Buyer's market: Is now the time to rent or buy?

For those looking to enter the market, current economic conditions may make buying a home a long term, cost-effective alternative to renting.

The large number of homes for sale, coupled with incentives such as the new First Time Home Buyers tax credit, could give buyers the opportunity to save thousands of dollars. Taking a conservative approach to borrowing and the new first time home buyers' tax credit may put current buyers in an even better position. A credit of up to $8,000 is available on homes purchased between January 1 and December 1, 2009 for qualified buyers who earn less than $75,000 filing alone or less than $150,000 filing jointly.

The large number of homes for sale and the new tax incentive give some buyers the opportunity to save tens of thousands of dollars. The National Association of Realtors' latest figures indicate that existing home sales fell almost 9 percent from January '08 to January '09. Across the country, single family home prices fell about 19 percent from December '07 to December '08. Although prices have decreased dramatically, tightened lending standards may require some buyers to make larger down payments than in the past. Lower mortgage rates, however, could ease the pain. The average par rate on a 30-year mortgage dropped below the five percent mark in mid-March.

Potential buyers can use this opportunity to make a smart purchase and avoid common pitfalls that contributed to the trouble that some home owners are in right now. One piece of advice to keep in mind is to avoid buying more house than you need. The current market has illustrated that speculating in real estate can be risky, so it may make sense to buy a house that you would be willing to live in for at least a few years.

In addition, buyers should be realistic about how much of their monthly income they can devote to costs associated with housing. A practical rule of thumb suggests that buyers should spend no more than 30 percent of their gross monthly income on mortgage payments, taxes, and insurance. Spending more than 30 percent could make it difficult to have enough left over to cover other expenses.

For more about mortgage programs and rates, click here.

--Bridget O'Sullivan