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Wednesday, May 5, 2010

Buy, Sell or Wait?

Predicting Milwaukee’s housing market trends

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When Jonah and Rachel Kolterjahn began looking for a home in Milwaukee three summers ago, it was hard to know where to begin.

"When we moved back to Wisconsin, we started looking for a house and decided we couldn't afford one. Then we started looking again in January, and it was one headache after another," Jonah Kolterjahn said. "We weren't even sure we'd get a loan commitment."

Fortunately, it took just one open house to get the couple on the path to homeownership. After connecting with a real estate agent and spending four weekends viewing houses, they were ready to make an offer.

This process wasn't hurdle-free, but the Kolterjahns were able to find the resources they needed to assess their finances, compare properties and make an offer with confidence. Plus, they acted quickly enough to edge out other buyers looking to take advantage of the $8,000 federal tax credit for first-time home buyers, which ended April 30.

Though the credit—and a separate $6,500 credit available to repeat home buyers, which also expired on April 30—helped to move many properties out of the local real estate market, it also created a frenzied—and in many cases, competitive—atmosphere for buyers and sellers alike, as well as real estate agents and lenders.

"The tax credit made us unbelievably busy," said Julie Luettgen, a real estate agent for Bay View Homes.

Still a Buyer’s Market

Stressful conditions aside, the federal tax credits did their job by eliminating a substantial amount of local housing inventory, according to Mike Ruzicka, president of the Greater Milwaukee Association of Realtors (GMAR). And though the credits are not likely to return, it's still a good time to buy, especially for those who want to make a long-term investment in a home, and not hope to create a short-term path to house-flipping riches.

"There's still an 11- or 12-month supply of houses, which is more than ideal, and prices are down 20% to 30% from their peak three years ago, so it's still a buyer's market," Ruzicka said. "And with interest rates as low as they are now, it's almost like getting free money."

By "low," Ruzicka means 6% or less on a 30-year fixed-rate mortgage. As of press time, interest rates are hovering around 5%, making home-buying and mortgage refinancing very appealing.

Sure, it's a buyer's market, but the outlook's not so shabby for sellers, said Shorewest Realtors sales associate Nancy Meeks.

"If you're selling your house right now, you should be just fine if it's priced properly," she said.

The rule of thumb? If it's been on the market 200 days, it's probably overpriced. And if similar homes within a mile of yours are receiving offers in 30 days, they're probably at the right price point.

So don’t be discouraged if you must sell a house while you’re transitioning into a new home. Meeks said listing your home at the right asking price typically leads to a 60-day close.

“Some people are assuming that buyers are going to come in and low-ball their price, so they want to puff up their price by 20%,” Meeks said. “This is hurting the sellers because the buyers don't want to even look at their [overpriced] houses. The thing is, Milwaukeeans aren't quite like people other places. They like to sit and wait and watch houses; they don't like to low-ball. They will watch your house until it rots away.”

Plan in Advance

But don't rush off to an open house just yet: You need to plan if you're seriously considering a real-estate purchase. Even if you're nervous that interest rates will rise—a likelihood if the Federal Reserve raises rates this summer, as The New York Times predicted on April 10—it's not wise to rush, said Rob Seetan, a mortgage loan officer for Brewery Credit Union.

"The 'smart' people are saying that we haven't quite reached the bottom for the Milwaukee metro-area market. We're a year or two out from that, I think, so if you buy now, you're probably going to lose equity over the next year," he said.

Others disagree and think that the Milwaukee market may have hit the bottom.

Then again, a home’s purchase price is not the only factor a buyer must consider. Low interest rates can make a purchase worthwhile in the long run.

“People are understanding that it's worth it to jump now because rates are so low,” said Shorewest’s Meeks.

In other words, buyers must be prepared to hang onto their home for several years to see a return on their investment. This means having enough money to pay the mortgage and other expenses such as homeowners' insurance each month.

"That's why the first thing buyers should do is talk through their plans with a Realtor, even if they're two years away from purchasing," Ruzicka said.

Remember, all real estate agents, even that nice person who drives you around town to see any number of homes, work for the seller unless they are hired as a buyer’s agent.

Luettgen noted that real estate agents, especially buyer agents, can locate lenders willing to work with individual buyers' financial situations.

"If you're looking to buy, you want a lender to pre-approve you for a [mortgage] loan sooner rather than later," she said. "Some sellers won't even look at your offer without a pre-approval, especially if they have others on the table. And pre-approval helps you figure out what your budget might be."

That said, the Home Buying Institute, an online resource for buyers, recommends checking credit scores and resolving credit problems first, then applying for pre-approval, before contacting an agent.

This doesn't have to mean going it alone at the lender's office, though. Home-buyer-education organizations like the nonprofit Select Milwaukee can help buyers prepare to have their finances scrutinized and guide them through other tough decisions.

It's a process that helped the Kolterjahns find some extra money to pay for their home, too. In addition to qualifying for a Federal Housing Administration (FHA) loan, the couple received a Select Milwaukee grant and successfully closed their purchase with the local branch of a national bank.

The Credit Crunch

Although the days of easy credit and no-money-down mortgages are over, it isn’t impossible to get a good mortgage and make a down payment.

"Many people think that to get a mortgage loan today, you have to have impeccable credit and make a down payment of 20% [of the home's price]," said Ray Schmidt, Select Milwaukee's executive director. "For the most part, that's perception. Lenders are requiring slightly higher standards for evaluating creditworthiness, and this means more documentation for the buyer. But more is being required of the entire transaction, which benefits the buyer, too."

A down payment of less than 20% requires most buyers to purchase private mortgage insurance but doesn't prevent them from house shopping. And while lenders now want buyers to provide pay stubs, plus a credit score of at least 620 for those seeking an FHA loan, they also want sellers to provide extra details about their property's condition and value.

FHA loans like the Kolterjahns' are an especially good choice for first-timers, Seetan points out, since they require a down payment of just 3.5% and come with a specific set of quality requirements.

"FHA makes sure there's no lead in the house, and there are all sorts of other restrictions to protect buyers, especially inexperienced ones," he said.

Finding Value

But perhaps the most important question for buyers and sellers is, “What, exactly, is this house worth?” An appraiser’s opinion, plus some market research, can help put a dollar amount on a home.

"You can put in all the granite countertops you want, but they're not necessarily going to add to the home's value, especially if the value of the house next door is falling," Seetan said.

In other words, it's important for buyers to study homes nearby the one they have their eye on. And buyers who want a fixer-upper shouldn't aim to create the crown jewel of the neighborhood, Seetan said, since it will be compared to the lower-value homes that surround it.

But a diamond in the rough is the right choice for some, Schmidt argued: Appraisers' opinions are important to keep in mind, but they're not the be-all and end-all of value determination. Plus, substantial subsidy for repairing a foreclosed home may make one a good buy.

"Depending on your income, where the house is located and a few other factors, you may be eligible for up to $30,000 in federal stabilization money to help you if you intend to live in that home and fix it up," Schmidt said.

For instance, through the city of Milwaukee's Neighborhood Stabilization Program, a family of four with an annual income of less than $84,840 can get up to $20,000 to occupy and repair a home in several city neighborhoods with high foreclosure rates. Program participants also receive technical assistance to bring the house up to code, from help estimating costs to monitoring of the construction process. (More details are available at milwaukeehousinghelp.org.)

So, while now is a good time to jump into the market, don't forget to do your homework. Research neighborhoods, grant and loan programs, lenders and the properties themselves. More importantly, trust your gut when you're feeling overwhelmed and don't hesitate to ask for help.

And take it from Seetan, the man with the mortgage money: "If you find a deal, there's a reason it's a deal. Make sure you find out what it is."