Navigate the New Rules of Real Estate
By KATE ROCKWOOD
After taking a beating during the Great Recession, the housing market is finally staggering back to its feet—but millions of Americans are wondering: Is it safe to get back in the real estate game?
“It made so much sense at the time,” says Maura C. of the Chicago condo she and her husband purchased in 2009.
The 30-something couple—motivated in part by the $8,000 federal tax credit for first-time homeowners—decided to buy the $310,000 two-bedroom unit shortly after their wedding.
“I’d been a renter for more than a decade,” Maura says, “but I never doubted that I would eventually own. In my mind, it was an integral part of building a future for myself and my family.”
Fast-forward four years and their apartment is underwater. A neighboring unit went through a short sale last summer, going for just $220,000, and another condo in the building is on the market for $243,000.
Now pregnant with her second child, Maura wants to eat the loss and buy a larger home. “Prices are starting to come back up, and interest rates are so low. If we wait to get above water, we’ll miss our chance,” she says.
But first, Maura has to convince her husband, Paul. “He feels trapped by the whole situation,” she says. “For him, renting would mean regaining our freedom and flexibility. But I grew up dreaming of having a ‘forever home.’ I just can’t let go of that idea.”
Maura and Paul are not alone. As statistics hint at a budding housing recovery, millions are struggling with the same questions. Is it time to get back in the game? Can we trust the market again? And perhaps the most difficult question of all: Is owning a home still the right dream?
The Housing Horizon
One thing is certain, says Jed Kolko, chief economist and head of analytics for real estate site Trulia.com: “The rebound is real.” After U.S. home prices hit rock bottom in the first quarter of 2012 (plummeting nearly 30 percent since early 2008), they rose over the next nine months, according to the Case-Shiller home price index. The National Association of Realtors recently reported that the median existing home price in February was $173,600, up 11.6 percent from a year ago. And fewer listings are languishing, which means buyers are making choices faster. The median time it took to sell a house in January was 108 days, down from 119 days in January 2012, per Realtor.com.
“When any housing recession recovers, it goes like gangbusters,” says real estate mogul Barbara Corcoran. “But this is the fastest comeback I’ve seen.”
Celia Chen, a housing analyst with Moody’s Analytics, expects to see continued growth for the next few years. If you’re ready to buy a home, this is a good time to do it, she says. But in today’s post-bubble market, how should we define “ready”?
“Home ownership makes sense only if you can buy toward the future you want for yourself and your family,” says Ilyce Glink, head of the financial website ThinkGlink.com and author of Buy, Close, Move In! “You shouldn’t buy a one-bedroom condo if you want to have kids in the next five years. If you’re looking to retire but the thought of monthly payments keeps you up at night, you’re far better off skipping the mortgage—even if interest rates are at 3 percent. And whoever you are, you should plan to be there for a minimum of 10 years.”
That means staying not just in your home but also in the town and region. Think about the area schools and amenities, and how they’ll align with your needs over the next decade. Consider the stability of your current job, as well as your career prospects if your company were to close or lay off employees. In today’s job market, many workers find themselves having to relocate for new opportunities. In that scenario, a home—especially one that’s underwater or tough to sell—could become a millstone. During the Great Recession, the number of long-distance moves sank to record lows in part because many job seekers were trapped in a frozen housing market.
Before You Leap
Ready to start cruising the real estate listings? First, experts recommend taking three steps.
1 | Look at the local market.
National statistics don’t necessarily apply in your own backyard. “With real estate, it’s local numbers that really tell the story,” says Errol Samuelson, president of Realtor.com. “And the variances between local markets are staggering.”
On one end of the spectrum: the impressive comebacks experienced by some of the towns and cities most affected by the crash. Prices are up about 20 percent in Sacramento and Phoenix, for example. But buyers beware. “These high growth rates aren’t sustainable,” says Chen, and new owners shouldn’t expect huge price gains to continue year over year. “Twenty percent jumps are too good to be true for long.”
Elsewhere, the rebound is softer. New Jersey, Florida, and Illinois, among other states, require judicial foreclosures, a process that can drag through the courts, so distressed homes in those states will continue to trickle onto the market for years. Other economic factors come into play, too. “In Chicago, for instance, job growth is weaker than in most of the country, and the bubble didn’t hit as hard,” says Kolko. “That means prices are rising more slowly.”
2 | Investigate your ability to get a loan.
Today, banks are much more tightfisted than they were a few years ago, meaning it’s tougher to get a mortgage—much less those tantalizingly low rates—than ever before.
Generally speaking, a home buyer would need a credit score of 760 or higher for the best mortgage rates, says Lawrence Yun, chief economist for the National Association of Realtors. Even a respectable score of 700 to 720 may require additional fees, such as insurance. “Below 700, you’ll probably have to rethink your expectations,” says Yun. The good news: The credit market is expected to loosen this year or next, though interest rates may well rise at the same time.
For now, says Glink, the best way for buyers to look more attractive to banks is to make a bigger down payment—think 20 percent or even more. (This will, of course, have the added benefit of minimizing your monthly mortgage payments.)
“In years past, homeowners were getting mortgages with no money down or interest-only payments,” she says. “Now there’s been a sea change. More people are strategically buying less home than they can afford. They’re asking: How can I spend less than my max to afford the life I want to live?” And at a time when tens of millions of Americans are living paycheck-to-paycheck, that financial breathing room can mean the difference between security and sleepless nights.
3 | Reconsider your reasons.
“Housing should not be viewed simply as an investment vehicle,” says Chen. “I’m afraid that attitude could come back: Home prices start rising, investors pile into the market and cause prices to rise higher, soon everyone’s buying homes because they think they can make money. Over the long term—10 to 15 years—a home can be a decent investment. But no one should expect to make a killing just because they bought a house.”
Instead, think beyond investment: Have you found a home you can see your family growing in for a decade or more? Do you love the neighborhood and the people in it? Are there plenty of job opportunities within commuting distance?
“You should really be looking at properties you can see yourself in for 15 to 20 years,” says Leslie Piper, a consumer-housing specialist with Realtor.com. “We went through a period where too many people were taking leaps of faith. But buying isn’t about playing musical chairs. It’s about making a house into your home.”
Click here for our breakdown of old vs. new real estate rules.
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