The Sensible Buyer’s Time

Today’s market is ideal for buyers, but it’s not for all buyers. The current real estate market and lending environment is only suitable for buyers who are responsible and prepared, according to a recent Wall Street Journal Online article.

After years of spiking home prices, many buyers who were waiting patiently on the fringes of the action may finally have their chances at owning homes. These buyers are the ones who have a secure job, can meet lenders’ tighter income and credit requirements, and can afford higher down payments than were required in recent years.

Don’t lose heart: “Lenders aren’t cutting everyone off,” says Dick Lepre, senior loan officer at Residential Pacific Mortgage in San Francisco. “They’re reverting to sanity after years of making bad loans.” In January of this year, the U.S. median home price was $201,000, a drop of 4.6 percent from the same time in 2007. Additionally, the S&P/Case-Shiller national home-price index for the fourth quarter was down 8.9% from the previous year, which is the biggest drop in its 20 years. Prices have also dropped 10 percent to 12 percent in volatile markets like California and Florida, and many economists are anticipating an overall drop of 20% or more before the market bottoms out. Finally, there was a 10-month supply of existing homes for sale in January, a rise from just over five months during recent boom times.

For buyers, this is all good news! But before you rush out to open houses, consider that the home-buying rules of recent years no longer apply. Buyers need to be much smarter and more realistic than before. It is important to keep in mind that you are investing in a place to live, not playing the stock market or stockpiling money in a savings account. It will pay off to keep it simple, buy smarter and buy within your means. If you think the current market could be for you, here are a few tips to get you on your way.

Estimate what you can afford. This is the most critical step of all. “The days of easy money are over,” says Jeff Bogue, a financial planner in Wells, Maine. Due to the housing crisis, lenders are tightening their standards and requiring larger down payments where before they required no money down. They expect buyers to spend no more than 28% of their gross monthly income on mortgage payments, real-estate taxes and home insurance. To estimate what you can afford, check out the Internet for online calculators.

"You should also take the step to get preapproved for a loan, before you even start looking", says Bogue. "Finally, you should make sure you have cash for closing costs like legal fees and title charges. The total fees typically reach 2 percent to 3 percent of the house price, but will differ by state and mortgage product", explains Ilona Bray, co-author of Nolo’s Essential Guide to Buying Your First Home. You should also remember that you will need to pay for moving expenses and increased bills and maintenance costs.

Understand the market. Power is in the buyer’s hands in today’s markets. Sellers are making more and more concessions and if buyers are bidding, they’re bidding on lowering the home price. In this type of market, more than ever, location is critical, down to the neighborhood and street level. When home shopping, concentrate on crime statistics, good schools and any upcoming construction or public works that could increase or decrease the home value. “Eighty to 90 percent of housing prices can be explained by what’s happening in local economies,” explains Patrick Newport, an economist with Global Insight in Waltham, Mass. “Take a hard look at job growth and neighborhood conditions.”

Look for bargains. Keep your eyes peeled for homes that are listed at significantly below their 2004 prices. You can ask real estate agents for advice on this. “From the peak to trough, home prices in some markets will drop 35 percent to 40 percent,” Christopher Thornberg, a principal at Beacon Economics in Los Angeles, says.

Negotiate, negotiate, negotiate. Remember: buyers have a lot of leverage. You can’t assume that the seller is in the right area with his or her asking price. Take a page out of property investors and appraisers’ books and look at prices from another perspective. Think about what it would cost to buy land and build a comparable structure in today’s market. Insurance companies can provide general cost estimates, but you can get a thorough assessment from an appraiser. You should also compare your monthly costs for the taxes, mortgage and other expenses with the monthly costs of renting a similar home nearby. If you can rent an almost identical property for a much lower cost, the seller is asking for too much. Everyone is eager to get rid of unoccupied homes, from builders to sellers to banks, and they will make quite a few concessions to the buyer to do so. "You should also check out real-estate owned (REO) properties held by lenders", advises Patrick Carey, executive vice president of default and retention operations for Wells Fargo.

Settle down. In a down-turning market, experts recommend not buying a home unless you are planning on staying put for seven to 10 years. It may take a while for the market to look up again, and you want to be able to ride out any ups and downs. "If you’re not planning on staying in one place for a while", Patrick Newport says, “it may be wise to watch from the sidelines.”

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