Despite the current combination of low interest rates and housing prices, many would-be homebuyers are still leery of jumping into the market at this point. Fearful that home prices may yet drop further, they're holding out for stronger signs of an economic recovery and a bottomed-out housing market.

Given the steep drop in housing prices over the past three years, one can hardly blame them. And despite signs that a housing recovery may be under way, a surge in foreclosures brought on by rising unemployment could nip the recovery in the bud and send prices tumbling once again.

The problem, however, is that you never know when the bottom of the market has been reached. While one should never purchase a home without confidence that it's a sound investment, postponing a purchase until the optimum time to buy is just about impossible to do. Most experts say that trying to time the housing market is like trying to time the stock market - and that's roundly discouraged as well.

Long-term ownership tends to increase value

One of the main reasons for this is that the longer you own your home, the more likely it is to appreciate in value, from a historical perspective. Buying a house now instead of next year means you'll have one more year to dampen out any price fluctuations that may occur between the purchase and the time that you sell it.

An economic analysis by the National Association of Realtors showed that, for homes purchased from 1989-2001, homeowners who bought and held their homes for 10 years not only saw a greater increase in equity than those who bought and held their homes for six years, they also had proportionately smaller losses when prices began to decline.

Basically, the longer one owns a home, the more likely its value will follow the historical norm, that is, increase in value. Buying sooner rather than later increases the length of time one owns the home.

There are other reasons to avoid trying to time the housing market as well. Presently, interest rates are near historic lows - about a percentage point or more lower than they were last year, and more than two percentage points below what they were earlier this decade. While there's a possibility that housing prices may further decline, there's also a chance that interest rates could go back up - effectively raising the price you pay for a home.

Home prices down, or interest rates up?

For example, 30-year fixed mortgage rates have been running around 5.25 percent in recent weeks, according to Freddie Mac. Assume a $250,000 loan at 6.25 percent, per 2008 interest rates, which would produce a monthly payment of $1,540. For that same monthly payment at 5.25 percent, you could get a $280,000 mortgage, 12 percent more. Are housing prices more likely to decline by 12 percent or more in your area, or are interest rates more likely to go up a percentage point more?

Your answer to that will likely depend on how volatile your housing market has been. While some areas, such as Phoenix, Los Angeles and Miami have seen massive price declines, the downturn in other areas, such as Dallas, Denver and Charlotte. N.C. have been fairly modest, around 10 percent or less since the downturn began, according to the Standard & Poor's/Case Shilling Home Price Indices.

Some areas more stable than others

Significantly, areas showing relatively small declines over the past three years also tended not to have had the huge price run-ups earlier this decade that were experienced by the areas that later saw big price declines. So prices there tend to be inherently more stable, with less risk of major declines. At the same time, the demographic factors that originally drove up prices in the volatile areas could send them back up again once the market bottoms out, though tighter lending standards will likely keep them from rising as fast as before.

Overall, it's more important to feel secure about your own financial situation that to worry about the direction housing prices will take in the next six months or a year. If you think your own job is safe, and that of your spouse or partner, that's a bigger consideration than worrying about possible further fluctuations in the market in your area.

Published on April 7, 2011