Terms differ state-by-state, but most require borrowers to finance their home through a state mortgage finance program, which provides financing through approved lenders and generally features below market rates.  However, to be eligible, borrowers have to meet limits on income and on the cost of the property or size of the loan.  These limits can vary by locale, and will be higher in urban and suburban areas than in rural communities.

Most state down payment assistance programs are also restricted to first-time buyers despite the recent inclusion of existing buyers in the Federal legislation.  Some are reviewing their programs and including existing buyers, like Kentucky, which included existing buyers in its program as of December 1.

 Colorado offers homebuyers a 30 year competitive fixed interest rate first mortgage and a second mortgage for $6,000 or 3.5 percent of the home, whichever is less, to be used for down payment and closing costs. The second mortgage will be offered with a zero percent interest rate. For more information on the Colorado Housing and Finance Authority: www.chfainfo.com.

 In Delaware, the Delaware State Housing Authority (www.destatehousing.com) provides 8 percent second mortgage loans up to $10,000 to help pay down payment and settlement costs.  Borrowers must meet income and purchase size requirements. The program is open to existing as well as new buyers, but they must participate in homeownership education and the property must be inspected, 

Idaho’s Housing and Finance Association (www.ihfa.org) provides down payment assistance at zero percent interest, due on sale. Assistance, based on need, can range from $1,000 to $20,000 but it is limited to borrowers who earn less than 80 percent of the Area Median Income.  It is also limited to first-time homebuyer, displaced homemakers or single parents with custody of children. Borrowers must take homebuyer education.

The Illinois Housing Development Authority (http://www.ihda.org/) offers a second loan for down payment assistance through its Home Start program for first-time homebuyers.  The DPA Loan is a 10-year, zero percent, non-amortizing, forgivable loan in the amount of 3 percent of the purchase price up to $6,000.  Income and purchase price guidelines must be met and Homeownership counseling is required.

Kentucky provides first and existing home buyers six percent loans for down payments and closing costs that are not due until July 1, 2010.   Home buyers must obtain a Kentucky Housing Corporation KHC) first mortgage through an approved KHC lender, and they must meet KHC income and purchase price guidelines. Find out more here: www.kyhousing.org.

In Massachusetts, to qualify for the state-backed second mortgage the buyer must first receive a MassHousing loan through the state housing finance agency.  These mortgages have loan limits and income limits ranging from $119,000 to $80,300.and are limited to first-time buyers (www.masshousing.com).  Illinois also restricts participations to borrowers using state housing loans, which are available through approved lenders and have income limits. The Illinois Housing Development Authority is at: (www.ihda.org).

Maine gives a $2500 cash grant and a $500 coupon for an energy audit to buyers using state loans, pay at least 1 percent of the down payment from personal resources, take a homeownership education class. (www.mainehousing.org)

Missouri gives qualified, eligible first-time homebuyers a second mortgage of 3% of the loan amount to be used for down payment and closing costs.  The second mortgage is forgiven after five years of ownership. Buyers who don’t need down payment cash can use the second mortgage to reduce their primary loan.  Missouri also offers a advance in the form of a second mortgage at the time of closing worth up to 6 percent of the home purchase price or a maximum of $6,750, which is used to cover down payment and closing costs. The homebuyer then files for the federal tax credit and uses the credit refund to pay off the MHDC tax credit advance loan. The Missouri Housing Development Commission is at (www.mhdc.com).

For first-time buyers who are using state financing, Nebraska offers a second mortgage loan that advances up to 85 percent of the borrower’s tax credit at the time the regular first mortgage is closed. The loan bears interest at rates set periodically, with a maximum term of 10 years. If the homebuyer uses the tax credit refund from the IRS to repay the ABC-2 mortgage loan within 180 days of loan closing, the state will send a $500 “incentive” check to the homebuyer within 60 days of loan repayment. (www.nifa.org)

New Jersey’s “Prefund” program provides a loan to pay your down payment and/or closing costs.  It is limited to first-time home buyers who meet all of the requirements of the state financing, including income limits, and who are eligible for the Federal The loan is limited to $5,000 and secured by a second mortgage. Find out more at the New Jersey Housing and Mortgage Finance Agency (www.nj-hmfa.com)

New Mexico (www.housingnm.org) limits its tax credit down payment loans by the size of the property purchase price, ranging from $343,799 in Santa Fee to $237,031 elsewhere, and by income. Income limits range from $46,600 to $65,550.  The Tax Credit Loan Program provides a first-time homebuyer with a loan of 8 percent of the sales price or $6,500, whichever is less, to cover the down payment and closing costs associated with purchasing a home. After loan closing, the homebuyer may file for the federal first-time homebuyer tax credit and use the tax refund to pay off the Tax Credit Loan.

As of January 1, New York State (www.nyhomes.org) will offer cash advances of up to $8,000 on the Federal homebuyer tax credit for borrowers using a State of New York Mortgage Agency (SONYMA) mortgage to purchase a home. The advance can be repaid without interest when homeowners receive their Federal homebuyer tax credit after filing their annual tax return

The Ohio Housing Finance Agency (www.ohiohome.org) offers second mortgages to first-time buyers for up to 3 percent of the purchase price of the home.  Funds can be used for down payment, closing costs, or other prepaid expenses incurred prior to closing. Borrowers must already be participating in the state-s first time buyers program, which has loan and purchase limits. If a borrower takes advantage of the loan, t  he second mortgage interest rate will be fixed at 1 percent higher than OHFA’s current mortgage rates and payments will begin August 1, 2010.

Oklahoma (http://ohfa.org) also offers a homebuyer tax featuring no interest and no loan payments until August 2010. Eligible borrowers participating in the state financing program can get a second mortgage up to 3 percent fixed at 1percent higher than OHFA’s current mortgage rates and you will begin paying August 1, 2010.

Pennsylvania (http://www.phfa.org/) is one of the few states that includes existing home buyers in its tax credit program.  It allows borrowers participating in its first mortgage program to apply a portion of their 2009 or 2010 first-time homebuyer tax credit towards the purchase of their home by providing an advance in the form of a zero-interest loan.  First-time homebuyers are eligible for the lesser of 10 percent of the purchase price OR $6,000 for newly constructed homes, $5,000 for existing homes.  Non first-time homebuyers are eligible for the lesser of 10 percent of the purchase price OR $4,000 for newly constructed homes, $3,000 for existing homes.  Borrowers must invest a minimum of $1,000 of their own funds towards the purchase of their first home and the TCA can not be used to fund a down payment of over five percent. Due to limited funding, the program will be available to homebuyers on a first-come, first-served basis.  Loans closed in 2010 are due to be paid back to PHFA by June 30, 2011.

The South Dakota Housing Development Agency (http://www.sdhda.org) allows first-time buyers to use a portion of their First-time Homebuyer Tax Credit for down payment and closing costs in conjunction with a South Dakota Housing Development Administration First-time Homebuyer loan.  SDHDA loans have income and purchase size limits.  If the loan is not paid prior to June 1, 2011, interest of 6 percent will begin to accrue and monthly payments, for 5 years, will begin on July 1, 2011.  The maturity date of the ATC Loan is June 1, 2016.   Eligible properties include properties that were not acquired from a related person, which includes a corporation or partnership, or by a gift of inheritance. 

The Tennessee Housing Development Agency’s  (www.thda.org) Great Advantage Program offers a slightly higher interest rate loan secured by a first mortgage for down payment and closing costs.  The program, limited to low- and moderate-income borrowers, provides down payment and closing cost assistance of 2 percent. The Great Start program offers a loan at a slightly higher interest rate, secured by a first mortgage, but offers assistance with down payment and closing costs of 4%. The Stimulus second mortgage program — available only in conjunction with Great Rate and Great Advantage — offers assistance with down payment and closing costs of up to 3.5% of the property’s purchase price.

The Texas Department of Housing and Community Affairs (www.tdhca.state.tx.us) recently released a new First Time Homebuyer Program that offers a 10-year deferred forgivable 2nd lien for down payment and closing cost assistance. The amount of assistance is up to 4 percent of the 1st lien mortgage amount. The 30-year first lien fixed interest rate is a competitive 6.25%. The program is limited to first-time buyers, and has limits on income and purchase price.  Pre-purchase homebuyer education course required.

In Virginia, the Virginia Housing Development Authority (http://www.vhda.com) offers a First-time Homebuyer Tax Credit Plus loan that allows borrowers to use the federal First-time Homebuyer Tax Credit for a down payment on a VHDA mortgage up to 5 percent of the sales price. The loan has a built-in second mortgage to help cover the down payment and closing costs, with zero interest and no payments for the first 12 months.  It has income and purchase price limits, and is available only to first-time buyers.

Here’s another site to check for updated information on state housing programs. http://www.ncsha.org/resource-center.

The effective date is the date of enactment, presumably today November 6,*  for the enhanced first-time buyer credit and for the new credit.  It is not retroactive.  However, first-time buyers who have been rushing the meet the November 30 deadline for the existing program need not worry.  They can qualify under the new one.  Existing homeowners who are also in the process of buying a home should consider delaying closing until December 1 or later to qualify for the credit.

Both credits expire next spring.  Buyers must have a contract on a home before May 1, 2010 and they have until June 30, 2010 to close in order to qualify.

Key Provisions

Amounts: 

• The first-buyer credit remains 10 percent of the cost of the home or $8ooo, whichever is less.
• The credit for existing homeowners is 10 percent of the value of the new home or $6500, whichever is less.

Definitions:

• A first-time homebuyer cannot have owned a home during the past three years.
• Existing homeowners must have owned and lived in their current home five out of the preceding eight years.
• Only principal residences qualify. No second homes or investment properties.

Income limits:

• The measure raises the income limits for those claiming the credit to $125,000 a year for individuals and $225,000 for couples, up from $75,000 and $150,000 in the previous first-time buyer credit. After that, the value of the credit phases out.
• The cost of the new home cannot exceed $800,000.

 Cost:

•  Expanding the home buyers’ credit will cost about $11 billion.  The total cost of extending the first-time buyer credit and adding the existing owners’ credit is $16.7 billion.

 How to Apply::

•  Use IRS form 5405, which you file with an amended tax return.
• For more information on applying, go to http://www.irs.gov/newsroom/article/0,,id=204671,00.html

CORRECTION:  The effective date is the day the legisolation is signed into law, not December 1 as previously reported.

To decide which mortgage is right for you, consider which circumstance each is designed for.

30-Year Fixed Rate This is the most comment type of mortgage.  It calls for exactly the same payments over a thirty year period. With the passage of time, you will pay more and more on the principal and less interest, which will increase your equity , or ownership, of your home but reduce the amount you can deduct on your taxes under the mortgage interest deduction.  The burden of this loan will ease in time as inflation–and your potential wage growth–makes the payments seem smaller. The only relative disadvantage is that the payments will be higher than those initial low teaser rates of an ARM, so you won’t be able to afford as much of a house.

15-Year Fixed Rate If you can afford it, a 15-year mortgage offers quicker repayment and faster growth of your equity. You save a great deal in interest over the life of the loan, because the rate is usually lower than a 30-year loan.

5/1 Adjustable Rate Mortgage An adjustable rate mortgage allows you to start off with low payments and afford more house now. Two numbers identify these loans: the first is the number of years until the rate resets and the second is how often it will reset. A 5/1 ARM will reset after five years and never again.  ARMs are for people who expect to move before the rate jumps or people who expect their income to rise significantly.  Be careful.  Thousands of people took out ARMs during the housing boom expecting to me able to sell or refinance at a profit.  When prices fell, they found themselves “under water”?owing more on their home that it was worth.  If you expect your income to rise or to pay off a big expense (such as school loans) they might be right for you, too. 

The lender sets the interest rate by adding a margin to an index rate. Common indexes include:

 Cost of Funds Index. The Eleventh District of the Federal Home Loan Bank Board, which covers California, Nevada and Arizona, publishes the Cost of Funds Index. For more information on the index, visit the Web site of the Federal Home Loan Bank of San Francisco.

 Treasury bill yields. The yied on the 1-year T-bill, adjusted for a constant-maturity security, is widely used.

 Most ARM loans have a periodic rate cap and lifetime cap to limit the amount the interest rate can increase each adjustment period and over the term of the loan, respectively. If you have a payment cap in your loan agreement, you may face negative amortization of your loan. This has the effect of increasing the amount you owe.

 Convertible Mortgage Loans. These are ARM loans that allow you to convert to a fixed-rate loan at or before a specified time. The conversion privilege lets you start off with a low variable rate, then lock in when fixed rates drop low enough.

Balloon Mortgage Loans. These loans often have interest-only payments. In this case, you don’t amortized any loan principal and the entire loan amount is due at the end of the loan term. A balloon mortgage allows you to minimize your monthly payments until you refinance the loan. Another advantage is that a larger share of your payment may be eligible for the mortgage interest tax deduction.

1/1 Interest Only Loans.  An interest only mortgage allows buyers to pay just the interest on a mortgage initially. Then, payments rise. People who take out these loans are typically counting on their house value to rise, a strategy that got a lot of people in trouble.

Option Loans You can decide each month whether you’ll just pay the interest or work off some principal. This mortgage is designed for those with an erratic income, say, someone who gets a big bonus. The minimum payments are so low that you may actually sink deeper into debt with each minimum payment.

40-Year or 50-Year Mortgages. You can get slightly lower monthly payments by stretching out the loan for a decade or two, but at a high cost. Someone with a 30-year $300,000 mortgage would pay $1,837 a month, for a total interest cost of $361,466. By stretching the loan out for 50 years, they would only save $213 a month and end up paying about $300,000 more in interest

Reverse mortgages, the kind of loans marketed by aging celebrities to seniors interested in converting the equity in their homes into cash, aren’t the safe haven they are portrayed by marketers, according to a General Accounting Office report released in July.

In fact, there is growing evidence that reverse mortgages, also known as Home Equity Conversion Mortgages, offer a ripe field for mortgage fraud.  Reverse-mortgage schemes have the potential to increase substantially,” according to the Federal Bureau of Investigation and the Office of Inspector General at the U.S. Department of Housing and Urban Development which oversees the federally insured loans that account for some 99% of the reverse-mortgage market. The FBI is investigating 13 times as many cases of fraud this year as last, involving hundreds of properties.

Various types of fraud have been popping up across the country, including organized schemes of systematically inflating house appraisals to increase the lender’s profit off the senior and the federal government.  With the government’s role backing these loans, the lenders have very little to lose. One scheme, prevalent in the Upper Midwest and Southeast, involves the use of “straw buyers” and flipping properties. Speculators purchase distressed properties and, with the aid of cosmetic repairs and inflated appraisals, deed them to senior straw buyers at above-market prices. Seniors—some of whom may be part of the scheme—typically are promised homes for no money down. In return, they secure a reverse mortgage and divert some, if not all, of the proceeds to the scheme’s promoters. Regulators say promoters have even recruited seniors from homeless shelters.

The Office of the Comptroller of the Currency recently issued a consumer advisory designed to help you better understand reverse mortgages and decide whether they are right for you.  Below are the key points to remember.

What Are Reverse Mortgages?

A reverse mortgage is a loan secured by your home that lets you receive payments from the lender—either over time or all at once—based on the value of your home at the time of the loan. As you receive payments, these amounts are added to your loan balance. Interest is charged on the outstanding balance, so even if you do not receive any further payments from your lender, the loan balance continues to increase.

Who Can Obtain a Reverse Mortgage?

Generally, to obtain a reverse mortgage, you must be a homeowner at least 62 years old, must use the home as your primary residence, and must have either no current mortgage or a mortgage balance low enough that you can pay it off with funds from the reverse mortgage.

Are There Different Types of Reverse Mortgages?

Yes. And the differences can be important. For example, most reverse mortgages are made under a Federal Housing Administration (FHA) program. These loans (called Home Equity Conversion Mortgages or HECMs) have government insurance that protects not just the lender, but also the borrower. If the lender becomes unwilling or unable to make payments due to the borrower, the government steps in to make them. Other reverse mortgages do not have this guarantee.

.How Much Can I Borrow?

That depends on many factors, including your age, the value of your home, and applicable interest rates at the time you obtain the loan and over the course of the loan. Generally, the amount of your loan will be larger the older you are, the more valuable your home is, and the

lower that applicable interest rates are. How do I get my payments? Reverse mortgages can be very flexible about this. Depending on the type of loan you get, you can take out the funds in fixed monthly payments that last either for a set period of time or for as long as you stay in the home, as a line of credit that permits you to take out funds as you see fit, in a single lump sum (or a single draw on a line of credit), or in some combination of these options.

How Do I Get My Payments?

Reverse mortgages can be very flexible about this.  Depending on the type of loan you get, you can take out the funds in fixed monthly payments that last either for a set period of time or for as long as you stay in the home, as a line of credit that permits you to take out funds as you see fit, in a single lump sum (or a single draw on a line of credit), or in some combination of these options

How Much Will it Cost?

Like many home loans, reverse mortgages have both interest and fees charged over the life of the loan and upfront costs due at closing. These up-front costs generally can be “financed”—not paid out-of-pocket at closing but added to your loan balance instead. Reverse mortgages may have relatively low interest rates, but they can still be expensive compared with other home loans in other respects, primarily because of mortgage insurance premiums and other up-front costs. The interest rate on a reverse mortgage may be variable, increasing or decreasing with the “prime rate” or some other measure of market rates.

How do I repay the loan?

In a reverse mortgage, you do not make monthly payments of principal and interest to the  ender. Instead, interest and fees are added to your loan balance. Unless you make “escrow” payments to your lender, however, you are still responsible for paying property taxes and insurance when they are due.

When do I have to repay the loan?

Generally, you do not need to make any payments until you stop using the home as your primary residence—for example, when you sell the home, no longer live in the home, or pass away. The loan then becomes due. Your obligation to the lender will be limited to the lesser  of the amount due or the value of the home at the time, unless you or your heirs want to keep the home. To keep the home, you or your heirs would need to pay the full amount you have received, plus all accumulated interest and fees.

Can I lose my home before I’m ready to move?

Yes, under limited circumstances. With a reverse mortgage, you keep title to your home, but you remain responsible for property taxes, insurance, and home repairs. If you fail to pay  taxes and insurance or fail to maintain the home, the mortgage may become due and payable, and you could lose your home through foreclosure. Of course, if your lender requires a

monthly “escrow” payment for property taxes and insurance, that risk can be reduced.

Is a Reverse Mortgage my Only Option?

Keep other options in mind. Other loan products, such as standard mortgages and home equity lines of credit, may make more sense for you, depending on your financial situation and needs. Other financial options—from drawing on retirement plans to selling the home—should also be considered. In addition, your community may offer home repair or other services to assist you, and you may be eligible for public benefits.

What About Annuities that are Offered With a Reverse Mortgage?

Be wary of anyone trying to sell you other products along with a reverse mortgage. Because a reverse mortgage can give you access to a large amount of funds, it can make you a target for aggressive sales pitches for expensive and

inappropriate products or services. You should generally steer clear of anyone trying to sell you other products—such as annuities, long-term care insurance, investment programs, or home repair services—along with a reverse mortgage.

Should I Get a Second Opinion?

Get a housing counselor.  A reverse mortgage is a complex loan secured by your

home. Whether such mortgages make sense for you depends on your financial situation and needs. For these reasons, we strongly recommend that you consult with a qualified, independent housing counselor in a face-to-face counseling session before making this decision. Housing counselors can help you learn about reverse mortgages, identify and evaluate the available alternatives, and understand the potential consequences of reverse mortgages, including the impact on your taxes, benefits, and heirs.

Financial advisors or housing counselors can help you find other financial options or community or government programs that may meet your needs. A reverse mortgage usually makes more sense the longer you are planning to stay in the home. This is because the high up-front costs make the first years of the loan relatively expensive. For example, a borrower who uses a reverse mortgage for only a couple years can have an annual loan cost several times greater than a similar borrower using the reverse mortgage for a decade or more. For this reason, it is very important to have a realistic understanding of not just your life expectancy but also how long you can afford the expenses related to your home—including utilities, property taxes, insurance, maintenance and repairs, and condo fees—and how long you are physically able to keep living there. In considering these factors, you should bear in mind that the average HECM borrower remains in the home for only six years after obtaining the reverse mortgage.

·         Find housing counselors at the U.S. Department of Housing and Urban DevelopmentWeb site at www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm. Or call 1-800-569-4287 or1-877-483-1515.

·         Visit NeighborWorks America’s Web site at www.nw.org/network/home.asp.

For More Information

·         •AARP Foundation, Reverse Mortgage Education Project www.aarp.org/revmort

1-800-209-8085

·         • U.S. Department of Housing and Urban Development www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm

1-800-CALL-FHA (1-800-225-5342)

·         National Association of Reverse Mortgage Lenders

www.reversemortgage.org/Home/tabid/63/Default.aspx

·         National Council on Aging (information about government assistance programs and other alternatives to reverse mortgages)

www.benefitscheckup.org

The FBI reports that the number of mortgage fraud reports last year increased more than 36 percent to 63,173.  In five years, the Bureau’s caseload of mortgage fraud cases has tripled.  Though no records are kept of total losses, they are measured in billions of dollars. The FBI defines mortgage fraud as “any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.”

Rescue scams and mortgage modification schemes are only the latest in a variety of swindles designed to defraud homeowners.  These include misrepresenting the terms of loans, falsifying documents, paying fees up front for services that are unnecessary or never materialize, “builder-bailout” schemes where developers unload excess inventory through financial trickery, seller-assistance scams that use false appraisals to sell homes, and identity theft that leads to home equity credit lines being opened and drained.

Here are some other common examples of mortgage fraud from the National Consumers League.

•  Upfront Fee Scam. A fraudster promises, for an upfront fee, to negotiate with homeowner’s bank to pay down back-payments, but he ultimately takes the money and disappears.
• Lease-back or repurchase scams. Con artists promise to pay a mortgage and lease it back to their victims if the consumer signs over the deed. The scammer then raises the rent, sells the house, steals equity, or even evicts the tenant.
• Refinance fraud. Victim signs over ownership of the house, thinking that they are signing documents for a new loan at a lower payment level.
• Bankruptcy schemes. The scammer encourages the victim to stop paying their mortgage and offers to file bankruptcy for the consumer, for a fee.
• Appraisal fraud. An appraiser - in cahoots with a lender - overvalues the home, and then secures an unnecessarily large loan at high interest rates for the homebuyer. Another scenario is that the appraiser undervalues the home in order to justify a short sale and subsequent re-sale at market value for profit.

The FBI, the Treasury Department and state attorneys general across the nation are working together to crack down on mortgage fraud.  New resources are paying off as indictments and convictions increase.

The best defense, however, is education.  Here are some tips and advice from the FBI’s Mortgage Fraud Website that will help you identify potentially fraudulent practices and avoid becoming a victim.

• Get referrals for real estate and mortgage professionals when you want to buy or sell a home. And once you do, check out their licenses with state, county, or city regulatory agencies. If they are a Realtor, check with your local board of Realtors. Most of these people are exceedingly honest and above-board-it’s just a small percentage who has given the overall profession a black eye.
• Do your own research into what other homes in the neighborhood have sold for to get an idea of what your house is worth. Also, look into recent tax assessments of neighborhood homes. Don’t let anyone talk you into selling your house for less than it is worth.
•  Beware of “no money down” loans. These have been used to talk people to buy a home they really can’t afford.
• Don’t let anyone talk you into making a false statement on your loan application, like overstating your income or lying about where your down payment is coming from.
•  Never sign a blank document or a document containing blank lines. You will be bound by whatever you sign. Don’t let someone tell you, “We’ll fill that in later.” Be sure to read and review all loan documents signed at closing. If you don’t understand, don’t sign. Don’t be afraid to ask questions or take the unsigned document to someone you trust to help you understand it better. If you don’t understand what you’re signing, get an attorney who can review the documents for you.
• Understand the costs of the loan and what is covered. Your loan can include the actual amount you’re borrowing, Private Mortgage Insurance, and closing costs. Make sure your loan is not “packed” with premium credit insurance add-ons that you don’t understand or want.
• Financial difficulties? If you’re a homeowner who’s having a tough time making your mortgage payments, be wary of e-mails, TV ads or web-based ads from companies who claim they can help you eliminate your mortgage debtwhile all you have to do is pay an up-front fee for them to do the paperwork-it’s a scam. Never pay an up-front fee for a loan modification.
• If you’ve been told by your lender that you are facing foreclosure, don’t fall for any of the fraud schemes out there, including the one where a perpetrator convinces a homeowner to sign over the house deed “temporarily”-for a fee, of course. The homeowner not only loses the up-front fees, but the perpetratoroften turns around and sells the house out from under the owner.
• Contact your lender beforeyour situationgets too bad. Most will work with you to help you keep your home.
•  If you think you’ve been victimized, contact your local FBI field office.

There are literally thousands of mortgage products available today.  Some are highly risky and many buyers have gotten themselves into serious financial trouble because they did not take the time to understand their obligations.  Find the one that fits your particular financial situation.

Prepare your documentation and credit.

To prepare a mortgage application you will need detailed information about yourself, your employment record, and the house you want to purchase. You will need to document your personal finances–your earnings, your monthly expenses, and your debts.

Check your credit record on all of the three major credit rating bureaus: Experian, Equifax and Transunion.  Take steps to make sure each is accurate by carefully reviewing them.  You have a right to know what information is contained in your credit report and to have someone from the credit bureau help you understand what the report says.  Lenders will examine your credit record to learn if you pay your bills on time and decide how much of a credit risk you pose. You may not qualify for certain loans, pay a higher rate of interest or have your application for a mortgage rejected altogether if the report shows that you have a poor credit history.

Determine how much house you can afford.

Assess your financial ability to handle a mortgage by preparing an estimate of your monthly income and loan payments.  Total your before-tax income including salary, commissions, investment income and interest.  Then calculate your monthly loan payments including all outstanding obligations, credit cards, student loan, alimony, etc that won’t be paid off within ten months.  The balance is the absolute maximum you will have available for a monthly homeownership costs: insurance, property taxes, and mortgage payment.

Apply for pre-approval.

It’s far better to be preapproved for a loan than to be prequalified. If you have good credit you can become pre-approved for a loan before you start looking for a house. 

Shop around for a lender before you shop for a home.  Shopping takes time and energy, but not shopping around can cost you thousands of dollars. You can get a mortgage loan from mortgage lenders or mortgage brokers. Brokers arrange mortgage loans with a lender rather than lend money directly; in other words, brokers sell you a loan from a lender. Neither lenders nor brokers have to find the best loan for you–to find the best loan, you have to do the shopping.

Many consumers accept the first loan offered and don’t realize that they may be able to get a better loan. On any given day, lenders and brokers may offer different interest rates and fees to different consumers for the same loan, even when those consumers have the same loan qualifications. Keep in mind that lenders and brokers also consider the profit they receive if you agree to the terms of a loan with higher fees, higher points, or a higher interest rate. Shopping around is your best way to avoid more expensive loans.

Ask your lender to pre-approve you based on what your finances indicate you can afford and the down payment you intend to make. Armed with a preapproval letter, you can focus on homes you can actually afford to buy.  Sellers will be more likely to immediately accept your offer, even if that offer is for less than list price, because you are giving the seller peace of mind that their home is sold.

When reviewing your projected mortgage payment and existing debt, some lenders might use ratios such as “28 and 36″ to determine whether you qualify for the loan. These are commonly used ratios.

In the case of “28 and 36,” the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage): the monthly payments on your outstanding debts, when added to the monthly housing expenses, may not exceed 36 percent of your gross income. When you talk to a lender, find out what ratios will be used to evaluate your application.

Be prepared to document your income (W2 forms) for past years and year-to-date (pay stubs), current debts (account number, outstanding balance, and creditor’s address for each), and the purchase contract for the home you want to buy. When you file your application, ask the lender how long the approval process will take. The time may vary depending on the complexity of your mortgage, current market conditions, and whether you have to provide additional information. It’s common for a decision to be made within 30 days after the lender receives all the necessary information. Applications for FHA or VA loans may take longer.

Apply for a mortgage. 

When you have negotiated a contract on a property, the lender will hire a real estate appraiser to give an opinion about its value based on the condition of the property and the recent selling prices of comparable properties nearby. Lenders usually will lend the borrower up to a certain percentage of the appraised value of the property, such as 80 or 90 percent, and will expect a down payment making up the difference. If the appraisal comes in less than the asking price of the home, the down payment you planned to make and the amount the lender is willing to lend you may not be enough to cover the purchase price. In that case, the lender may suggest a larger down payment to make up the difference between the price of the house and its appraised value.

If your application is turned down, Federal law requires the lender to tell you, in writing, the specific reasons for the denial. Make sure you understand the reasons given–you may be able to find answers or alternatives that will satisfy the institution’s lending standards. Even if that doesn’t happen, understanding fully why the loan was denied may improve your chances with the next lender you visit. Factors that may affect the loan decision include:

Searching on line make sense.  Buyers who use the Internet spend 2.2 weeks on average looking for a home with an agent whereas traditional buyers spend an average of 7.1 weeks?[1]   Typical buyers search a total of ten weeks and physically visit ten homes before buying. [2]

 When you look at listings on a Web site, can you be confident about the information you are reading?  Are you sure that the data is current and complete?  Are the pictures a fair representation of what the property really looks like?  How can you find out about the neighborhood?  Are you taking advantage of the latest tools the better sites have developed to help you find your dream home?

About Search Sites

At any given time, you can find between four to six million US residential properties for sale on the Internet. However, you only want to find one-the perfect home for you and your family.

 When it comes to search sites, though, most people use more than one-three in fact or as many as seven, according to a recent study.[3]  Different sites serve different purposes.  The large, national sites are great for relocators and for people who want to get a feel for what’s available.  You can add local MLS and brokerage sites for an additional look at local properties when you have a good sense of the community where you plan to buy.

 There are several kinds of search sites:

Third Party Aggregators.  These sites often offer valuable services in addition to listings, such as home valuation, neighborhood search, mortgages, and help finding a real estate agent.  Examples are Realtor.com, Yahoo Real Estate, Zillow, Cyberhomes and Trulia.   National listing sites operated by the large franchises like ReMax and Coldwell Banker operate in much the same way.

 MLS Sites  Multiple listing services (there are about 900 in the US) are organized and owned by local Realtor organizations, in most cases.  They pre-date the Internet and were created to help real estate brokers, not consumers, buy and sell property for their clients and customers. Today MLSs remain the primary local databases of homes for sale, except that most do not carry homes being sold by directly by owners without the help of a professional. They are the source of information for local brokers who carry information about all the homes for sale on their sites and they are they primary source for national third party sites.  Brokers who are members of the MLS are required to list properties they represent on the MLS within seven days of signing up the seller.  Though their first responsibility is to the brokers who own them, more and more MLSs are creating consumer-facing Web sites.  These are one layer closer to the properties for sale than the national sites or local brokers’ sites, except for properties the local broker represents.  Here’s a directory of consumer-facing MLS sites http://mlscloud.com/

Virtual Office Web Sites.  As the name implies, these sites act as “virtual” real estate brokerages and to access their listings, you must register.  They get their listings from MLSs. Examples of VOWs are ZipRealty, Redfin and Sawbuck.

 Local Brokers.  Brokers who are members of multiple listing services can operate sites that list all properties for sale in the MLS, including those listed by competitors.  The information comes from a feed from the local MLS, updated at least.  Homes represented by the broker hosting the site are usually highlighted.  Information about those properties is fresher on the host broker’s site than anywhere else on the Internet.  Sometimes it can take national aggregator sites days to receive and post data originating from a local broker.

 Local Newspapers.  Newspaper sites may contain MLS listings as well as listings from classified ads.  Newspaper classifieds are a rapidly declining option for home sellers, and even the largest carry only a fraction of the local homes for sale.

 Tips on Using Search Sites

Privacy.  Some sites, such as virtual office Web sites, require you to fill out a registration form to access listings.  These are known as Virtual Office Websites and the information may be distributed to real estate agents who will contact you if you give permission.  Check out their privacy policies before proceeding. To register for search agents that automatically email you with updated information on homes you are interested it, all sites will ask for your name and email address.  Again, check to see that they have a policy protecting your privacy.

Search Agents.  One of the most useful features of search sites is search agents.  Once you enter a zip code, house type, size and price range for your search, the site has enough information to email you updated information on new listings that fit your profile and changes in existing listings, such as sales and price reductions.  You can activate search agents on several kinds of sites to ne sure that you don’t miss important information.  Once you have found your home, be sure to cancel you’re agents or you will receive updates forever.

 Neighborhood Information and Local Market Data.  National aggregator sites like Realtor.com, Zillow, and Trulia have introduced features that help you understand local real estate market trends and give you a wealth of information about local neighborhoods ranging from school ratings to heat maps showing home values and recent sale prices.

 Financing. The trend today among real estate sites is “one-stop shopping.”  That means they want to provide you services in addition to the search, especially a mortgage.  Some sites provide sophisticated wizards and widgets that help you accurately estimate mortgage and closing costs involved in the sale even as you are browsing the listing.  They help you understand how changes in property prices, mortgage rates, loan terms, closing costs and your credit directly affect the range of houses you can afford.  However, you are under no obligation to obtain a mortgage from the site where you found your home. 

Accuracy.  The listing information and photos you see on a search site were entered by a real estate professional (unless you are looking at a “for sale by owner” site) is generally reliable, accurate, and current-but not always.  A recent study found that accuracy improves with proximity to the source of the data. MLS sites were most accurate.  Sites fed by MLSs such as brokers sites and national aggregators were only slightly less accurate-98 to 96 percent.  The small percentages of differences occur because IDX data is typically refreshed once a day. Any home that gets sold, newly listed, expired, or has had a price change gets updated within 24 hours.

 Q&A

I am trying to sell my house.  Can I put it on a search web site myself? 

In order to get your house on the most popular web sites, you must list it with a broker who is a member of the multiple listing service.  Once it is on the MLS, it will automatically appear on other sites, including the sites of other brokers in your region, VOWs and national sites that have agreements with your MLS.  However, some national sites like Zillow will also take listings directly brokers or owners.  If you have no agent, you can also list on “for sale by owner” sites.

 I found a home online I really liked and I sent an email to the listing agent, but have yet to hear back.  What should I do?

Find the home page of his or her agency and send another to the owner or top broker.  Sometimes busy people miss an email now and then, so don’t assume it’s for lack of interest.

The blurb describing the property tells me more about the agent who wrote it than it does the home itself.  Is that typical?

Agents are expert at writing descriptions that sell, and they realize how hard it is to sell you on a home via an Internet listing.  They do their best to pique your interest in the next step, a walk-through.

 What can you really tell from the photos on a listing?

Listings feature photos because they know that’s what attracts buyers.  Some listings have as many as 25 large color photos to show all the home’s selling features.  They are usually taken by professionals to show off a home at its best, just like a portrait shows off a person at his or her best.  You won’t see trash on the drive or weeds in the lawn or the house across the street.  Always visit the property yourself before you put a contract on it.

 How will a listing differ from one site to another?

In most cases, it won’t Only if you are looking at the listing on the site of the listing broker who actually represents the property, you might see more photos or narrative-and you can be sure that the information is as up to date as it is anywhere else on the Internet.

There is an error in the listing for my home.  What should I do?

Contact your real estate agent immediately.  Only he or she can correct the mistake on the MLS, which is the source of information accessed by other Web sites.  If you don’t have an agent and placed the listing yourself on a For Sale By Owners site, you must contact the site directly. 

[2] NAR 2006 Profile of Home Buyers and Sellers http://www.realtor.org/Research.nsf/Pages/reportsbuysell?OpenDocument

[3] To Buy or Not To Buy -Finding Your Dream Home Online. eVOC Insights LLC

http://www.evocinsights.com/reports.html

 During the very depths of the housing recession, sales and prices were strong in places like central Texas, Alaska and the Rocky Mountain states.  During the boom years, markets in the Midwest like Omaha or Detroit hardly felt it.

How can you find out whether it’s a good time to buy or sell in the market you live?

Defining Your Market

First, you need to define what you mean by “local.”  To appreciate the impact of location, geography, services and other factors that create appeal for real estate, try to break the area where you want to live into the smallest discrete units for which you can get useful information.  Some urban real estate markets are as small as a three or four block area.  Suburban markets can be a housing development or a small incorporated area.  Rural markets can be a county or more.

If you are new to the area where you want to buy, note the local political and geographic boundaries that define neighborhoods.  Are houses and lots larger on one side of the street than other?  Do commercial establishments stop along a certain boundary and give way to completely residential housing?  You have come to the subtle boundaries that define the most local of real estate markets.

Check out your area online on a Microsoft Virtual Earth map to get a good perspective.  Best of all, talk to locals and listen to how they describe the neighborhood in which they live.  Get a sense for the more desirable areas and the factors that make other areas less so.

Virtual Sources of Information

The Internet today offers some great sources of information and free tools designed to help buyers and sellers understand their local markets.  Several of the best are Trulia, Realtor.com, Cyberhomes and Zillow.

Zillow introduced the automated value model (AVM) to consumers in 2006 and has worked hard to perfect its tool for valuing property.  Today it offers detailed market information, including not just recent sales but also a home valuation index for the entire housing stock by zip code, incorporated town and even community, neighborhood or subdivision. 

Cyberhomes also is known for its online valuation and provides market values data by county, city and zip code.  They provide median value and change over the past year.  Their heat maps drill down into neighborhoods and include valuations for homes not for sale as well as for sale, giving you a good graphic picture of

Trulia is famous for its heat maps, which give a wonderful graphic presentation of market trends. Trulia gives median sales price as well as listing price but unlike Cyberhomes, you cant drill down below the zip code level on it heat maps.

Google maps are a great way to look at a neighborhood online, with street views too.  It has searchable listings as well.

Realtor.com combines listings with extensive neighborhood information.  Best of all is its “wikihood” function which allows users in about 30 cities to draw their own neighborhood boundaries. 

Sites operated by local Realtor boards and multiple listing sources also publish market data that may be local enough to be useful to you.

Non-virtual Sources

Newspapers are good sources of local market data.  Most publish sales from registered by county and city authorities and many also publish listings data and market commentary from local Realtor boards.

At the end of the day, there is the real estate professional.  There are some 3 to 4 million licensed agents and brokers eager to help you buy and sell.  A viral service they bring you is knowledge of the local market where you want to buy or sell.  When selling, ask your real estate agent for a Comparative Market Analysis (CMA) which most provide at free cost to market their services.

Market Realities

At present, most of the nation’s local real estate markets are strong buyer’s markets. That is, the number of buyers placing bids and purchasing homes is significantly less than the number of homes available for sale and in inventory (listed).   Sellers are forced to bring prices down to meet buyers’ demands. This state of affairs is expected to continue until the inventory of homes becomes more in balance with the demand for homes. The nation’s month’s supply has been hovering between a relatively high 9 and 10 months during the past 6 months. Some local markets’ months supply exceeds 10 months, while other local markets months supply falls below 10 months.

Anatomy of a Real Estate Market

Depending on the market’s current condition (i.e., the balance between demand and supply), property values are either headed upward, going downward, or staying flat. From a buyer’s perspective, you are negotiating for a property from either a position of strength, weakness, or somewhere in between. Moreover, local property markets are always changing. What may be balanced today might be a seller’s market tomorrow, and a buyer’s market a year from now.

When the demand for homes in a particular area increases, there is upward pressure on market prices. In other words, when demand is more robust than supply, prices increase. But often the supply of available homes does not immediately change in response to increased demand. This is due either to time lags between a change in price and an increase in the supply of new properties becoming available (builders cannot react instantaneously), or to homeowners delaying putting their properties on the market. When demand increases and supply has not had time to respond, the resulting excess demand exerts upward pressure on home values. As inventories increase over time-from the construction of new homes and homeowners putting their homes on the market-one can expect to see downward pressure on prices.

A Balanced Market

In the ideal local real estate market, there should be a balance between the demand for homes and the supply of homes available for sale. Although there is no exact benchmark to measure balance, there are ways of knowing if a local market is close to being a balanced one.

A local market has an adequate supply of homes for sale if houses on the market sell within five to seven months (some locations may be on the low end of this range and others on the high end). This means that at the current sales pace, the entire inventory of homes would be sold within five to seven months.

Of course, demand for home buying depends on a variety of factors, including local job growth, income growth, mortgage rates, and net migration. In a balanced market, neither the buyer nor the seller has the upper hand in negotiations. Current examples of local markets that are near balance include Charlotte, North Carolina and Houston, Texas. Neither area participated in the real estate boom, but neither stagnated either. A well balanced local market is a more sustainable market.

It is difficult to determine the exact amount of housing demand and housing supply that creates a balanced local marketplace. That is because each local market is unique. One practical way to identify a balanced market is to look for home values that produce a 3 to 5 percent price appreciation (difficult to do in today’s real estate recession). The goal of any housing market should be to generate healthy and sustainable price appreciation.

A Seller’s Market

When the market demand for homes in a particular area is high and there is a shortage of homes available for sale, the balance of power in the market shifts toward the seller. With excess demand in the market for homes, sellers can wait for offers on their property to reach (or exceed) their minimum selling price.

We were in an extreme seller’s market throughout the 2003 to 2005 real estate boom in most of our nation’s housing markets. Housing was “hot,” particularly in ocean resort towns. This prolonged excess demand for properties exerted substantial upward pressure on prices.

A Buyer’s Market

When demand for new and existing homes is weak and there is a glut of properties available on the market, the upper hand in negotiations switches to buyers. Buyers now have a much wider choice of properties from which to choose and are often able to negotiate a price that is lower than the listed price. This is obviously the case in many of our nation’s local market today. Aside from today’s market, the most recent buyer’s market was during the 1983 to 1992 period, where the average supply of homes available for sale registered a lengthy 9.2 months supply. There was an excess supply of homes in the nation at large, and housing demand fell due to a slowdown in the U.S. economy and double-digit mortgage rates. One local market that was particularly hard hit during this period was Boston. The months supply of homes in Boston rose to an unthinkable 16 months. At the same time, the local Boston economy experienced a sharp recession and lost 15 percent of its jobs. That created a serious imbalance between weak housing demand and excess supply. Predictably, home values plummeted, creating a buyer’s market in Boston during the 1990s. Sellers did all they could do to sell their homes-even offering to pay some of the upfront costs of the buyers, reducing the listing price and offering other incentives to attract buyers. Of course, sellers are again offering price and non price incentives in today’s extreme buyer’s market.

Transitioning Markets

Many times, local markets are in transition-switching over from a seller’s market to a buyer’s market, or vice versa. In transitioning markets, the balance of (negotiating) power is in flux. This transition is what occurred in many of our nation’s previously hot local markets when the real estate boom slowed in late 2005 and then cooled in 2006. Both buyers and sellers need to beware when negotiating in a transitioning market. The key in today’s market is to today’s buyer’s market is knowing when each local market is transitioning to a more balanced market.

Usually in the early stages of a market transitioning from a seller’s to a buyer’s market, sellers remain stubborn and continue to list their properties at high prices. At the same time, buyers have lost their appetite to bid at such lofty prices. If you are a seller, you need to carefully read the market. Listen to your Realtor-that is what he or she is there for. To sell more quickly, list your home at a more reasonable price that reflects current market conditions. If you list your house at a price that reflects last year’s market, your property will remain on the market longer, costing you lost opportunity money. Most real estate agents will tell you that in a softening market, you need to present a reasonable listing price in order to sell the property. Usually, most serious interest from buyers is generated in the first few weeks a property is listed. If the listing price is too high, the property will sit, lose its luster, and force you to lower the price even more to attract potential buyers.

If you are a seller, the lesson you should learn from a market that is transitioning from seller to buyer is to forget about the “good ole days” of high-price growth. You are no longer going to get top dollar. Price your property correctly. In fact, during market transitions, your real estate professional will likely recommend staging-where you “window dress” your home to attract prospective buyers to want to live there. You will find many ways to spruce up your home on the HGTV cable channel: eliminating clutter, removing some furniture to create a spacious appearance, repainting rooms in neutral tones, eliminating personal items like family photos, and so on. Curb appeal-such as landscaping-is equally important.

If you are a buyer, you need to be more sensitive to your strengthening negotiating position. If days-on-market time lengthens for the seller (your Realtor can tell you this), you are in a better position to make demands. For example, you can bid a lower price, ask the seller to pay points, and negotiate the timing of the transaction, to name a few options. If you are bidding on a new home, the builder may be willing to make concessions. While the builder may not reduce price because he does not want to anger recent buyers, he may be willing to add upgrades to the deal. The list of possible upgrades can include landscaping, free washers and dryers, crown molding, upgraded window treatments, paying down the mortgage rate, or paying the first six months of mortgage payments.

When the market is transitioning in the opposite direction-from a buyer’s to a seller’s market-the roles are reversed. If you are the seller, you will be calling the shots. There will be less need for staging and you will probably not have to offer buyer incentives. If you are a buyer in a seller’s market, flexibility is a key in negotiations. You may need to bid higher than the listing price, depending on the number of bids and interest. You may also need to bid quickly-you may not have the luxury to think about the offer. You may also have to be more flexible in the timing of the transaction.

Demand for Property

Whether you are a first-time buyer, a trade-up or trade-down buyer, a second home buyer, or a real estate investor, there are a variety of reasons why and where you purchase property. Put all these households and factors in a mixing bowl, stir them up, and you have the local demand for property. Demand for real estate influences the willingness and ability of households to make home purchases. All factors influencing demand can be grouped into four categories: population factors, home buyer wherewithal factors, investment factors, and purchase-cost factors.

Population Factors

Population growth is the primary fuel behind home buying. The more people (households) living in a neighborhood or city, the greater the demand for homes. The operative adage is that high population-growth rates are good for housing, while low population-growth rates are not. The population of a local market influences property values through:

• Internal population growth
• Household formation
• Net migration
• Demographic trends

Internal population growth: is the difference between birth rates and mortality rates in a local market. Young metropolitan areas (those with a low average age for its total population) are likely to have high internal population-growth rates compared with older metropolitan areas (those with a high average age). This is because a young community with , let’s say, a median age of 32 years is more likely to have children and so increase the internal population of that community than an older community where the median age is 55. Thus, without any other influences on the population, a younger metropolitan area should experience a more robust demand for housing (trade-up buying) vis a vis an older one.

Household formation: Households range from a single person living by him-or herself, to a married couple, to a mother and/or father living with children. A married couple is considered one household because they live in a home together. Change in the trend of household formation impacts the demand for housing. When a couple divorces, for instance, they are now considered two households, because they will be living separately. Thus, divorce rates influence household formation and housing demand increases: the higher the divorce rate, the greater the number of households looking to purchase a home.

Net migration: Migration is the term for people moving from one location to another. In-migration represents the number of people moving into an area; out-migration is the number of people moving out of an area. The difference is the net migration. If more people move into that out of a metro area, you have a positive net migration.

Demographics: are perhaps the best-known influences on the demand for home buying. The largest demographic player right now is the baby boomer population group. We saw their impact on the housing market in the 1990s, when boomers entered their peak earning years and home sales exploded. There are about 78 million boomers, and they fueled the purchase of larger homes (trade up buying), second homes (vacation buying and/or investment), and condominiums (downsizing). Because analyzing demographic trends is crucial in understanding future home values by location, following the behavior of the boomers will help identify the robust and down markets during the next 5 to 10 years. Further, focusing on the life cycle trends of all major demographic groups - retirees, boomers, the baby bust, immigrants and echo boomers-will allow us to better anticipate future real estate values.

Homebuyer Wherewithal Factors

Homebuyer wherewithal means having the necessary income and savings to purchase property you wish to buy. If you have never owned a home before but you have saved a sufficient amount of money to purchase a home, you will likely do so. If you are a current homeowner and want to purchase a larger home and you have the funds to do so, you will likely purchase a trade-up home. The greater a household’s financial wherewithal, the greater the demand for home buying.

There are many ways to raise your financial wherewithal through income growth, favorable employment opportunities, consumer confidence and stored wealth. As a household’s income rises, so does its demand for housing. Similarly increased income raises the demand for more expensive properties as people enter the trade-up market. The typical homeowner spends about 20 to 30 percent of disposable income on housing (mortgage payments and housing-related goods and services- e.g. furniture, landscaping). The greater your income, the more likely you can purchase the property you desire.

It follows that local markets with relatively high average or median household income levels may experience healthier real estate markets than do those local markets with low household income.  It is also true that markets with higher median home prices relative to median incomes may have lower homeownership rates than do more affordable markets. In addition, local markets with high unemployment rates will inhibit property purchasing, while markets with low unemployment rates and job creation are likely to promote home sales, exerting upward pressure on property values.

Confidence is more vital in the purchase of property than almost any other good or service sold. This is because purchasing a home is probably the biggest financial transaction most of us will ever make. If people see their local economy deteriorating, they may become less optimistic about their own financial circumstances. A drop in their confidence may end their search for a new home or delay entry into the existing home marketplace.

In addition to income, people store or accumulate wealth through savings, inheritance, existing home equity, investments, or gifts. Obviously, the greater your wealth, the greater your demand for home buying.

Investment Factors

Property owners expect the value of their property to rise over time; that is what is referred to as price expectations. The fact is, real estate is America’s number one vehicle for building wealth. The majority of wealth for almost 80 percent of all households is derived from the real estate market, not from stocks and bonds. For many, real estate equity is the only way to build a nest egg for retirement.

Of course, if price expectations are unreasonable, the price we pay for property may also be unreasonable. For instance, during the height of the real estate boom, in many of our nation’s hot housing markets, home buyers and property investors were willing to pay unreasonably high prices for rental property. Investors hoped that eventually future price gains would outweigh the negative annual cash flow generated by the mismatch of low rental income and high expenses (including the mortgage).

What is an unreasonable price? A price is unreasonable when demand is so great for a property that the buyer abandons the fundamentals of the transaction to make the purchase. One way to determine when prices are unreasonable is to look at the ratio of the home-price growth to income growth. When home prices grow too quickly relative to household incomes, homes become unaffordable. During the real estate boom, households had to stretch their incomes by using interest only mortgage loans to keep monthly costs down in order to purchase properties at lofty prices. A better more reliable measure of unreasonable pricing is the mortgage debt service/income ratio. If prices are out of line with reality, households and investors have to stretch their financial capacity to purchase the property. Their hope is that as demand for housing increases-from renters, homeowners, and investors-the equity in their homes will also increase.

The speculative element in real estate purchasing arises when households (mostly investors) believe that future capital gains will be high and will be able to be realized in a short period of time. A rise in the expectations of future short-term capital gains attracts speculators to the real estate market. This in turn, raises the demand for home buying. The 2001- 2005 real estate boom attracted thousands of speculators to the real estate markets, pushing home values even higher. Such speculative activities included property flipping, preconstruction purchases, and condo-conversion purchases.

Purchasing Costs

In general, if the cost of purchasing a property rises, demand will fall-and vice versa. There are four major factors that influence the costs of property ownership: mortgage rates, settlement costs, mortgage product offerings, and tax/government subsidies.

Property is still the most interest-sensitive purchase in our economy. This is because the majority of property purchases are financed with a mortgage, and so those mortgage rates matter. A rise in borrowing costs can make the transaction cost-prohibitive. Although the level of mortgage rates may differ slightly across regions of the country, by and large, mortgage rates are homogeneous across the nation. If they rise by 1 percent in New York, they rise by 1 percent in California. Changes in mortgage rates directly influence the demand for housing.

That said, a 1 percent rise in mortgage rates in San Diego will impact local housing demand in San Diego quite differently that it impacts demand in Buffalo, New York. The demand for home buying in San Diego is more sensitive to interest rate changes than the demand for home buying in Buffalo. Why? The median-priced home in Buffalo is a bit under $100,000, while the median priced home in San Diego is a bit over $600,000. Households in San Diego are already stretching their incomes by taking out adjustable-rate mortgages to be able to afford and qualify for homes that are vastly more expensive than similar homes in Buffalo. As a result, a 1 percent rise in mortgage rates results in a much higher per month payment in San Diego than in Buffalo (1 percent of $600,000 is six times more than 1 percent of $100,000).

Settlement Costs include title insurance, appraisal, mortgage insurance, credit-report fees, escrow fees, homeowner’s insurance and loan origination fees. These are payable at a property closing. They assure the lender that the property transfer is in order and that the lender can use the property as collateral if you default on the mortgage loan. Most of the time, your real estate agent or lender will recommend settlement service providers, but you can find service providers on your own as well. Either way, settlement costs can be quite substantial (1 to 4 percent of the loan balance). A rise in settlement costs, too, can inhibit home buying, especially among first-time buyers; conversely, a drop in settlement costs can motivate home buying. Settlement costs can vary across states because of different state and local requirements and pricing for settlement service providers.

Mortgage Products

Although there are less mortgage product offerings today than during the boom years, there still remains and long and varied menu of financing options for home buyers. Here are just a few mortgage loans currently available in the marketplace: thirty-year and fifteen-year fixed-rate mortgage loans; interest only loans, cash flow option adjustable-rate mortgage loans; FHA loans; VA loans; Fannie Mae and Freddie Mac loans; jumbo loans; one, three, and five-year adjustable rate mortgage loans; rural housing loans, reverse mortgages…and so on.

The availability of mortgage credit is one of the most influential factors that affect demand for home purchases. This was never more evident than during the 2007 - 2008 mortgage credit crunch, when home sales plummeted by more than 25 percent The greater the number of available mortgage loan products, the easier it will be for households to find a mortgage loan that works for them.

Tax and Government Benefits

No other sector of the economy receives more of the attention and generosity of federal, state and local governments than real estate. On a national level, the Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), the Veterans Administration (VA), Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System are dedicated to promoting housing and assisting low and moderate income and minority households. This is true on the state and local levels as well. The more government assists the housing sector, the greater the demand for home buying.

For most households, the largest deduction on their tax returns is the mortgage interest deduction. Other important tax benefits include the deduction of property taxes, home purchases deductions and capital gains exemption from a home sale. The interest you pay on a mortgage loan of up to $1 million for your primary residence is tax deductible on your tax return. You may also deduct the interest paid up to $100,000 on a second home and/or home equity loan (although the total loan amount on a primary and second g home cannot exceed $1 million). Property taxes are completely deductible on all real estate owned. A home buyer may also deduct closing costs with a real estate purchase on his or her personal income tax in the year of the purchase. These items include origination fees and loan discounts, transfer taxes, recording fees, and title insurance that serve to increase the basis (the original cost of the property). Finally, there is a generous tax exemption on the capital gains from the sale of a home. The current exclusion is $250,000 for individuals and $500,000 for married couples filing jointly. The only requirement for this capital gains exclusion is that the seller lives in the home for at least two of the previous five years. The capital gains exemption plus all the other deductions provide a distinct advantage for the purchasing and selling of real estate over other assets. If and when the real estate tax rules change, so does the demand for property purchases.

Supply of Property

Housing supply depends on a number of factors including construction costs, local growth restrictions, and homeowners’ and builders’ responses to demand conditions. If five of your neighbors decide to sell their homes just as you are ready to put your home on the market, now may not be the best time to add to the housing supply.

The various materials that go into building a residential property influence its cost and thus the number of homes that are built, as well as the price for each home. Take for example lumber. The United States imports a great deal of lumber from Canada. The tariffs and quotas between the two nations may influences the price of lumber imports and the amount of lumber imported. A more restricted supply of lumber will affect both the price and the supply of homes. In recent year, the prices of steel, copper, and other materials have risen significantly, contributing to price appreciation.

Labor costs and other nonmaterial builder costs also influence the supply of homes. I fhte local housing market is hot, a general contractor will have a difficult time holding down costs from subcontractors (such as electrical work, framing and so on). In some local areas, subcontractors are busy, limiting the total number of homes that can be constructed in that area and increasing costs.

The cost of construction-or even the ability to build-is very much dependent on the local political climate and relationships that builders develop with local policy makers. Local growth restrictions rein in the number of homes available for sale by limited their construction. For those homes that are being built, getting site permits, building permits, and so forth adds to the cost of construction. Smart-growth policies, as they are called, have become more common throughout the nation. The notion behind “smart growth” is that as our population grows, we must use land more efficiently and plan for growth. Comprehensive planning, innovative land use techniques, well planned infrastructure, and urban revitalization are universally recognized smart growth strategies. On the other hand, urban growth boundaries and development regulations disrupt markets and driveup the price of housing.

Like any business, builder will increase or decrease the inventories of their products with changing market conditions. A high growth rate in housing starts (construction projects) reflects builders’ response to healthy housing conditions; a slowing in the growth of housing starts reflects builders’ lack of confidence in the housing markets. By tracking starts and housing permits (such information about the local markets you are interested in can be provided by your real estate agent), you can get a sense of how builders are responding to market conditions. If builders are producing too many homes, an excess inventory of properties can result and home values could soften. Conversely, if builders are not building enough homes, you may find a lean supply of homes and home values could rise.

Since existing homes comprises about 85 percent of all homes available for sale versus 15 percent for new homes, it is property owners, not builders, who control the majority of homes for sale in any local market. Understanding why and when current homeowners put their properties on the market is important in determining property value and sales trends. A local market dominated by young households would have a higher frequency of home listings than a local area dominated by established households. That is because young households, on average, are more likely to eventually trade up to larger homes because they have children or relocated because of job advancement. There are many other reasons why homeowners list their home: expected price gains; an inprovemenet in the local economy (creating a more favorable selling environment), the construction of a new highway through a particular location (motivating homeowners to move away from a transportation-dominated area), and so on.

Tools to Monitor Demand and Supply

Here are some housing measures that will help you evaluate the magnitude of demand and supply in your local market. There are three measures on the demand side (population, jobs and investor share) and two measures on the supply side (housing starts and month’s supply).

Population. Compare population growth rates across local real estate markets. Net migration (how many additional households are moving into the local market) is a good proxy for this. This information is easily obtainable from your real estate agent. The higher the net migration number, the healthier are the prospects for local real estate activity.

Jobs. Positive job growth is essential for the long term viability of a healthy real estate market. Again this information is available from your real estate agent. Every country and city in the nation makes job gains/losses information available to the public. Robust job markets are an excellent indicator of an active real estate market.

Investor Share. Before committing to a property purchase, estimate how many investors are involved in the local market. Investors add some degree of risk to a local markeat because they area the first to pull out of the market if the good times turn to bad-as we painfully discovered during the 2006- 2008 real estate bust. Investor flight exerts downward pressure on prices. Obtaining investor share information is difficult, but y our local real estate agent should have a good “gut” feel for investor share percentages.

Months’ Supply. It is essential that you know the inventory of properties available for sale in a local market before committing to a purchase. Months’ supply is the most reliable indicator of inventory and is easily accessible from your real estate agent.

Housing Starts. Even if the demand for home buying is healthy, it is possible that local home builders overbuilt in the local market, creating excess housing inventories that eventually could exert downward pressure on property values. Housing starts (new residential construction) and housing permits are good indicators of how many properties builders are planning on constructing. This information is easily obtainable from the Department of Commerce or just ask you real estate agent.