The “can I rent it out if push came to shove” is a useful test for getting a grip on your comfort level with a purchase – here are a couple other ways to think about it (and keeping in mind that if you’re looking at buying in a NYC co-op, for example, the “rent it out” exercise will be next to meaningless if your co-op doesn’t let you sublet):

1. Immediate cashflow impacts: what’s going to save you money in some window of time meaningful for you (probably a number less than 30 years for most folks), assuming you get NO benefit from appreciation. For example, what’s your current total housing cost (rent, utilities, cost of transportation to work, etc.) versus your total housing cost as a home owner (mortgage, maintenance, utilities, cost of transportation to work, and net out your tax benefits from ownership). If you can buy at or less than what you spend on housing today, seems like that’s a pretty positive indication.

2. Cost per square foot comparison – if you’re going from renting a studio to buying a 1 BR, maybe you’re willing to spend more total dollars on housing – Are you getting reasonable value when you index the total housing cost by the size of the apartment?

3. Does the fixed-ness of the 30-year fixed mortgage mean anything for you? A little predictability is a nice thing, and if you’re a renter, you may think about the security of your tenure. If you buy, the housing portion of your budget planning is pretty much totally in your control for as long as you like – there’s no having to move because the landlord decides he’d rather rent to his cousin. Maybe knowing what your bottom line housing cost will be for-practically-ever will be particularly reassuring if you decided to change careers into a lower paying (but higher karma) field.

4. Last but not least – personal timing. Do you need the space in the next couple years? Are you able to take advantage of any first time home buyer incentive programs that are available today and may not be around later? Do you want to lock in a school district in time for preschool admission?

“The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you’ll know it’s safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

annual rent / purchase price = 3% means do not buy
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy”

As far as the “Don’t buy the House”, I’ll chime in as well. If you’ve been saving and waiting for the time to buy a house, now is probably about the best time to do it. Two years ago, had these same people found the right house and had the savings at the time, they would have bought. What’s different now? Prices are lower by 30% or more. Is that still overvalued? Quite possibly. However, in general people who buy homes and intend to live in them don’t do it with the objective of being able to sell for a profit. That might be a nice side benefit, and might be something the last generation or two were brainwashed to believe, but nothing more.

Just like the stock market a year ago, when the Average Joe was so shell-shocked that he pulled all his money from the market, taking his lumps, and swearing never again to invest in it, watching the stock market have historical gains, the same type of rebound is likely to occur in the housing market. It may take longer for it to happen because of the magnitude of the price of housing to begin with and tighter lending standards, but those are good things. People are finally realizing they will need to have larger savings, bigger downpayments, and more stability going forward.

The fact of the matter is that a house is not an asset that you lose use of over its life like a car – that’s never going to change. You buy the house, and you’re guaranteed to have a roof over your head. The landlord can’t throw you out, can’t raise the rent, tell you what you can or can’t do.

Is now the absolute bottom of prices in the housing market? Probably not. Are things going to fall another 50% from prices today? Extremely unlikely. Lots of people will resonate with the author on this topic because they are shell-shocked just like Average Joe was a year ago with the stock market. However, for those who have been saving and waiting, have good stable jobs, they may be making a big mistake by changing their mindset.

Further, it is well accepted that interest/mortgage rates are about as low as we’re going to see. Because of all the handouts and money printing taking place in Washington, we are going to have inflation, and interest rates are going to go up…right along with rental prices. You lock into your fixed rate mortgage today, and regardless how high interest rates go, your mortgage payment isn’t going to change. How high can interest rates go? I’m sure there are some people here who can still remember mortgage rates of 15% or higher 30 years ago. That may well be where we’re headed.

Personally, we’ve just paid off our mortgage about 2 weeks ago and the feeling couldn’t be more wonderful – never having another monthly housing payment.

The bottom line now, as it has always been, is simply whether you can really afford a house or not? People seem to have lost sight of that fact. If you can’t afford it, then don’t buy. If you can afford it, you’ve been saving, then you should feel extremely lucky that you are being given the opportunity of an incredible buyer’s market, with historically low mortgage rates, and a massive inventory of houses to choose from.

Don’t be the shell-shocked Average Joe, being paralyzed because of fear.

To me, the attitude in these comments – that rapidly growing house prices is “normal” and that this is just a temporary “down market” blip – seems to be indicative that prices have further to fall before people start looking at housing rationally…