Part of the reason the market got in this mess was because realtors, loan officers, etc. were encouraging consumers to use that type of reasoning in the first place, and a lot of questionable appraisals were being used to prop up an unreasonably increasing market. (I’ve done a couple thousand real estate closings, so I’ve seen some of the worst).
The only true measure of a fair price is what you are willing to pay for it. It’s that simple. If you really love the house, then paying even over the asking price (if you have competition) may be worth it. If it’s just an adequate place for you to be for now, then the asking price is outrageous FOR YOU. Get a fair appraisal to know whether the asking price is reasonable for the LOCAL market. Remember that percentage based commissions mean your loan officer and realtor have an incentive for you to pay more, fee based arrangements, if you can find them, might be better for you. Then decide what you can realistically afford to pay. Stay away from adjustable rate loans. Don’t forget it does you no good to buy a great house you can’t afford to maintain, redecorate, or end up surrendering in a foreclosure or bankruptcy (I’ve done a lot of those too).
The current market does mean now is a good time to buy, although my “guesstimate,” contrary to what some realtors and lenders want you to believe, is the market will drop quite a bit more in many areas before it gets better. The foreclosures are just starting to hit the market, and will continue to depress prices for a while. After all, do you want to pay full price to the guy who needs to make a profit on his sale so he can buy a bigger house with a decent down payment, or a lower price to the lender trying to dump the house for what they can get to cover their loss? Builders are already cutting prices on new construction in some areas to well below what earlier homeowners paid a few years ago. This makes resale of new construction in those developments very difficult, as who is going to pay more for a used house than a brand new one?
In a lot of areas, paying 5–10K below asking price is not unreasonable at all, but merely reflecting the recent elimination of the outrageous expectations sellers had re the appreciation of their property. Everybody believed prices would keep going up, so they did. Prices will continue to drop as long as people believe they should drop and there are desperate sellers out there, which is going to be for a bit longer. While I understand there is a lot of cheerleading going on by professionals in real estate trying to prop up the market, some of that is entirely an effort to keep their incomes at prior levels, and does buyers a disservice.
If you don’t have to buy now, I think you’re more likely to find prices dropping than going up. Some of the people who can’t unload their houses don’t really need to sell. Some are desperate. Being able to tell the difference between the two will make a big difference in the price you get. I see no reason you should pay more because someone says that is what you should pay. Decide what you want to pay, and if it’s not accepted, move on. After all, right now there are plenty of houses out there.
The wisest advice I ever heard was my former partner, who always said you don’t make money on real estate when you sell it, you make money when you buy it. Unless you have to buy now, or really have fallen in love with a must have (and I’ll bet there is another property just as nice or close to as nice in the area), then now is the time to wait for a good deal.