The reason is that people are afraid to dive in at a time when they think housing prices may be dropping. That's why most would-be buyers have taken themselves out of the game until prices hit bottom, which could be a mistake for those who plan to stay in their new homes for quite a while.



The common wisdom is that if the house of your dreams comes along, go for it. After all, it may not be available six months from now. As long as you remain in the house, any further drop in prices will be offset by rising prices down the road.

In all likelihood, you'll make money in the long run, so your best deal could be right now. That scenario notwithstanding, for most people, today's situation raises the question: How do you know when prices have bottomed out?

It's tough to know the precise moment when prices stop falling and start rising once again. It's not even easy to spot a trend reversal. If it was so easy to find the bottom we'd all be millionaires.

But there are telltale signs that smart buyers can look for, evidence that the housing market has finally firmed and is about to rebound. Every economist has his or her favorite indicators. A key indicator is the incentives that builders are throwing at potential buyers. Once the giveaways start to dry up, he said, it's a sure sign the market is beginning to turn.

Existing home sales are perhaps the most predictive indicator. But it takes some legwork, because the number of homes sold in a given month is just a number. What you really want is a moving average, from month to month.

You need to slow everything down by creating a 12-month moving average," he says. "This takes the seasonality out of the equation.

Add up the last 12 months sales, that's local sales, and divide by 12. Do the same thing month by month and you'll get an accurate reading of whether sales are slowing or increasing. When the pace begins to quicken, it means sellers are likely to start holding firm on their asking prices, or at least won't be willing to come down as much.

Don't confuse this signal with the average number of days on the market, although time on the market is helpful, it's a stat that is too easily manipulated. After all, when a seller takes his house off the market for a while or switches agents, the clock resets at zero when it comes back on the market.

Building permits are an excellent leading indicator; No one reads a local market more accurately than builders. They have their fingers on the pulse of the market and adjust their businesses according to demand.

When builders pull more permits in a month than they did the month before, then pull even more the next month, they think the market is improving and they want to be ready.

Public information on mortgage defaults can be gathered from the local recorder's office. If defaults are rising, it means lenders are still being loaded up with foreclosed properties, which have to be put on the market to compete with other sellers. And when there's too much supply, prices tend to fall. If the number of foreclosure filings is rising, it is a sure signal of prices headed down

Foreclosure sales are another indicator. The actual number of foreclosures is the number of filings minus the number of owners who have been able to bring their loans current, at least for the time being.

Lenders tend to dump foreclosures on the market at 10% to 20% below the rest of the market so they can get rid of it quickly.

Mortgage rates aren't so much a predictor as an accelerator. This signal doesn't hold up very well right now because of the sub-prime mortgage-market meltdown. But normally, rising rates slow the housing market, and falling rates propel it.

The housing market will eventually turn around. It may be months or even years in a given locale, but it will turn. The trick is to know when it does before others do. Anyone following these five vital signs on a regular basis can nail the bottom pretty closely.