Worst of Housing Bust is Over

The worst of the housing bust is over, economists said by nearly 2-to-1 in the latest WSJ.com economic forecasting survey. But they still predict that the average selling price of a house will fall next year.

After several years of double-digit percentage increase, housing prices stopped soaring this year. The 49 economists responding to the WSJ.com forecasting survey expect home prices, measured by the government's Office of Federal Housing Enterprise Oversight index, to rise 2.8% this year and to fall by 0.5% next year. That contrasts with a 13.4% increase in 2005.

"We're nearing the end of the slowdown for most markets," said Ethan S. Harris at Lehman Brothers. Prices still have some ways to fall before they'll stabilize, but there are signs that most drastic parts of the downturn - marked by a sharp pullback in demand and new construction - have run their course.

The economists' predictions for home prices next year vary widely, from an increase of 7%, predicted by Kurt Karl and Arun Raha of Swiss Re, to a 10% decline, expected by Maury Harris of UBS. Mr. Harris, for his part, said he expects a large inventory of vacant newly constructed homes to push prices lower in the first half. Construction companies "built much more than were justified because of investor interest," he said.

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Home Prices: Record Drop in October

According to an industry group, the price of existing homes sold in October fell for the third straight month and posted the biggest drop on record adding it expects weakness in pricing to drag on into next year.

The National Association of Realtors said that the median price of a home sold in October was $221,000, the same as in September, but down 3.5 percent from October 2005.

The previous record drop was a 2.1 percent decline in November 1990, the real estate group said.

While month-to-month declines in home prices are not uncommon, year-to-year drops had been rare before the recent housing slump.

August was the first month in 11 years to see such a decline. September was originally reported as a record 2.2 percent drop, but a revision in those numbers put that price decline at 1.8 percent

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The House of Your Dreams

Before deciding which house to buy, think about your lifestyle, your current and anticipated housing needs, and your budget. Finding the right house involves striking a balance between your wish list and the reality of the housing market.

Your Wish List

When creating your wish list, take a look at your lifestyle.  For example, if you love to cook, you'll want a well-equipped kitchen.  If you love to garden, you'll want a yard.  If you want to work at home, you may want a room for a separate library or home office.  If you have several cars, you may require a garage or parking spaces.

Write down on paper all the things you and your co-purchaser, if there is one, would love to have in your home.  You can let your imagination take over, but realize that you will have to cut the list back later.

As you think about your housing needs, it's important to consider how long you may live in your home.  If you are newly married, you might not be concerned with a school district right now.  But you could be in several years.  Will you move then — or is the house you are looking for now is in a neighborhood where good schools are available?  If you have aging parents, might they need to live with you in the near future?  If so, you may want to look at homes that offer living arrangements for them as well as you.  So, when preparing your wish list, factor in both your current housing needs and what you may anticipate a few years from now.

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Buying Home in the U.S. by Foreigners

Recent law changes grant non-permanent resident aliens most of the same purchase and home-financing opportunities that American citizens have.

When buying a house, foreigners don't need to worry anymore about their good employment and credit records becoming lost in translation since many major U.S. lenders now use credit-reporting agencies that have reciprocal agreements with European countries and can use a simple currency conversion table to track your current income and assets.

However, a foreigner needs to come up with a down payment of 20 percent to 25 percent of the purchase price, depending on the rules of the lender, which is a little higher than what most Americans pay. Nevertheless, the home-buying process in the U.S. is relatively simple and less bureaucratic for a foreigner than it would be in most countries and there are hundreds of web sites where you can view American properties online from the comfort of your European home to facilitate your search.

Read more about what foreigner should know when buying a house in the U.S. …

Reducing Income Tax

Because of income tax deductions, the government is basically subsidizing your purchase of a home. All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income.

For example, assume your initial loan balance is $150,000 with an interest rate of eight percent. During the first year you would pay $9969.27 in interest. If your first payment is January 1st, your taxable income would be almost $10,000 less – due to the IRS interest rate deduction.

Property taxes are deductible, too. Whatever property taxes you pay in a given year may also be deducted from your gross income, lowering your tax obligation.

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