Is the S&P Case Shiller Index Housing Price Relevant to You?

The Case Shiller Housing Price Monthly Index was released this morning, and it reported that housing prices have barely changed over the past quarter and year. The national index fell 2.0% in the first quarter, compared with 1.9% in the same quarter in 2011. In addition, the data indicates that housing prices are the lowest they’ve been since mid-2006, which is when the housing crisis began. However, overall, the data has been showing that housing prices are still decreasing, but it appears that this decrease has slowed down. In fact, they have been generally flat for the past year.

While this type of housing information and data may be useful for drawing some conclusions regarding the overall economy, as a potential homebuyer, this data should be wholly disregarded for your personal home-buying decision-making process.

You see, all the housing price measurement indexes and calculations report short-term changes in value, like monthly, quarterly, or annual changes. As a potential homebuyer, short-term fluctuations in asset values, especially in housing, don't really affect you and you shouldn't pay too much attention to them. Also, keep in mind that “short term” for housing is probably a three- to five-year period, whereas you should only buy real estate if you plan to own it for a long time. In other words, it is suggested that you only buy a home that you plan to own for longer than five years. Therefore, paying attention to short-term fluctuations in a long-term investment asset may make you make ill-conceived decisions that are not financially beneficial and wealth-building actions.

Especially in the current marketplace where pricing is very low and housing affordability is very high, and where interest rates are also outrageously low, the conditions may be right for you to consider real estate ownership. However, real estate ownership is not for everyone, and even if it is, you can’t just buy any property, or a property at any price. Here are items that are much more important to consider than just relying on the price alone, or forecasted changes in housing prices.

• Are you planning to own the home for at least five years? If you own property for short-term periods, the transaction costs on the buying and selling will most likely wipe out any hoped-for increase in wealth you would earn from owning real estate. So if you aren’t sure if you’ll own it for a long time, stay a renter until you are sure.

• Can you comfortably afford the payments on your current income? Luckily, today the banks stop us from buying real estate we cannot afford on a monthly basis. Too bad they weren’t doing this in between 2004 and2007!

• Do you have strong indications that your current income will continue? If you are concerned about your job security, potential job transfers to another city, or if you plan to become self-employed soon, you might want to hold off on real estate ownership until you have settled down on your employment situation. After all, your income will affect your ability to make your mortgage payment each month!

Do you love the property that you are buying? You should really love the property before you buy it. It should bring joy to your life, make you feel secure, and make you want to own it forever. The last is a good thing because if you do own it forever, you will probably earn wealth from that ownership.

• Is it too much more expensive to own over renting? In some areas, it is a lot more expensive to own property than to rent it. But in other locations, the opposite may be true. If it is much more expensive to own than to rent, you should think through whether you should possibly rent a place instead and invest your would-be homeownership money elsewhere. This is especially true if there is no scarcity of land in the area. However, if you are wealthy and want to own a property in a certain locale, plan to own it for a long time, and can afford the payments, then go for it anyway!

Is there too much vacant buildable land nearby? No scarcity of land probably means there will be less long-term appreciation in value. And watch out for those redeveloping downtown areas, where there is plenty of land to build high-rise buildings, especially if you'd rather not live perpetually in the shadow of a sky scraper!

• Is the city in a declining state? Some U.S. cities are unfortunately not doing too well. Detroit comes to mind, but there are many others as well. Take caution if you're planning on placing your hard-earned dollars into real estate there.

• Are there any industrial, railroad, chemical, power plants, oil drilling, etc. land uses nearby that could cause nuisances, damage, or noise at your home? This one seems like a given, but many people overlook these issues to their own detriment.

• Are there any large empty retail sites, vacant sites, religious institutions, etc. that could be currently or in the future cause nuisances or decreases in property valuations? That empty lot, big vacant retail site, or religious site could become a gun store and shooting range, a Sunday-traffic-causing spiritual institution, or a local biker’s club hangout. Now, there's nothing inherently wrong with any of these things, but they don’t generally mix well with residential neighborhoods.

• Are the HOA finances in fair shape? If you are buying in a common interest development, termed an “HOA”-governed property, make sure the HOA's finances, legal, and operations are in good shape. As a buyer, you will be an owner in the HOA and those problems will be partially shared by you. Learn the issues and avoid communities in trouble.

The news media, TV, newspapers, etc. widely report housing price changes, as measured by reports like S&P Case Shiller. But if you are a homebuyer, disregard them.

Think through and understand the questions and issues noted above, and others from your family, friends, real estate sales professional, and financial advisor, and make the best decision that suits your needs and financial ability based on the most important reasons you would like to own real estate.