How to buy a home and protect yourself against falling prices

For sale sign with sky in background

Savvy buyers can reduce the odds that the home they buy today will be worth less tomorrow -- and avoid losing their shirts if it does decline in value.

We certainly understand why many families are reluctant to sink their hard-earned money into a house or condo when prices are still falling.

The median price for all types of single-family homes sold across the country fell 12.9% in 2009, increased 0.2% in 2010, and is forecast to fall 2.4% in 2011 according to the National Association of Realtors.

But the combination of falling prices and record low mortgage rates has also made homes more affordable than they've been in decades.

Our Buy vs.Rent calculator can help you decide if the current buyer's market has made it cheaper for you to own rather than lease a house or condo.

If that's the case, these four smart moves can help you limit the risk of falling home prices and buy with confidence.

Smart move 1. Commit to a home for at least five years.

The typical rule of thumb is don’t buy unless you plan to stay in your home for at least two years.

But in this market you need at least a five year commitment so that your home has time to recoup any value it might lose over the next 12 to 24 months.

Smart move 2. Favor neighborhoods with the fewest foreclosures…

Nothing drives home prices down faster than a bunch of nearby foreclosures – and the crisis is far from over.

About 2.2 million homes are somewhere in the foreclosure process right now, according to Loan Processing Services.

Another 4.3 million borrowers are "seriously delinquent," which means they are more than three months behind in their payments and probably headed towards bankruptcy, according to the Mortgage Bankers Association.

But a new report by the Joint Center for Housing Studies at Harvard University says nearly half of all 2010 foreclosures were concentrated in just 10% of neighborhoods across the country.

So the key is to avoid buying into one of those unstable neighborhoods where property values are most likely to fall, and fall significantly, over the next couple of years., for example, can provide the number of foreclosures in the area you’re interested in. Use’s foreclosure filter and search by neighborhood, ZIP code, or address.

To see whether the number of foreclosures is increasing or decreasing, change the filter for the number of days on the market from a shorter period like 30 days to progressively longer periods like 90 days, 6 months, 12 months, up to 36 months.

Smart move 3. …and the best schools.

The better the schools the more stable the value of your new home will be.

That's because homes near good schools are always in demand, while those served by schools with less favorable reputations attract fewer potential buyers in a slow market.

You can't count on your real estate agent to provide a reliable comparison of local schools. Check one of the websites that now do that.

SchoolDigger ( ranks public and private schools based on criteria like the student to teacher ratio and standardized test scores. To narrow down the neighborhoods you’re interested in, look at rankings by school district or individual school.

Another ranking site is GreatSchools (www,, which provides reviews, parent ratings, and test scores for public and private schools.

Smart move 4. Let a cheap mortgage take some of the risk out of buying now.

Mortgage rates are near record lows this summer.

That's not something you can count on if you put off buying a home because you're worried it might decline in value.

Let's say you bought a $250,000 house and borrowed $200,000 to finance the purchase with a 30-year, fixed-rate mortgage for 4.5%.

Check our database of the best mortgage rates from scores of lenders. You'll find many banks and mortgage brokers offering loans for that – or even less.

You'd pay a little less than $82,000 in interest over the first 10 years of the loan.

Now what if you waited until you were able to buy the exact same home for $230,000, and only needed to borrow $180,000 to finance the deal.

But by that time the economy has improved and interest rates have gone up so that your 30-year mortgage now costs 6%.

With that loan you'd pay a little more than $100,000 in interest over the first 10 years of the loan.

Bottom line: The savings you would have enjoyed by taking advantage of today's record low interest rates would nearly offset the benefit of paying less for the house.

Our mortgage calculator can determine the monthly payments for any home loan and provide an amortization schedule that shows how much interest you’ll pay.

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