Should you buy? Should you sell? Should you hunker down where you are and just hope for the best? That’s what a lot of skittish consumers want to know as they look for ways to determine how low housing prices will go.

“Housing prices are going to fall for another two years — at least — maybe not everywhere but in the majority of places,” says Morris A. Davis, assistant professor of real estate and urban land economics at the University of Wisconsin-Madison. He expects home prices to drop nationally between 15 and 20 percent from a 2006 peak. “Suppose we’ve lost 5 percent so far, we’ve got another 10 percent to 15 percent to go,” Davis says.

But some areas of the country will fare better than others, depending upon local economic conditions. For instance, the median listing price of homes rose 6.18 percent in Knoxville, Tenn., and 4.71 percent in Charleston, S.C., in March from a month earlier. Meanwhile, the Tampa-St. Petersburg-Clearwater, Fla., area saw median listing prices fall 7.54 percent, while the Las Vegas area saw list prices plunge 11.51 percent, according to data compiled by Cyberhomes.

So what should people consider when deciding whether to buy, sell or cautiously wait on the sidelines until the housing market recovers?

Factor in regional factors

“Each situation is different and people should look at their own circumstances,” says Jeannine Cataldi, a senior economist with Global Insight, a provider of economic and financial information. “There are a lot of [local] factors for people to consider such as employment growth, population growth and jobs growth.”

Jeff Fisher, director of the Benecki Center for Real Estate Studies at Indiana University, says there isn’t “any easy way to predict how far home prices will fall before they turn around. This will vary considerably from area to area just as the foreclosure rates and drop in the median home price has varied considerably across the country.”

People need to consider forward-looking data when evaluating home prices, says Davis. For instance, while some people speculate about whether the median household income can be used to predict where home values are headed, he says that data just isn’t useful when forecasting how low prices will go.

Look carefully at the numbers

Davis says the capitalization rate, which is used to measure the value of commercial real estate investments, is a better indicator of where residential prices may head. The cap rate of a property is based upon a ratio of the net operating income for a property and the expected sale price. “For a lot of cities the current cap rate is too low.”

Fisher agrees that using income alone doesn’t work as a forecasting variable. “I don’t think you can just look at what might happen to median household income because it also depends on what happens to mortgage interest rates, whether lenders continue to tighten up lending requirements, the extent to which there are additional foreclosures on properties with subprime mortgages, which adds to the supply of homes on the market and depresses home prices further, and many other factors.”

The markets that have suffered the most involved a lot of speculative buying, such as in California, Florida and Arizona, says Cataldi. “Areas where there was not the huge run-up in prices and where prices were more stabilized, such as Texas and Utah, are benefiting now.”

Remember that knowledge is power

If you’re considering buying a home, make sure you’re armed with the right information before making an offer. “What I’d advise everyone to do now is to track as best as possible market assessments of the house that they’re thinking of purchasing,” Davis says. “Try to find the last 10 years of assessments and just look at the rate of growth. And they should ask themselves how much of that growth do they think will be unwound eventually.”

He adds: “Make sure you do your homework and make sure you’re comfortable with potentially losing money within the first few years of the investment. The amount of money that will or might be lost is going to depend an awful lot, I think, on how much prices increased in the area. If the price doubled in the last five years, you should just think twice before you make your offer.”

 

Watch these three markets in 2008
How well housing markets across the country withstand the credit crunch depends a lot on regional factors, according to senior economist Jeannine Cataldi of Global Insight. Here is Cataldi’s take on three sample markets:

Las Vegas
Expect Las Vegas home sales to decline 30 percent to 35 percent in 2008, Cataldi says. That’s due to the fact that condominium investment activity has dried up, leaving a glut of inventory that can’t be absorbed until prices drop. Las Vegas also has lost almost 20,000 construction jobs since the middle of 2006. “You’re seeing a lot of layoffs in terms of the construction industry and related industries like finance, which has mortgage lenders and other housing-related occupations,” Cataldi says. “The job losses are leading to even more restrained spending. … The economy is hurting because of overall conditions, but it’s also hurting because of this housing decline.”

Detroit
The Detroit-Flint area will probably have weakness in its housing market through the middle of 2009, according to Cataldi. “Those areas have been hard hit by auto manufacturing losses, and they’ve had declining economies for quite awhile.” Michigan as a whole has been impacted not only by job losses, but by a negative population growth as people leave the state.

Memphis
Here’s a city that may actually see slight growth, 1 percent, in home prices during 2008. That’s because Memphis is benefiting from an influx of new residents from coastal areas such as Florida, Georgia and the Carolinas. “Memphis is an area we expect to have no declines in employment growth going through 2008. We expect population growth to continue at a steady pace,” Cataldi says. “They will see some decline in home sales, but again that’s something you’ll see pretty much everywhere.”