The Best Bargain for 2010?

Stocks have gone straight up for the past nine months. Investors are flocking into bonds and other fixed-income investments. Gold is near record highs. Given how much bullish investors have bid up prices of these investments, you might think there's nothing left that's affordable right now.

But there's one area that investors have almost universally shunned recently. Even though the real estate market may well have some lumps left to take, it's extremely unlikely that you'll ever again see housing as affordable as it is right now.

Still hunting for the lows
Of course, some of you will immediately point out that housing prices still haven't shown signs of a definite bottom yet. The latest release of Case-Shiller index data showed that although home prices stayed steady in October compared with previous months, they're still down by more than 7% from year-ago levels. And although some have seen recent readings as encouraging, few would be surprised if prices start to decline again during the traditionally slow winter period.

However, there's more to the affordability question than simply looking at the price. For good or ill, other factors play at least as much of a role in determining whether buying a home makes financial sense.

It's all about the payments
Perhaps the most important thing that's making homes affordable for more people lately has been ultra-low mortgage rates. With the 30-year mortgage rate having flirted with the 5% mark for months now, homebuyers who are fortunate enough to have the financial means and credit history to get home loans are finding amazing deals.

Homebuyers did find ways to stretch even during the housing bubble. But unlike then, borrowers don't have to use dubious financing methods like negative-amortization or interest-only loans to finance their home purchases affordably. Just look at some of the rates available from major banks:

Source: Bankrate. Rates posted as of Dec. 23 for loans in the D.C. metro area.

The combination of lower prices and low interest rates have put homebuying within reach for a lot more families. According to The Wall Street Journal, mortgage payments haven't been this low in comparison to median earnings figures since the early 1970s.

But there's no guarantee that those low rates will last. Already, interest rates have moved up a bit, and with the Federal Reserve set to exit the mortgage-backed-securities market next March, mortgage rates could jump substantially, making those monthly payments a lot higher.

In addition, there are more things encouraging homebuyers to act now:

• Homebuyer tax credit. The popular first-time homebuyer tax credit was recently expanded to include those who already own homes. If you've lived in a principal residence for five straight years out of the past eight, then you can claim a tax credit of up to $6,500 toward a new home. First-time buyers are still eligible for the larger $8,000 credit.
• Homebuilder incentives. Many homebuilders, including Toll Brothers (NYSE:TOL), NVR (NYSE:NVR), and Pulte Homes (NYSE:PHM), offer incentives to prospective buyers. Lately, though, those incentives have started to disappear as demand increases. Although incentives differ greatly, they may make a big difference to some buyers.

No guarantees
Naysayers will point out that future problems could easily create another leg down for home prices. But the more relevant question that potential homebuyers need to ask is this: How likely are you to see this unusual confluence of low home prices, low interest rates, and additional incentives to buy? In my opinion, those odds are pretty small -- and so it might make sense not to wait even if you're concerned that home prices haven't yet hit bottom.

So whether you're looking to buy your first home or want to move up to a better one, don't let fear about the future direction of home prices dissuade you from taking a serious look at buying right now. You may well end up getting a better deal than you'd be able to get a year or two down the road.