Thursday, February 12, 2009

For Some, It's Finally Time to Dive Into Housing Market

Wall Street Journal

February 11, 2009

For Some, It's Finally Time to Dive Into Housing Market


For years, even as her friends bought huge houses in the expensive Phoenix market, ElizabethChild remained a renter.But in January, the airline customer-service agent and her boyfriend closed on their first home.

The three-bedroom, two-bath house, complete with granite countertops and a pool, had been listedfor $340,000 in late 2007, but the couple bought it for $220,500. "Six months ago I didn't thinkI would own a home," says Ms. Child, 27 years old.

"And now I do. It's so perfect."Elizabeth Child and William McGeary were able to buy their first home after prices in Phoenixdropped sharply.The housing bust is creating a new group of winners: first-time home buyers.

People who sat onthe sidelines -- often watching wistfully as their friends became homeowners -- are suddenly ina position to grab some great deals. Indeed, first-time home buyers made up 41% of all buyers atthe end of 2008, up from 36% in 2006, according to a recent survey from the National Associationof Realtors.

The new buyers are being lured in by home prices that are down about 25% from their peak levelsin mid-2006, according to the S&P/Case-Schiller Index. In some markets, prices have dropped evenfurther -- slumping around 40% in Phoenix, Miami and Las Vegas. Lower mortgage rates have alsohelped make real estate more affordable, and as houses languish on the market longer, morehomeowners are willing to negotiate.

With Congress considering plans to sweeten a tax credit forfirst-time home buyers, the picture could get even brighter.

"Buyers are now coming back into those hard-hit markets to take advantage," says Lawrence Yun,chief economist for the Realtors' association. "It's a buyer's market."Ululani and Scott Larson looked for a house in the Seattle area several years ago, but held offfrom buying, deterred by the high prices.

"I felt like we were missing out, because everyoneknows it's the American dream to buy a home and build equity," Mrs. Larson says.The couple was shocked to discover recently that they could afford a four-bedroom home inFederal Way, Wash.

The assessed value of the home in January was $400,000, Mrs. Larson says.Their offer of $315,000, with a down payment of $15,000 was quickly accepted by the relocationcompany, which had had the property on the market for six months.

"Honestly, I didn't think we'dget as nice of a house as we did," Mrs. Larson says.Of course, would-be buyers need decent credit scores and the money for a decent down payment.Also, finding the right property can be a challenge for first-time buyers, who tend to beseeking less-expensive homes.

The typical first-time buyer purchased a home costing $165,000last year, according to the National Association of Realtors. Yet some of the best bargainsright now are in luxury condos and sprawling single-family houses.

"The disproportionate McMansion inventory doesn't work," says Shari Olefson, a real-estatelawyer who works in southern Florida. "Even if you qualify for the loan, there are huge overheadcosts to buying a larger home."

Still, real-estate agents and mortgage lenders are banking on first-time buyers to helpstimulate the otherwise dreary housing market. Many are holding workshops and informationsessions designed specifically for first-time buyers, addressing federal and state taxincentives for homeowners, local prices and ways to take advantage of low mortgage interestrates.

Tim Epps, a mortgage adviser in Tulsa, Okla., runs rent-vs.-buying simulations forwould-be buyers and recommends that other prospective buyers do the same long-term calculations.Mr. Epps and many mortgage lenders recommend that buyers come up with as big a down payment aspossible, even though Federal Housing Administration loans will allow some first-time buyers toenter the market with as little as 3% down. ( has more information about FHA loanprograms designed for first-time buyers.)

"Even if [a home owner] loses some paper equity, in the long run, there are some tax benefits,"says Mr. Epps, referring to the deduction for interest paid on mortgages and the credit forfirst-time home buyers.Elizabeth Child bought a home once listed at $340,000 for $220,500.

The $7,500 tax credit for first-time buyers, which Congress passed last year, has had littleeffect on the market so far. Because the credit has to be repaid, buyers are viewing it asanother loan, industry experts say.

But the stimulus package that Congress is working on islikely to repeal the provision that requires buyers to pay the credit back and possibly enlargethe tax credit as well.For many buyers, the biggest question is whether to hold out for even better conditions.Historically, recoveries in the housing market are slow, and most experts expect the prices tostay low for some time.

That means people can take their time shopping for the right property,real-estate experts say.John Stratton, an agricultural engineer in Lisle, Ill., was serious about buying last summer butheld off from making a bid.

Some of the money he planned to use for a down payment sufferedlosses from mutual-fund investments. He's also waiting for prices in his area to go downfurther. "I can do better investing in things other than real estate," he says. "Right now, I'mnot diving in."Patience can pay off. Jen and Drew Rocky spent over a year tracking their prey before the pricewas right.

In the summer of 2006, they saw the four-bedroom, 2½-bathroom home of their dreams inSherman, Conn. The asking price was $565,000, "completely out of our price range," Mrs. Rockysays.But they didn't give up.

The Rockys kept driving by the vacant house. They had online alerts tonotify them of changes in the property's listings. They went to town hall to research the home'spublic records. As they suspected, the home was in foreclosure.

"There were liens all over theplace," Mrs. Rocky says.They bought the home in December 2007 for $410,000. "I felt so vindicated," Mrs. Rocky says. "Wegot a good deal, but I'm sure there are even better deals out there."

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