Hopeful Times for Home Buyers
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 property 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, homeowners’ association dues or assessments, and so on.
However, you should not assume that an 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 an 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.
Copyright © 2009 by the American Institute of Certified Public Accountants, Inc., New York, NY 10036-8775.