Down payment with 401k?

I'm in my late twenties...interest rates are low...housing prices are falling.... I didn't plan on buying a home as Southern California is very expensive. But...it's not looking too bad. Lots of short sales and foreclosures... The only challenge I have is whether to take a hardship... show more I'm in my late twenties...interest rates are low...housing prices are falling....

I didn't plan on buying a home as Southern California is very expensive. But...it's not looking too bad. Lots of short sales and foreclosures...
The only challenge I have is whether to take a hardship "withdrawl" from my 401k to jump in. I know it's usually not a good idea for tax reasons and loss of future compounded interested.
However, assuming the housing market rebounds in the next 10 years, I'll easily make up what I lost in the compounded interest.
For some strange reason, I FEEL inflation will eat away my 401k savings. (Get rid of that cash...)
Buying this early in the year will help add up as much tax savings as possible...
I don't think a 401k loan will work...it will add to my debt ratio.
What are your answers?

The houses are between 300k-400k...

Also...is PMI now tax deductible?
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