5/29/2008 - Perfect Time to Purchase Real Estate
Finally, it's a buyer's market out there.
For years rapidly rising prices kept many first-time home buyers out of the housing market. But as home values slide further downward and interest rates hover at relatively low levels, it may be time to start looking to buy that first house.
That is, if you have a secure job, can afford higher down payments than were required a few years ago and can meet lenders' much stricter income and credit requirements.
"Lenders aren't cutting everyone off. They're reverting to sanity after years of making bad loans," says Dick Lepre, senior loan officer at Residential Pacific Mortgage, in San Francisco.
The U.S. median home price was $201,000 in January, down 4.6% from January 2007. The S&P/Case-Shiller national home-price index for the fourth quarter was down 8.9% from a year earlier, the biggest drop in its 20 years. Prices have plunged 10% to 12% in troubled markets like Florida and California, and many economists predict an overall slide of 20% or more before the housing market bottoms.
There was a 10-month supply of existing homes for sale in January, up from just under five months during boom times.
If you are about to get into the housing market, this is all good news. But before you begin visiting open houses, recognize that the old home-buying rules no longer apply. You want to approach buying your first house with a financially realistic point of view.
Remember: You're investing in a place to live, not speculating in the stock market or even putting money into a savings account. So keep it simple. Buy smarter. Buy cheaper.
Determine what you can afford. "The days of easy money are over," says Jeff Bogue, a financial planner in Wells, Maine. Mortgage lenders have tightened their standards and are requiring larger down payments. Typically, they want buyers to spend no more than 28% of their gross monthly income on mortgage payments, real-estate taxes and home insurance.
To figure out how much you can afford, use online calculators at realestatejournal.com, dinkytown.com or bankrate.com and "get preapproved or preauthorized for a loan," Mr. Bogue says.
Be sure you also have cash for closing costs like legal fees and title charges. The total typically reaches 2% to 3% of the house price, but differs by state and mortgage product, says Ilona Bray, co-author of "Nolo's Essential Guide to Buying Your First Home." Also be prepared to pay for moving expenses and ongoing maintenance.
Know your market. Gone are the days of "sure thing" home purchases when buyers would bid up prices and then watch the values of their houses soar like tech stocks in 1999. Today, if buyers are bidding at all, they're far more likely to insist on lower prices and to walk away if they don't get what they want.
Now more than ever, location is crucial, down to the neighborhood and street level. Focus on good school districts, crime statistics and any impending construction or public works that could increase or decrease the value of a home. Conduct preliminary research online at Web sites like Zillow.com, Trulia.com and greatschools.net.
"Eighty percent to 90% of housing prices can be explained by what's happening in local economies. Take a hard look at job growth and neighborhood conditions," says Patrick Newport, an economist at Global Insight in Waltham, Mass.
Make your dollars count. Although conditions vary by market, look for a home that is significantly lower than its 2004 price. (You can ask real-estate agents for information and check estimated historical values at Zillow.) "From the peak to trough, home prices in some markets will drop 35% to 40%," says Christopher Thornberg, a principal at Beacon Economics, a consulting and research firm in Los Angeles.
Haggle. Don't assume the seller is even in the right ballpark with his asking price. Most real-estate agents and sellers only look at comparable sales prices, or "comps," of similar homes in similar neighborhoods. Take a lesson from property investors and appraisers instead and check out prices from other angles as well.
Consider what it would cost to buy land and build a comparable structure. Insurance companies can provide general cost estimates, but for a thorough assessment consider hiring an appraiser (search online by zip code at AppraisalInstitute.org).
Also compare your estimated monthly costs for the mortgage, taxes and other expenses with the cost of renting a similar place nearby. If you can rent virtually the same house for a much lower cost, the seller is asking too much.
Builders, sellers and banks are eager to unload unoccupied houses, giving the buyer more leverage to ask for lower prices or incentives. And don't overlook REOs ("real estate owned" properties) held by lenders, says Patrick Carey, executive vice president of default and retention operations for Wells Fargo.
Buy for the long haul. "Most first-time home buyers don't buy the house they're going to end up in," says Ilyce Glink, author of "100 Questions Every First-Time Home Buyer Should Ask." But experts suggest that in a downward market, people should purchase a home only if they intend to live there for seven to 10 years.
"Historically, housing bubbles have taken several years to deflate, but it's hard to tell if we'll see prices drop a lot in the next two or three years or see moderate drops over the next 10 years," says Mr. Newport, the economist.
If you're not planning to stay in the house for long, he notes, "it may be wise to watch from the sidelines."