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May 2013 – The Housing Bounce

Headlines are proclaiming a rebound in the residential housing market, but investors and homeowners should be cautious.

In March home prices rose on a national average by 10.9 percent from a year earlier, as measured by the Standard & Poor’s Case Shiller index, marking three straight months of year-over-year growth. Prices are still off the peak reached seven years ago, but a recovery is clearly underway.

New housing permits have climbed steadily, but are nowhere near the highs reached before the housing crisis. The recovery, moreover, is not occurring evenly across the nation (see chart on page 45). This suggests that a full recovery will take time. It is also highly uncertain how much longer the historically low mortgage rates that have fueled the rally thus far will continue (see chart below).

When deciding whether to rent or to own a home, prevailing mortgage rates are a critical concern. Other important considerations include2 your ability to pay property taxes and mortgage interest with pre-tax dollars, your ability and willingness to perform maintenance and to meet other obligations (insurance and property taxes), your intended length of stay in a given residence, and your eligibility for special government mortgage assistance. Finally, you should consider your desire to accumulate or acquire equity in a house through either sweat equity or by committing your savings to a tangible store of value.

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