To succeed in a tough market, you’ve got to change your strategy. MONEY found owners, sellers and buyers making smart moves in three very different markets.

Money Magazine
By Stephen Gandel, MONEY Magazine senior writer
May 29, 2006: 1:51 PM EDT

NEW YORK (MONEY Magazine) – Home sales are slowing. Condo prices are slipping. Sellers can’t get their asking prices.

And even real estate bulls are now waving the caution flag.

If you’re expecting a short-term gain, “you should be looking elsewhere,” says Christopher Mayer, a Columbia University economics professor who not long ago argued that land shortages and rising populations would translate into ever-rising prices in “superstar” cities like New York and San Francisco.

Clearly, it’s time for a re-think, whether you’re mulling over buying, selling, refinancing or remodeling a home or investment property. Or if you’re just wondering, Is our house still worth what we think it is?

The short answer: It depends on where you live. If you reside in one of the past decade’s boom markets along the coasts or in the Southwest, brace yourself. Prices there were powered by two kinds of fuel: low interest rates and the willingness of buyers to pay up for the American dream.

That tank is almost empty.

In Los Angeles today, the median dream goes for 10 times the median income. That’s unsustainable no matter how creative banks are in coming up with new hybrid loans.

Mayer thinks that, with fewer people buying but plenty still hoping to cash out, prices in the most expensive markets could drop 15 percent in the next year, if mortgage rates rise another point. The forecasters at Fiserv Lending Solutions and Moody’s Economy.com, who crunched the numbers for our 12-month nationwide forecast, aren’t so pessimistic, but they’re hardly Pollyannas.

Prices will flatten in most ex-boomtowns this year, and next year will be worse, says David Stiff, Fiserv’s chief economist. “A lot of markets – particularly those where prices have increased dramatically compared with income – will see drops by late 2007,” he says.

Those declines are expected to range from a few percentage points in Boston to as much as 20 percent in Miami and Las Vegas, says Economy.com’s Mark Zandi. The more unhinged prices are from local incomes, the more likely a fall.

That doesn’t mean, however, that real estate is about to crash across the United States.

First, if you live someplace that hasn’t gone wild – think Atlanta or Philadelphia or just about anywhere in the Midwest or Texas – you’ll see slower rates of increase, but losses aren’t likely. “There are sizable parts of the nation’s housing market that will be just fine,” says Zandi.

Second, a strong economy and job growth should hasten a return to a normal housing market in which prices rise just a bit faster than inflation. Since World War II, notes Stiff, the housing market and the economy have moved largely in sync.

Then, starting in 2002, the Federal Reserve’s rate cuts in the wake of the tech meltdown and 9/11 kept home prices rising even as the economy stalled. “Now, as the housing cycle unwinds,” Stiff says, “the rest of the economy will keep growing. That puts a floor under prices and will let housing and the economy sync back up.”

The caveat, of course, is that if the economy falters, housing will really start to look overvalued.

So what do you do? If you’ve got a place you like, a mortgage you can handle and no plans to move or build a new wing, relax. But if you’re active in the market, or you soon might be, rethinking is indeed in order.

Again, your strategy should depend on where you live. MONEY found owners, sellers and buyers making smart moves in three very different markets:

By JULIE B. HAIRSTON
The Atlanta Journal-Constitution
Published on: 05/12/06

Foreclosure was not even a remote prospect on Debi Steedley’s mind when she moved into her three-bedroom, three-bath Woodstock home with her two children in the spring of 2001. The triathlon competitor had just gotten her graduate degree and was launching a business as a freelance nurse practitioner.

But an unforeseen health crisis two years ago rendered her unable to work full time, with no unemployment insurance or disability income to bridge the gap.

Struggling to hold onto her home, Steedley, 47, turned to her mortgage lender, HomeBanc, which gave her an interest-only loan and an equity line of credit that initially lowered her monthly payment by hundreds of dollars.

But Steedley’s health struggles continued, and her loan payments all too quickly began to spike.

“With all the refinancing and interest rates going up, it really climbed,” Steedley said. “All of a sudden, boom, it was maxed out.”

Steedley missed her first payment in November 2005. By the time she approached a HomeBanc loan officer with a payment in January, her home had been recommended for foreclosure and slated for sale in June.

Mortgage market watchers are predicting that foreclosure stories like Steedley’s are about to be oft-told tales in Georgia.

Nationwide, the number of foreclosures has spiked in the first quarter of 2006, according to RealtyTrac, an online marketer of foreclosed properties and database publisher of foreclosure trends.

And Georgia leads the country in the rate of foreclosure, RealtyTrac said. The number of Georgia homes in some stage of foreclosure has more than doubled since the end of 2005. Currently, there is one foreclosure for every 127 households — almost 25,000 homes statewide — RealtyTrac reported.

Rick Sharga, vice president of marketing for RealtyTrac, said recent mergers and layoffs in some of metro Atlanta’s largest employers help explain the sharp rise in foreclosures. Unemployment and foreclosure rates are closely linked, Sharga said.

“That could be a factor in a place like Georgia where you’ve had a lot of churn,” Sharga said.

The Consumer Credit Counseling Service of metro Atlanta, which works with foreclosed homeowners like Steedley, reported a 20 percent increase in first-quarter 2006 referrals for housing finance problems compared with the first quarter of 2005.

CCCS President Suzanne Boas said Georgia’s short foreclosure process, which bypasses the court system, contributes to the state’s high rate because it attracts aggressive lenders willing to make loans to marginal candidates. Once a property enters foreclosure, it can be sold at public auction within 37 days.

“Our state is very attractive to lenders, and part of that is our non-judicial foreclosure process,” Boas said. “There have been a number of incredibly aggressive products [loans] marketed to consumers over the past five to eight years. Now we’re starting to see the fallout of that aggressive marketing.”

But a HomeBanc spokesman said his lender would not initiate foreclosure until a loan has gone unpaid for at least 90 days, and only then if the homeowner shows no desire or effort to resume payments.

“At the end of the day, we do not want to foreclose, because that doesn’t benefit anybody,” Mark Scott said. He declined to comment on the Steedley case, citing confidentiality.

Loan policies cited

The Mortgage Bankers Association is forecasting a national rise in the number of home loans that will become delinquent or enter foreclosure over the next two years. And the loans that Boas calls “aggressive” — bankers call them “innovative” — are among the chief causes for the increase.

These loans include mortgages that charge a lower interest rate in the early years of the loan and adjust to a higher rate after the initial period. They also include so-called interest-only loans like Steedley’s, on which the borrower pays only interest charges but not the loan’s core principal for the introductory years.

Such loans, once available only to very wealthy borrowers, have become available to people with lower incomes in recent years. The jump in foreclosures and delinquencies is expected to correspond with a wave of ballooning payment requirements on these nontraditional loans made as their use spread through the market in recent years.

Doug Duncan, chief economist for the Mortgage Bankers Association, said as many as 35 percent of the loans made since 2003 have been something other than the traditional, 30-year, fixed-rate agreement that homeowners in earlier years used.

“For the last 2 1/2 years, we’ve been making a higher than average number of adjustable-rate loans,” Duncan said.

The loans are very attractive to borrowers because the initial payments are lower and many consumers, eager to believe in a best-case future, fail to consider the full implications of the loans’ long-term demands.

“I wish I understood finances better, but when I talked to [the HomeBanc loan officer], it made sense,” Steedley said. “The chart I was looking at showed [the loan payment] didn’t move all that much.”

In Georgia, more than a quarter of all loans made in 2005 carried an adjustable rate, according to data provided by the bankers association.

Home values undermined

Foreclosures are a potential threat not just to the housing market but to the broader economy as well.

A slew of foreclosures has several dampening effects.

Foreclosures strip homeowners of what often is their most valuable asset. By spewing homes onto the market, foreclosures also undermine the area’s home values. That hurts other area households who might be selling their property, taking out a loan or trying to trade some equity for cash.

All of this affects consumer spending.

Foreclosures also cost lenders money — although foreclosures may generate money for some professionals, including attorneys.

A critical mass of foreclosures can be a dead weight on an area’s growth.

Still, many economists generally think that a spate of foreclosures is more likely to be a symptom of economic troubles than a cause. That is, a truly dangerous wave of foreclosures would probably come after job losses in the local economy. However, once that wave got started, it could do even more damage — no matter how it got started.

Little-known upside

Foreclosures also may have a generally unacknowledged upside, making homeownership available to people who ordinarily could not afford it. But if those people become owners with shaky mortgage arrangements, the cycle may start all over again.

The high number of loan payments about to uptick combined with rising interest rates, increased unemployment and waning home sales may add up to trouble for many unsuspecting consumers, Sharga said.

“You could paint a perfect storm scenario with all these conditions,” Sharga said. “It’s a challenging time to be a homeowner, especially if you’ve been on the margins to begin with.”

Steedley said financial help through her church and intervention from a number of consumer experts has helped her stay in the house while she re-evaluates her options.

On their advice, she went to see the bank’s lawyer and got an itemized list of payments and charges due. She got a cashier’s check drawn to the exact amount to bring her account to current status and got a receipt for the check when she turned it over.

Steedley is still strapped for cash; she has put her home up for sale, begun packing and is looking for a new place to live. But without the help of consumer advocates, she said, “that house would be gone before I knew what to do.”