Big breaks for home buyers.

MONEY MANAGEMENT

Low interest rates and moderate prices are creating more opportunities for homeownership.

There are few industries more badly bruised than the real estate market. The combined pressures of a construction glut, layoffs in both blue- and white-collar industries,

and a tightening in bank regulations have taken their toll. Dim job prospects and slow income growth continue to make consumers skittish about spending. Despite favorable mortgage rates, consumer anxiety over a slow recovering economy is stifling home sales. And housing starts for single-family homes have dropped 6.8%.

However, there is a silver lining to the cloud that hangs over the national landscape. Smaller cities are expected to improve more quickly than the larger cities, particularly those in the Northeast and far West, says Chief Economist John Tucillo of the National Association of Realtors (NAR), Washington, D.C. "Home values will stay ahead of inflation in most regions. We expect the inflation rate to be about 3.5% (compared to 5% in 1990), and home prices should appreciate between 5% and 5.5%."

This spread of between 1.5% and 2% will be good for sellers who have been hurt by the economic downturn. At the same rate, buyers will continue to benefit from lower interest rates. "Falling inflation will be the tonic that keeps interest rates declining and consumer purchasing power rising," says Tucillo. "As rates slip further, growth in all sectors of housing-single- and multi-family construction and existing and new-home sales--will rise." The forecast for this year is that mortgages rates for 30-year fixed loans will average 8.5%.

Moreover, homes are more affordable now than in the past 14 years. In fact, NAR's affordability index, which measures the typical wage earner's buying power, shows that the median family income of $36,361 is 116.1% (as of Sept. 1, 1991) of what's needed to buy a single-family home at the median price of $101,800.

But not everyone who can afford to buy a home will necessarily qualify for a mortgage. Tougher credit standards and slow loan processing in the mortgage-lending environment are unpleasant for home buyers. For black and Hispanic loan applicants, getting a mortgage is even slimmer, because of race discrimination. A study released by the Federal Reserve Board, The 1990 Home Mortgage Disclosure Act, shows that minorities are likely to be turned down for loans regardless of income (see In The News, this issue).

There are a number of affordable-housing programs cropping up, created by local and national government agencies as well as private organizations. Industry observers predict that good financing options in addition to low interest rates will make 1992 a bright spot for home buyers and homeowners, who can profit from refinancing deals.

Home: Where The Heart And Purse Strings Are

Soaring prices kept many middle-income families off the housing turf during much of the 1980s when values in such places as New York, Boston, San Francisco and Los Angeles, and their suburbs, appreciated at a rate of 20% a year. But buying a home this year will be easier for most people. The drop in mortgage interest rates and home prices nationwide have put all buyers on the inside track of the residential market. Buying a home is still easiest in the South and Midwest, says NAR's John Tucillo. In the Midwest, the median price of a single-family home is $76,703, and the median household income of $37,491 is 156.6% of what is needed to purchase it. In the South, the median income of $32,703 is 113.7% of what is needed to buy a $92,000 median-price home.

On the other hand, the average home buyer in the Northeast and West is between 7% to 17% short of the income needed to buy a home. The Northeast's median household income of $40,049 only comes to 93% of the income needed to buy a home at the median price of $136,900. And in the West, the regional median income of $37,788 is 83% of the cost of a median-price home of $144,000.

For the time being, buyers have the upper hand. "Sellers realize that they cannot get the same prices for their homes that their neighbors got a few years ago," says George McLaurine, of McLaurine & Associates Realtors in Nashville. "So sales will pick up this year. Buyers are ready, and sellers are becoming more willing to make a deal."

Taking advantage of lower interest rates and an anxious seller, Adrienne Hardy was able to buy a home a year ago that she probably could not have afforded a year earlier. Hardy, who works for the Department of Social Services for the State of California, had spent two years in search of her dream house at an ideal price. "I had put my top price at $100,000 when I started looking," says Hardy, "because that's all I could afford."

Hardy says she viewed every type of residence in the market. "I saw homes, condominiums, apartments and even mobile homes. Everything I wanted was too expensive and what I could afford, I did not want to buy."

However, last spring, she found what she wanted--a two-bedroom, two-bathroom home in Riverside, Calif. Originally, the owner was asking $112,000. Anxious to sell, he agreed to take $108,000, instead. [Tabular Data Omitted]

Getting Your Money's Worth

Finding the best buy for your money, real estate professionals say, boils down to this: Know what you're buying. Buying a home will be an empty victory if it is not a sound investment. "No matter how many times a buyer visits a home," says Mike Teer, owner of Teer One Properties in Riverside, Calif., "he or she will not be able to see everything that is important to know about the house."

To ensure you are getting a good property, use professional inspectors to clarify that the building's foundation, roof, heating and cooling and ventilation systems are sound and that the home is free of termites and other pests. Equally, ask the owner for evidence of upkeep and proper maintenance, usually kept in the form of service contracts and inspection reports.

Another aspects of buying well, is making sure you do not pay too much for the property. Even if the seller has come down on the price, what seems like a good deal might not be when compared to the value of other homes in the neighborhood. Buyers relocating from an area where prices are lower should take particular care in comparison shopping.

To avoid the pitfall of paying too much, check the recent selling prices of homes similar in size and design to the ones that you are considering. In the real estate industry, these are known as comps. These are the same numbers the bank's appraiser will use to justify a loan on a house. You can check with the local tax assessor's office to see if any tax increases are on the horizon. Tax hikes not only affect your ability to afford a home, but may influence its overall value.

To get what they like and can afford, most people don't look beyond the house. "I tell buyers that if they don't know the neighborhood, then look around before making any commitment," says Realtor George McLaurine. He suggests gauging the area's schools, shopping centers and transportation system. Definitely visit the area at night and on weekends if house tours have been daytime, weekday trips.

Some of the best buys will be in mature but stable neighborhoods close to central business districts in large and mid-sized cities, says Matt Rigg, president of Transaction Aide Inc., a real estate investment consulting company in Miami. These are areas that have been overlooked in the past 10 to 20 years as most buyers have focused on the suburbs and brand new neighborhoods in the cities. "Wherever you are house-hunting," says Rigg, "look for locations that have potential for appreciation based on demographics; proximity to business, commercial and retail areas; and where the prices are slightly below the market."

Where To Strike A Bargain

House hunters can benefit from the real estate market's troubles in many places. There are bargains in the foreclosure inventories of banks and savings and loans, on auction blocks and in the holdings of the Resolution Trust Corp. (RTC). Despite the decline in the market, buyers--working in these areas--may be able to get additional savings of up to 30% of whatever they would have paid if the properties were sold under normal conditions. The reason is that the sellers--be it banks or builders--often are willing to give up some if not all of the profit in exchange for a quick sale. More the reason buyers must take extra precautions when going after these types of deals. Some properties are sold regardless of their condition. Here is a brief guide to the sources of below-the-market housing: * Resolution Trust Corp.: Created by the federal government, the RTC disposes of the properties owned by scores of lending institutions that have gone belly-up in the last few years. While commercial properties are the most commonly sold, RTC does have some homes and apartments throughout the country for sale on a piece-by-piece basis. The agency compiles a list by state, city and ZIP code. However, the property list is updated only every two to three months. Some of the residences on any given list could already be sold or under contract. * Bank Foreclosures: The volume of foreclosures at some banks has become so large that new divisions were set up to handle the sale of these properties. In most cases, the banks are looking for prices that will cover their investments. "Anyone who is eyeing foreclosures should inspect the property carefully and shouldn't be afraid to negotiate," says Mike Teer of Teer One Properties. "Holding these properties is an expense the banks don't want. Often they are flexible because there is no emotional investment connected with the transaction." The real estate section of most local newspapers will list foreclosures along with other homes for sale. You can also check with the local banks and real estate offices. * Auctions: There are two types of auctions. Public auctions held by a city, county or another branch of government try to sell properties that have been repossessed because the owners failed to pay taxes. You can find out about these periodic public sales by calling the city or county government in the area where you are house-hunting. These sales are normally good prospects for anyone looking to buy a multi-family residence. Also increasingly common in real estate sales are builder-sponsored auctions of homes and apartments, which often are brand new developments. Auctions are usually advertised in newspaper real estate sections about six weeks beforehand. Many Realtors also work with auction houses. A house may go for 70% to 80% of its appraised value.

Before you participate in any bidding, understand the terms of the sale. At some auctions, bidders will be required to make a 10% down payment in cash or certified check at the time of the sale. If you need an escape hatch, make sure the terms of the contract include a cancellation clause that will give you time to back out of the deal. Sometimes the auctioning of tax-delinquent properties require the winning bidder to settle the tax bill. * Resale Homes: Corporations that buy and resell the homes of transferred employees account for nearly 20% of the resale housing market. These companies are usually flexible since they want to unload the properties as quickly as possible. The average relocation home is between 3% and 6% lower than what the market bears.

No Room For A Hard Sell

One word to describe the approach that sellers must take over the next year is flexibility. During most of the 1980s, home prices skyrocketed so quickly that sellers in many parts of the country merely needed to list with a Realtor and wait for the offers to pour in. But today, many homes are going for less than the owner paid two or three years ago.

Since the highest hurdle for home buyers is making the down payments, homeowners can improve their chances of getting their asking price by extending a helping hand to a cash-short buyer. One way for the buyer and seller to make a deal is for the owner to hold the mortgage. Instead of making mortgage payments to the bank, the buyer pays the seller. This will work only if the seller doesn't need to take the cash from a sale to put down on another home. Most of these arrangements are for short-term loans of less than five years.

Sellers also can offer a prospective buyer a lease-buy option. This approach is being taken by many builders who are now stuck with homes or condominiums they cannot sell. The value to the seller is that it puts someone in the home or apartment who can cover costs.

This is the strategy Carmen West used when she took a new job in Baltimore, but could not sell her Brooklyn co-op. "It was either rent or lose money on a sale," says West who bought her small one-bedroom apartment in 1986 for $99,000. The mortgage and maintenance cost her $1,026 a month. The rent she is charging her tenant, $1,000 a month, will almost cover her expenses. "I'm hoping that in a year or two I will be able to sell to my tenant or someone else."

Creative financing could involve giving up some of your equity. Take the Rev. Peter Demery, who has put his California home on the market. He is trying to attract the attention of brokers, as well as buyers by offering a $5,000 bonus. This amount would be in addition to the standard 6% commission for the broker who can find a buyer to meet his price. Demery took this approach because his asking price of $275,000 is a bit above the market, and he is in no hurry to sell the home.

A seller may also opt to pay all or part of mortgage closing costs. With these expenses often reaching 8% to 10% of the loan, it is no small gesture. It may help the buyer to make the down payment. Whatever special arrangement you make with a buyer, hire a lawyer who specializes in real estate to draw up the contracts.

Building Versus Buying

There always have been homeowners who have sought not to buy, but to build a home. In most parts of the country the cost of a custom-built home is going to be much higher than an existing residence, even if it is brand new. Substantial increases in land costs, in both urban and suburban areas during the 1980s, has put build-to-suit projects out of reach for most home buyers. Gopal Ahluwalia, an economist with the National Association of Home Builders, Washington, D.C., says that construction costs for the typical new single-family home ranges from about $60 to $100 per square foot. That would put the price tag of a 2,100-square-foot home in the $126,000 to $210,000 range (excluding the cost of the lot).

But it is possible to benefit from custom design and the savings that come with mass construction projects. Dr. Rene Earles, a dermatologist and his wife, Eve, signed a contract last year for one of the single-family residences under development in Dearborn Park, Ill., near downtown Chicago. "We have lived in a home in the suburbs and in an apartment in the city," says Eve Earles. "We really wanted to stay in the city of Chicago, but we also wanted our next place to have the space and privacy you can only get with a home. Our new home satisfied both goals." By building their two-story, 5,100-square-foot, five-bedroom residence, the Earles had a say in its design.

If building to suit your taste is an option you favor, don't forget to include in your budget soft costs. These include architectural and engineering fees, the costs of having the building plans approved by a local public agency, legal bills and the fees associated with any short-term construction financing.

A New Lease On Your Mortgage's Life

Now is also a good time for homeowners to take advantage of low mortgage interest rates. "Any owner who is paying above 10% interest is a good candidate for refinancing," says David Totaro, senior vice president and chief marketing officer of The Dime Savings Bank, which is based in New York City.

Consider this: Just three-fourths of a percentage point reduction on the interest rate of a 30-year, $100,000 mortgage would save $21,000 over the life of the loan. The money you save may even be used to remodel or renovate your home, raising its value in the long run when prices are sure to rise. Some folks also are shortening the term of their loans from 30 years to 15 years to build equity faster and to pay off their loans quicker.

But it may not be worth it to refinance, if you don't plan to be in your home longer than three years. That's because it will take that time to recoup the costs, including points and an origination fee, which generally total 3% to 4% of the loan. Also, the IRS limits the deductibility of the closing costs. A borrower can deduct points on an original mortgage the year of purchase. Closing costs are deductible for a refinanced loan, but it must be amortized over the life of the loan.

Home ownership is still considered one of the best long-term investments a person could make. Whether or not the economy experiences a full upturn by year-end, if you want to own a new home: Buy it now--or risk paying more for it later. [Tabular Data Omitted]

A HELPING HAND FROM MORTGAGE LENDERS?

Buying a home will continue to be a challenge in today's economic climate. True, the drop in prices has made housing more affordable than it has been in 14 years. But 90% of all renters cannot afford the down payment for a modestly priced home, according to the National Association of Realtors (NAR).

To top it off, there is some disparity in terms of who obtains conventional loans. A Federal Reserve Board study. The 1990 Home Mortgage Disclosure Act, shows that nationally, 33.9% of black applicants compared to 14.4% of whites are denied conventional home mortgages.

Although the picture is bleak, several public and private groups are working to improve access to affordable housing. Generally, low- to moderate-income families and minorities--regardless of income--have a greater chance at obtaining federally insured mortgage loans. Expanding upon its efforts, the Federal Home Loan Mortgage Corp. has established the Affordable Housing Initiatives Department. The agency's overall commitment through 1992 is to provide approximately $3 billion of affordable homeownership and rental housing.

In a joint effort, NAR and the U.S. Conference of Mayors are sponsoring a program in 11 localities. The Realtor-mayor programs include home-ownership assistance for low- to moderate-income buyers, low-income unit construction or rehabilitation, the development of trust funds or revolving-loan funds for home-ownership assistance and counseling services for home buyers.

The Federal National Mortgage Association (Fannie Maes) and the Federal Home Loan Mortgage Corp. (Freddie Macs) are making financing available for the programs through their low- and moderate-income housing initiatives. The communities selected for the demonstration programs are Hartford, Conn.; York, Pa.; Rockville, Md.; Cleveland; Rockford, Ill.; Milwaukee; San Juan; Fort Worth, Texas; Macon, Ga; Los Angeles; and Portland, Ore. For more information, contact your local board of Realtors.

The Home Buyers Club (HBC) is another program established by the Neighborhood Reinvestment Corp., a congressionally charted, public, nonprofit corporation. The HBC is a voluntary organization whose members meet regularly to learn about home ownership and to remove any hindrance in purchasing a home. These meetings typically focus on budgeting, saving, applying for credit, selecting a home and securing a mortgage. There are 10 HBC sites: Aurora, Ill.; Beloit, Wis.; Burton, Mich.; Chattanooga; Cincinnati; Great Falls, Mont.; Kankakee, Ill.; Kansas City, Mo.; Kenosha, Wis.; and Lafayette, Ind. For more information, call 202-376-2400.

Countrywide Funding Corp., an independent mortgage banker, and GE Capital Mortgage Insurance Corp. are offering incentives to encourage local boards of Realtors and low- and moderate-income families to participate in their Community Home Buyer's Program. Countrywide will donate $50,000 to assist the first 50 Realtor boards that schedule a home-buyer education program using an instructor provided by the lender and materials from GE Capital. In addition, borrowers, who apply for the Community Home Buyer's program through one of Countrywide's 95 retail branches before March 31 will not have to pay appraisal fees. Also, half of their home inspection fee, up to $100, will be paid by GE capital.

The program is designed to assist home buyers in complying with the education requirement of Fannie Mae's three-half loan option. With this option, borrowers must contribute 3% of the required 5% down payment from their own. But the remaining 2% can be a gift, loan from a relative or grant from a government agency or nonprofit organization. The program also requires less income to qualify for a mortgage. Loan applicants will be evaluated mostly on their ability and willingness to make monthly payments as well as a good credit history. You can devote as much as 33% of your gross monthly income to total house payments, compared with 28% for most other mortgage plans. To find the Countrywide branch nearest you, call 800-669-6606.

Several Realtor boards around the country also are joining in to help Habitat for Humanity International, an ecumenical, Christian housing ministry (912-924-6935). Through volunteer work, management expertise and tax-deductible donations of money and material, Habitat builds and refurbishes homes with the help of homeowners. There are more than 650 affiliated projects nationwide.