A lot has happened in recent weeks....events with significant impact on the credit markets.  Facts and news abound but their interpretation is primarily influenced by our own experiences, grasp of the local market and our views about the future. We all agree on one thing and that is that the real estate sector is soft and has been for the past 26 months and is expected to last another 4 months to 15 months depending on who you talk to....of course, the naysayers expect the real estate market to crash and lose 15% of its value in major metropolitan areas that experienced "hot growth" during the early 2000s.
 
I have always said that real estate experience is local and not regional, national or global. Real estate prices vary depending on its location and the strength of the location's economy and community (macro factors can impact local/regional economies but for now I will leave it at that). Boston and metro Boston have weathered "the softening" relatively well thus far. Selected communities in the Greater Boston area have experienced price increases this year (based on sales through July 2007). But now that credit has become scarce and sub-prime mess has made its impact evident (August and thereafter) what should a buyer do?
 
Boston Globe (August 31, 2007) recently has an article titled: WHEN THE STOCK MARKET GETS SCARY, IT MAY BE TIME TO HUNT FOR BARGAINS. In this article, the writer opines that when the stock market acts crazy - hitting records and then selling off in broad, dramatic movements that sends many screaming for the exits in fear - learn how to buy. That's when stocks go on sale and you can find good companies at good prices - if you know how to look."
 
"Don't worry about trying to catch market tops and bottoms; nobody does that with perfect regularity. But if you can train yourself to buy when others are running in fear, and to sell when those same sheep are greedily knocking on the door, you will be a happy investor. Even on those stressful days."
 
This is true for real estate also. Buyers seeking to purchase real estate want the best deal. Good deals or rather value deals can be found when most are screaming for the exits. Learn how to buy. All options require understanding and a strategy.

SHOULD I BUY A FORECLOSED PROPERTY?

Aleksandra Todorova writes in the Wall Street Journal, "all foreclosed properties may offer bargains, but there are risks. As some homeowners get squeezed by higher mortgage interest rates and a cooling real-estate market, many house bargain-hunters are turning their attention to foreclosures. They hope to get good deals by buying from homeowners who are falling behind on their mortgages or by buying after the lenders have seized such properties. Buying foreclosure properties is more complicated than going the regular home-buying route."
 
Tapping Pre-Foreclosures: "Buying property in a pre-foreclosure stage -- the period between when the owner receives a Notice of Default from the lender and the day the lender puts the property up for an auction -- may offer the best bargains, but it's also the most difficult. Pre-foreclosures tend to be more for the seasoned investors. For starters, you have to deal directly with the owner of the house, who may not even be aware that the house was made public in a foreclosure listing. Even if you come to an agreement with the owner, you may have very little time to complete the transaction. Depending on which state they call home, the owners may have only a month before the bank puts the home up for auction."

Auction Risks: "If buying pre-foreclosures is tough for the regular home buyer, buying at an auction can be downright impossible. For starters, you have to pay cash, since financing auctioned properties isn't allowed. You're also expected to buy the house sight unseen. And on top of that, you're not allowed to get title insurance: If the house has a $100,000 tax lien attached, the new owner will have to pay it off. The auction is the most risky way to buy."

Foreclosed Deals: "If no one shows up on the courthouse steps or there are no bids high enough to cover the outstanding loan, the bank will take ownership of the property and put it up for sale. This is the easiest way to buy foreclosed properties, but you are also least likely to get a discount, as the bank will typically put houses up for sale at or close to market value. Bank-owned properties, also known as REO or "real estate owned" properties, are usually sold through real-estate brokers. To find an REO broker in your area, try REONetwork.com."

As with other aspects of the real estate industry, technology is closing the gap between pros and amateurs, and making the foreclosure auction more accessible to casual investors. Free and subscription Internet services now provide a wealth of property and public record data and make locating auctions, or just homeowners in distress, easier than ever for investors.

SHOULD I MAKE AGGRESSIVE OFFERS ("low-ball" offers)?

The vast majority of home sales in Massachusetts (especially in Boston and Metro Boston) are discretionary, meaning that sellers don’t have to sell because of a major life event such as a job change or divorce or job loss . Since so many homeowners don’t have the urgency to sell, they don’t budge on prices. In other words, buyers looking to find bargains through "low-ball" offers may have to wait a long time or adjust their expectations and modify their search to seek out value rather than bargains. Buying a property in good condition, at the right location and at a fair price is defined as value here....a notion that becomes difficult to attain in a heated market.  Buyers often times fail to remember that the real estate transaction can be as optional and discretionary for the seller as it is for them as a buyer. If sellers cannot sell their home at the price they want, they frequently decide to renovate, expand or rent their properties. The rental market is tight and rents have trended upward in the past two years.

The number of condos and single family homes listed for sale has dropped steadily since last year. In July, 2007, there was 8.6 months of supply, down from 10.3 months of supply during the same time in 2006. At one point in 2006 there was a 15 month supply of properties.

Sellers typically are obtaining about 92 percent or more of their original asking price, which is similar to a year earlier, according to MLS PIN. At the height of the market two to three years ago, sellers were getting as much as 95 percent to 100 percent of the listing price. Keep in mind that asking price or listing price is the price against which an offer is made. It very well could be that the seller may have had to bring down the listing price before an offer was received on it.

SHOULD I BUY A FIXER-UPPER?

Elizabeth Gehrman writes in the  Boston Globe, "Buying a less-expensive house that needs significant work may sound like a good idea, but before you decide to commit to a project, make sure you understand what you're getting into. Living with plaster dust for months or even years, doing your dishes in the bathtub, and moving your belongings from room to room can take a toll, both physically and emotionally. But your reward is a house that's custom made for you in every detail, and, if you do your homework, one that can cost less than a comparable place that's already finished."

Up-and-coming neighborhoods and towns – Chelsea, Dorchester, Roslindale, Somerville – have more distressed houses available than long-desirable areas like, say, Beacon Hill or Brighton. But once you've decided on a neighborhood, look for  a house on the best street. if you're going to buy a bad house, make sure it's in a good location.

"Settling on a fair price for a fixer can be tricky, because if there's one thing all home renovators, real estate agents, contractors, and mortgage brokers agree on, it's that no matter how much time and money you think it's going to take to get your house in shape, it's going to take more. Even with professional help, one thing home renovators agree on is that buying a fixer-upper is an education."

HOW DOES THE INTEREST RATE CUT AFFECT THE HOUSING MARKET?

The stock market soared when the Fed lowered an important interest rate to 4.75 percent on September 18th. However, the impact of interest rate cuts on the housing market will be relative gradual. The Federal Reserve's aggressive half-point cut Tuesday could provide support for a slumping housing market. A quarter-point drop had already been priced into the market for Treasury bills and other instruments tied to mortgage rates, according to Richard DeKaser, chief economist for National City Corp.

The Fed Funds rate affects a range of consumer loans, including home equity and mortgages.

"Lower mortgage rates would add to the number of home buyers able to afford to make purchases, increasing demand for properties and buoying home prices. If rates drop, so will monthly debt obligations. Interest rates for conforming loans - those of no more than $417,000 - are already reasonably low, averaging 6.31 percent for a 30-year fixed rate loan. But an important class of loans that might benefit from the big cut: the high-ticket home mortgages known as non-conforming or jumbo loans. These loans have no guaranteed secondary market because they exceed the $417,000 cap and Freddie Mac and Fannie Mae will not buy them." Jumbo rates may come down if the cut makes consumers more confident, according to Mark Zandi, chief economist for Moody's Economy.com

Borrowers should also see rates drop on a variety of loans including popular home equity lines of credit which often are used to pay for education, home improvements or medical bills. And, it will help some homeowners whose adjustable rate mortgages reset in the fall. Those rates will still go up but not by as much as they otherwise could have.

An estimated 2 million homeowners face sharply higher mortgage payments when their current loans reset over the next year. So a Fed rate cut could possibly stave off a wave of foreclosures. "That's key since more foreclosures could have the potential to hurt consumer spending as a whole", said David Wyss, chief economist for Standard & Poor's .

(Sources: The Boston Globe, Wall Street Journal, CNN/Money, MAR, Banker and Tradesman, Economy.com)

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