Time to jump into housing market?

Amid all the bad news about the housing market, there is some good news—for buyers. Plummeting prices have made homes more affordable. And a new tax break could provide a federal income tax credit of as much as $7,500 for qualified first-time buyers.

Families earning the national median income of $61,500 a year could afford 56 percent of the new and existing homes sold in the third quarter of this year at a median price of $206,000, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index.   

That’s a respectable gain for previously priced-out shoppers. At the height of the housing boom, in the third quarter of 2006, the median family income could get you into only 40 percent of the homes sold then. The heyday of relatively cheap housing was the first quarter of 1999, when the index, which began tracking affordability in 1991, hit 70 percent.

How to get a loan when credit is tight

In today’s tight credit market, borrowers need to be in tip-top financial health and have the documentation to prove it. Here’s how to improve your chances of getting a loan with good terms.

Reduce debt. Lenders check how much of your income goes to pay your debts. Paying down big debts, which lowers your debt-to-income ratio, improves the odds that you’ll get a loan, says Jack Guttentag, creator of the Mortgage Professor’s Web Site.

Pay on time. Avoid late payments and take other measures to improve your credit record and score. For advice, go to www.myfico.com. It’s a gradual process that can take months or longer, so start today.

Check your credit report. Look for errors that could lower your credit score. As you probably know, federal law lets you get a free report from each of the three major credit-reporting agencies every 12 months. If you find errors, follow these steps to correct them.

Save up. Mortgage lenders in particular are looking at down payments. Some will want you to put down 20 percent, although you may be able to get a loan for less, depending on the type you’re applying for and your location, says Keith Gumbinger of HSH Associates, a company that analyzes consumer debt markets.

Gather records. Lenders no longer just ask how much you make and how much you spend. They want pay stubs, proof of rent or mortgage payments, copies of bills, and other documents.

Contact lenders beforehand. Learning the requirements for a loan in advance will help you determine how to become a more attractive borrower.

Shop around. Rates and other terms vary widely these days. Prudent lenders that remain well capitalized may be less restrictive than those licking their wounds because of the risks they took.

Borrow from the government. Various programs, including FHA-insured mortgages and federal- and state-sponsored student loans, are alive and, in most cases, well. Many are easier to get and have better terms than private loans. But you might need to tailor your request to meet their requirements.

Don’t overdo it. Even if you’re eligible, don’t accept a loan that you’re not sure you can handle. Follow these benchmarks to keep your borrowing within manageable limits.—Anthony Giorgianni

The wrong advice for these times

Count on someone in the mortgage business to start this perilous week with a pitch for bigger mortgages.

You read that right: Bigger mortgages.

After everything that's happened in the past year—to the mortgage industry, to the hapless millions who gorged on home debt and are now cash-starved renters, to real-estate prices, to Wall Street, to the limping economy in general—who would suggest homeowners go out and borrow more from their homes?

Gibran Nicholas, Chairman of the CMPS Institute, for one. The Ann Arbor, Mich. organization, which certifies mortgage bankers and brokers, suggests folks stop pre-paying their mortgages, max out their home-equity lines of credit, and in fact get a home mortgage if they don't already have one.

“Cash is king in a liquidity crunch,” said Nicholas in a press release sent today. “The worst thing you can do in this environment is dump more of your cash into your home equity because you may not be able to get access to it if you run into financial difficulties, if the housing market continues to decline, or if the credit crunch gets worse.  Although it sounds counter-intuitive, you should have as big a mortgage as possible—even if you don’t need it—and leave as much cash as possible in a safe, liquid place that is readily available to you. This empowers you to weather the storm and also have your funds available to take advantage of bargain opportunities that are becoming available because others have not followed this advice. In this environment, the one with the most cash wins.”

OK, we agree that having an insured, emergency account is very important. And perhaps you could redirect a mortgage prepayment into a cash account. Nicholas recommends checking to make sure all your investment and bank accounts are covered by insurance, which is always good advice.

But borrowing more? We don't think so.

Getting a primary mortgage is expensive. The points, origination fees, title insurance costs, filing fees, and many other costs can add up quickly into the thousands of dollars.

Plus, you are bound to pay that mortgage back, with interest. Unless the interest rate you're making on the cash you've taken out of your home is greater than the interest rate of your mortgage, you'll end up spending more by having the mortgage, even given the tax benefits. According to Bankrate.com, the average interest rate on a fixed, 30-year mortgage is 5.78 percent; the average rate for a 1-year certificate of deposit is 3.69 percent. It's 3.17 percent on a 6-month CD, and 2.39 percent on a money market account of greater than $10,000.

Borrowing on a home-equity line of credit is less expensive now than it's been in the past—the national average is about 5 percent for $50,000 borrowed, Bankrate says. But that's still more expensive that what you'll make in any super-safe cash accounts. If interest rates go up, that HELOC floating rate could rise to drown you.  And if you don't need all the money now, why pay all that interest on it?

Most important, if your job or regular income should shrink or evaporate, you could be in the same position as all those millions of former homeowners. Debt is debt. You owe it regardless of what's happening to your income. Millions of Americans learned that the hard way.

Yes, cash is king. Budget to put away a portion of your earnings each week or month in an insured account, and keep it there for emergencies. Ideally, you should stockpile 3 to 6 months of expenses. But please, don't get into more debt unless you are absolutely sure  you can pay it back.—Tobie Stanger

Home buyers should look beyond low prices for long-term values

The bad news in today’s housing market could be good news for you if you’re looking to buy a home. In many parts of the country home prices are falling and the inventory of homes for sale is growing—and likely to go higher as rising foreclosures add to the glut of homes on the market.

Single-family home prices dropped 7.7 percent in the first quarter of the year, the largest year-over-year decline since the National Association of Realtors began tracking metropolitan prices in 1979. The median sales price fell to $196,300, down 4.8 percent from the first quarter of 2007. With mortgage rates still at historically low levels—recently hovering around 6.5 percent for a 30-year fixed loan—the stage is set for home buyers to test the market.

But buying in this market is no cakewalk, especially given the challenge of securing a loan in a credit-crunched environment. With the widespread uncertainty over how much farther prices could yet fall, buyers must take extra care to get not just a lower price, but long-term value as well. “It’s true that today you can buy many properties for less than you could a year or two ago,” says Peter G. Miller, a nationally syndicated real estate columnist and creator of the Web site, OurBroker.com. “But property you buy still has to make good economic sense. If you’re buying a home in an area where the price of local property has gone down 15 percent, that doesn’t mean it won’t go down further—you could be looking at a false bottom.”

One thing most experts agree on: This type of market is best for longer-term buyers. “If you’re buying with the idea of selling again in two or three years, you need to be particularly careful,” cautions Steve Casper, owner of Comey and Shepherd Realtors in Wyoming, Ohio. “We can’t give any kind of assurance you’ll be able to recoup your selling expenses.”

Follow these tips to help secure the best deal you can.

Thoroughly research the area. It’s still true that real estate prices reflect local conditions, and we do mean local: at the neighborhood and community level. So before even beginning your search, scope out the listings for comparable houses in your price range and location. You can find them on Web sites such as Realtor.com, or ask a local real estate agent to do it for you.

In places where homes had meteoric rises in the last few years—as in parts of California and Florida—prices have been susceptible to a downward trend. In other areas, including much of the Carolinas, prices remain strong. You’ll want to find out the number of houses for sale in your chosen area, as well as the number of days houses have stayed on the market. When new inventory is increasing faster than sales, it’s a sign prices have further to fall.

Consider using a buyer’s agent. Though most people use a real-estate agent in their house hunt, brokers receive their commissions from the seller, and are obligated to get the highest sale price they can. A “buyer’s agent” works exclusively for the buyer, and so has a fiduciary responsibility to negotiate the lowest price possible. Typically a buyer’s agent charges a percentage of the purchase price—usually 3 percent, which comes out of the sales commission of the listing agent—or a flat fee or hourly rate. A buyer’s agent will help locate suitable homes, do the background research that helps in negotiating a fair price, and work out the terms of sale and contract contingencies.

Though there are agents who designate themselves as a buyer’s broker or agent, many also work for the same firms as listing or sales agents do. Their loyalties can be divided, notes Jon Boyd, an Ann Arbor, Mich.-based buyer’s agent who is former president of the National Association of Exclusive Buyer Agents, a professional organization that requires its members work in offices that do not accept listings.

“There are cases now where sellers are offering bonuses to agents who bring in a buyer,” he says. “But that information is only available to agents—the consumer never really finds out about it.” The NAEBA code of ethics requires the agent to disclose any bonuses up front.

Go beyond pre-qualified to pre-approved. Getting “pre-qualified” involves a very limited check of your finances, based on the information you supply the lender. Far more valuable is being “pre-approved” for a loan, which means the lender has independently checked your financial background as well as your credit rating, and has approved you for a specific mortgage amount. To get the best mortgage rate, you’ll have at least a 20 percent down payment and excellent credit. Make sure you’ve checked your own credit reports at least two months before you begin your home search, so you have time to address any errors or negative information that could affect your ability to get the best loan terms. You can obtain one free credit report a year from each of the three major credit bureaus by visiting AnnualCreditReport.com; you can get your FICO credit score and one credit report for $15.95 from myFICO.com.

Gathering information ahead of time is especially crucial for first-time buyers, notes Adorna Carroll, a buyer’s broker with Realty3 Carroll & Agostini/Valley Properties in Connecticut. “First-timers not infrequently come to the table with credit issues—lower FICO scores and sometimes a blemish on their report that needs an explanation,” she explains. “The process enables me to work with them and their loan originator to get them into a real buyer’s mode.”

Pre-approvals typically last from 30 to 45 days, but in these swift-changing credit markets it’s wise to check in with your loan originator before you execute a bid. “The mortgage market is so volatile,” says Judy Andersen, an exclusive buyer’s agent in New City, N.Y. “I know of a recent case where three days before closing, the bank didn’t fund the loan, and left buyers scrambling to find another.”

Look for leverage. Knowing how long a house has been on the market and why the owner is selling can give you extra bargaining power. “Sellers’ motivation makes a huge difference,” says Andersen. “If it’s a divorce or relocation, a new baby on the way and they need more space, then you’ve got a highly motivated seller.” (Another common scenario: the seller bought in the last few years and has a mortgage resetting at an unaffordable rate.)

Protect yourself. As the buyer, you write the purchase agreement, so you can include whatever provisions you want. A crucial one: a contingency clause that includes an inspection of the house that is satisfactory to the buyer. Once you have the inspection report, you’ll be able to identify what costs you may face in the next five years, notes Miller.

“Inspections are the most significant deal breaker,” notes Casper. He points out that some purchase agreements give the seller the right to correct any defects found, a version his firm no longer uses. “Some buyers were getting stuck with what they didn’t want to cure,” he says. “If there’s a serious foundation problem, you may not want the house under any circumstances; there’s no absolute assurance it will get fixed properly.” In the purchase agreement his firm now uses, “the buyer has the right to walk if the inspection isn’t satisfactory, and they don’t have to give any reason,” adds Casper.

Remember that even with the deafening drumbeat of falling prices, prices will depend on local market conditions. “If a property is priced right, and there’s a limited inventory within that dollar range, the buyer has less leverage,” says Carroll. “It’s the local market that determines who’s under the gun, and it’s not necessarily the seller.”—Barbara Bedway

Lower rates easing burden for some ARM borrowers

While Congress and the White House continue working on how to help homeowners with adjustable rate mortgage resets that have sent monthly payments through the roof, some relief is already on the way, thanks to lower interest rates.

ARM rates tend to follow movements in the short-term federal funds rate, which the Federal Reserve has lowered by 3.25 percentage points since last September. The index used for most hybrid and one-year ARMS, the one-year Treasury Constant Maturity, has dropped 2.3 percentage points in that time.

How much does that help? ARMs typically tack a margin of 2.75 percentage points onto the TCM index rate. Thus, a 3/1 ARM that had an initial rate of 5 percent when it originated in May 2005 would have reset to 7 percent this month if interest rates had stayed where they were before the Fed started cutting rates last year (assuming that annual adjustments are capped at 2 points, which is typical of many ARMs). Instead, the Fed cuts have brought the TCM index down to 1.93 percent, which results in a slight drop in rate—to 4.625—when the ARM resets. The drop cuts the monthly payment on a $300,000 mortgage to $1,547 from  $1,610.

The rate cuts are “absolutely” helping ARM borrowers, says Keith Gumbinger, vice president of HSH Associates, a mortgage-rate publisher in Pompton Lakes, N.J. “Even where they haven’t completely obliterated rate increases, they’ve ameliorated them.”

Lower interest rates only go so far, however, if the terms of the loans are stacked against the homeowner, as is the case with many subprime ARMs, according to data in a recent study (PDF download) by the Federal Reserve Bank of New York. For example, the 2/28 ARM, a subprime loan offered by New Century Financial, the second-biggest subprime originator in 2006, charged a “teaser” rate of 8.64 percent on average the first two years before resetting. Like many subprime mortgages, this one was tied to the 6-month London Interbank Offered Rate (LIBOR) index, with a whopping 6.22 points added as a margin.

So if last September’s 5.4 percent LIBOR rate remained in effect this month, this ARM would have reset to 10.13 percent. (A 1.49 point initial rate adjustment cap limits the hike somewhat.) Unfortunately, these loans reset every six months, so the rate would jump again to 11.62 percent in November (again assuming a 5.4 percent LIBOR). That would have added $6,610 to the mortgage’s annual cost.

With the recent rate drops, however, this ARM would reset to 8.9 percent (assuming the applicable LIBOR for a May reset remains where it stands now and for the rest of this year). That still increases the annual cost of the mortgage, but only by $770. “Subprime borrowers are not getting a lot of relief, but they’re no longer getting hammered,” Gumbinger says.

As if the New Century 2/28 was not anti-consumer enough, it also came with an interest rate floor equal to the teaser rate and a lifetime rate cap of 15.62 percentage points. Fortunately, 2/28 mortgages are now virtually defunct.—Jeff Blyskal

Smart moves for older homeowners (who’d rather not move)

For an upcoming report on products and services that can help older people make their homes safer and more convenient and thereby live there longer, one of our staffers recently covered the annual Aging in America conference in Washington, D.C.

We know that “upcoming” might not be soon enough if you’re already dealing with these issues for an older family member or perhaps for yourself. So, in the meantime, here are three of the most useful resources our staffer found:

• For a general overview of home modifications, as well as how to pay for them, the Eldercare Locator, sponsored by the U.S. Administration on Aging, offers this helpful fact sheet.
• Falls are the No. 1 cause of injury-related death among men and women over 65. Even when falls aren’t fatal, they often result in impairments that keep people from returning to their homes. The Fall Prevention Center of Excellence at the University of Southern California provides this list of resources.
• Vision loss is another common problem as we age. The AFB Senior Site, sponsored by the American Foundation for the Blind, has many simple, low-cost solutions to make a home safer for a visually impaired resident.

Recession’s bright side? Bargains for brave consumers

Let’s say you have some cash on hand, your job (or other source of income) is secure, and you love a good bargain. What opportunities might a recession bring?

First a disclaimer: Nobody, including us, knows what’s ahead for this economy or, indeed, precisely what’s happening now. (Recessions are officially determined after the fact by the National Bureau of Economic Research.)

However, the battle-scarred veterans of our Money team have seen our share of recessions, and some of us even took notes. Based on our collective judgment, here are some of the possible buying opportunities that consumers with cash—and the guts to spend it—may find:

Homes. Home prices are already down in many parts of the U.S. Where they go from here is anybody’s guess, but few of us would expect them to rise at a steep pace anytime soon. So if you’re in the market for a home, now could be a good time to start looking and get a baseline feel for the market—even if you decide to hold off buying for a while.

Mortgages. Interest rates are already relatively low, averaging 5.42 percent for a 30-year fixed-rate mortgage as we write this. Credit standards have been tightening, though, so expect higher hurdles in getting the very best rates.

Stocks. Some are sure to become bargains, but unless you’re a stellar stock picker, consider a no-load stock index fund and hope to benefit from an overall rise in the market. Keep in mind that stock prices will often start upward well before a recession ends, as investors look ahead to better times.

Credit cards. Our resident credit expert thinks people with good credit scores should have a golden opportunity to negotiate for lower rates. Issuers will want to hold onto creditworthy customers more than ever.

Cars. If demand continues to drop (sales for 2007 were down compared to 2006), carmakers and dealers will have to do something to move their wares.

Appliances and electronics. Ditto.

Luxury goods. Sales are already slowing, we hear, so high-end goods may carry less-high prices.

EBay stuff. People eager to raise cash may be auctioning off knickknacks and whatnots in record numbers. So that Pee-wee Herman doll or first edition of Proust you’ve long wanted could be yours for the clicking.

Home remodeling. Lower demand should mean more room to bargain and, possibly, less wait to get the work started. If you need to finance your home improvement, you might also find favorable borrowing terms if your credit score is high.   

Travel. Our travel expert says to expect fare cuts from the airlines, but beware of the carrier going bankrupt before you can use your ticket. Hotels and rental cars should see cuts too.

Other services. If it’s something consumers can put off until the economic clouds clear (cosmetic dentistry vs. an aching tooth, for example), demand should drop and prices along with it. And it rarely hurts to haggle—even in the best of times.

Recession ahead? Already here? Neither?

Nobody knows the answer to those questions or will for a while. But the dreaded R word is certainly in the air and the news at the moment.

What might a recession mean to you—and what should you be doing now just in case?

We dipped back into the CR archives to see what we had to say during the memorable recession of 1990-‘91. Our advice today would be much the same:

1. Get a grip on your cash flow. When you have a spare moment, make a list of your typical household expenses. Divide it into two columns: items you don’t have much immediate control over (mortgage or rent, for example) and those where you have more discretion (groceries, eating out, clothes, vacation travel, etc.).If you need to slow your cash flow in the months ahead, plan to attack the discretionary items first. You may also discover cash leaks you can plug right away—and should anyhow, recession or no.
2. Stash more cash. If you don’t already have an emergency fund, now would be a good time to create one. The conventional advice is to keep three to six months of living expenses in a reasonably liquid account, such as a bank or money-market fund. If you have a lot of assets, few debts, or rich relatives, you may be able to get away with less, but this is a good starting point.
3. Reduce your debts. You’ll waste less money on interest payments and reduce your overall monthly expenses. As a general rule, we noted in 1991, it’s best to keep monthly debt payments (apart from your mortgage) at no more than 15 to 20 percent of your take-home pay.
4. Consider your job. How well you’ll fare in a recession will depend in large measure on whether you can keep your customary income coming in. So try to be realistic about your job security as well as your employer’s prospects. It might be time to revise the old resume, just in case.

Remember, too, that recessions aren’t forever. The 1990-‘91 one ran for eight months, economists later determined. In fact, it was already half over by the time most articles like this started appearing.

Consumer Reports Money Adviser offers some additional tips on recession-proofing your finances.

Tips on selling your home in a slow market

If a for-sale sign is planted on your front lawn, it’s likely no surprise to you that home sales are slow. Sales of existing homes plunged 8.0 percent in September from the previous month, and stood at 19.1 percent below sales in September 2006, according to the latest figures from the National Association of Realtors. The national median price for existing homes of all types was $211,700 in September, down 4.2 percent from the $220,900 median a year earlier.

At the end of September, there were 4.40 million existing homes on the market, which NAR says represents at 10.5 month supply at the current sales pace. In a dismal market like this, what does it take to clinch a sale? Real estate experts say that sellers need to set a realistic price and be prepared for some hardball negotiating.

Consumer Reports Money Adviser offers the following tips to help your home stand apart from all the others on the market:

• Pick the right broker.  Look for agents who are listing, marketing, and selling in your area even if the market is slow. Visit potential brokers’ open houses to make sure they greet people, and show the home at its best, including details like removing pets.
• Know the real prices. To negotiate effectively you need to know if if deals in your area tend to include sweeteners. A house may sell for $400,000, but if the owner gave a 3 percent credit for deck repair and a new furnace, that’s a $12,000 reduction. Your real-estate agent should revise your deal to reflect what’s happening in your local market.
• Use staging to enhance your home’s appeal. A professional home stager can make over your home to de-emphasize your taste and make it more appealing to a broad range of buyers. A two-hour consultation can run around $300. Find staging pros in your area at www.stagedhomes.com or www.homestagingresource.com.
• Keep your MLS listing current. If it’s December and the picture of your house on the Multiple Listing Service shows your hydrangeas in full bloom, it’s a dead give away that your home has been on the market for awhile–and potential buyers may look elsewhere.

Calif. wildfires underscore need to review insurance coverage

The loss this week of more than a thousand homes to wildfires in Southern California brings into sharp focus the importance for all homeowners to have proper insurance coverage. Many of the homes affected by this week’s fires are likely to be compensated to some degree by homeowners insurance. Any home that still has a mortgage must also have homeowners insurance, and fire is a covered peril under the typical policy.

But many homeowners may find belatedly that their policies won’t pay as much as they had anticipated. Guaranteed replacement-cost coverage, which promises to finance the rebuilding of your home no matter what the cost, is either too expensive or impossible for many consumers to buy today. Some homeowners also forget to add coverage when they make additions to their homes; their original insurance may not cover the cost of rebuilding that additional space.

That’s why it’s important to review your policy regularly to make sure your policy is keeping up with the increasing cost of replacing or rebuilding your home. Click here for our advice on protecting your home and belongings.

Another peril for California homeowners who’ve lost their homes is the specter of being denied insurance for the next home they build. That happened to a number of Californians following the last major fire in San Diego in 2003. In response, Consumers Union, parent organization of Consumer Reports, this week urged California Insurance commissioner Steve Poizner to prevent insurers from refusing to issue or renew homeowners insurance policies based on claims from this fire and other natural disasters.

In addition, Consumers Union offers some useful information, including a resource list and some claims-filing recommendations, for California homeowners who’ve experienced a loss. For others, this concise guide will help you to prepare yourself for a natural disaster.—Tobie Stanger