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First-time dilemma

By Jose R. Cordova

Real Estate Broker/Owner with CASA REAL PROPERTY

April 08, 2008 07:43 AM

Home prices are dropping, but should first-time buyers jump in?

By Amy Hoak, MarketWatch

Last update: 2:01 p.m. EDT March 9, 2008

CHICAGO (MarketWatch) -- Everyone likes a bargain. So it's no surprise that as home prices fall in many markets, those who have been priced out of owning a home are beginning to take notice.

And some in the real-estate industry are saying that factors are aligning to make this a good time for first-time buyers to be in the market because they don't have to face the challenge of selling a home in order to buy another.

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In certain ways (and in certain places) these agents are right: Home prices are dropping, there's often a glut of inventory to choose from and interest rates are still relatively low.

That's saying nothing of the foreclosures out there. In fact, bank-owned properties are lately making up the bulk of real-estate agent Annie Brown's showings.

In Brentwood, Calif., just east of San Francisco, homes that were priced at about $700,000 or $800,000 are now listed at $450,000 and $500,000, said Brown, who works for Zip Realty. In many cases, the homeowners couldn't afford their mortgage payments when the interest rate increased on their adjustable-rate mortgage, and they ended up in foreclosure. The banks, not thrilled about having the homes on their books, are pricing them to sell, she said.

"I'm seeing some fantastic prices right now, and the prices seem to be stabilizing," she said. "This is absolutely a wonderful time... a perfect time to start searching for a home."

But there are also roadblocks that first-time buyers are facing.

For one, lending standards have gotten more stringent than they were last home buying season, as lenders try and reign in risk at a time when home prices are dropping. Buyers are generally required to have higher credit scores and bigger down payments. Read more on mortgages.

Then there's the fear factor, general consumer angst about the economy, coupled with a worry home prices will keep dropping, said Teresa Boardman, a real-estate agent with Keller Williams Integrity Realty in the St. Paul, Minn., area.

"They're scared to death that it might depreciate by 1% next year," she said, and her clients are often not thinking of long-term home appreciation.

Local conditions matter

In Boardman's market, the median home price dropped 4.9% in the fourth quarter compared with the fourth quarter of 2006, according to the National Association of Realtors. The national median home price decreased 5.8% during the period.

Generally, homes are becoming more affordable, and mortgage rates -- though somewhat volatile over recent weeks -- are still relatively low, said Tom Kunz, CEO of Century 21.

"This is one of the best times that a first-time home buyer has had in a long, long time," Kunz said.

But prices aren't falling everywhere. They were actually up 4% in the Raleigh-Cary, N.C. market, where Stu Barnes is owner of Barnes McQuade Realty.

"It's more normal than a lot of places," Barnes said of his market, adding that appreciation has steadily ticked up. Those looking for bargain-basement prices are in the wrong market; it might take longer to sell a house, but sellers there aren't willing to drastically reduce their price, he said.

For every Raleigh, there's a Ft. Wayne, Ind., where prices were down 10.5% in the fourth quarter, year over year. And for every Los Angeles, where prices were down 13.1% in the fourth quarter, there's a San Jose, where prices were up 11.2% in the fourth quarter.

In some areas, prices still have some more room to fall.

"Houses are still a bit unaffordable for first-time home buyers," Boardman said. While vacant homes that need to move can be bought for a steal, there's often added costs to make them livable -- costs that would-be buyers aren't always prepared to deal with, she added.

In a recent research note, economic consultant Carl Tannenbaum said that it is likely home prices "will be in decline for a good while to come."

"Sellers are reluctant to cut their prices, while buyers are sensing that bargains will be available if they continue to wait. In many markets, transactions have been so infrequent that Realtors lack sufficient benchmarks to assess what a fair value might be," he wrote.

Ask the "what ifs"

In this time of changing lending standards, those thinking about shopping for a home for the first time should get prequalified for a mortgage early on, real-estate agents say. Beyond that, consider future scenarios that could come to fruition.

"Get qualified and go to a Realtor ... and then ask the questions 'What if the property drops,'" and "'What if the rates go up?'" Kunz said.

"The cost of capital is important to look at," he said, adding that it's possible that even if prices do drop significantly, interest rates could go up, making the savings negligible.

Of course, sometimes the best answer is to continue renting, Boardman said. For example, she has told those with weak credit scores to postpone buying a home instead of agreeing to a higher interest rate.

"It's so much better to clean that up and get that lower interest rate," she said.

Another question she asks clients is how long they plan on living in the home. If they say two or three years, her advice is also to take a pass -- even if they can buy it for a steal.

Amy Hoak is a MarketWatch reporter based in Chicago.

PLEASE READ. I am a Realtor. First, real estate traditionally has been a relative long term investment even for the investor. To buy and immediatedly flip/sell is not so smart considering the higher capital gain taxes on short term holdings.