July 27, 2011
No place like home: Finance expert says home ownership still possible in troubled housing market
Considering buying your first home or moving up the property ladder? Today's troubled housing market, hit by foreclosures, slow sales and declining values, presents opportunities and challenges for homebuyers, according to Eric Higgins, a professor of finance at Kansas State University.
"When prices drop substantially, it creates the opportunity to buy," Higgins said. "But if you're waiting for prices to hit absolute bottom, that may not occur for some time."
Florida, California, Arizona, Nevada and Ohio are the five states where most of the home foreclosures have been. Other areas across the country, like Manhattan, Kan., have had fewer problems.
Higgins is co-author of a recent study that found the best way to help the housing market recover is to stop delaying foreclosures. Regardless of whether you're buying a home in a market that's struggling or that's thriving, he says to keep in mind the following:
* Be careful when buying a foreclosed property. "The property has probably been unoccupied for some time, which means it could have gone for awhile without some attention and may have issues," Higgins said. "Remember, if it's declined in value, it may have declined physically. Know what you're buying."
* Check out the neighborhood where you want to buy a home. "Be wary if you're buying into a neighborhood where more than 50 percent of the homes are in foreclosure. If more than 50 percent are, be skeptical the neighborhood will come back," he said.
* Determine the completeness of the development. Higgins suggests finding out whether the homeowners association is still active. He also says to make sure the developer is making good on promised amenities, such as a community pool. Also look at the location of the development. Proximity to shopping or a golf course can make it a place where people will want to live, especially when the housing market rebounds.
* Want a bargain? One way is to look for a short sale, where the property is being held by a bank or mortgage lender and is being sold for less than the value of the mortgage. "Short sales can be a good opportunity, but they also can take longer to complete," Higgins said. "That means your finances can be tied up longer, so make sure it will work for your budget."
* Expect to abide by the 80/20 rule when it comes to getting a loan -- and have the income to support the loan. Lenders today will want a down payment of at least 20 percent of the home's price to secure the loan, Higgins said, although some first-time homebuyers may be able to qualify for government programs that allow for a smaller down payment. "You also can expect more loan documentation," Higgins said. "The days of not having to prove your income are gone. You've got to be creditworthy to get into this market."
* Only buy as much house as you can afford. "It's much harder to buy more home than you can really afford today -- and you shouldn't do it," Higgins said.
While it may take awhile for the housing market to recover nationally, Higgins said real estate will remain an attractive investment, even in states hit hard by foreclosures like California and Florida.
"As they say, 'there's only so much coastline and so much sunshine.' People are always going to want to be there," he said.