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CA Real Estate Market Trends

Home Buying Trifecta: Right House, Right Price, Right Rate

By: Robert Kleinhenz, Ph.D. deputy chief economist

The California housing market showed more signs of adjustment as it moved further from the influence of tax credits earlier in the year and as it responded to evidence of a weaker than expected economic recovery as the year has progressed. Statewide sales rose in September for the second month in a row to 466,580 homes, a 3.8 percent month-to-month gain over sales of 449,290 homes in August. Sales continued to lag last year’s pace, declining 12.2 percent compared to 531,180 sales a year ago. The median price rose 4.5 percent over last year from $296,610 to 309,900, while decreasing 2.7 percent from the August median of $318,660. The monthly decrease was larger than the average August-to-September 1.7 percent decline over the past 30 years, but was consistent with current market conditions.

The months ahead offer a prime opportunity to seek the home buying trifecta: finding the right home at the right price for the right mortgage rate. Here’s why:

• First, there is a wider variety of homes on the market now, including a mix of REOs, short sales, and conventional or non-distressed homes for sale. This means that buyers have more to choose from than in the past two years.

•Second, home prices have stabilized or risen in most California markets for at least a year, but still remain well below the peak levels of the last decade. There was a 10-to-1 ratio between the California median price and theCalifornia median household income during the last peak. That ratio has fallen to 5-to-1, a level that has not been seen in at least 10 years.

•Third, mortgage rates are at their lowest levels in over 50 years, pushing the monthly payment down dramatically. For example, if one buys a home at the September median price of $309,900, puts 20 percent down and obtains a 30-year mortgage at 4 percent, the monthly mortgage payment would be $1,330. If rates climb to 5 percent, the payment increases to $1,500, or an additional $2,040 per year. If rates climb to 6 percent, the monthly payment would be $1,670, or an additional $4,080 per year. The savings in just two years would exceed the value of the $8,000 tax credit that motivated many households to buy in 2009 and the first half of 2010. With high unemployment, constraints on consumer credit, and assets that have lost value in recent years, households will face ongoing challenges in the months ahead. Still, the next few months offer a rare chance to “win” the buyer trifecta. Rates are at or near their lowest levels now, but will rise as the economy gains strength. The supply of homes is better than last year, but points to stable or modestly rising home prices over the near term. In the end, if a household is in a position to buy and if it finds a home that will meet its needs for the next several years at a monthly payment it can afford, then it cannot lose if it acts soon.

How The Mortgage System Works!

AND how its been rattled...

How The Mortgage System Works — And How It's Been Rattled
By Peter G. Miller

Foreclosures are setting off fresh tremors across the country but not because of any surge in unpaid loans. An elaborate system designed to assure good title to your home and solid assets on lender books has been shaken by revelations of botched foreclosure affidavits.

This is a problem because courts rely on sworn affidavits as evidence, and it appears that large numbers affidavits were signed but not read. If an affidavit has not been read then it's possible lender claims are wrong. Since we don't know which affidavits are accurate and which are not, massive numbers of audits will now be required to find out if any owners unfairly lost their homes. Already court systems and title insurance companies are tightening standards to protect homeowners, many areas have set up foreclosure freezes and state prosecutors have begun to investigate past foreclosures for evidence of fraud.

Because owners missed payments few foreclosures are likely to be reversed as a result of affidavit worries but other questions have emerged, questions which bring uncertainty into the financial system.

“It's important to get the process right to assure that both homeowners and lenders are protected,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “At a time when a quarter of all residential sales involve foreclosures it's in everyone's interest to be certain that titles are clean and that all court actions have been by the book.”

Step 1: A Note Is Created
It used to be simple: Local lenders made local loans and kept them. Such “portfolio” lenders still exist but now the odds are overwhelming that the cash you receive at settlement comes from far, far away — and that the party who originated your mortgage no longer owns the loan.

To figure out how the lending system really works today let's start with you. You want to finance or refinance a home. In exchange forcash from a lender you agree to repay the debt over time and with interest. Your promise is in writing in the form of a mortgage note. You pledge the property as security for the loan — if you don't make payments the lender has the right to take the house through foreclosure.

The “lender” could be a bank, credit union, savings and loan association or insurance company but most likely your loan was originated by a mortgage broker or a mortgage banker. In general terms, a mortgage broker sells loans from lenders who have cash while a mortgage banker has the capital to finance the loan.

The reason for such sales is that if a loan originator has $5 million and makes 20 mortgages for $250,000 apiece he has no more money to lend. If he sells the loans he has fresh capital and the ability to make more mortgages and generate more income. Originators without cash simply retail loans from sources with capital such as big banks or insurance companies.

You got cash and the lender got a mortgage note and the promise of repayment when you financed your property. Now your loan originator gets cash by selling the loan and passes the mortgage note to buyers on Wall Street, a process which is now entirely common: In 2009 mortgage-related securities worth nearly $2 trillion were issued.

Step 2: Notes Move To Wall Street
Once on Wall Street your mortgage and other mortgages can be bundled together to create a mortgage-backed security (MBS) or a collateralized debt obligation (CDO) — a combo security stuffed with mortgages, car loans, credit card debt, student loans and other forms of debt. Generally such investments are described as mortgage- related securities.

None of this happens easily or automatically — or without lots of fees and charges.

First, we need an “issuer” to create securities that can be sold to investors. This is a bankruptcy-remote special purpose entity, meaning that the loans cannot be taken by creditors if the issuer goes bankrupt.

Next, an underwriter organizes and sells the mortgage-related securities to investors. The investors want the cash flow from the mortgage interest paid each month by borrowers. The underwriter also creates a market so investors can buy and sell interests in the mortgage-related securities.

For their part the investors want to know that their mortgage-related securities are good, marketable and insurable. To get this information they rely on “raters” who evaluate each security to determine the level of risk it represents — less risk means a lower interest rate, more risk requires a higher interest rate for investors, if they will invest at all.

Investors also want their securities to be protected so that if a large percentage of loans fail there's a financially strong third party to step in and limit losses. This third party — what most of us would call an insurer — provides a “credit enhancement” in the form of guarantees to investors.

Step 3: Dividing Ownership
If you buy one share of IBM you own the whole share, but with mortgage-related securities investors buy a piece of the action called atranche — a French word which means such things as slice, block or section. In a sense tranches are like mortgages. If a house secures two mortgages and the owner is foreclosed, the claims of the first loan must be completely satisfied before the second lien holder gets a dime. With mortgage-related securities the claims of the first tranche holder must be paid off before other investors can receive any cash. Of course, this also means that the first tranche has a lower interest rate because it represents less risk while second tranches have higher rates because they're riskier.

Step 4: Investor Representatives
Once the mortgage-related security is created we next come to the practical problem of day-to-day loan administration.

A trustee is appointed to represent all the investors who own the mortgage-related security. The trustee hires a servicer to collect the borrower's monthly payments, release mortgages when paid off and foreclose if necessary. The servicer is a “special” agent who must act within the rules established under a pooling and servicing agreement (PSA) with the trustee.

If we go back to the first step we can see that the borrower got cash and the originating lender received a mortgage note. Once on Wall Street, ownership of the loans is recorded within MERS — the mortgage electronic registration system. MERS then appears to be the nominal holder of the note and the note can be used to create a mortgage-related security. In turn, the mortgage security can be bought and sold without changing local property records to show new ownership of the borrower's mortgage note. Of course, if the borrower doesn't make payments the note can be used to force a foreclosure.

But Is The System Failsafe?
The mortgage financing system appears to be bullet-proof, with lots of protections, safeguards and certainty built in for both borrowers and investors. Unfortunately, no financial system is without risk and much of the mortgage meltdown is related to failures within the mortgage financing system — big failures.

• The ratings agencies overvalued mortgage-related securities which included option ARMs, interest-only mortgages and home loans created with no-documentationo loan applications. The result was that investors grossly overpaid by purchasing weak securities at premium prices and now face big losses.
• Third-party “credit enhancements” turned out to be financed with credit default swaps, complex financial instruments which brought a steady flow of premiums to insurers. Unfortunately not enough was set aside in reserves when investor claims arose. AIG, as one example, defaulted on credit default swaps worth $14 billion according to Newsweek — coverage ultimately paid off with loans from Uncle Sam.
• There's growing controversy over the MERS concept and an expanding “show me the note” movement among foreclosed borrowers. Several courts have rejected lender efforts to foreclose because the mortgage notes did not show a change of ownership on local records with each sale or assignment.
• Because of improper affidavits, borrowers qualified for mortgage modifications may have lost the opportunity to save their homes from foreclosure.
• Mortgage insurers — including the FHA and VA — may have paid lender foreclosure claims that were not justified.
• Title insurance companies who promise to protect homeowners against fraud now face huge new costs.
• Pension funds, insurance companies and other investors will have to review mortgage-related securities to assure that past foreclosures and losses were justified.
• The deliberate manufacture of faked affidavits undermines the legal system, and that's a serious matter to judges. Audits, assessments, fines, suspensions, disbarments and even perjury and fraud charges are being considered.
• A bank can sometimes be a lender, underwriter and servicer at the same time, a situation that can set off worries about conflicts of interest. For instance, a bank with lots of second mortgages may not want to foreclose on a homeowner who fails to make mortgage payments because then the bank's second lien would likely become worthless. Meanwhile, the investors who own the first lien are hurt because income from the note is unpaid. In such situation investors can ask the bank/servicer to buy back the loan — and if “asking” is not sufficient they can sue. Investors holding mortgage-related securities worth $600 billion have come together to challenge Wall Street banks, according to William Frey, president of Greenwich Financial Services.
• Outright fraud is an ongoing worry. One enterprising New Jersey mortgage broker gamed the system by originating loans and then selling the same mortgages multiple times. According to federal prosecutors he generated fake paper worth $11 million over a two-year period before being caught. How Wall Street underwriters, raters and insurers missed such fraud is unclear.

In the end it turns out that the financial fortress created to transform home loans into securities has more holes than an old cheese. The result is a new and harsh look at the system from borrowers, lenders, investors and regulators — to say nothing of courts, trial attorneys and state prosecutors.

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Is Mortgage Relief in Your Future?

Is Mortgage Relief In Your Future?
By Peter G. Miller

There's a little voice you might have heard, the one which says it's great that the government is trying to help people facing foreclosure but what about you and me? After all, we'd like lower monthly mortgage payments too.
For instance, in July the typical borrower helped by the Making Home Affordable program was paying $513 less for their mortgage, a 36 percent decline. That's good, it means there will be fewer foreclosures in the neighborhood and therefore less pressure to force down the price of local homes.
And yet there's that little voice. As much as I like my fellow citizens, why can't the government help you and me save some mortgage money each month? In fact, such an idea is now on the table.

Mr. Gross
They just had a big meeting in Washington to discuss the future of housing finance and there it was suggested that the government should have a program to refinance all mortgages — including those which are performing — down to current rates, about 4.42 percent as this is written.
According to Shahien Nasiripour with the Huffington Post, the suggestion comes from Bill Gross, head of the $239 billion Total Return Fund and a well-respected financial observer.
The government could do this. For example, in 2008 Washington set up the $700 billion TARP rescue plan to assure the stability of the financial system. The government says $194 billion spent under the program has been repaid, $190 billion remains outstanding and $316 billion was never spent. Huge sums remain available under the program, even more if the GM IPO goes through and Uncle Sam gets a fat check from the proceeds.

Higher Home Prices
According to Reuters, a general refinancing such as that proposed by Gross would have the potential to raise home values by 5 to 10 percent. Does anyone see anything else on the immediate horizon which might generate such results?
“A program which would produce a general increase in home values has enormous importance,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “Across the country home values have been down more than 12 percent since April 2007 and far more in the major foreclosure areas. It's hard to imagine a more popular federal effort at this time.”
Higher real estate prices are not only a big deal to homeowners, they're also important to lenders. Right now we have huge numbers of mortgages on lender books that if valued on the basis of real-world property sales would represent massive losses. To stop this problem the government literally changed the accounting rules to keep up the appearance of higher asset values.

Why? Because the mortgage inventories in most cases are not actually being sold. If they're valued at today's discounted levels lenders would have to increase capital reserves and reduce lending. Share values would fall. Higher real estate values would resolve the asset problem without accounting sleight-of-hand.

But wait, there's more....
The gross domestic product at this time is about $14.5 trillion annually. If interest rates are lowered on millions of home loans consumers will have more money to spend (and more money to pay down household debts).
More than 70 percent of all economic activity ($10.3 trillion) is in the form of personal consumption. By lowering mortgage interest costs, personal income would increase and that's good because personal consumption is the major engine which powers the economy. The money added to the economy — about $50 to $60 billion according to Reuters — would not be just the dollars saved from lower mortgage rates, it would be more because of what economists call the “multiplier” effect. The result of cutting home mortgage rates would be a magnified economic stimulus, something that would create more jobs, disposable income and tax revenues at precisely the time when they're needed.

Higher Taxes
One of the oddities of a general mortgage relief program is that it would increase federal revenues. This would happen because mortgage interest is generally deductible. Lower mortgage rates would create smaller interest costs and that would mean less to write off. Uncle Sam would see bigger tax payments in April, money that could be used to replace TARP funds used for mortgage relief.

The Taking Clause
Let's imagine that with a wave of the federal wand all mortgages in the US are re-set to 4.45 percent, fixed, for 30 years — or fewer years if individual borrowers prefer.
Unfortunately the government cannot simply order loans to be refinanced. Mortgages are assets owned by institutions, pensions, insurance companies and individuals. Lowering the interest rate means less income to mortgage owners and therefore a reduction in the market value of the loans.
This is where the “taking” clause of the Fifth Amendment comes in. It says private property cannot be taken for public use without just compensation. In other words, the government can take private property — the excess contract interest rate in this case — but only if it pays fair market value for what it grabs. Given the unused portion of the 2008 TARP account this should not be a problem.

Political Reality
The idea of a massive government program to lower mortgage rates nationwide seems unlikely if only because it's never been done. That said, three or four years ago the idea of a Wall Street Reform Act and the establishment of a federal agency to represent consumers would have been regarded as equally implausible. Perhaps with elections looming someone in Washington will hear a little voice.

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Downsizing is BOOMING!

Downsizing is booming
Smaller homes trendy again as baby boomers look to shed excess room and recession makes large homes too costly
BY TANYA MANNES


Goodbye, McMansion. Hello, bungalow, condo or suburban split-level.

The Great Recession may be over, but many people’s lifestyles will never be the same. They are saving more, spending less, simplifying their lives and — increasingly — downsizing their homes.

This trend, which began with the economic downturn but has dovetailed with demographic changes, has given way to a trickle-down effect for local businesses offering services to live gracefully in tight surroundings.

There are benefits to letting go of those supersized showpieces, from the lower upfront cost to smaller electric bills and less yardwork.

Median home size has dropped 6 percent since 2007, in large part because cash-strapped Americans can’t afford to buy, heat or maintain larger homes, according to the National Association of Home Builders.

But people are still investing money in making their homes as comfortable as they can be. The trend means work for organizers, interior designers, home-furnishings stores, carpenters with tricks to maximize shelf space and, of course, self-storage businesses for those who can’t bring themselves to part with their 1980s designer clothes or collection of African masks.

Why they’re downsizing

Colleen Cotter, a broker with Keller Williams Realty, said that her six-member team specializes in helping people relocate to downtown San Diego, and “downsizers” make up 60 percent to 70 percent of her clients. “Most people aren’t buying these Dallas-size houses anymore,” Cotter said.

“They have to short-sell the big place they’ve got, and they have to rent or buy a small place in the interim.”

Clients find Cotter through the website mysandiegoagent.com. In some cases, they are older, empty-nesters who don’t need five or six bedrooms anymore. “We try to get them to sell their house in the suburbs and move downtown into a smaller footprint,” she said.

In other cases, clients are young, just starting out and can’t afford a large home.

Cotter downplays the space constraints and touts urban amenities — from wine bars to farmers markets — where they can relax or entertain friends. “You don’t have to feel like you have everything in your house,” she said.

Stephen Melman, director of economic services for the National Association of Home Builders in Washington, D.C., said that home size appeared to peak during the building boom. Since then, the trend toward smaller homes seems to be lasting longer than in previous recessions. The median floor area of new homes dropped from 2,309 square feet in the first quarter of 2007 to 2,169 square feet in the second quarter of 2010, according to the group’s analysis of Census data.

In the organization’s most recent survey, 95 percent of homebuilders said they were building smaller and less-expensive homes than in the past because that’s what consumers want.

Melman said the U.S. consumer consistently cites affordability and operating costs — mainly energy — when asked about concerns in buying a home. Small homes cost less to heat and cool.

Demographic changes play a role. As baby boomers age, they are transitioning to smaller homes that need less upkeep. Other factors in downsizing include the difficulty of qualifying for a large mortgage and the fact that many people have smaller amounts of equity in existing homes to roll into a new home.

Adding to the trend, there is a crop of first-time homebuyer, lured to the market by tax credits, who are seeking affordable small homes, he said.

Which businesses benefit?

Storage: What to do if there’s more stuff than closets? That’s where storage companies, such as Solana Beach Self Storage and its sister location, Morena Self Storage in San Diego, see an opportunity. The two facilities, online at mystorageroom.com, are locally owned with more than 20 employees, and offer help with moving for customers trying to downsize.

“Our warehouse guys are here to help them move in trucks, and we offer that for free,” said manager Chris Meehan. “That results in a lot of referrals.”

Meehan said the firm has seen business grow steadily in the past few years. Occupancy at his facility is at 90 percent, up from 82 percent in January. Recently, a client moved from a 3,000-square-foot home to a 1,000-square-foot home, putting excess stuff in storage. Monthly rates for storage spaces — which start as small as 4-feet-by-4-feet — range from $46 to $350.

DECLUTTER: For those who aim to get rid of excess belongings instead of paying to store them, there are de-cluttering experts such as Cheryl Hughes, who established her San Diego organizing business, “Allow Me,” in 2005.

Hughes specializes in helping clients downsize and gets leads through her website, allowmesolutions.com. Frequently, her customers are seniors moving into assisted living or those who have lost a spouse.

Hughes used to be a mental health nurse, which helps her address the emotional ties people have with their possessions, she said.

“I work with people who sometimes have a lot of pain around what they have to get rid of,” she said.

She charges $40 per hour, with discounts for seniors.

She helps her clients pare down to the basics, encouraging them to donate items or sell them.

Recently, she worked with a couple in their 60s who were tired of the upkeep of their 2,400-square-foot house with a swimming pool near Balboa Park. They decided to move to a small, two-bedroom condo on the bay.

Hughes helped the couple sell things on Craigslist, donate bulky items such as an antique loom and host a yard sale. “They are loving their new place,” she said.

RESIZING: Sometimes people find that their old furniture is too big, said Mike McAllister, managing partner of the locally owned Hold It Contemporary Home in Mission Valley. The store, online at holdithome.com, specializes in European contemporary and modern home furnishings, which tend to be smaller in scale than American styles.

“We see people moving from a home in Scripps Ranch to a loft or condominium building, and the scale of their furniture is too large,” McAllister said.

Customers often visit the store looking for its signature European sleeper sofas, which range from $499 to $1,595.

“The hottest seller we have is a compact love seat, just 58 inches wide,” he said. “It opens into a bed that sleeps two adults.”

The Hold It store also features a “100-square-foot living area” display.

REORGANIZE: Those who downsize sometimes need help arranging their belongings in a way that doesn’t feel cramped. That’s why they call Maryann Traficante, who started her design business, Interiors by Maryann, 25 years ago. She specializes in downsizing.

“I get clients all the time,” she said. “They’re moving, and typically these days they don’t move to a larger space. They’re just moving to something more manageable financially.”

She charges about $200 for an initial two-hour consultation; customers can find her online through interiorsbymaryann.net.

She visits the new home to take measurements, and plans where everything, from the sofa to the TV, will go. She makes suggestions for layouts, colors and paint, After she and the client agree on what’s needed, she will often shop at The Container Store for storage solutions.

One of her clients, an elderly woman who had traveled the world, had a large collection of African masks scattered throughout her large house and couldn’t imagine giving them up. Traficante helped her group them together on one wall in her new, smaller home.

“You have to be very diplomatic, sensitive and caring about what their needs are,” she said.

Since most clients end up getting rid of lots of items, Traficante has a source who will hold a garage sale or estate sale for clients, and split the proceeds with them.

REDESIGN: Contractors benefit from downsizing when they are hired to make the most of small spaces.

Troy LaCoursiere, a San Diego contractor, recently opened a local business as an affiliate of ShelfGenie, a national company headquartered in Georgia.

Shelfgenie.com provides “glide-out shelving solutions” to improve access to hard-to-reach cabinet areas. “People are always frustrated with their pantry space and not being able to get to items in the back,” he said.

Typically, a client will end up spending $1,000 to $2,000 to redo shelving, he said.

LaCoursiere takes custom measurements and orders a prefabricated product, which he installs. “We look for underutilized spaces,” he said. “Some kitchens have a blind corner if it’s an L shape, and you can use that space. You’re able to declutter.”

Click here to read full story

FHA Short Refinance Program FAQ

The FHA’s ‘Short Refinance’ Program: Frequently Asked Questions

By Nick Timiraos

On Saturday, we looked at the newest effort by the Obama administration to address the threat of foreclosures from borrowers who are underwater, or who owe more than their houses are worth.

If it works well, the program could deal with the risks of strategic default, from homeowners who could afford to make their payments but choose not to because they’re so far underwater. But the story noted how many of the knots that have snarled previous modification efforts—including dealing with second liens and contracts that govern mortgage securitizations—could also stymie the latest initiative.

Here are some answers to the most frequently asked questions:

Q: Who can participate?

Generally speaking, the program is designed for borrowers who are current on their loans and owe more than their properties are worth. Borrowers are refinancing into FHA-backed loans and must be able to meet all traditional underwriting guidelines (including a minimum credit score of 500 and an income that can support the current loan payments).

Loans already backed by the FHA can’t participate. Fannie and Freddie aren’t currently participating in the program, though it’s possible that they could decide to do so in the future. Fannie and Freddie currently have programs to allow borrowers to refinance loans for borrowers that are underwater, up to 125% of the property’s value.

Q: How does the program work?

If a borrower owes more than the property is currently worth, the bank or investor that owns the loan—and the company that services the loan (i.e., the company that collects monthly mortgage payments)—must agree to reduce the loan balance by at least 10% so that the new loan is no more than 97.75% of the home’s current value.

If they’re willing to take the loss, the borrower must agree to refinance into an FHA-backed loan at today’s interest rate.

Q: What costs could borrowers face?

Borrowers will have to pay transaction fees associated with refinancing. Because they’re getting an FHA-backed loan, they’ll also be paying mortgage insurance.

Q: Will participating in this program affect my credit score?

Yes. Lenders are forgiving some principal, which will be reported to credit bureaus.

Q: Can I use this program on an investment property or second home?

No. Borrowers must occupy the property. The FHA doesn’t finance second homes or investment properties.

Q: What if I have a second mortgage?

The combined mortgage debt on the first and second mortgages must be no greater than 115% of the property’s current value. The second-lien holder must agree to the refinance, and if the combined loan to value exceeds 115%, either the first- or second-lien holder (or both) will need to reduce the loan balance further. The government will make some incentive payments for second-lien holders that reduce principal.

Q: If my loan was modified by my bank, under HAMP or under a different program, can I participate in this program?

Maybe. If the modification was made under the Home Affordable Modification Program, or HAMP, the borrower is eligible one month after the HAMP modification is made permanent. If the modification wasn’t made through HAMP, the borrower must have made three monthly payments on time, and the modified mortgage must be current. If the loan is in a temporary or trial period, it isn’t eligible.

Q: What should I do if I think I’m eligible for the program?

Mortgage servicers—the companies that handle monthly payment collections—will ultimately decide whether borrowers can participate. Borrowers should talk to their mortgage servicers to see if they are eligible.

Because the program is voluntary, the investor that owns the loan will need to agree to the write-down. If there’s a second mortgage involved, then that creditor will also have to agree to participate. If the loan was bundled into a pool and sold to investors as mortgage-backed securities, then the servicer will have to decide whether to participate on behalf of the investors.

It’s also important to remember that because the program is new, servicers may be unfamiliar with it at first. While some servicers have hired lots of staff to deal with a crush of modifications and foreclosures, it could still be a while before banks are fully ready to refinance loans through the program.

If your bank says they’re not participating or that they don’t know about this program, you might refer them to some materials that have been issued to banks to help them become familiar with the program.

Q: How is this program different from HAMP?

The so-called “short refinance” initiative differs from other modification programs because it’s available only to borrowers who are current on their loans; so far, most modifications have extended help primarily to borrowers who are delinquent.

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Five Mistakes Home Buyers Make

Five Mistakes Home Buyers Make

Even in this market, buyers can get tripped up. Here are a few do's and don'ts for first-timers.

by Sarah Max Wall Street Journal Real Estate

Home buyers are an increasingly rare breed these days. Many who were eager to buy a house raced to take advantage of federal homebuyer tax credits. When those government perks expired in April, home sales essentially went into deep freeze, plummeting to levels not seen in more than a decade, according to the latest numbers from the National Association of Realtors.

Still, the Realtors project that nearly 4 million existing homes will sell in 2010. First-time buyers, without the burden of a home to sell, could benefit from the foul market–and the record low mortgage rates.

But woe to the overconfident buyer. Here are five common missteps that first-time home buyers make.

1. Snubbing the real estate agent

With so many websites offering a mass of data on listings, who needs an agent? Most people, actually. Finding a house and figuring out comps–the price of comparable homes on the market–is the easy part. Managing the nuances of offers, inspections, financing and all the other pivotal steps to buying a home is where many new buyers tend to get tripped up, says Shii Ann Huang, an associate broker with The Corcoran Group in New York.

When you hire an agent to act as your "buyer's representative," she's obligated to put your interests first, even if her commission is paid by the seller and based on the sale price. Skeptical? That's all the more reason to find an agent on your terms. Ask friends and acquaintances for referrals and interview two or three candidates before deciding.

But don't let the agent find you. When Viviane Ugalde and her husband, both physicians, bought their first home in Sacramento nearly two decades ago they made this mistake. "We stumbled onto an agent when she saw us peeking in the windows of an empty house for sale," Ms. Ugalde recalls. The agent, who happened to live on the same block, came out of her house (wearing pajamas), offered to show the couple around the neighborhood, and ultimately helped them find a house. Then the agent, who was new to real estate, neglected to show up for the closing. "It was scary and confusing signing what seemed like a thousand pages," says Ms. Ugalde.

2. Guesstimating how much you can afford

Many buyers mistakenly take a do-it-yourself approach to financing. They use online calculators to estimate how much house they can afford, dive into the house hunt and then get a dose of cold water when lenders refuse to qualify them for that amount. "The process is so different than it was four or five years ago," says Diann Patton, a broker with Coldwell Banker in Grass Valley, Calif. Not only are lenders reading loan applications closely, she says, they're verifying employment and running credit checks multiple times during the process.

Make a date with a mortgage broker or banker before you get serious about your search, says Ms. Patton. Remember, too, that the costs of buying and owning a home go well beyond the sticker price. While online calculators do take into account property tax and insurance, it's up to you to account for maintenance costs, moving fees and association dues.

3. Letting charm cloud your judgment

No one will fault you for falling hard for a charming older home. But, unless the house has been painstakingly remodeled or you're prepared to pay for repairs and upgrades, an old house can quickly lose its allure. Last year Alison Koop, a public relations manager for the University of Washington, came dangerously close to saying "I do" to a seemingly fabulous mid-century home in northeastern Seattle. Ms. Koop was so smitten with the big windows and vaulted ceilings in the living room that she neglected to notice the exposed wires, shoddy roof and other structural problems. Any delusions Ms. Koop had were laid to rest in the guest bathroom. "When the inspector turned the faucet on," she says, "the spigot fell off, hitting the floor of the tub with an exclamatory thunk."

If you're considering an old home, don't let the inspection be your last line of defense, says Jay Papasan, vice president of publishing at Keller Williams Realty. "Negotiate a long due diligence period," he says. That gives you time to get real estimates from contractors and back out if need be.

4. Focusing on the house, not the hood Of course, new homes aren't without their drawbacks. Recently, many newly built homes experienced serious problems with Chinese-made drywall, for example. Proceed with care whatever the home's age.

In hindsight, many buyers say they wish they'd taken their due diligence a few steps further to really get to know all the perks, quirks and hassles of living in a particular place. You can always fix up the house, but there's no easy remedy for annoying neighbors, oppressive homeowner association rules and marathon commutes. When Laurie Tarkan and her husband bought their first home in 2001 they were so infatuated with the circa-1924 three-bedroom cottage that–in addition to brushing over some of the headaches of an old house –they didn't give a whole lot of thought to its somewhat out-of-the-way location about a mile from downtown Maplewood, N.J., a popular New York suburb. "As a first-time buyer you're not aware of all the things you should think about that aren't about the house," says Ms. Tarkan, who after living in New York City for 17 years, still hasn't gotten used to driving everywhere.

Spend as much time as you can in your future neighborhood, ideally on different days and times. Eat in the restaurants, drop in a yoga class, test drive your commute.

5. Making arbitrary offers

With housing inventory running high and sales at record lows, in most markets, there's no shortage of houses for sale and sellers desperate to get out from under them–all the more reason to hold out for the right house and the right price. But when you find that perfect house, don't assume you can lob a lowball offer or make unreasonable demands. Even in hard-hit markets, nice houses in desirable neighborhoods are fetching multiple bids.

If the house has been on the market for months, you probably don't need to worry about other buyers lining up behind you. Make an offer based on recent sales for comparable homes, foreclosure activity and market trends, and don't be afraid to start the bidding low. If the house is fresh on the market (or recently foreclosed) and other buyers are circling the block, put your best foot forward but don't get suckered into a bidding war.

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Home Prices Gain 3.6% in Last Year

Home prices gain 3.6% in past year

By Les Christie, staff writerAugust 31, 2010: 9:53 AM ET

NEW YORK (CNNMoney.com) -- Despite a recent spate of bad news coming out of the housing industry, home prices show signs of stabilizing.

National home prices jumped a substantial 3.6% in the past year, according to the S&P/Case-Shiller Home Price Index released on Tuesday. Prices also climbed 4.4% in the second quarter compared with a 2.8% plunge in the first quarter.

"While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead," said David M. Blitzer, chairman of the Index Committee at Standard & Poor's. "Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year."

Of course, the positive report was buoyed by the government's tax credit program, which refunded as much as $8,000 for homebuyers. With that program now over, markets could cool.

"We all know what happened to housing after the homebuyers tax credit ended," said Mike Larson, real estate analyst for Weiss Research. "It's been an Acapulco-sized cliff-dive."

And because this report is a lagging indicator, Larson adds that "it would be foolhardy to think that this report tells us that prices will continue to rise." Instead, he expects prices to slowly deteriorate over the next several months.

In fact, home prices across the country could be substantially lower a year from now, according to Pat Newport, an analyst with IHS Global Insight. "It's now apparent that the demand for housing is a lot weaker than anyone thought," he said.

That has resulted in a glut of inventory, which a slew of bank repossessions of foreclosed properties is only making worse. Plus job gains are still proving elusive.

"These three factors are enough to bring home prices down," Newport said.

Winners and Losers

A market basket of 20 metro areas tracked by the S&P/Case-Shiller home price indexes showed that prices gained in all markets but one. The index is up 4.2% year-over-year, well above a 3.1% forecast from industry experts as compiled by Briefing.com. The month-over-month gain was 1%.

"Las Vegas was the only city to record a fall in prices during June (-0.6%), compared with a month earlier. All 19 other markets were either up or flat, with Chicago, Detroit and Minneapolis the biggest winners. Each gained 2.5%.

Fifteen of the 20 cities recorded 12-month price rises, with San Francisco leading the way. Its 14.3% increase was one of three cities posting double-digit gains, with San Diego prices jumping 11.2% and Minneapolis 10.7%.

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