Sunday, February 1, 2009

5 Tips for Buying a Home During a Recession

By Luke Mullins

What you need to know about purchasing real estate in 2009

In the wake of a historic housing bust and a bone-chilling credit squeeze, the American economy is grinding to a halt. The National Bureau of Economic Research reported that the U.S. economy has been mired in a recession since December 2007. And as more bad news-such as mounting job losses-continues to pile up, the chances for a quick turnaround seem increasingly dim." The current downturn is well on its way to becoming the longest in the past six decades," Nariman Behravesh, the chief economist at IHS Global Insight, wrote in a report. But for would-be home buyers, 2009's economic pain could be a great opportunity to get into the market. After all, home prices at the national level have dropped more than 20 percent from their 2006 peaks, while mortgage rates have plummeted. Still, buying real estate during an economic recession presents some serious risks. Here are five things to consider before you purchase a home this year:

1. Make sure your financial house is in order: One of the biggest risks of buying a home during a recession is that you could lose your job after closing the deal. With that in mind, anyone who is considering purchasing a home this year should do so only if they have solid job security. In addition, banks have been raising their lending standards in the face of increased delinquencies. That means in order to get the best mortgage rates, most would-be home buyers will need solid credit, a decent down payment, and documented income verification, says Keith Gumbinger, vice president of HSH Associates. "Mortgage money is available," he says. "In order to have access to the financing, however, you are going to have to align yourself more closely with the new, more prudent lending standards." So, if you're uncertain about your job security, or if you can't meet the credit requirements, you should probably hold off on buying a home until the economic outlook improves.

2. Buy a home, not an investment: A lot of people were hurt in the housing bust because they bought houses as short-term investments. With the market expected to decline further this year, 2009 won't be a good time to get back into real-estate flipping. "Don't buy a house because it's cheap, buy a house because you want to live in it," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California-Berkeley. Home shoppers should only purchase a home this year if they plan to live in it for at least three to five years, says Mike Larson, a real estate analyst at Weiss Research. "The real risk is that prices continue to deflate, so do you want to get in front of that bus?" Larson says. "[Don't buy a home this year] unless you are planning on staying for the very long term."

3. Be conservative: Given the gloomy economic outlook, 2009 isn't a good year to stretch your finances. If you do decide to buy a home, make sure it's a place you can conservatively afford. Rosen says a buyer's monthly housing payment shouldn't exceed 35 percent of their gross monthly household income. And given how low interest rates are these days, buyers should target a 30-year, fixed-rate mortgage, he says. "Make sure you can make those payments comfortably," Rosen says. "You don't want to have to struggle."

4. Get those concessions: With so many homes on the market, would-be buyers will have a great deal of leverage this year. Don't be shy about using it: low-ball the listing price or ask if the seller will chip in for closing costs. You might even ask about a decorating allowance. "[Sellers are] throwing in lots of extra stuff to put transactions together," says Ron Phipps of Phipps Realty in Warwick, R.I. "The rule of thumb is ask for anything." In a market like this, you might be surprised by what sellers will agree to. Just don't go overboard-angering the seller with overly aggressive demands could end up torpedoing the deal.

5. Check out foreclosures: While the foreclosure epidemic has caused tremendous pain for many Americans, it has created some great deals for would-be buyers. "[It's] a once-in-a-generation opportunity for many people," says Steve Dexter, a foreclosure expert and author of the forthcoming book, Buy and Hold Forever-Building Real Estate Wealth Far Into the 21st Century. Because such properties can often be found at sharp discounts, anyone looking to buy a home this year would be wise to check out the inventory in their market. But foreclosed home buying can present unique challenges-legal and otherwise-that are often best handled by someone with experience. So, unless you are a veteran real-estate investor, you're probably better off having a professional with experience in the foreclosure market assist you.

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