You’re thinking of purchasing a home but are worried about home values falling. Then you see that the Case-Shiller Home Price Index says home prices fell again. So you postpone your potential house purchase. That could be a mistake.
Actually, the Case-Shiller Home Price Index is not really saying home prices are falling nationwide.
The quoted decline is a drop in its “national index,” an average of the 20 metro areas. Five of those cities, or a quarter of the group, are in California and Florida, states hard hit by the real estate bust. Other cities house purchasing, home buying, home values, home prices, case shiller indexer in real estate bubble areas like Las Vegas or areas of chronic economic decline like Detroit. All in all, the index is tilted toward cities near the coasts that tend to have volatile house prices, as opposed to areas in the middle that tend to have more stable home prices, like Kansas City or Wichita.
The index is just an average. Like any average, it’s an interesting number for conversation, but not much use for home buyers. You can drown walking across a pond with an average depth of four feet. The average doesn’t tell you there’s a 10-foot drop in the middle.
Home prices in certain hard-hit areas can drag down the average figure. Think Florida condominiums. Condos tend to be more susceptible to overbuilding and price collapses because they are not as constrained by the supply of land. If there not enough acres around, the builder can just build up. And because there can be so many of them, condo prices can drag down the overall home price average.
The reality is that home prices are going their different ways – increasing in some places, stable in others, still in trouble in others. If you’re worried about home price trends, check the trends for the town where you’re house hunting.
Home prices in your neighborhood may, or may not, roughly follow prices of prices in a big city on the coast. In fact, home prices in the neighborhood could trend differently than a nearby neighborhood.
In any case, no home buyer ever buys equity in a home price index. They don’t buy stock in a home price index like they buy stock in company. They buy a home in a particular community in a particular neighborhood.
Even if you’re house hunting in area that has seen falling home prices, your decision to purchase a home should depend more on your own personal circumstances and what kind deal you get from the seller as well as what kind of mortgage rate you can find. Learn about home buying.
But if you’re worried about where home prices will be next year, you probably shouldn’t be considering buying a home anyway. Homeownership is for the long term. If you don’t expect to own your home for at least three years, or probably more like five years, may you shouldn’t bother.
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