by Vicki Gerson
Friday, April 18, 2008provided by
Investing in real estate used to be considered a “no brainer,” a can’t-miss investment.
But these days, this sure thing isn’t so sure. Home prices keep falling. Standard & Poor tracking shows prices down 7.7 percent nationally in November 2007.
The National Association of Realtors, or NAR, reports that sales of single-family homes were down by 13 percent in 2007, the biggest drop since a 17.7 plunge in 1982.
Representatives of the NAR say that this makes it the best buyer’s market in a long time. Prices are down, interest rates are near a 45-year low and the supply of houses is high.
But others argue that with the real estate market in a tailspin, it might be a very long time before prices rebound — making it a poor market at this time.
Even those who advocate real estate investing concede that you need the right circumstances before you take the plunge.
Who Should Buy a Home?
“Dual-income customers should definitely buy a home now,” says George Kaiser, vice president of banking operations for Northbrook Bank and Trust and West America Mortgage Co., its sister company. “People with assets in reserve and a credit score of at least 680 should buy as well. Anyone with a credit score less than that will have to verify their income.”
Renters who have stable jobs might find this a good time to try homeownership because of the lower prices, says Scott Rose of Coldwell Banker in Deerfield, Ill.
William Chu, senior mortgage loan consultant, American Chartered Bank, suggests it’s a particularly good time to look at the higher end properties if you can afford them because with the pool of buyers shrinking, upper market sellers are lowering their prices to attract a larger pool.
“So if you qualify, you could purchase a more expensive home at a much lower price than you could a few years ago,” he says.
However, as always, consumers need to shop intelligently, avoid risk and buy what they can afford.
Kaiser warns that potential homebuyers must not get in over their heads. They should feel comfortable with their mortgages and be confident they can handle the payments along with taxes and insurance.
Those with lower credit scores will find it a little tougher.
“If you have some credit challenges or less than 20 percent down, be prepared for higher interest rates due to risk-based lending,” says Rose.
Who Should Not Buy Now?
While prices are more attractive these days, not everyone should be in the market.
“There is no hard and fast rule that applies in all cases, whether it be a good market for real estate or a down market, such as we are currently experiencing,” says Valerie Anderson-Jones, CPA, JD, CVA at Kessler Orlean Silver & Co. PC. “Tax advantages can make the ownership of real estate quite appealing, but the decision whether or not to own a home should be based on many factors.
“The size of the down payment and resulting mortgage will play a large part in this decision, as well as the amount of any other assets and debt one currently has.”
Brent Kalka, Certified Funds Specialist, or CFS, and financial adviser at Mueller Financial Services Inc., Elgin, Ill., points out there are times a person or couple should not consider buying in this market.
“For example, if a retired couple is thinking of selling their home in order to downgrade and gets less than fair market value, they will lose more financially then what they gain by getting a good deal on a less expensive house and are better off financially by waiting until the market turns around.”
A second consumer who ought not consider changing residences is a homeowner who, prior to the market downturn, had 20 percent equity in their home and didn’t have private mortgage insurance, or PMI payments.
“With home values down,” he says “their equity has dropped, and they no longer would have the 20 percent down payment necessary in a lateral or upgrade purchase to avoid PMI, which can run anywhere from $50 to $150 per month.”
Kalka also believes that potential homebuyers should consider the fact that the real estate market could be no better or even worse a year from now, so they have to decide if they want to wait it out.
People whose jobs are shaky should wait until their situation is more secure.
“To buy on what you are making now if future income is not stable is asking for trouble,” Rose says.
Also, if you are experiencing a life change, such as an upcoming job transfer, getting married, planning to move geographically within the next two years or struggling financially, you should wait.
“People who are thinking of flipping a home should not buy,” says Walter Molony, spokesman for the National Association of Realtors. “Housing is a long term investment, and if you’re only planning to be there for a year or two, keep renting.”
According to Karen L. DeRose, CFP, DeRose & Associates, Chicago, renovating and flipping homes is much harder today and not something she is recommending to any of her clients. She says several of her clients now have to sit on these properties and the gains they thought they would get have been eaten away by the decline in home prices.
People with heavy credit card debt should not consider buying now. “They must clean up their credit first,” Chu says.
Should You Buy a Home in Foreclosure?
The Census Bureau reported that the number of vacant homes in 2007 climbed to 2.8 million from 2.07 million. This is the biggest one-year jump on record. What does that mean to potential homebuyers?
Although property is available, Marsha Schwartz, a broker associate from Coldwell Banker Residential Brokerage in Northbrook, Ill., and Rose believe that buying a home in foreclosure can be a challenge and not always a good deal. Sometimes the home has been neglected for a long time due to financial reversals. Be prepared to invest money in the property.
Before you purchase it, have a professional inspection done, even though most of the time the home is being sold “as is.” It also pays to research comparable prices to make sure the price of the foreclosure is significantly below values in the area.
“You can always buy a home in foreclosure, but it depends on how much the lender is willing to lose to get rid of the property,” Kaiser adds. “Sometimes you can get a good deal.”
Is Raw Land or Commercial Real Estate a Good Alternative Now?
“Now is a great time to acquire land, because when you look at the residential market, many homebuilders are looking to get their existing inventory off the books,” says Ben Reinberg, Alliance Equities LLC, headquartered in Chicago.
“However, if you are going to buy land, you must have the ability to hold that piece of land until you have an opportunity for the next cycle to come around.”
When purchasing land, investors should investigate if it has sewer and water, what type of zoning it has and what you can do with it as well as the location of the property. When buying a piece of land, lenders require 30 percent to 60 percent equity depending on where it’s located and what the selling price is.
Reinberg believes if you have the opportunity to purchase the land at a discount (less than it would have sold for three to five years ago), buy it.
“There will be opportunities to buy land within the next 12 to 18 months, especially if we go into a recession,” Reinberg says. “The market is correcting itself, and was very inflated. Now it’s adjusting.”
In addition, Reinberg expects the rental market to be strong compared to the condo market, so multifamily properties will be in strong demand as well.
But he does issue a word of caution. “Be careful what you buy in this down market. Due diligence is important, and if you are a novice you may want to hire a commercial real estate broker.”
Why Not Wait Until the Economy Turns Around?
“If you wait till the economy turns around, the interest rates may not be as favorable, nor in all probability will there be as much inventory,” says Schwartz.
She feels it’s hard to predict when the market will bottom out, just as you can’t predict when a stock has “bottomed out” until it has started to rise again.
Homes are starting to sell because prices have been lowered, but Kaiser doesn’t anticipate home prices dropping much more. Interest rates are also dropping, and that is changing consumers’ outlook.
When Will the Housing Market Turn Around?
The National Association of Realtors is projecting that home sales will trend up this year.
“The timing of the recovery is a bit ambiguous because there are buyers looking for a bargain, while others are looking for more signs of stability. Still others are looking for interest rates to keep lowering, with prices still bottoming out in their area,” says Molony.
However, he suggests the window of opportunity for buying is within the next six months.
But there is serious disagreement on that point.
“Overall my consensus is to wait another year to see how the housing market settles and see how capital gains plays out,” says DeRose. She bases her thoughts on the fact that Census Bureau Data indicates this is the highest housing inventory in history with 17.9 million housing units available. In addition, foreclosures are at an all time high.
“I am recommending to my clients that they do not purchase another home or one on contingency unless their home sells first. Otherwise, they could end up carrying two mortgages.”
“Over all, the real estate market won’t be strong till the spring of 2009,” says Bob Mecca, CFP, MBA, RIA, of Robert A. Mecca & Associates LLC. He recommends that people look now, establish a list of priorities and amenities and do their homework. Then, negotiate.
“Of course, Realtors will say to buy now, but the investment has to make sense and have appreciation potential,” he adds.
Mecca believes people should wait and see if the economic stimulus package takes hold as well as keeping an eye on the Federal Reserve rate. “If the Fed starts hinting that interest rates are done with, then is the time to start investing and flipping homes.”
“Many people believe that the earliest turn around will be in the second half of 2008,” Schwartz says, “while others believe it will not be till the first half of 2009. Other people think people will have a wait and see attitude until after the presidential election, which would prolong the market turnaround.”
The bottom line, Molony points out, is that all real estate is local, and people need to understand what is going on in their local market area before they buy. Internet research is an important first step, and you need to know if it is a buyer’s or seller’s market locally or if it is balanced.
Molony projects that home prices will stay flat this year, but 2009 will lead back to more normal market conditions with prices rising 3.1 percent.
There’s a Job Market That Knows No Age Limit. Online.
This is part 4 in the Stories from Strapped series. Previous posts in the series are: