Image: Laura Young and her husband, Andre Gjerde
Elaine Thompson  /  AP
After some soul searching and number crunching, Laura Young and her husband, Andre Gjerde, bought this home in Bothell, Wash.
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updated 6/28/2011 4:59:43 PM ET 2011-06-28T20:59:43

Why are so few people buying houses? One of the key reasons is falling prices.

Although lower prices encourage true bargain hunters to look for deals, they can also scare off homebuyers. And, between the two, anxiety is winning.

This spring, home prices in major cities were back to the same levels reported in the summer of 2003. Although prices in several locations are beginning to rise again, even with the increases, housing remains the weakest part of the U.S. economy. Prices won't fully recover until the glut of foreclosures for sale is reduced, companies start hiring in greater numbers, banks ease lending rules and more people get comfortable again with buying a house.

Laura Young and her husband, Andre Gjerde, wrestled with whether a weak housing market was a great opportunity or a serious risk.

"We were keeping an eye on prices hoping to hold out a couple of years to see if they hit bottom," says Young. They were particularly cautious after seeing a relative buy a condo in 2008 only to see its value drop by $100,000.

After sitting on the sidelines the Seattle-area couple took stock of their financial situation: Gjerde, a freelance foreign-language translator, was able to maintain a consistent income during the recession; and Young's job at a public relations agency remained secure. They decided a few months ago to meet with a mortgage banker and start the process.

Ultimately the couple settled on a newly built home in Bothell, Wash., a suburb about 15 miles northeast of Seattle.

They were impressed by the 3-bedroom, 2½-bath home on a corner lot. There had been an outstanding offer on the home but, in a sign of the times, the financing fell through. Young and Gjerde then jumped at the opportunity to make an offer of $325,000, about $5,000 lower than the home's appraised value.

"We felt really fortunate," Young says. "We were just shocked we were able to get that."

Buyers who are ready to enter the market are likely to be hard-pressed to find a better time.

The national median existing-home price for all housing types was $166,500 in May, which was almost 5 percent below the comparable price in May 2010, according to the National Association of Realtors.

Financing is cheap: The average interest rate for a 30-year fixed-rate mortgage is 4.5 percent, slightly above the four-decade low of 4.17 percent reached in November.

What's more, the number of existing homes available for sale remains high with 3.72 million homes on the market in May. A large inventory of homes tends to suppress prices.

Here are some factors you need to think about as you ponder taking the leap:

Determine if bying makes sense
The market conditions all favor the buyer in closing a deal, so it seems like they would be clamoring to find an ideal home.

But an uncertain economy has complicated matters. A banker who specializes in working with first-time buyers, Justin Lopatin of Baytree National Bank and Trust in Chicago, says clients are appropriately cautious.

"Some people fear the financial commitment, while others may be hesitant because they don't have the certainty of job security," Lopatin says. "For the rest it's just mustering up the down payment."

Whatever the condition of your local housing market, as a potential homebuyer you need to start with the threshold question of whether buying makes financial sense.

To figure this out it's important to consider several factors including the direction of home prices and rents in your area. Recognize that, if you buy, it typically takes four to five years before your annual expenses fall below the cost of renting. Although homeowners get the benefit of deducting mortgage interest from income taxes, precisely when they will be able to realize that benefit is influenced by the direction of rents and home prices in the area.

Gather all of the financial information that will influence your decision, such as the amount you have to put toward a down payment, a reasonable price estimate of the home you want to buy and the property tax rates for the location. Once that's collected there are several online calculators that can help you evaluate gauge at what point buying a home may begin to save you money, Ginnie Mae offers one.

Keep in mind that in a buyer's market you'll have some bargaining power. Negotiating with motivated sellers and brokers looking to make a deal can help you control some of your costs.

Know what's affordable
If you decide you're ready, you then need to determine your budget.

Real estate website Trulia.com found that buying a home is increasingly more affordable in most major cities because of falling home prices and stable interest rates that remain near record lows. The site defines affordability as being within reach of households earning the national median income of $64,400.

You'll want to get preapproval for a mortgage to determine how large a loan you might qualify for, and at what interest rate. The preapproval can help guide your search, but you should do a gut check to determine how large a mortgage you can manage without compromising your lifestyle or ability to save for retirement.

Story: Yes, you can still sell your home in this market

With a projected mortgage payment in mind, then add in cost of property taxes and homeowner's insurance. Banks will hesitate to approve a loan if these costs exceed 28 percent of your income before taxes.

To provide plenty of breathing room in your budget, calculate your housing costs based on your take home pay. Let's say you bring home $5,000 a month. Multiply that by 28 percent and you find that you should keep your monthly housing expenses below $1,400.

You should also figure out your debt to asset ratio, which will give you some insight into your total debt load. Add up your monthly payments for auto loans, student loans, credit cards, and the home mortgage. Total debts shouldn't exceed 36 percent of your gross income.

Again, to be really safe, buyers can make the calculation based on their take-home pay. Try the calculator at Bankrate.com.

Evaluate your financing options
Many potential homebuyers are needlessly assuming they won't qualify for a loan, so they don't try, says Jeff Hansen, a real estate agent in Littleton, Colo. "That's our biggest problem, people are afraid to pick up the phone because they are so shell shocked by this market."

That's not to say anyone can get a loan. But even those with an average credit score can get a competitive mortgage rate, says Greg McBride, senior financial analyst at Bankrate.com.

"The idea that banks don't want to lend money is like saying fast food chains don't want to sell hamburgers," McBride says.

Buyers with a credit score of 680, which is close to the national average credit score, should be able to get a loan at a competitive rate, according to McBride. The minimum score requirement varies depending on the bank. Some will accept a lower credit score if there's a higher down payment. So it pays to shop around.

Potential homebuyers with a FICO score much below 680, which ranges on a scale between 300 and 850, might be better off renting until they can boost their score by paying down debt, boosting savings or otherwise repairing their credit.

Still, the biggest financial obstacle for many potential buyers is coming up with the down payment. A typical conventional bank mortgage requires 20 percent. On a $200,000 home that's $40,000. Some lenders may allow less but will require a home mortgage insurance policy. The premium will be added to the mortgage payment, pushing the monthly payment higher.

Story: Upward blip in home prices — but don’t  relax just yet

Loans through the government FHA program allow down payments for as little as 3.5 percent for borrowers with good credit. These loans are much more accommodating to average consumers and are worth considering.

Focus on local conditions
Plummeting home values have raised serious doubts about whether a home is a good investment. But keep in mind you shouldn't view your home as an investment in the traditional sense. It's your home, not a liquid asset that you can easily sell and cash out as soon as prices rise.

In some parts of the country where foreclosure rates are high and many homes remain unsold, values continue to be depressed. Buyers who jumped in a few years ago may have homes worth less now.

For example, the price of a home in Minneapolis was about 11 percent less in April than it was a year ago, according to the latest Standard & Poors/Case-Shiller home- price index released Tuesday. The report, however, did show an increase in prices from March to April. It's an encouraging sign, but there's still some way to go for many cities.

In Seattle, where Young and Gjerde purchased, the local home price index is down 6.9 percent from a year earlier.

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"You're seeing more and more markets across the country right now where the cost to acquire and own property financially simply makes more sense than renting," says Budge Huskey, president and chief operating officer of Coldwell Banker Real Estate.

Huskey says buyers need to focus on their local market conditions instead of reacting to what they read about nationally.

We know there is a pent up demand from buyers simply looking for the right time, he says: "They're trying to time what they consider to be the bottom of the market, which we know is almost impossible to do."

If you're looking to buy do your homework, consult a banker, and look only at homes you can comfortably afford. If it's your first, remember it doesn't need to be your dream home. Buying a starter, building equity, and trading up remains a good strategy.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Photos: Barbara Corcoran on what home buyers can get for $200,000 or less

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  1. What buyers can get for $200,000

    Each week, TODAY real estate expert Barbara Corcoran looks around the U.S. to see what homebuyers can get for their money.

    This week’s search goes from Pennsylvania to Washington State in search of truly unique properties you can get the keys to for $200,000 or less. () Back to slideshow navigation
  2. Reading, Pennsylvania

    $114,900

    4 bedrooms, 2 baths

    See the next slide for the interior () Back to slideshow navigation
  3. Reading, Pennsylvania

    Reading, in southeastern Pennsylvania, has an unlikely landmark: A pagoda on a hilltop that was built in 1908 as a hotel and restaurant. It also hosts the nation’s third largest jazz festival, noted museums and even wineries. This cute house is within walking distance of schools for kindergarten through college. There’s a friendly porch, a stone wall and a big old tree out front! The interior is totally hip and modernized. The living room has gleaming wood floors and room enough for an upright piano. The light-filled dining room also has hardwood floors. The eat-in kitchen has exposed brick, tall wainscoting and old fashioned cabinets that have been updated just enough to make them feel new. The attic has a finished bedroom. Out back there’s a covered stone patio, a wood deck and a fenced yard.

    View the listing () Back to slideshow navigation
  4. Cleveland, Ohio

    $155,000

    2 bedrooms, 2 baths

    See the next slide for the interior () Back to slideshow navigation
  5. Cleveland, Ohio

    This Victorian cottage is in Ohio City, one of Cleveland’s oldest and most diverse neighborhoods. It has a broad front porch and an elaborate gingerbread trim. The main living area has soaring ceilings, a graceful staircase and blended hardwood floors. The formal dining room has vaulted ceilings and a floor-to-ceiling china cupboard. The kitchen has a vintage tin ceiling mixed with new stainless steel appliances. There’s even a first-floor laundry/mud room. The sunny family room overlooks the paved and landscaped backyard. Outside, the brick driveway leads past a pond and waterfall to a two-bay garage, a rarity in this part of town. The private backyard patio is like your own little oasis!

    View the listing () Back to slideshow navigation
  6. Mesa, Arizona

    $160,600

    3 bedrooms, 2 baths

    See the next slide for the interior () Back to slideshow navigation
  7. Mesa, Arizona

    Mesa is 30 minutes from downtown Phoenix and just a few miles from the Superstition Mountains. This home is in a true community where you know your neighbors. The simple landscaping out front suits the solid lines of the house. The living room has tile floors, an oversized window and warm yellow walls. The cozy family room has handsome wood floors. The kitchen has a big dining area, granite counters and a roomy island. There’s also a first-floor laundry room with space enough for drying racks. The second floor landing is currently set up as an office. The fenced yard has a covered patio, big lawn and growing trees. Taxes are just $1,400 a year!

    View the listing () Back to slideshow navigation
  8. Sarasota, Florida

    $169,000

    3 bedrooms, 2 baths

    See the next slide for the interior () Back to slideshow navigation
  9. Sarasota, Florida

    This Sarasota neighborhood has A-rated schools as well as three golf courses, fields for polo and cricket, and 18 lighted tennis courts! And it’s just 25 minutes from Sarasota’s white-sand beaches. This powder-blue home has sturdy block/stucco construction. The living room has cool tile floors and sliding glass doors leading to the lanai. The dining room has blonde wood floors, chair rails and crown molding. The all-white kitchen has a sunny dining area and glass brick above the sink. Out back there’s a sparkling enclosed pool with views of the lake!

    View the listing () Back to slideshow navigation
  10. Rockford, Washington

    $187,000

    5 bedrooms, 2 baths

    See the next slide for the interior () Back to slideshow navigation
  11. Rockford, Washington

    Rockford is a farming community on the Washington-Idaho border. Established in 1878, it has a population of just 482 and a small-town atmosphere. This storybook home was built in 1895 and is on the historical registry. It has an abundance of gingerbread trim and a sweet front porch with a white picket fence. The interior has details like original light fixtures and glass doorknobs. The living room has original wood floors and an ornamental brick fireplace. The formal dining room has a graceful chandelier. There’s also a peaceful sunroom. The cheerful eat-in kitchen has original white cabinets and sunny yellow walls. The quarter-acre lot has lush green lawn, lilacs and 100-year-old trees.

    View the listing () Back to slideshow navigation
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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.32%
$30K home equity loan FICO 5.05%
$75K home equity loan FICO 4.50%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.98%
10.96%
Cash Back Cards 16.43%
16.45%
Rewards Cards 16.00%
15.99%
Source: Bankrate.com