- - Thursday, April 5, 2012

Standard & Poor’s Case Shiller Home Price Index fell in January to its lowest level since 2003. Despite feeble signs of economic recovery, home prices nationwide have fallen 3.8 percent over the past 12 months.

I proclaimed a few weeks ago in this column that I thought the timing is pretty good to be buying a house. The latest data might suggest I’m wrong, but I think it depends upon how you perceive these things.

For example, the few homes in various neighborhoods across the country that are actually selling might be selling for, say, $400,000. The same house might have sold for $500,000 or $600,000 back in 2005. Does this mean the fellow who buys today for $400,000 is getting a bargain? Well, he certainly is if you compare him with the unfortunate lad who purchased the same house for $600,000 seven years ago.

But if in 2014, the buyer sells it for $300,000, his house wasn’t such a bargain. The problem is that no one really knows how far home prices will fall.

Existing market conditions do not support rising values. Foreclosures are rampant, which is exacerbating the anemic market. High unemployment and low consumer confidence are making people skittish about making a commitment to buy a home. And, despite rock-bottom interest rates, the credit crunch and overtightening of underwriting guidelines have disqualified many of the willing buyers out there.

The vicious cycle we’re in is apparent. Sellers who would like to sell cannot because their homes have lost too much equity. Foreclosures add to the problem by bringing down the appraised values of other properties. Many willing buyers cannot buy because they can’t obtain a mortgage. Many more willing and qualified buyers are sitting on the sidelines, fearing they will be purchasing a depreciating asset.

Mix up this perfect storm of events and we get exactly what we have: a stagnant, unmoving market. And then you will have folks who, for one reason or another, have no choice but to sell, so they reduce the price drastically and hold a “fire sale,” which further depresses prices everywhere.

Eventually, though, prices will stabilize and more buyers will enter the marketplace. While I believe we have a few more years to go before the real estate market really heats up, I think we are fairly close to the bottom in terms of home values.

One of the lessons I hope we have learned from the bursting of the housing bubble is this: The purpose of purchasing a home — first and foremost — should be to provide a means of shelter. It should be affordable, and considered a long-term investment as a secondary purpose only.

Those folks who went nuts getting large mortgages in order to scoop up investor properties with the expectation of selling in a year for a 25 percent return didn’t think about one thing: Market values don’t always go up.

• Send email to henrysavage@pmcmortgage.com.