Of course, no one knows the answer to these questions. But there is one measure used by Wall Street traders that gives an indication of where professionals expect home prices to be in the future. They are futures on residential home prices – contracts between professional traders that are bets on where home prices will end up. Again, no one knows what home prices will do over the next year or two or five, but these contacts hammered out between traders have a whole host of informed opinions behind them – the expectations of economists, supply and demand considerations, etc. – so they are arguably one of the best indicators of future home prices around and certainly much better than an uninformed opinion.

So what does the market for housing futures currently say about future home prices?

The outlook is negative to be sure. Today’s market (as of April 7, 2009), which is based on the RPX index of home prices, predicts that home prices for 2009 will fall by almost 30%. (They have already fallen 10% since January.) The chart below shows this very well. Historical home prices are shown in white and the path predicted for the next five years by the RPX housing futures market in red. Note the drop for 2009 still to come.

Many people I’ve talked to still make the old argument in favor of purchasing a place to live: Why throw away my money on rent when I can be putting it toward the ownership of my own home? But given the free fall in home prices these days, that is outdated reasoning. With such a steep drop in prices being predicted by housing futures markets, it seems a much better idea to wait a year or two, when home prices are projected to level off. Why purchase a home today only to see another 20-25% of its value go up in smoke? Instead, save your money by renting during that time, and use it to purchase a home later at lower cost.

It’s true that there are many benefits to owning a home that I haven’t mentioned, like tax breaks and having a place of your own to raise a family, but there are also negative ones, like upkeep costs and property taxes. In the vast majority of cases, however, the economics of purchasing a home make no sense at all when staring at a potential drop in value of 20-25%.

I should also mention here that home prices can vary extremely from city to city, and that the nationwide averages shown above are likely not well-representative of any given location.

By the way, you can check these markets yourself here. You can also have a look at the history of home prices in your city since 2000.

To put the $15 decrease in further perspective, my wife and I live in New York City in a 1-bedroom apartment that cost us $3,200 a month in 2008. A $15 decrease amounted to a 0.5% drop in rent. I thought about the offer for about a few minutes. With the backdrop of economic turmoil, couldn’t we expect better than mere half a percent taken off our rent? After all, over the past year, the equity markets have dropped by over 38%, home prices have fallen by 18% across the nation, and unemployment has risen from 5.1% to 8.5% and is still increasing rapidly. I figured with the prices of almost all other assets falling and with more people unemployed and less able to afford their rent, shouldn’t the rental company be willing to relinquish more than just $15 a month to have a dependable tenant stick around?

I thought about calling up the leasing office in my building and making that argument. I think it would have worked to some extent. But the problem wasn’t simply that I knew my leasing company was trying to short-change us with a mere $15 discount. It was that I needed to know *by how much* they were short-changing us. What price would the leasing company be willing to accept from a reliable tenant? $3,100… $3,000… lower? This brings me to my first point in any financial negotiation:

Do your homework – Obtain comparable prices.

I needed to know what kind of rental rates were available from other comparable apartment buildings in my neighborhood. Then, I could approach my leasing rep with that information. 

Too many people don’t do their homework when making an important purchase. Instead, they rely on approaching the salesperson with *what they want*, as opposed to what they could get elsewhere. But the salesperson’s job is to rent apartments, lease cars, or sell mattresses for the highest price. He does it all day! You’re not likely to finagle a great deal out of him by smooth-talking and such. In fact, if you go in unprepared, a good salesperson will detect this weakness in your demeanor and be even more unwilling to budge in negotiations. Being prepared helps to:

Take the negotiation out of the “personal realm”.

Being armed with comparable pricing evens the playing field. It takes away a bit of the personal nature of negotiating (where the salesperson probably has the edge) and leaves only raw facts on the table.

With that in mind, I spent about 3 weeks visiting other 1-bedroom apartments in New York that I thought were comparable to mine. And guess what I found. Most were priced around $2,900 per month with 1 month of rent free on a 1-year lease. That free month brings the rent down to $2,658 when distributed over 1 year. Suddenly, my $15 drop in rent to $3,185 didn’t look like such a good deal!

My wife and I thought about the apartments I visited, and we narrowed down the possibilities to one apartment building that we would be happy to move into for around $2,600 if our leasing company was too stubborn about our rent. The location of that building was slightly more inconvenient than our current one, but the building was beautiful and the price was right. 

Given that it would cost us about $2,000 to move (or $166 per month over the course of 1 year) and it would be a hassle, we decided that we would be willing to pay at most $2,850 to stay in our current apartment.

Armed with this information, I scheduled a meeting with my leasing rep. We exchanged pleasantries, and I presented the details very simply. We could live in a beautiful, comparable apartment for $2,600 per month. If you cannot make a comparable offer, we will have to move there. I even gave him the contact information for the other building so he could verify all the information himself.

As soon as he saw I did my homework, his mood changed. He opened up to me. He took out his daily apartment list and showed me what facts he was dealing with. That day, they were asking $3,050 to rent comparable apartments to mine to new tenants. But, I countered, new tenants would also receive one month of rent free, dropping their effective rent to $2,795. I was willing to pay $2,800 per month and no more. He appreciated my honesty, knowing I wasn’t just another whining customer, but that I:

Let the facts be my guide.

Three days later, I received a call from my leasing rep. After some slight haggling, he met my breaking price – $2,850 per month. He even threw in two free gym memberships for me and my wife ($89 each otherwise)!

Remember the rules when making a big purchase or entering into a big agreement in order to level the playing field between you and your counterparty:

1. Do your homework – Obtain comparable prices.
2. Take the negotiation out of the “personal realm”. 
3. Let the facts be my guide.

By the way, these tactics may also work for those of you looking to lower your rent, even if your lease is not expiring soon. Approach your leasing rep and offer to sign a renewed 1-year lease at a lower rate. Many leasing reps will be happy to get the renewal in this bad economic environment and may be willing to accept the lower rent that comes along with it.