Business Math in Action

Chapter 10: Housing Costs

Reading the Housing Market

The biggest investment most of us will make during our lifetime is buying a house. Traditionally, home ownership has been a wise financial move: Over the past four decades, since the National Association of Realtors began keeping track, the median price of homes nationwide has only gone up. Prices and trends are different depending on the housing market, so some research is in order before you reach for the classifieds.

Before you decide to buy a home, it is a good idea to get a sense of whether prices in your area are rising or falling. Naturally, you want to buy when they are rising so your home will improve in value. However, it can be smart to buy when prices are declining. If you buy at the bottom of the housing cycle and stay in your home for a few years, you may gain more equity than if you buy in the middle of an upward-moving cycle. (Equity is the difference between the current value of your property and the amount of your mortgage.)

Here are some questions that will help you determine the direction of your local housing market. The statistics can be found on various Web sites or with the help of a realtor who has access to the Multiple Listing Service.

Are prices going up or down? This is an obvious place to start, but be sure to compare prices only among houses that are alike in square footage, location, and style. Track prices for the previous four to eight months.

How long are homes staying on the market? If the time between listing a home and completing the sale is getting longer every month, sellers may start to lower their prices.

How many homes are for sale in your area? Find out how many homes were for sale last month and how many sold. Compare those figures for the past four to eight months. If more homes are for sale and fewer are selling with each passing month, it could point to an eventual decline in home prices.

How many homes have sold? If fewer homes are selling each month, prices may drop.

Is it cheaper to rent than to buy? It makes sense to think about this both in terms of what you can afford and how good an investment home ownership will be. When an area has a surplus of appealing, cost-effective rental properties, it means the housing prices may soon drop so renters will be convinced to buy.

Keep in mind that maintaining a house is expensive. First-time home owners are often stunned at the amount of money it takes to replace a broken water heater, clear clogged drains, or repair a roof. The amount you will have to spend on maintenance depends on the age and condition of the house. Pay very close attention to the home inspector's report, and get estimates for every major repair job before making the final decision to buy.

English Language Arts/Writing

The Risk of Investment

Write a short paragraph explaining why or why not you would invest in a house at a time when real estate prices are falling.