bust has been scary. Over the past year, according to the Shiller-Case index, prices in Los Angeles have dropped by 28% and in San Francisco by 30%. A recent article in the Santa Cruz Sentinel says the median home price in Santa Cruz County fell to $433,000 in November. That's down 41% from a year ago.

The price of a median home is still high, however. I don't know where the residential real estate market's bottom lies--let alone when the housing market will stabilize. My best guess--and it's a guess--is that there are additional price declines in our future.

A home is a good purchase for many people. The key is that your finances shouldn't be stretched. If that's the case, a home is a low return long-term investment with some tax benefits and, most importantly, a lifestyle--a neighborhood and a nesting place.

Price matters. What concerns me is that you'd have to make a "financial stretch" to buy a home. That's how people get into money trouble. I'm less concerned that prices might go lower than I am about what owning a home might do to your financial health.

It isn't just the cost of paying the mortgage principal and interest payments, real estate taxes, and homeowners insurance. A home is expensive to run. You may love tending to your garden and taking care of the lawn, fixing the roof and maintaining the garage, but that pleasure costs money. A good rule of thumb for the average homebuyer is that annual maintenance costs range from 1.5 to 4 percent of the home's original cost. It sounds as if you and your husband are handy since you're looking at fixer-uppers. Sweat equity is a good way to build value, but there is still a cost to repair and improvements.

It's no fun being house poor. That's why I lean on the conservative side when it comes to home ownership. Run the numbers carefully. Be comfortable with the fact that a home typically only pays off over the long haul. Make sure that owning doesn't prevent you from meeting other important financial goals, such as saving for retirement. If your okay by these measures, then buy by all means. If not, I'd be wary.

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