Should We Buy a New House?

Should We Buy a New House?

Q: I've recently married, and would like to give my new wife a new home. I'm tempted to buy one now, since builders have been giving away things like finished basements—one even will credit 1% of the price of the home towards upgrades for teachers like me. But since new-home prices still seem to be falling, we're nervous about committing. Plus, we see a lot of great deals on apartments, too, like one month's free rent for a unit with free WiFi and utilities. What should we do?

—Chicago
A: If you're motivated by incentives, suggest that you keep house-hunting. I don't think great builder incentives are going to last too much longer, and may even disappear before a newly-signed lease can expire.

It's true that there are deals on new homes now, spurred by the Chicago's still-weak economy. In its Chicago Market outlook PNC Financial Services Group noted that the city experienced a "more draining downturn" during the recession than the rest of the country due to heavy job losses and slow population growth.

But the city has a broad-based business sector that's beginning to revive, causing unemployment to tick down to a projected 9.8% in August from 10.1% a year earlier, according to the U.S. Bureau of Labor Statistics. While the recovery is still nascent and fragile, the housing market is responding. According to the most recent statistics from the Illinois Association of Realtors, in the Chicago metro area, 49,293 homes were sold from January to August this year, up 15.8% from the same period a year ago.

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Associated Press

A sign advertises a new home's reduced price in a development in Twinsburg, Ohio.
.Although it's unclear what impact the current foreclosure mess will have on home prices, Standard and Poor's Case-Shiller indexes based on housing futures, while lightly traded, point to a possible turnaround in the offing, at least for Chicago. The composite index, which tracks 10 major metro areas, predicts that overall home prices will decline an additional 5.7% by Nov. 2011, while in Chicago, they'll fall only 0.5%. Then Chicago's prices are expected to pick up steam, rising 3% in Nov. 2012 and 5.4% in Nov. 2013. Meanwhile, the composite index for the same period is expected to fall 4.5% in 2012 and 1.4% in 2013.

All of which points to the likelihood that the days where you can score free finished basements and granite countertops are numbered. Indeed, last month the Federal Reserve's Beige Book noted that while residential building activity in Chicago has been minimal of late, despite falling inventory levels, "downward pressure on new home prices had likely bottomed out " and that "builders were refraining from reducing prices below costs, as many had done earlier in the year."

JUNE FLETCHER Wall Street Journal
HOUSE TALK
OCTOBER 21, 2010, 3:27 P.M. ET.