What’s the forecast for the housing market for the rest of 2011? My prediction is that the market will continue to suffer for the balance of this year and well into next year. Why aren’t home buyers buying? Maybe they’ve heard the recent spate of bad housing news:

  • Home prices fell again, and housing experts are predicting an official “double-dip” price decline. While for some people it may have been inconceivable that home prices are still too high, they are still dropping in many markets.
  • We’ve lost nearly a decade of value, as home prices have slipped back to where they were around 2001-2002.
  • The number of people applying for purchase mortgages (rather than refinance mortgages) has fallen all the way to levels last seen around 1997-1998.
  • Some 61 percent of home sales are distressed, meaning that they are short sales or foreclosures. (No wonder housing prices are falling.)
  • Mortgage lenders want home buyers to put down more in cash, and Congress is talking about requiring a far higher down payment for FHA loans if your credit score is less than optimal.
  • The number of new homes sold is at a record low, at least since records were kept starting in 1963.

On the other hand, this may be the best time in several decades to buy a home: Housing affordability has skyrocketed, as super-low interest rates combine with much lower housing prices.

But I’m hearing stories from Realtors that suggest (anecdotally, if nothing else), that some buyers are looking at the housing price predictions as an indicator that they shouldn’t make an offer – or they should revise downward the offers that are on the table.

It seems that when property and home prices are falling (or may have been too high to start with from the top of the market), interest in buying a house wanes as well.

But I wonder if that isn’t the wrong way to look at an asset (your home) you plan to own for at least 7 to 10 years.

While it is true that home prices may be falling now, the likelihood is that prices will rise over the time you own the property or stay somewhat constant. In some markets home prices may still be too high but have adjusted closer to where they should stabilize. In other housing markets, prices have gone up or down depending on the month and index that is used to gauge the housing market.

And, by buying now, you’re getting to take advantage of near-record affordability and (if you qualify), near historic low mortgage interest rates. You can think about it this way, with historic low mortgage interest rates, you’ll pay thousands of dollars less for the home over the many years you live in that home.

Is the problem psychological? Is there some sort of mental barrier home buyers have to get past in order step in?

Real estate investors aren’t having this problem, possibly because they look at the property as an asset, something that’s emotionally separate from them.

But home buyers, particularly first-time buyers, seem to be having a tough time making the leap. Instead of falling home prices, perhaps first-time home buyers (who traditionally account for at least half of all home purchases each year) are having trouble qualifying for a mortgage or don’t have enough cash on hand to ease a lender’s nerves. Or, perhaps, they feel that home prices may still be too high and simply want to wait to see if home prices fall further.

Still, think back. When home prices were rising in the early 2000s, first-time home buyers would jump into the market even if they knew that they were stretching themselves too thin by purchasing the home. Or, in some cases, they were buying homes that they downright couldn’t really afford.

But with the lure of increasing home values, first-time home buyers thought they could benefit financially from increasing home values, flipping the property quickly to lock in some of the cash and get a short term profit. Now that home values have come down, first time home buyers have the opposite reaction. They may tend not to want to buy for fear that home prices might continue to go down.

[ad#in_content_1500]Timing the market – any market – is a difficult thing to do. And, a first time home buyer might live in the home for 7 to 10 years (or longer). Given that time frame, the first time home buyer might want to look at the property they are buying more as a long term place to live rather than as a real estate investment expected to appreciate over time. If a long term purchase makes economic sense now and would continue to make sense for five to ten years, that purchase may be a good decision to make.

Let’s hope that as unemployment falls and consumer sentiment rises, home buyers will return. Until that happens, you can’t really call it a recovery – not when it feels exactly like a recession.