Time to Purchase a House?

New-home sales continue to plunge, but don't try to predict the bottom before buying.

Signs line the streets of one Reunion, Colo. neighborhood hoping to attract potential buyers, December 2007.
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"Name your price!"
—from a recent condominium ad by Hovnanian Homes

Thanks to a positively dismal report on new-home sales last year, buyers can pretty much take their pick of about half a million unsold new homes now on the market.

But with sales down by 26 percent from a year ago—and by nearly half since their 2005 peak—just be sure you're ready to follow through with that low-ball offer, because home builders are so desperate these days that they very well may say yes.

That said, even if they throw in granite countertops and a finished basement, your dream house may be no deal if home prices continue to fall, which remains a distinct possibility. "There is no sign of a bottom in any of these data," Ian Shepherdson, chief U.S. economist for High Frequency Economics, says of unsold home inventory levels that now stand at a 9.6-month supply, 2½ times what they were during the boom years.

If, for example, you bought a new home a year ago for $245,400 (the nation's median new-home price), chances are that you paid about $13,000 more than you could buy a comparable home for today, or about 5 percent. And as the recent surge in foreclosed homes begins to hit the market this spring, the resulting glut "should depress prices further," adds Joseph Brusuelas, chief economist at IDEAglobal.

That's especially true in so-called exurban areas like California's Central Valley and the Punta Gorda area in Florida, where the drop in home prices has been most precipitous and where foreclosures are still on the increase. On the opposite end of the spectrum, close-to-the-action areas like Washington, D.C., where stable job growth and relatively fast commutes have minimized the downturn, may soon present buyers with opportunities. "It will only be a matter of time before buyers in these places get off the fence and start to bid up prices again," says Mark Fleming, chief economist for First American Core Logic.

Although he, too, believes the overall market has yet to bottom, he says the recent swoon in mortgage interest rates—with rates on a 30-year fixed mortgage now approaching 5.5 percent—provides further incentive to take the plunge. "For people who plan to stay in their houses for a while, it's not going to matter much whether the market has hit bottom because it'll go back up by the time they're ready to sell."

It's like being a value investor in the stock market. Once you see a bottom on the horizon, "then it's time to get in," he says.

Although no one is sure exactly when that will be, most economists agree that we're finally getting close.