With subprime mortgage meltdowns rocking the Federal Reserve to lower interest rates by a whopping fifty basis points, whether to buy, sell, or hold is on the mind on every real-estate investor / speculator. The background can't be more dismal: record number of vacancy rates / short-sales / foreclosures, not to mention the recent bankruptcies of most sub-prime lenders. Adding to these concerns is the fact that increasing numbers of Americans are not able to refinance their existing mortgages.

First, a few words of common sense are in order. Every market is always a demand-supply equilibrium. With number of vacant homes mounting and foreclosures / short-sales skyrocketing, house prices are in for further beating for the next few quarters. Further, the fact that the feds lowered interest rates by 0.5% shows that inflation is not as much a concern to them as was before. Inflation is nothing but a measure of increase or decrease in CPI (Consumer Price Index), and housing accounts for 40% of the CPI, albeit indirectly (through rental prices, not mortgage prices). In other words, the current fed move further corroborates what I have highlighted in my previous articles about house prices going down currently…Consequently, it makes sense to wait for that dream home; bargaining hard with the seller in most markets is the second-best option. This also means that speculating to flip is insane / irrational in the present market conditions.

When flipping was in vogue, taking adjustable rate mortgages (ARMs) with teaser rates made immense practical sense. You wanted to buy low, flip high, and leverage extremely by going for low teaser rates for the first couple of years, assuming you could successfully flip and get out within that time-frame. But, is taking adjustable rate mortgages for a house you want to own over the long haul a good financial idea? Not!

If your goal is to really invest in your own home, you have to judge / estimate your ability to pay mortgages in good times and bad, whether you have a job or not, whether your wife lives with you or runs away with the more financially attractive neighbor, whether interest rates go higher or lower, whether house prices rise or fall, whether you have financial plans to borrow against your home equity or not, and whether universal health-care becomes a reality in America or whether it is just a tool in the hands of the politicians to gain power at the cost of gullible Americans. In other words, you got to have a wide-angled view over your personal and financial affairs, and for any American, her primary home of residence is her biggest personal and financial asset. Consequently, one needs to couple financial savvy with common sense, or one's house gets foreclosed / short-sold by predatory lenders and unscrupulous real-estate professionals.

What is this common sense / financial savvy when it comes to shopping for a home with a mortgage on it? I have said this before in my previous articles, but let me repeat it again for your benefit: buying a home is like buying stocks, or it is an investment. In other words, you need to have a long-term perspective of at least ten years. If the tax breaks you get because you pay a lot in interest can't match the difference between your monthly mortgage amount and the market prices for renting an equivalent home, you are better off renting for the next few years. Since house prices are unlikely to go north any time soon, assuming that the capital gains you will enjoy when you sell will offset the real-estate agency commissions plus the differential in the mortgage versus monthly rental amounts, is pure speculation. In other words, you are not thinking any better than the speculators who bought to flip, paying adjustable rate teaser rates, and can't unload the house in the market, since house prices have mostly dropped in the past two years.

So, what is one to do? For starters, you need to evaluate this rent-versus-buy equation every two to three months, while monitoring the house prices in your MSA. Suppose in the esteemed opinion and financial calculations by your cousin who is a realtor / CPA / lawyer, you conclude that in ten years you will indeed make a profit on your home, and you can reinvest that tax-free in your next home [as per current laws, up to half-a-million dollars ($250,000 if you are single) in capital gains on your primary residence can be applied tax-free towards the purchase of your next home when you sell the current one where you live]. In other words, you have decided to buy a home and stay there for the next ten years. A good decision indeed, I mean on staying put for at least ten years. Now comes the tricky question: should you go for the 30-year Jumbo (if you want to take a mortgage out for more than $475,000) fixed rate / 30-year fixed rate, 15-year fixed, or a one or two year ARM?

If you have been reading this article seriously so far, ARM mortgages are for flippers, not true home-buyers. Going for ARMs because the current mortgage payments are attractively priced and pushing higher mortgage payments into the future is like Argentina taking on more and external help in the form of debt, making merry and partying, and then financing the increased debts with further rounds of external financial borrowing. Hundred years earlier, Argentina had a higher GDP than America's, and look where that country is today, and where America is. In other words, if you want to live in a home for ten years (or even five years for that matter), you have to go for a fixed rate mortgage.

Now comes the second critical question: should you go for the 15 year fixed or the 30 year fixed? This one is easy: if you can pay higher mortgage amounts, go for the 15 year fixed, you can always refinance it if interest rates go lower oryour ability to pay mortgage decreases down the line. If you can't pay this higher mortgage amount on a sustainable basis for the next twelve to twenty four months, go for the 30 year fixed. Also, as I have said in all my previous articles, don't have the Damocles' sword of debt overhang hang over you. Please pay the 20% down so that you actually own 20% equity in your home! If you don't have the 20% saved, save for it now, because house prices are really not going up any time soon, and buy your dream home when you can pay the 20% down. What is a matter of relief with the sub-prime lenders going bankrupt / closing shop is that buying homes for zero down (in other words, with no equity) is history, and that is a good thing for America.

Consequently, I recommend first-time home buyers to do the following (I also have one recommendation for home-sellers, since most of my friends who read my articles live in homes):

1. Deciding to buy homes is really like deciding to buy stocks. It is a mental and psychological exercise in prudent investing. If speculation is your goal, and aggression is what you live and breathe, this article was never meant for you.

2. In today's turbulent market conditions with rising foreclosures / short-sales, record number of vacant homes, and a lot of Americans' inability to buy homes paying zero down thanks to the current sub-prime carnage; the demand-supply equilibrium is tilted in favor of the buyers, with a downward pressure on home prices in most MSAs and most of the American flat-land. Consequently, it makes sense to evaluate home prices every quarter in your MSA before jumping in to buy that dream winter home.

3. The feds lowered interest rates today by 0.5%. So, inflation is not as much a concern to them as was before. Inflation is nothing but a measure of increase or decrease in CPI (Consumer Price Index), and housing accounts for 40% of the CPI, albeit indirectly (through rental prices, not mortgage prices). In a nutshell, this fed move further points to housing rents not going up as much as in the past… In other words, the current fed move further corroborates the fact that house prices are going down currently…

4. Once you have decided to buy / invest in your dream home, go for the 30-year fixed, or the 15-year fixed mortgage. Going for ARM (adjustable rate mortgages) is for flippers, who want leverage for higher profits. Again, at the time of this writing, the real-estate markets are not conducive to flipping!

5. Avoid the debt-overhang. Wait until you save enough to pay 20% down, so that you can own some equity in the place where you are going to live, for what this author hopes, a long time, without getting foreclosed. Patience is a virtue; don't be in a hurry to buy that dream home in winter, for home prices are not galloping upwards any time soon.

6. Avoid social pressures, pressures from your realtors, and neighbors, and other near-and-dear ones who pressurize you into buying. In many areas, renting, not buying, is the better option. Another way of stating the obvious is this: very few people in this world are your true well-wishers. Most just want to make some money out of you, including your favorite CPA / lawyer / real-estate agent.

7. If you want to sell, it might be a good idea irrespective of market conditions, if you have lived in your home long enough and can make that tax-free capital gain of $500,000 or less; if you wait for six months, prices may fall further! However, if you can sit the current storm out and your capital gains is not hitting the $500,000 ceiling ($250,000, if you are single), and you don't want to sell at the low prices of today, keep living in your home until market conditions improve, so that you can sell your home at the desired price level.

Note: Recommendation is not advice. Please read our Terms of Service.

Click here to read more analyses by the same author on today's housing bubble. To send your comments to the author by email, please click here.

Subscribe Here         Add this article to del.icio.us »         Digg this article »