The housing bubble; that is, inordinately high house sales prices, began in 2000 and is now declining. Scholars say that across the nation the bottom in home sales prices will occur sometime between 2010 and 2013. However, they will occur sooner or later in a specific location. Check statistical trends for your location of interest at Internet places like trulia.com or zillow.com. Note that the current economic recession will extend the home price decline. Home prices will continue to decline until they track long term trends in (1) family incomes and (2) rental prices. Check the statistical trends for your specific location of interest to see if home prices are following this trend or are still in a housing bubble.

How to know if the bubble in a specific location likely will continue to decline in 2009 if it is not obvious from the trend lines?

Answer: Note the median home price and/or average $/square foot for 2000 for the location. These are available from trulia.com and zillow.com. 2000 is the year before the housing bubble. Multiply this price (or price/sf) by 1.035exp9 = 1.36. This is the average cumulative long term inflation for the last 9 years. Why track inflation? Because home prices track family incomes and rental incomes, which in turn have tracked inflation very well for the last 100 years. If the location has bottomed out, then compare the listed price of a home of interest with other homes that have sold there. At the bottom, your purchase will likely not lose equity in the next few years if you sell. If the home price is out of line, then your purchase will likely lose equity in the next few years if you sell. If you must buy before the bottom, then buy only at a deep discount so that when you sell, your equity loss will be minimal. If you must buy AND sell now, then all you can do is try to sell as high and buy as low as possible. If you buy for the long run, say 10 years or more, then a current purchase will certainly result in increased equity UNLESS another economic recession occurs in the meantime.

Beware of realtors who say, "Buy now, home prices will never be better!" or "Buy now, real estate always goes up." These mantras are not necessarily true; it depends on the location. In a housing bubble, these claims are false.

Current low mortgage rates are a mixed blessing: They decrease monthly mortgage payments or allow purchase of a higher priced home, since a buyer has a monthly mortgage budget. That's good for the buyer and bad for the seller. However, mortgage rates will certainly increase eventually. They could increase to double digits because the Fed is flooding the economy with liquidity, i.e., money, which is inflationary. No problem now in a depressed economy, but it could be a BIG problem for current buyers later after the economy recovers and they want to sell. Higher mortgage rates will decrease home values and decrease home equity when the buyer sells at higher rates because the new buyer has a budget too. When mortgage rates increase, the buyer can only afford a lower home price. (Most likely there will be no more "bubbles" for a long time, so the buyer should not count on that to help a future sale.) If the buyer waits and buys a home at a bottom price (the proverbial "bottom feeder") with a low mortgage rate, then when rates increase, as they certainly will, home equity will not be reduced too much. Likewise, the seller should wait for home prices to return to normal, if he/she is not under duress to sell, to increase his/her equity on sale.

Beware of realtors who say, "Buy now, mortgage rates are low." One should buy when home prices are low AND mortgage rates are low. Sell when home prices return to normal, which is expected to be between 2010 and 2013, depending on location. Recovery will take longer in some locations because of the depressed economy.