Each day, if you pay attention to news media, you may find yourself either riding a roller-coaster or pulling at an old fashion taffy pull when it comes to the housing market.

The Wall Street Journal had an article “Home Prices Sink Further”: Declines Reported in All 28 Major Metropolitan Areas; Unsold Inventory Piles up”, stating that Portland home values went from approx. 6.25% down in the 2nd Quarter to 12.1% down in the 4th Quarter. As stated in the article, “Falling prices are a reflection of weak demand and tight credit conditions that reduce the number of potential buyers.”

Question: If Portland area homes dropped 6% (approx) in 3 quarters, how much further will they drop in 2011?

OregonLive.com: “University of Oregon Economist “much more optimistic” as Indicators Point to Recovery” by Tim Duy, the economist who prepares the UO Index of Economic Indicators. He states, as one of his supporting factors: Oregon residential building permits rose, although from low levels. “Still,” Duy wrote, “any improvement is welcome in this beleaguered sector.”

Question: So does that mean housing prices are at the bottom and we will see them start to rise?

RMLS Market Action for January 2011: Clackamas County, average sale price down 7.6%, Multnomah County, down 0.1%, and Washington County, down 2.3%. A graph shows that January 2011 average sales price equals the average sales price in January 2005. The number of closed sales were up 5% from a year ago and the new listings dropped 20.5% from January 2010.

Question: Sounds like there is less inventory and more people are starting to value owning real estate again – is this the time for me to consider it as well?

What about the Purchase $?

Although we are experiencing more cash purchasers than in past years, most people do still rely on a loan from a financial institution to purchase their next real estate property.

Many buyers wonder about waiting and hoping interest rates and prices of homes will continue going down?

Question: How much does it matter if the interest rate goes up if the home prices go down? I am just interested in getting the best price for my next property.

Interest rates do very much impact your purchasing power. An example: if a purchaser wants to pay $1000/mth for a mortgage payment with an interest rate of 4.75%, the home purchase price = $191,700 and at 5.25% the home purchase price = $181,092 — - so a difference of around $10,000 in home sales price for the ½ point interest rate or over 5% purchasing power.

So, again, To Buy or Not to Buy? We have seen the interest rates creep up in just the past week. Every indication says that there are fewer active listings on the market, we are seeing multiple offers in place once again (something we have seen very little of in the past 18-24 months) and indicators are stating the economy is growing. So you must ask yourself, if you are on the fence – will the prices continue to drop in Portland or are they stabilizing while the interest rate is rising?

The Reality: You actually may be losing $ while you wait.

For interest rate projections, see economist, Matthew Gardner’s graph below:

The Mortgage Insurance companies don’t seem to think so (at least not in Portland).

So what is Mortgage Insurance (MI)?

Contrary to what it sounds like, MI it is not insurance that your mortgage will be paid if you lose your job. In fact, it is not insurance for you at all, even though you may be paying it every month.

Mortgage Insurance is for the lender holding the loan on the property. The lender will typically require MI on any loan where there is less than an 80% loan to value ratio (LTV). For instance, if the down payment is less than 20%, the lender will likely require MI. The mortgage company wants some sort of insurance that if they lend over that magical 80% LTV mark and if the borrower defaults, they won’t lose their shirts. By having the insurance, the MI will help reduce or eliminate financial loss.

Who are these mortgage insurance companies anyway?

PrivateMI, one of such companies, studies economics, housing, employment, affordability, excess housing supply, interest rates and foreclosure activity, along with many other factors to determine the likelihood of lower home prices in 2 years in a particular metropolitan statistical area (MSA). I kind of view their researchers like actuaries, all they do is measure risk, risk of falling home prices. The risk may be a factor for PMI in deciding if they will indeed offer the insurance, and if so, how much the insurance will cost.

Is there good news?

Yes! Portland-Vancouver-Hillsboro has seen the largest decrease in risk from quarter to quarter in the top 50 Metropolitan Statistical Areas. In fact, the Portland area saw a drop in rate of risk of 49 percentage points from 82.4% to 33.4%. See report below.

What does this mean?

It means that experts, the ones who study this data for a living, are saying that in the next 2 years, Portland has a 33% chance (moderate by their standards) of decreased home values. That coupled with the risk of rising interest rates make this a wonderful time to buy.

Stay Tuned…

Next week learn how rising interest rates could affect you.