Refresh Your Financial Life: Real Estate

The market rally of 2009 helped Americans make up some the ground they lost in the crash. But to make the most of the ongoing economic rebound, many investors will have to tweak their game plans. SmartMoney magazine’s December cover story, “Refresh Your Financial Life,” offers strategies for dealing with the shifting landscape.

The resounding thump heard in many cities this fall may have been the sound of the housing market hitting bottom, but few analysts are predicting much of a bounce. With a “shadow inventory” of foreclosures and other homes likely to flood the market, “there is still an enormous glut,” says Dean Baker, codirector of the Center for Economic and Policy Research, a progressive think tank based in Washington, D.C. So what did the generally bearish Baker do this summer? He bought a house. He doesn’t expect a huge surge in home values, but he craved a porch and a yard to claim as his own, and he thinks the days of huge price declines are mostly behind us. And it helps that interest rates remain near record lows, recently dipping below 5 percent for those with good credit.

In general, of course, sliding prices can make a good case for buying rather than renting. Baker suggests that would-be buyers divide the price of a home they’re considering by the annual rent for a comparable place; if the number falls below 15, buying starts to look compelling. An equally important question: Will the buyer stay long enough to make the purchase worthwhile? Transaction costs can reach 10 percent of the purchase price, and in flat or choppy markets, sellers who flip in two or three years could take a loss. Many analysts think it’s now reasonable to plan to buy only if you plan to stay five to seven years.

The second-home market looks intriguing as well, and analysts expect a plethora of bargains at the high end, with JPMorgan Chase estimating that homes listed at $750,000 or more will see far bigger price declines than the overall market. But it is no surprise that 30 percent of vacation-home buyers paid all cash last year. Buyers seeking financing find that lenders give closer scrutiny to a second-home application and generally charge at least a half point more in interest. Similarly, if the loan is for a jumbo mortgage—more than $417,000 in most markets, up to $729,750 in the most expensive cities—interest rates have lately been almost a point higher.

Sellers, meanwhile, still have to compete with foreclosures on price. Agents say effective sellers are increasingly using comparison tools on Web sites like Redfin, Zillow and ZipRealty to help calculate the listing price. Looks count too: Owners do better when their property’s appearance and condition stand out, although lavish renovations are out of fashion—overall, remodeling spending is off 11 percent this year. One silver lining: “You no longer have to call 10 contractors to get one to call you back,” says Nicolas Retsinas, of the Harvard Joint Center for Housing Studies.