With so much talk about falling prices and bargains for home buyers, most folks looking for a house are expecting to find a "real steal" when they go house hunting. And some no doubt will.

But there's a reason why homes in some spots have fallen in price more than homes in other spots. I did some research on the Phoenix area lately and found wide discrepancies in how much home prices had fallen from one area to another. Some were only down about 25% while others were down 67%.

I expect it's the same in other cities as well.

So what makes the difference?

  • Location
  • The number of lender-owned homes
  • The other people in the neighborhood
  • Age and condition of the surrounding homes

All of these factors affect home values. And unfortunately, even after this crisis is over, all but the number of lender-owned homes will still be a factor in the value of those homes.

Location covers a lot of different issues, and the desirability of a given location varies from one homebuyer to another.

But start with thinking about issues such the proximity to factories that belch out smoke or fill the air with noise around the clock. Nearby airports or rail lines are also a factor, because they mean noise. Homes in flood zones may be cheap - but the flood insurance won't be. Homes in communities dependent upon dying industries are usually at rock bottom prices, too - because people are moving away, not in.

These are issues that can permanently depress prices, so a bargain home might not be a bargain at all.

On a more personal level, buyers need to think about location in terms of their own lives. Saving several thousand dollars on the purchase price of a home is small comfort if they have to drive an additional 60 minutes to work each day.

An over-supply of lender-owned homes in the neighborhood may be the one factor that is depressing prices only for the short-term. Their presence will devalue a home, but only until they're sold. So buyers who are in it for the long haul might do well to consider buying in a location such as that - provided that other factors make the home a good choice.

The people in the neighborhood are an issue real estate agents aren't allowed to discuss. But it definitely does affect the value of homes.

Even if you get a home for 25% of it's value in another location, you should avoid it if all around you are run-down houses, yards filled with trash, and people coming and going that make you uneasy. Owning a home in a neighborhood where you're afraid to go for a walk in the evening is not a wise choice, no matter how low the price.

On a more personal level, and beyond the safety/fear factor, neighborhood make-up will affect your happiness in that home. If you're a young mom with small children, you will probably be happiest in a neighborhood with at least a few other young moms with kids. If you're a senior citizen, you might not enjoy a neighborhood filled with noisy children and teens - but on the other hand you might prefer it.

And, even though agents cannot by law talk about the racial makeup of any neighborhood, you probably should take a look for yourself. Will you be happy if you turn out to be the only person in the whole neighborhood who is of a different race?

Some would - others would not.

The age and condition of the homes is also a factor to consider. Old homes can be charming, but only if they've been maintained. So take a careful look. Is the whole neighborhood on a decline, or are some residents working at fix-up? An old neighborhood on the upswing could be a very good investment.

If others are making improvements and the home you find needs work, are you qualified and able to do that work? If you have to hire it all done, the house may not be a bargain at all.

The bottom line - don't choose based on price alone. Make sure you're going to be happy with the location, and that you're buying in an area where prices can be expected to appreciate when the mortgage crisis is over.