Deciding When to Buy

"The most common real estate mistake," the New York Times reports, "is viewing a house first as a financial investment and only second as a home."

No one knows if prices will go up or down. The reasons to buy a home have to be about owning a home:

1. You want deep roots
   You're raising a family or investing in a community over many years.
2. The kind of home you want is unavailable for rent
   Plenty of student apartments are for rent, but larger rentals can be hard to find.
3. You want creative control
   You want to paint the walls, install a home theater, and plant a tree.
4. Your home is your castle
   A landlord can't kick you out or hassle you.
5. You're handy
   If you like building decks & laying tile, your home value is far more likely to increase.
6. You want to accumulate equity
   Paying a bank is similar to paying rent, but you can accumulate wealth over time.

Even if you're sure you want to buy, it's still reasonable to ask about the costs of buying now vs. later. A few online tools are useful for basic calculations:

1. Calculate your break-even point
   The New York Times published a graphical calculator for determining how long you have to stay in a home before buying becomes less expensive than renting.

2. Consult the Case-Shiller index to understand pricing trends
   The Case-Shiller index is like a stock index, but for real estate. As with stock, it's impossible to say that housing is over- or under-valued based on the index value alone, but Case-Shiller is still the best measure of whether prices are increasing or decreasing in a market. Standard & Poor's provides the Case-Shiller formula, but you can easily find simpler explanations.

3. Look for price-to-annual-rent ratios below 20
   The New York Times recommends finding two comparable homes, one for sale, one for rent, and dividing the sale price by the annual rent: "a rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting." In 2006, this ratio peaked at 35 in Northern California.
4. When buying properties to rent, assume you'll only get half the rent
   The other half will go to maintenance, taxes & vacancies. For homes priced below $250,000, you can use the Redbrick Partners formula: (Projected Annual Rent / 2) / Price Including Closing Costs = Yield