Home prices should bottom out in 2011

House in rate chart

Most experts expect home prices to bottom out in 2011.

That should be welcome news for home buyers looking to take advantage of the lowest possible prices and sellers who have endured three years of steep declines in property values.

According to the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, the National Home Price Index declined 2% in the third quarter of 2010.

The median home value in the United States is now $177,900, down almost 20% from the median value of $217,900 in 2007.

With most of the speculation and housing boom hoopla drained out of the market by now, we're hopefully returning to more normal times. That means no more wild swings up or down and historical appreciation rates of around 3%.

Fannie Mae, one of the giant government-owned companies that provide money for mortgages, recently forecasted economic growth of 3.4% for the year, up from its previous estimate of 2.9% growth.

That should translate into more jobs and more people wanting homes.

"We expect modest increases in home sales, despite recent interest-rate rises, due in part to modest additional declines in home prices, and we expect people to take advantage of affordability as their employment and income outlook brightens," Fannie Mae chief economist Doug Duncan says.

Appreciation of only 3% might sound boring, but you'll have to trust us when we say that's a good thing. Housing prices shouldn't bounce up and down like stock prices.

While government intervention like the tax credit helped prop up the market in the first half of 2010, letting it come to an end was ultimately a good thing.

The sooner we get back to a normal housing market, the better it will be for everyone. And it looks like we'll be much closer to that in 2011.

It's probably time for all of those buyers who've been waiting for prices to hit rock bottom to make their move.

Walter Maloney, spokesperson for the National Association of Realtors, says prices are modest relative to family income and interest rates are still near historical lows.

"The relationship between home prices, interest rates and median family income is the most favorable it has been since 1970," Maloney says.

The Housing Affordability Index takes into consideration home price, interest rate and qualifying income. A higher composite index means more affordability. In 2007, the index was near 115. Today, it is near 172.

By that measure, homes are 33% more affordable than they were four years ago.

If you buy at today's median price of $177,900, put down 20% and snag a 30-year mortgage at 5%, you'll pay $764 a month in principle and interest.

According to the latest estimates, median household income is now at about $51,425. So, if you tack on another $300 a month for insurance and taxes, that means an average buyer today would be spending about 25% of their income on housing.

By most measures, that's not too shabby.

"Right now, you really can't find a more optimal condition if you have a job and a long term view," Maloney says.

A flat market might not usually be considered good for sellers, but when you consider the past few years, it's nice to see what could finally be a real bottom.

Sure, you might lose another 2% to 5% of the value of your home as prices hit bottom in 2011, but at least it won't be 15%.

That stability, combined with the fact that low prices and interest rates are bringing more buyers into the market, means that you might have a better chance of selling your home.

If you bought eight years ago, you'll likely still see a fair profit, just not the profits you expected when you were watching HGTV five years ago.

"It will all vary by market. People are not happy that you can't get what you might have been able to three years ago, but if you bought eight years ago and sell today, you might see a median gain of 24%," Maloney says.

Divide that 24% by eight years and you get a 3% annual return. Again, back to normalcy.

If you bought your home four years ago near the peak of the market and have seen its value plummet, things aren't going to look much better in 2011. The bad news is that it may be a long time before your home returns to the price you paid for it.

Hopefully you're not underwater and hopefully you don't need to relocate. Stay in your home if you can and try to ride out the storm.

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