Everyone’s talking about when is the right time to buy a home. Have prices hit bottom yet? How much further do they have to go? What about that tax incentive that is about to expire? How do you know when is the right time? The answer depends on a number of factors, including price, interest rates, and incentives. You may be surprised to learn that it might be wise to buy even before the market hits bottom – depending on your situation.

The most obvious factor, and the only one that many people seem to be paying attention to is price. Market values have been falling for the last couple of years, and they’ll probably fall even further. This depends a great deal on your geographic location. States that have been hardest hit by the foreclosure crisis, states like California, Nevada and Florida, will probably continue to see falling prices. Many cities have a large ‘shadow inventory’ of homes that will hit the market as foreclosures in the coming months. Supply and demand tells us that when the supply of homes on the market increases, prices will decline.

There is, however, a bottom price. A house is inherently worth something. It’s a safe bet that a home will be worth more than the rental value. If you could rent a home for $1000 a month, or pay $1000 a month for mortgage, taxes and homeowners association dues, which would you do? This supposes that the home is in decent condition. A home that requires $20,000 in repairs is worth $20,000 less.

I’m also assuming the value of a home to be the price at which you could purchase it, assuming that you have the money. The short sales currently on the market are a unique situation. You could make an offer on a short sale and wait months for an answer. This makes it less desirable than a home that doesn’t require lender approval. If you are willing and able to take whatever time is necessary and live with the uncertainty, you might get a bargain.

So let’s say that you think price will fall further and you could buy a house for less six months or a year from now. That still may not be the end of the story. There are other factors that might make it worth it to you to buy now, even if you ‘overpay’ on the purchase price. If you intend to keep the house for many years, do you care if the value drops a little and then increases?

Interest Rates may be even more important than price. Right now home loan interest rates are artificially low. The government is keeping them low in an effort to encourage people to buy homes. When consumers believe that prices have hit bottom and they start buying again, the interest rates will go back up to normal levels. If you could afford a payment of $2,000 a month, you could borrow about $380,000 at 5%. At 7.5%, you could only borrow $290,000. Are home prices going to drop more than that? This makes a huge difference during the first years of the loan, but maybe even more during later years. In 2020 the interest rate you pay will depend on when you got your loan. Once interest rates go back up to ‘normal’ and the real estate market recovers, they won’t be back down in the 5% range again for a long time.

Another potentially significant factor is the tax implications of home ownership. For most people, mortgage interest and property taxes on their primary residence are deductible. If you are buying a property for investment purposes, these and other costs, often including depreciation, may qualify as a business expense. Because everyone’s tax situation is different, the impact can vary widely. The best way to figure out how this would impact you is to go back and re-calculate your 2009 taxes as if you owned a house. If there are no other significant changes to your tax situation, this will give you a good idea of how much the tax benefits are worth to you. If you could save $5,000 a year in taxes, then waiting a year will cost you $5,000.

Federal and state governments are offering tax incentives to encourage people to buy homes. These usually have expiration dates, so you only get them if you buy a home pretty quickly. The federal tax credit of $8,000 for first time buyers or $6,500 for repeat buyers is only available for those who sign a contract by April 30, 2010 and close escrow by June 30, 2010.

The last consideration is not financial and probably matters most if you’re buying a home to live in. If you buy a home when there are a lot of homes on the market, you have a better selection. That house on a flag lot or with a spectacular view may go quickly and command a premium price during a more typical real estate market.

Now comes the hard part. You have to estimate each of these factors and weigh them against each other. How much do you think the price of a home in your city in your price range is going to decline? How much are interest rates going to rise and how quickly? How much could you save by taking advantage of tax deductions and government incentives? In Southern California, one of the worst markets, investors are buying up everything they can. The math just might work for you too.