First-time home buyer and move-up tax credits worth $8,000 and $6,500, respectively, expire April 30. Buyers who qualify get a dollar-for-dollar reduction in taxes or a cash payment if they don’t pay enough taxes to cover the credit.

Other factors that should spur buyers:

Low mortgage rates. If the Federal Reserve stops buying mortgage-backed securities at the end of March, 30-year rates will almost certainly rise to more than 6 percent.

Rising prices. About 30 percent of markets are already experiencing price increases. Prices are falling in 12 percent of markets, says Fiserv (but that only helps if you want to live there).Source: Money Magazine, Beth Braverman (03/02/2010)

Not long ago, homes worked like giant credit cards. Home Equity Lines of Credit (HELOCs) helped borrowers cash in on the equity in the homes.

Dan Wolfrum of Peoria, Ariz., bought his home at a foreclosure auction in 1991 for $51,000. At the time, the four-bedroom, two bath house on a peaceful cul-de-sac in the Phoenix area seemed like a no-brainer.

As the value of his home skyrocketed in the decade that followed, Wolfrum observed fellow homeowners in his neighborhood take out home equity loans to finance swimming pools, SUVs and summer vacations. In the late 1990s, after divorcing and remarrying, the meat distributor salesman finally took the plunge and applied for his own home equity loan to pay for home renovations and a new car. A few more refinances and one loan consolidation later, Wolfrum owes $170,000 on his mortgage.

With foreclosures and short sales rampant in the Phoenix area, Wolfrum’s house is now worth less than what he owes. His income in decline and retirement getting nearer, Wolfrum is now working with mortgage experts to lower his payments.

Wolfrum’s now-familiar tale might lead one to conclude that home equity loans and home equity lines of credit (HELOCs) are at the top of the current list of homeowner no-nos. But that conclusion would be dead wrong.

Certainly banks have tightened their lending standards, due to declining housing markets nationwide. According to Equifax, the volume of new HELOCs created in November 2009 was $4.9 billion, less than a quarter of the amount created two years earlier, in November 2007. But rates remain at historic lows, around 5 percent for revolving credit HELOCs and just under 9 percent for fixed-rate home equity loans, according to Bankrate.com. Good luck finding credit cards with rates below those.

If you plan to brave the waters of home equity borrowing, here are a few current guidelines:

1. The first key to success is to use home equity borrowing in a sensible, educated way. A good general rule is to reserve it only for something that could be considered an investment, such as education or home improvements. Avoid quickly depreciating purchases such as cars, vacations, and big-screen TVs.

2. Do some serious comparison shopping before signing up with any particular bank or lending institution. These days, many major lenders aren’t doing home equity deals, even with consumers with good credit. But some smaller, regional and online banks are. The trick is to find them and find the ones with the best rates. Ask around at local banks and do some searching on the Internet, as well. As always, an excellent credit score helps–over 740 is best.

3. Don’t use your house as a piggy bank. A good example of this is not using home equity to pay down credit card debt. This is an easy way to fall into deeper debt without addressing the underlying problem–mainly, that you’re spending too much to begin with. Even home improvements and tuition payments can drain your home dry if the spending limits aren’t kept in check.

4. Finally, be careful to limit the size of your home equity loan. Avoid combined mortgage and home equity borrowing that leaves a cushion of less than 20 percent equity. If you owe more than 80 percent, you’ll pay higher interest rates and eliminate a vital source of emergency funds. Besides, if housing prices continue to decline, you could find yourself “underwater,” just like Dan Wolfrum.

Another issue to be watchful of is the increased difficulty homeowners with second mortgages are having in modifying their loans, though President Obama’s recent bailout initiative regarding five states that have seen housing values drop more than 20 percent, may easy some of that pain.

Alec Foege, AOL Real Estate & HousingWatch.com Contributor

Home Buyer |Real Name Hidden|
San Diego, CA
I am a first time home buyer and every time I like a property my realtor automatically suggests for me to place my bid atleast 10,000 – 15,000dollars more than the asking price. He tells me that I have to come in with a high enough offer so we can win the bid. However, since it is currently a buyers market shouldn’t I bid a bit lower or at the asking price? Why does my realtor always jump to such high bids?

Above is a real question asked by a buyer. Her concerns are extremely valid however contrary to what the media says “Buyers Market” they fail to say what kind of inventory the market is flooded with. Todays market is Flooded with homes that are trash and cant qualify for VA or FHA financing (This is the majority of loans being used right now to purchase homes). Now, the homes that are in good shape have multiple bids on them; sometimes 20-30k above listed price. . Buyers today do not want a deal they want a STEAL! But with multiple bids and her offers coming in with the STEAL mentality the seller or bank will simply throw out her offer because it is to low.

Buyers need to understand that listing agents sometimes list properties way below their actual value to entice “Bidding wars”. Todays computer savvy buyer would see these prices and think they can bid even lower. This is normal though, I myself would try to buy anything lower than what the price is listed @.

Let me give you a scenario; A buyer wants to sell his home, the comparable’s in the neighborhood are selling @ 320k+. Sometimes a listing agent will list this property at $299,500 We know that the homes in the neighborhood are selling around 320k and above but the agent has marketed this property to get as many offers he can in the shortest amount of time. Now…. Here comes the internet home searcher who see’s this home selling for $299,500. With the media blanket telling everyone our real estate market is flooded and in shambles the internet searcher will 98% of the time assume that “there are not enough buyers, market is flooded, I’m pre-approved, they’re bound to accept my offer etc..” With those assumptions the buyer will tell their agent that they want to submit an offer for $280,500 and sometimes even less. Here comes the part where the homebuyer starts to question their agents interest’s..”Why would my agent tell me to bid higher than the listing price?, We are in a buyers market..” That agent knows very well that the last home sold in the same neighborhood was above the listed price. Any prudent real estate agent working today will in the best interest of their client tell them to bid higher.
They are not trying to make it harder, make more commission or anything like that, They simply want to fulfill their fiduciary duty and get you in a home in the shortest amount of time.

“Housing has been on government life support, and without it the crash would have been much more severe,” said Mark Zandi, chief economist with Moody’s Economy.com in Pennsylvania. “This spring and summer as those policy efforts unwind, we most likely will see mortgage rates move higher and more house-price declines.”

Rather than being held by banks, today’s mortgages are sliced, diced and resold on Wall Street to create liquidity – money that then can be lent in more mortgages. After the credit crunch beginning in the fall of 2008, investors lost their appetite for these mortgage-backed securities, so the Federal Reserve stepped in to purchase them to ensure that money would keep flowing to home purchasers.

The Fed started buying securities backed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009 and originally planned to conclude the program by year’s end. It extended it for three months to ease the impact on mortgage markets, although it didn’t allocate more money. The program’s ultimate cost won’t be known until the Fed sells off the securities, something that officials said it will do gradually starting this year. It’s conceivable that the program could end up generating a modest profit, breaking even or losing money, depending on what prices the securities go for.

While experts agree that the Fed’s exit will cause mortgage rates to rise, the big unknown is how severe the effect will be.

“There is no question rates have been kept artificially low by the Fed’s heavy buying,” said Guy Cecala, publisher of Inside Mortgage Finance. “My opinion is that rates will go up a full percentage point initially,” meaning that 30-year fixed conforming loans, now hovering around 5 percent, would hit 6 percent.

Keith Gumbinger, vice president of HSH Associates, which compiles mortgage loan data, thinks that rates will slowly rise to about 5.75 percent after the Fed withdraws.

“Right now the Fed is acting as a sponge, absorbing about $12 billion a week of what you might consider excess supply,” he said. “When they stop, the market will have to pick up some chunk of change.”

Julian Hebron, branch manager at RPM Mortgage’s San Francisco office, anticipates a bump up to around 5.5 percent by summer with rate volatility all year.

“The Fed isn’t going to start dumping mortgage bonds on April 1, they’re just going to stop buying,” he said. “By that time, improving economic data is likely to push the Fed toward a rate hike bias. This will contribute to higher mortgage rates, slowing refi activity, and less mortgage bond supply. So while the Fed won’t be buying anymore, rates shouldn’t spike immediately because there will be less supply for markets to absorb.”

Christopher Thornberg, principal at Beacon Economics in Los Angeles, thinks the Fed’s withdrawal will have a radical impact.

“Clearly, when they stop printing all that money, it’s going to be a shock to the system. I have to assume that when they pull back on it, it will cause a 100- to 200-basis-points rise” to rates of 6 percent or 7 percent, he said. “When they start selling off the stuff they purchased, which by my guess would come early next year, that would cause another 100- to 150-basis-points rise.”

The Fed has indicated that it might resume buying mortgage-backed securities if mortgage rates spike.

In written Congressional testimony released last week, Fed Chairman Ben Bernanke said the Fed eventually will take steps to forestall inflation that also are likely to result in higher interest rates for all loans.

Several other government programs designed to prop up the housing market also are in play:

– The home buyers tax credit of $8,000 for first-time buyers and $6,500 for repeat buyers expires April 30. Although many experts think the program simply caused people to buy houses earlier than they had planned, its end is likely to cause a dip in home sales.

“Higher interest rates without a tax credit means the cost of buying a home will rise significantly,” Zandi said. “We should expect much weaker home sales in May, June and July.”

Cecala thinks that if home sales are anemic, Congress may extend the tax credit an additional six months, as it’s already done once before.

– Federal Housing Administration loans, an increasingly important source of financing for many borrowers, especially those with low and moderate incomes, imposed more stringent lending criteria in January. As FHA delinquencies rise, the rules could tighten still more, eliminating some potential buyers.

“The FHA portfolio has all sorts of bad debt in it,” Thornberg said. “Eventually they’ll have to pull back” on lending.

– Home Affordable Modification Program, the government-backed plan to get banks to help troubled homeowners, has kept the market from being flooded with foreclosures, as hundreds of thousands of borrowers are negotiating with their lenders for lower payments. Eventually, observers say, much of that backlog will wind up in foreclosure because homeowners simply don’t have the income or ability to make modified payments. A new surge of bargain-basement foreclosures would undermine home prices.

“We have a boatload of homes that ultimately will find their way to a foreclosure sale, and that will put pressure on house prices,” Zandi said. “The more that distressed home sales rise, the more home prices get pushed down.”

E-mail Carolyn Said at csaid@sfchronicle.com.

This article appeared on page A – 1 of the San Francisco Chronicle

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/02/15/MNSP1BVILP.DTL#ixzz0g1kuq8ly

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