by Vicki Gerson
Friday, April 18, 2008
provided by Bankrate.com  

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.

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.

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.

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