What does it mean when this huge housing bear decides to buy a house?

I am buying a house.

This is way sooner than I expected to buy (I was thinking early next year or even later), but a fantastic deal on a bank owned property came up and my wife and I have decided to jump on it.

Why did I decide to buy?

The biggest reason is my wife is expecting and she is in major nesting mode right now. However, I was not about to buy an overpriced house and she knows that. According to my calculations, homes in our area should be in the $130 - $150/sqare foot range and that is the target I've been looking for. I calculated this by taking the pre-bubble value of my first home in 1998 ($96 square foot) and adding 3% - 4% inflation over the next 10 years. Most homes on the market right now are still priced $190 square foot and higher.

The home we are purchasing is for sale at the rate of $112/square foot! That is well below my target rate and, adjusted for inflation, is cheaper than the house I bought in 1998! The nominal purchase price is $30,000 lower (with about 40% more square footage) than what we sold our house for in 2006 and it sits on 3.5 acres!

This house also has some nice features we were looking for including straw bale construction (very well insulated), radiant heat, and a separate 800 square foot studio on the property.

On the negative side, this house is close to the highway, so there is some noise from that. I also wanted to move closer into town and this is about the same distance to Santa Fe (about 14 miles each way). So it's not an exurb, but it is farther out than I'd like.

Does this mean the housing market has bottomed out?

Not in your life, the resale market is still way too high. As I said before, most homes in my area are still over $190 square foot (and that is down from previous years). On the positive side, I have seen two houses in good condition being sold by motivated owners at $139/square foot this summer. Now that the summer selling season is over, I expect home sales to fall dramatically and only those people that are pricing their homes competitively will be able to move them in this market.

Nationally, the Case Schiller home index is down about 15% in the past year. I expect at least another 15% decline nationally in the next two years and it could overshoot that. Just as homes overshot on the high side, they will overshoot on the low side.

Am I concerned about my house value declining?

Absolutely. But I am buying this house a such a discount below the market that it would take a decline on the order of 40% from today's market to break below what I am paying for this house. I can live with that cushion and I still stick with my fair valuation of $130 - $150/square foot for this area.

The most important thing to know if you are buying in this market is to not overpay for real estate. There is such a dearth of qualified buyers that you can dictate the terms and the seller will probably capitulate (if he's smart). I recommend you look at the value of comparable homes pre bubble (2000 or earlier), then inflate that number by 3% to 4%/year to get your target. Only offer at or below that number.

I actually got the bank to agree to drop their price by $10k because I was paying cash for the property and promised a quick close! REO properties almost never drop their price so you can sense some desperation on their part as they are trying to unload their foreclosed properties.

Tread carefully in this market, there are bargains out there but you have to be patient and diligent.