Mark Pofsky and his wife are looking to buy their first home. Intent on finding a 2,000-square-foot house in California's San Fernando Valley for less than $300,000, the Pofskys have made a few low-ball offers but have not yet snagged a deal. Still, they're encouraged. "We started to look because of the interest rates coming down," he says. "It's a great time to buy a home."
The market certainly is improving for buyers. Since peaking in January, the average rate on a 30-year fixed mortgage has dropped a full point, to 8.25%, and it's still falling. One-year adjustable-rate mortgages are at 6.51%, down 0.36 points in the same period. Happily for house hunters, this financing bonanza has coincided with an oversupply of residences--there's currently a seven-month supply of newly built homes, up 17% from a year earlier--and a cooling of housing price inflation. The average existing single-family home sold for $107,900 in March, 1995, the same price as a year earlier.
"If I were looking to buy, I don't know if I would wait," says Priscilla Toomey, president of MovePower, a Southport (Conn.) moving consultant. Adds Richard Loughlin, CEO of real estate giant Century 21 International: "Homes are probably the most affordable they've been in years." The March median home price in the Northeast was $136,700, down 3% from a year earlier; in the Midwest, $88,000, up 3%; in the South, $92,600, down 2%; and in the West, $141,900, down 3%.
After a very weak winter, due to rainy weather in the West and high mortgage rates nationwide, sellers are anxious. Likewise, mortgage brokers, who lost 44% of their business when the refinancing boom ended in the winter of 1994, are still scrambling to write new loans. This hot competition has benefited consumers. Countrywide Credit, for example, allows mortgage seekers to apply in person or on the telephone. Details are also available on computer via America Online and CompuServe. Phone lines are open six days a week, 16 hours a day, and borrowers can go through a 15-minute application process that can result in instant approval.
POINT SHAVING. Customers are also finding more flexibility among mortgage brokers, so home buyers should price loans at several companies. Mortgage points, which are basically a sign-up fee assessed as a percentage of the purchase price, are particularly negotiable. "There's still a lot of capacity, which is bringing better pricing and better options to the consumer," says Sylvia Reynolds, director of marketing at BankAmerica Mortgage.
When choosing a mortgage, however, consumers should be aware of how much interest they save on shorter loans. The 30-year mortgage remains popular. But remember that a 15-year $100,000 loan at 8% costs $90,000 less in interest than a 30-year loan at 8%. And 15-year rates are less than the current 8%, 30-year rate.
To move inventory, builders are currently offering a host of attractive incentives. Many are willing to absorb a buyer's loan points, pay all closing costs, or throw in extras such as a deck at no additional cost. In late April, Los Angeles-based builder Kaufman & Broad began offering a 100% financing program. "It effectively costs people zero to move into a house," says CEO Bruce Karatz. But it's expensive in the long run. A 30-year annually adjustable mortgage priced to start at 8.125% covers 95% of the loan value. The remaining 5% comes as a five-year, 14% personal loan with interest payments that are not tax deductible.
Even in this buyer's market, many purchasers will still pay more than they should. "I've handled thousands of transactions, and no more than 5% of the home buyers I dealt with succeeded in getting the best deal," says Joseph E. Cummins, a former real estate broker and the author of Not One Dollar More! (Kells Media Group, $17.95), a guide for home buyers. According to Cummins and other consumer advocates, knowledge is the key. A home is usually the largest purchase a person will ever make, yet Cummins finds most people do more preparation for buying a color TV or a refrigerator.
A great way to get the lay of the land is to knock on doors in the neighborhood that interests you. Local schools, houses of worship, hardware stores, and even the corner diner are worth a visit. A resident is a lot more likely to warn you about a highway expansion or pending zoning changes than is your real estate agent.
Once you've chosen a neighborhood, shop for a preapproved mortgage. This is a commitment from a bank to lend up to a certain amount, assuming the property you choose is worth the price you're paying. Such commitments are readily available today and can be a very helpful negotiating tool with the seller. Preapproval lets buyers know exactly what price range they can afford. It also tells the seller you're serious and able to close a deal quickly. Todd and Elizabeth Gaydowski of San Piedro, Calif., got their preapproval for free at a conference sponsored by the Community Redevelopment Agency of the City of Los Angeles. They weren't sure initially they could afford a home they would like, but the preapproval gave them confidence to start looking. A few weeks ago, they closed on a well-maintained, two-bedroom house. With competition among mortgage bankers hot, many will informally process preapprovals for free. Others may charge a few hundred dollars and eventually apply it toward the mortgage.
It's best to obtain advance approval for the highest amount you are able to borrow, but never disclose to the seller or the seller's agent exactly how much you are actually willing to spend. MovePower's Toomey warns buyers that real estate agents are really on the side of the seller and have fiduciary responsibility to them. To protect themselves, buyers can retain their own exclusive representative, called a "buyer's broker." Your local agent may offer such services, but be aware that buyers' brokers who also work as sellers' brokers can sometimes end up on both sides of the deal. You can get a free referral to a broker who only represents buyers through Buyer's Resource (800 359-4092), a franchise organization. The buyer's broker is paid a portion of the real estate agent's fee, so there's no extra cost to you.
LOCATION, LOCATION. Now that you've talked to the neighbors, gotten your preapproval, and found a broker, you have to select the house. Look for one that suits your needs, but don't forget that someday you may want to sell it yourself. The most important thing: location. Two-thirds to three-fourths of a home's assessed value is based on the land beneath it. So buy in the nicest neighborhood you can, but not the fanciest house on the block. The local palace won't appreciate in price as quickly as the average home on the street. Buying an oddball is also a bad idea: It's not easy to sell a salt box in a row of colonials.
According to the National Association of Home Builders, the homes that sell easily these days average 2,100 square feet and feature a large kitchen and a "media room" for entertainment equipment--what used to be called a den. Most people want two baths: Three-bedroom homes with one bath are obsolete.
What buyers want depends to some extent on what part of the country they live in. In areas with cold winters, an attached garage may be a key factor, but in Florida you would probably consider a pool essential. How much you will end up paying for your home and its financing also depends on where you are. Atlanta is overbuilt and a buyer's market, but in Salt Lake City, where the population influx is astounding, prices are up 6% ever last year, and sellers are calling the shots. Whatever your local market, smart, well-prepared buyers are today finding great deals from coast to coast.
The Dos and Don'ts of Buying a Home
-- A lot of research: Knock on potential neighbors' doors. Get the local high school's SAT average. Find out from the town clerk what similar homes in the area have sold for recently.
-- Comparison-shop for a mortgage: Lenders and mortgage brokers are in hot competition and will sometimes shave points or whittle down the interest rate.
-- Get a preapproved mortgage: This shows sellers you're truly interested in buying and the deal can be done quickly--helpful when negotiating a price.
-- Know all fees: Nail down exactly what you're expected to pay at the closing.
-- Assume a real estate agent represents you: Unless you're working with a so-called buyer's broker, the agent works for the seller.
-- Discuss your maximum price: Never let the seller or the seller's agent know the exact amount you're willing to spend.
-- Sign a contract without an inspection contingency: A clean bill of health from a home inspector or contractor avoids headaches later.
-- Buy "unique": Avoid the fanciest house on the street or one of a strikingly different style from its neighbors. They often appreciate more slowly and may be hard to sell later.