Every so often I’ll get asked when I am going to buy a house again. My response is not until after prices bottom. This is when I’m asked to give a date prediction. It’s not that easy. Instead of picking a future date, I have a rule set that will be my guideline.
- Supply of inventory will be between 4 and 6 months. This is a healthy historical average. The last chart on February Existing Home Sales shows that the national supply is 9.6 months before the spring selling season even starts. When supply exceeds 6 months it means prices are too high for current demand. Notice that at the point inventory exceeded 6 months was the top of the real estate market.
- At least a quarter of price appreciation at normal inventory levels. I have no desire to bottom guess. Paying a few percent more after the bottom is fine with me.
- The normal historical relationship between renting and ownership returns. These can be calculated with the House P/E ratio and House Price-Rent Ratio which are covered on the Wikipedia page Real estate bubble.
- After the first three rules are satisfied, I will confirm with the Case-Shiller Index that the metro area I’m interested is predicted to have price stability going forward.
My last word is that I use national averages as a guideline. As those numbers move back to levels of sanity, I’ll focus on the metro areas that I’m most interested in living. Some areas will correct faster than others.