Last year, the home sale market began to slow, causing many
buyers to postpone buying hoping that prices would drop. In
fact, in some areas and in some segments of the market, prices
have declined. However, in high-demand markets like San
Francisco, Austin and Seattle, prices increased compared to a
year ago, particularly for upper-end properties.
When interest rates fell below 6.5 percent at the beginning of
2007, San Francisco Bay Area buyers were back competing against one another
in a low-inventory market. Was it wise for these buyers to postpone buying until
2007? Waiting resulted in lower interest rates, but in many cases, a higher
purchase price.

Mass psychology influences home-buying patterns. For example, when buyers
decide that it is not a good time to buy due to fear of falling prices or rising
interest rates, this notion tends to become a self-fulfilling prophesy. When the
volumes of home sales drop, buyers tend to hold back. When sales heat up,
buyers perceive this as a good sign. They feel they must buy immediately before
home prices rise and they are priced out of the market.
Buyers tend to follow the herd, which is counterintuitive. It would seem that the
best time to buy would be when there isn't competition from other buyers -- that
it, in a slow market. However, most buyers feel more comfortable buying when
all their friends are buying. The comfort of the crowd validates that their
decision is a good one.

Home sale markets are cyclical. There are up markets, down markets, and stable
or balanced markets. In an ideal world, you would buy at the end of a down
cycle, just before the housing market picks up again. But, it's impossible to time
the real estate market. You know that the bottom of a cycle has passed only
when the market is moving upwards again.

HOUSE HUNTING TIP: Given the cyclical nature of housing markets, home
buying is risky unless you have a long-term perspective in mind. If you buy at
the peak of a cycle and are forced to sell soon after in a softer market, you could
end up selling for less than the price you paid. Buyers who can stay put and ride
out a down cycle are in a better position to recoup their investment when they
sell, and possibly make a profit.

In an uncertain market, buyers who are not sure about how long they will be
living in an area may be better off renting than buying. It's often difficult to find
a rental that feels like home. However, from a purely financial point of view,
buying for the short term could end up costing more than you anticipated if you
need to sell in a down market.
A common complaint about renting is that it's a waste of money. There are no
tax benefits and you don't build equity. However, it can cost less to rent than to
buy. To get the tax write-off, you often need to pay more than you'd have to pay
renting. Renting usually requires no home maintenance and there's no risk of
losing equity.

Good candidates for buying in a slower market are buyers who are ready to put
down roots and stay put for awhile. This not only means that you aren't planning
on moving out of the area soon, but it also means that you can afford to buy a
home that will suit your long-term needs.

THE CLOSING: A purchase decision should involve a consideration of the
dynamics at play in your local market. Prices might or might not drop in your
area. In many places, sales volume is off, but not prices. When inventories are
reduced and buyers are back in droves, prices could go up.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home
Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle
Books.
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Copyright 2007 Dian Hymer