Well it’s been a tumultuous year to say the least in the real estate biz. With loans being hard to come by, products falling by the waste side, underwriters asking for your first born, and home values plummetting: buying now can be a nightmare. Good news is mortgage rates are wonderful right now, unless of course you are looking at expensive homes because jumbo loan rates aren’t very appealing.
Dana Dratch of Bankrate.com sums up the first quarter of 2009.
In 2009, sellers are battling shrinking home values and a constricting pool of available buyers. Buyers are sensing opportunities on home prices and home mortgages — if they have the credit, job security and ready cash to qualify.
Those in the best shape are homeowners who don’t have to sell and homebuyers with good credit, a stash of cash and working knowledge of their mortgage options.
“There are going to be great opportunities out there,” says William Poorvu, author of “Creating and Growing Real Estate Wealth” and professor emeritus at Harvard Business School in Boston. The question is: Is it right for you?
“Whether it’s Bernie Madoff or your own mortgage broker, at a certain point you have to rely on your own judgment,” he says.
Nationwide, home prices fell in the first quarter of 2009, but the exact amount is debatable. The National Association of Realtors, or NAR, puts the figure at 13.8 percent year-over-year. Another yardstick, S&P/Case-Shiller Home Price Indices, logs the decline at 19.1 percent year-over-year.
The number of new homes being built is also down. Housing starts, which averaged 1.3 million annually from 2000 to 2003, dropped to a seasonally adjusted 458,000 in April, according to the National Association of Home Builders in Washington, D.C.
You don’t have to be a buyer or seller to realize that homes are sitting on the market. In April, the inventory of unsold homes would have taken 10.2 months to clear at the current sales rate, according to the NAR. That’s down from almost 12 months in 2008, but higher than the industry’s historical norms of six to seven months, says NAR Chief Economist Lawrence Yun.
Some homes are selling
It’s not all doom and gloom. Fred Soule sold his home in Fort Wayne, Ind., after just two weeks. While he got $5,000 less than he’d hoped from the sale of his 4-year-old, three-bedroom house, he broke even when he bought another home across town. Soule negotiated the price on his new home based on what he was getting from his own sale, and the deal made it worth it, he says.
Soule also had a secret weapon — staging. His sister and brother-in-law, big fans of TV home fix-up shows, coached him on decluttering his house and getting it sale-ready. Soule moved out a lot of his nonessentials, cleaned out the garage and even rented a storage unit.
On the buy side, his new purchase — a never-been-lived-in, bank-owned home — was originally marketed at $174,000. He paid $150,000.
Jeanette Prose wasn’t so lucky. Her 3-year-old, three-bedroom home in Hollister, Mo., was on the market for 16 months, and she finally accepted $15,000 less than her original asking price. It took another three months to close.
But she was also buying, and her seller was willing to negotiate. “We got a good deal, so everybody was happy,” she says.
Prose and Soule both want to stay in their new homes for more than a few years. And that, according to many real estate experts, is the hallmark of a smart buyer, especially for those who are buying in areas where home values may not have hit bottom.
Opportunities for first-time buyers
While the total number of buyers is down, there is a larger slice of buyers who are shopping for homes for the first time.
“We estimate that half of the homebuyers (today) are first-time buyers,” Yun says.
Credit the triumvirate of low interest rates, lowered home prices and an $8,000 tax credit for first-time buyers who become homeowners before the end of this year.
“It’s a great time to be a first-time buyer,” says Eric Tyson, co-author of “Home Buying for Dummies.” “In many parts of the country, this may be the best buying opportunity in a generation.
“It’s a good time to trade up because the higher-end market in many areas is weaker than the entry-level market,” he says.
Still, buyers are facing intense scrutiny when it comes to their ability to afford a home. Lenders are examining not just credit, but job stability, down-payment amounts and how much cash buyers will have available after buying a home.
In the past, lenders would offer the same rates to anyone with credit scores in the upper ranges, but that’s changing, says Jack Guttentag, professor emeritus of finance at The Wharton School of the University of Pennsylvania. Lenders are differentiating between buyers who have a 760 FICO score and those who have a 780 — all the way up to 800, he says. “That’s a big shift.
Buyers aren’t the only ones under the microscope. The home must pass muster, too. Dick Gaylord, immediate past president of the NAR, remembers one home where the buyer had to wait “a little longer to get the loan” after the lender ordered a fresh home appraisal.
If you’re planning to move in the next year or two, “it’s probably not the time to buy a house,” he says.
In some areas, home values are still sliding. Worst hit in the past year was Cape Coral/Fort Myers, Fla., where homeowners saw values sank 59.1 percent since the first quarter of 2008, according to NAR statistics. Other heartbreakers were in California — the Riverside/San Bernardino area, down 39.9 percent, and Sacramento and surrounding areas, down 34.5 percent.
When Richard B. King recently sold his home in Long Beach, Calif., it sat longer than he anticipated and he accepted $263,000 less than his original asking price.
“The market went down,” he recalls. Neighbors kept lowering the prices, so “we kept lowering our price to be competitive. It’s a matter of, do you want to sell the place or not?”
Some towns are seeing home values increase. Best off was Cumberland, Md., where median home prices went up 21.1 percent since the first quarter of 2008, along with the tri-city area of Davenport, Iowa; Moline, Iowa; and Rock Island, Ill., which jumped 13.8 percent. Columbia, Mo., also rose 6 percent, the association says.
One big factor affecting home values stems from the large number of distressed sales. Roughly 40 percent to 45 percent of today’s sales are foreclosures or short sales, Yun says. Historically, that figure usually hovers around 5 percent, he says.
Mary Rubin recently helped a family member buy a $255,000 mortgage foreclosure in Ft. Myers for $116,000. While it was in excellent condition, the house was never worth the original $255,000, she says.
Buyers can be choosy
Buyers have a lot of selection. Consequently, they can be choosier. Homes with eye and price appeal will draw activity, says Dorcas Helfant-Browning, chief executive of Virginia Beach-based Coldwell Banker Professional, Realtors.
Conversely, “fixer-uppers are a tough sell,” says Ron Phipps, broker/Realtor with Phipps Realty in Warwick, R.I. “The issue is you can buy a really fine home in great condition for the same price.”
And the transition from homeowner to home seller is a mental adjustment. “Sellers, in a lot of cases, have not come to grips with the fact that their houses have dropped in value,” says Glen Lazovick, chief sales and business officer for Mid-Atlantic Federal Credit Union. “If you don’t have to sell, now is not the time to sell. If you want to sell your house, it has to be priced well and look great.”
Buyers also are looking beyond the closing table, Phipps says. “People want to know what the utility cost is, what the insurance is, what the flood insurance is. People want to know what the real cost of ownership of the home is.”
Trying to time the market
These are unusal times for buyers and sellers.
Today, you find extremely motivated sellers facing foreclosures and short sales. At the same time, “a number of markets are heating up,” becoming attractive to investors and first-time buyers, says Nic Retsinas, director of the Joint Center for Housing Studies at Harvard University.
But the traditional market of willing buyers and sellers is still stalled, “and I suspect it will be stalled until we get some sense that the real economy is starting” to recover, Retsinas says.
For those who want to buy, most housing experts are singing the same song: Clean up your credit, save your money, shop for a mortgage and get preapproved. And while trying to time the market’s rock bottom is impossible, trying to lock in a low interest rate is smart, says Gaylord.
Gaylord advises clients to shop around and put in multiple mortgage applications. “If one lender can’t help you, there are 50 others to look at and talk with,” he says.
Shopping for foreclosures can offer some good deals, but they also carry risks. “I’ve heard plenty of stories about people … showing up and finding the homes have been stripped of anything of value,” says Zigas.
Another strategy also is pushing down prices, if you can complete a deal. Short sales are where the homeowner gets permission from the lender to sell for less than the mortgage but closer to the current value. But some in the industry say it is taking months to close on them.
On top of these market conditions is the potential for them to worsen. “The danger of being underwater arises today from price declines,” Guttentag says. “That’s where the risk is. I think the concern about price declines is a major deterrent.”
Instead of worrying about market timing, look at your own time line. “Accept the fact that there may be some price depreciation short-term,” says Guttentag. And plan to be in the home at least two to three years to give it time to bounce back.
Shopping for a refi
Lower interest rates have had another side effect. It has boosted refinancing traffic. Homeowners with decent credit are divesting themselves of higher or adjustable rate loans for fixed lower rates.
Lower interest rates “are helping middle-class homeowners who want to save a couple of hundred a month on the mortgage,” Poorvu says.
These days, when it comes to financing, most buyers also are opting for the tried and true 30-year, fixed-rate mortgages. “It’s 98 percent of the market now,” says John Mechem, spokesman for the Washington, D.C.-based Mortgage Bankers Association.