If you are interested in buying a home, you might
find a good deal these days. The same may be true
if you have children who want to enter the housing
market or parents who want to buy a retirement home.
Both sellers whose home values have slumped and banks
that own homes after foreclosures may offer bargains
to buyers.
The National Association of Realtors (NAR) maintains
a Housing Affordability Index, which reflects the
relationships among household incomes, mortgage interest
rates, and housing prices. The index number is compiled
by dividing the median household income by the median
income a family needs to qualify for a mortgage on
a median priced single family home. A higher index
number indicates greater housing affordability: The
index number rises as family incomes rise in relation
to the cost of making mortgage payments on a median
priced home.
In 2006, at the peak of the housing boom, the NAR
index number was around 108. That is, the median household
income was barely enough to qualify for a mortgage
on a median priced home. Since then, median family
income has climbed from around $58,400 to over $60,500.
Mortgage rates have dropped from 6.6% to 5.3%, the
NAR reports. Most important, the median price of a
single family home has fallen from almost $222,000
to around $178,000. As a result, the NAR index number
is about 159, as of this writing, and homes are much
more affordable for many buyers.
Coming up short
You may find that buying a home today is not a simple
process, however. For instance, you may want to buy
a home in a "short sale" -- a transaction
in which the agreed upon purchase price is less than
the mortgage balance. If that is the case, the lender
will have to approve the deal.
Example 1:
Lyn Park finds a home she likes and bids $180,000.
The seller accepts her bid. However, the seller bought
the house a few years ago with a $210,000 home loan,
which now has a balance of $205,000. On a $180,000
sale, the seller might net only $165,000 after expenses
such as sales commissions. That $165,000 will be $40,000
less than the $205,000 that the seller owes the lender.
In such a transaction, the seller will have to ask
the lender for permission to sell for $180,000. The
lender may refuse, thinking that it can do better
by foreclosing on the loan, acquiring the house, and
selling it for a higher price. Alternatively, the
lender may examine the seller's financial situation
and earning prospects to negotiate payment of the
$40,000 shortfall.
Generally, the process of getting a short sale approved
can take weeks or even months. As a buyer, you may
end up obtaining a desirable home at a reasonable
price, but you'll probably need to be patient.
Buying from the bank
As home foreclosures increase, lenders own more properties.
Such homes are known as REO: real estate owned by
the bank. Generally, banks would rather hold cash
than real estate, so they may be motivated to offer
an attractive price to generate a quick sale.
When you buy REO properties from a lender, you may
get a property that's clear of obligations incurred
by the prior owner. A bank that's eager to sell the
property may have made sure there are no outstanding
liens, property taxes, homeowner's association dues
or assessments, and so on.
However, you should not assume that a REO house is
trouble free. Typically, these properties are sold
"as is." The prior owner, facing foreclosure,
may have neglected maintenance or even vandalized
the home. If the home has been empty for a while before
the sale, uninvited guests may have caused further
damage. Therefore, you should not make any binding
commitments to a home purchase - especially a REO
purchase - before you have the home inspected and
examine the report. If the house will need work, you
may want to reduce your bid or even start looking
for another place to buy.
