If you buy now, will you lose money?

By Elizabeth Razzi
Special to The Washington Post

WASHINGTON - It takes a bit of courage to buy a home in a weak real estate market.

But buying can still be a reasonable, financially sound choice for anyone with the traditional reasons for settling down: You need a bigger house for a growing family. You want to live in a particular school district. You want a place you can remodel and expand over time. You're a first-timer who wants to snag a place while interest rates are affordable.

But you will have to tune out a lot of alarmist commentary if you wish to keep your composure. Just last week on the "Today" show, Jim Cramer, the nuance-allergic host of CNBC's "Mad Money" program, told viewers nationwide to pass on a purchase. "Don't you dare buy a home now. You will lose money," he said. They might wonder about that advice in Seattle, where prices rose nearly 7 percent from July 2006 to July 2007, according to the Standard & Poor's/Case-Shiller Home Price Indices, or in Charlotte, N.C., where prices rose 6 percent.

If you buy now, will you really lose money? If you sell that home in the next year or two, you bet. Even in a normal housing market, in which home values rise a little more than inflation each year, you would lose money selling during the first couple of years of ownership, thanks to high transaction costs. Brokerage commissions alone, at 4 to 6 percent of the sales price, make it tough to sell quickly for a gain.

Other expenses involved in the purchase nibble at your gain, too. They include money spent on loan applications, appraisals, home inspections, title search and title insurance.

Buying and selling real estate is expensive and time-consuming. That's one of the reasons a home should always be thought of as a long-term commitment. If prices decline, that amplifies your loss.

In a market burdened with excessive inventory, what you really don't want to have to do is sell. Why compete with a crowd if you don't have to?

However, the tough sales market has helped people in search of rentals. Because of slow sales, developers have converted thousands of condo apartments into rentals. Condo owners unable to sell their units have also added them to the rental stock. And owners unable to sell their detached houses are looking for renters.

Should you rent and wait until the housing market gets past this slump? Once again, the answer depends on your household's needs and your temperament.

If you might be moving in the next couple of years, then, by all means, rent.

If you would like to buy but can't afford the down payment (the new "in" accessory for real estate deals this fall), rent the most affordable place you can and bank your cash until you have at least 3 to 5 percent of the purchase price.

If you don't mind hauling your furniture to a new place if your rent increases, if the landlord doesn't keep the place in good repair or if he pulls it off the rental market, sign that new lease.

If you want to lock in a low home price, establish roots in a neighborhood and snag a low mortgage interest rate, now is as good a time as any to make a purchase.

It's a much less risky move than it was in 2004, when bidding wars sent prices soaring and practically everyone seemed certain that buying a home was the right thing to do.