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Caution is in the air

Real estate’s biggest season is coming. Here’s what first-time buyers and others should expect.<br />By Alan J. Heavens<br />Inquirer Real Estate Writer<br />3/19/06<br /><br />The residential real estate market may be much slower than it was a year ago, but reports of its death have been greatly exaggerated.<br /><br />The market is, instead, different.<br /><br />”We’re not talking the early- to mid-1990s here,” said Gary G. Schaal, vice president of sales and marketing at Orleans Homebuilders in Bensalem. “Houses are selling. Just not as fast.”<br />Typically, the buyers affected most quickly by rising interest rates are the first-time-around crowd. Yet Patrick O’Connell, an agent with Prudential Fox & Roach in Center City, is dealing with more first-timers than a year ago.<br /><br />”There’s a lot more caution in the air,” said O’Connell, who has sold real estate downtown for 25 years and through other market slowdowns. “I don’t think real estate is the reason for that wariness. I think people are uncertain about many things.”<br /><br />Long-term interest rates haven’t risen all that much, again defying economists’ predictions. The rate for a 30-year fixed-rate mortgage remains less than 6 percent as the spring season – real estate’s biggest – begins.<br /><br />”Rising interest rates can easily be counteracted by creativity, starting with selecting a creative mortgage lender and real estate agent,” said <a href=”http://fredglick.com”>Fred Glick, president of US Loans Mortgage L.L.C.</a> in Philadelphia. “Being creative often implies risk, but there are ways to get the right financing with minimal risks.”<br /><br />Diane Williams, an associate broker with Weichert Realtors in Spring House, isn’t surprised that so many first-time buyers are in the market.<br /><br />”The increase in inventory has given first-timers more options this year than last, when the inventory was tight and there was plenty of competition for what was on the market,” she said.<br />Does that mean multiple offers are a thing of the past?<br /><br />”We are still getting some,” Williams said. “But in most cases, buyers can take their time because they have more to choose from.”<br /><br />What accounts for the increase in houses available for sale? Basically, it’s the fact that there are still sellers hoping to cash in before the market changes more drastically than it has.<br /><br />The residential market has shifted in the buyer’s favor, much as it was before the start of the boom period that began in 1997-98. And the big difference between this buyer’s market and past ones is the Internet.<br /><br />”Because of the Internet, the first-time buyers… today are better prepared to buy than ever, and are more savvy than any other segment of the market,” O’Connell said. “They begin research long before they get to me.<br /><br />”My job becomes one of helping them make sense of what they’ve seen,” he said, “and turn that knowledge into something they can use to buy a house.”<br /><br />With so many real estate brokers having a presence on the Internet, first-timers and other shrewd buyers are intimately familiar with what’s available, limiting the amount of time spent physically searching for homes, Williams said.<br /><br />And many entry-level buyers already know what they can afford.<br /><br />”They know their credit scores; they know enough to at least be prequalified or preapproved for a mortgage of the size necessary to buy something in the area in which they are looking,” O’Connell said.<br /><br />A decade ago, without the anonymous searches for information facilitated by the Internet, most first-time buyers underestimated what they were able to afford, Schaal said.<br />The Internet has exposed buyers to all sorts of mortgage programs. But knowing of them doesn’t mean knowing about them, Glick said.<br /><br />”I’ll get a call from a first-time buyer who will ask about an 80-15-5 mortgage. That’s where their expertise ends,” he said. “… Without knowing the details, they think it is the right mortgage for them.”<br /><br />An 80-15-5 loan means a borrower obtained a main mortgage of 80 percent of the home’s purchase price and a piggyback loan for 15 percent, and made a 5 percent down payment.<br />”Getting the 15 percent piggyback loan allows you to avoid paying private mortgage insurance,” Glick said. Generally, mortgage insurance is required when the loan amount is for more than 80 percent of the home’s price, “but frankly, PMI is getting cheaper.”<br /><br />The interest rate on the piggyback loan is higher than the rate on the first mortgage. But the combined payment often is less than the costs of a loan larger than 80 percent of the value of a house, plus mortgage insurance.<br /><br />Creative financing is important to the first-time buyer right now because the boom years have resulted in higher entry-level prices. “In Center City, we are talking about $250,000 to $325,000,” O’Connell said.<br /><br />When you look at Prudential Fox & Roach’s most recent determination of the city’s median price at $123,000 in 2005, this range looks like it could buy a lot. It doesn’t.<br />”Depending on where they want to live, they may have to wait until something in that range comes on the market,” O’Connell said.<br /><br />Some folks don’t want to wait, especially now, because they realize they will be competing with people transferring to this area as the spring market gets going.<br /><br />Moreover, some buyers don’t want to wait for a condo that will be ready to live in in the distant future if there’s something suitable coming on the market today.<br /><br />With more homes on the market from which to choose and more time to do it in, Glick suggests that buyers negotiate more with sellers to try to get concessions or a lower price.<br /><br />”If the seller pays the points, you can get a lower rate and still be able to deduct the points on your taxes,” Glick said. “Try to get the seller to pay closing costs, since they sometimes increase the cost of the transaction past the buyer’s ability to pay.”<br /><br />For buyers without deep pockets, Williams suggests looking into programs that are designed to help first-time buyers – information that is available from a real estate agent, but is also at your fingertips on the Web.<br />The new-home market also is slowing down somewhat, Schaal said, with the intensity of the situation differing from builder to builder. To get inventory moving, builders offer incentives to buyers, he said.<br /><br />For example, in return for a spec house’s going to settlement before the end of the builder’s fiscal year, the buyer might receive as much as $30,000 off the price, with the amount applied to options or closing costs.<br /><br />Or the builder might offer to subsidize the mortgage rate at a certain percentage for the first three years. Say the rate is 6 percent. The builder provides a subsidy of 2.5 percentage points for the first year, meaning that the rate the buyer pays is 3.5 percent. The second year, the subsidy is 1.5 percentage points, for a 4.5 percent rate. And the third year, the subsidy is one-half of a percentage point, for a 5.5 percent mortgage.<br /><br />Since most first-time new-home buyers are in the townhouse and condo market, “you’ll see efforts to move inventory in those categories,” he said. “We assume that first-time buyers will see increases in their income during the early years of the mortgage that will justify the subsidies. It gives them the opportunity to qualify for a mortgage that they might not be able to easily handle at first.”<br /><br />Schaal doesn’t expect the slowdown to last forever. In fact, real estate agents, lenders and builders are really taking a wait-and-see attitude until the spring market gets going.<br />Meanwhile, new-home buyers are spending more time on deciding whether to buy, increasing the number of visits they make to a development before making a commitment.<br />”It’s true that instead of five visits to buy, it takes nine,” Schaal said. “But the incentives are only in effect until June 30. On July 1, they’re gone.”<br /><br />Contact real estate writer Alan J. Heavens at 215-854-2472 or <a href=”mailto:aheavens@phillynews.com”>aheavens@phillynews.com</a>.

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