Is the time right for first-time homebuyers?
 
During the run-up in real estate prices over the last decade, many millennials were either in college or in entry-level jobs, watching helplessly as they were priced out of the market while aging boomers gleefully cashed in their newfound equity and used excess money for real estate speculation, driving prices even higher.

But now, as the real estate bubble deflates, is this a good time for frustrated millennials to finally buy a home? The answer, unfortunately, may be no.

"But why not?" prospective homebuyers may ask, probably with gritted teeth. Well, you may have heard the words "credit crunch" circulating around the water cooler lately, and for good reason. In the aftermath of the subprime mortgage mess, mortgage brokers and banks have sworn to tighten lending standards. Gone are the days when a 5 percent -- or less -- down payment was commonplace and banks glossed over problems in employment history, credit history or proof of income. Now, new homebuyers are likely to need at least 10 percent down and can expect lenders to scrutinize every aspect of their financial pictures.

"First-time homebuyers would be better off renting and accumulating a larger down payment rather than jumping into a soft housing market," says Dr. Anthony B. Sanders, professor of finance and real estate at Arizona State University.

What this means for first-time homebuyers is a steeper price of admission in the form of a higher down payment, and likely some difficulty getting financing at all for those with sketchy credit or high debt-to-income ratios, which includes the many millennials who come out of college with stratospheric credit card bills and tattered credit histories.

You can buy, but should you?
But even if you can afford to buy a home under these conditions -- and with many distressed homeowners and builders desperate to sell, chances are you can -- the real question is, should you?

Again, the answers here will probably be frustrating for homebuying hopefuls. While falling prices may seem like a blessing for young homebuyers, they also create an element of risk. According to the National Association of Realtors, or NAR, the median existing-home price fell 3.3 percent nationally in 2007, and as much as 10 percent to 12 percent in troubled markets like Florida and California. A probable wave of foreclosures resulting from rate resets on adjustable-rate mortgages signed in 2005 and 2006 threatens to drop prices even further in 2008.

Don't get upside down in first home
With no one quite sure when real estate prices will stop sliding, young homebuyers who can put down only between 5 percent and 10 percent of the price of their homes may see what little equity they have eroded by their homes' falling values. This can leave them "upside down," or owing more on their mortgages than their homes are worth.

"Certainly, there is a chance that the housing market has hit the bottom, but this is not a bet that first-time buyers should be taking," Sanders says.
This is an especially bad situation for people in their 20s and 30s. Because they are just starting out in their careers, young adults relocate often in search of better jobs. Their growing families mean that they will, in all likelihood, be moving out of their first homes quickly. In a situation where a homeowner has negative equity, getting out of a home is extremely difficult.
The owner must be able to pay the mortgage off at the time of sale. If the house can't be sold for at least what is owed, homeowners are stuck.

"First-time homebuyers tend to move on fairly quickly," says Holden Lewis, Bankrate.com's mortgage expert. "Buying at a time like this, they run the risk of being immobile."

Are you a first-time homebuyer eager to get into the market? Here are steps to take to help you decide whether you're ready to take the plunge.

Friendly neighborhoods for buyers
Still, in some markets, where prices didn't skyrocket as much as in former boom areas like Florida and California, the outlook for prospective first-time homebuyers is much better. Some markets in Texas, Utah, North Carolina and other states have actually seen modest growth and may offer less risk for first-time buyers.

Dawn and Michael Kessay purchased their first home in Seattle recently and enjoyed the best of both worlds -- a good selection and relatively risk-free pricing. Their agent, Sheryl McLaren, believes that despite the grim national news, this is still a good market for first-time buyers with strong credit.

"Yes, the market's tightened up, and the buyers that are out there are very qualified," says McLaren, who is an agent with Seattle's Zip Realty. "You have to be a strong buyer, but you'll have more negotiating power."

"We'd been thinking about buying for years, and hadn't because we'd been hearing all these bad things about the market," says Dawn Kessay. "(Michael) thought we should go look. We did and it was the perfect time -- it's definitely a buyer's market."

The couple searched for only two weeks before finding a house that gave them room to grow and fit their price range. "I think we got a bargain," says Dawn Kessay. "They had already lowered the price, and we got it lowered even further, and they paid closing costs and for a couple of repairs."

The Kessays have no plans to move in the near future, so they should be able to ride out any downward turn in prices in the Seattle market. For young buyers like the Kessays, with good credit, a down payment and the intention to stay put, the time might just be right.

Still, for most millennial homebuyers, the risks outweigh the benefits, especially with a glut of affordable rental units coming available as desperate sellers try to rent out units that are just not selling in the current markets. It may be best to spend most of 2008 kicking back, calling your landlord when your appliances break down and watching the real estate market for signs of a recovery.
 
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Why They're After Your Favorite Tax Break
By Dan Kadlec

There may be nothing more American than the home-mortgage deduction, which came into being in 1913--two years before the New York Yankees wore pinstripes. This deduction has helped make the American Dream affordable and has contributed to a run-up in the homeownership rate to 69% from 44% during World War II. In recent years, the mortgage deduction hasn't just helped folks get into a house, it has given them the most valuable tool for managing their finances since the piggy bank: tax-deductible home-equity loans and lines of credit. Just try to find a rate on a credit card or construction loan that, after adjusting for taxes, comes to around 4%, as it does with home-equity borrowing. People have been tapping into this low-cost source of funds for college tuition, vacations and other spending that bailed us out of the last recession.

Now they want to take it away. A presidential panel last week suggested eliminating the interest deduction on all types of home-equity borrowing and replacing it with a 15% tax credit for a principal residence. Is this lunacy? From the homeowner's perspective, it sure seems like it.

Lawmakers have toyed with curbing the mortgage deduction for 30 years, both for utilitarian reasons (to boost tax revenue) and philosophical ones (to make the tax code less favorable to the wealthy). Yet each time the idea has surfaced it has been swatted away amid public outrage and the battle cries of every real estate lobbyist not sunning at his second home on Fiji. This time the outrage may be even more shrill, given the fears of a real estate bubble about to burst. "We are raising the loudest possible alarms," said Tom Stevens, president of the National Association of Realtors, which along with the Mortgage Bankers Association and other industry players concludes that losing the deduction would drive home prices as much as 15% lower, sap consumer confidence and imperil the economy. "You could not pick a worse time to bring this up," says Edward Yingling, president of the American Bankers Association. "The housing market is already testy."

Indeed, mortgage rates rose last week to 6.31% for the average 30-year, fixed-rate deal--the highest level in 16 months. With higher borrowing costs, mortgage applications have been falling and home prices have been leveling off in many markets. Taking away the mortgage deduction would further boost the cost of buying; even proponents of scrapping the deduction concede that home prices would take a hit, though they say the brunt would be taken at the high end of the market--homes at $1 million and up.

Yet from a broader economic perspective, dropping mortgage-interest deductions has a certain appeal. For starters, it's only one part of a program that would reform the tax code without changing the burden on the average American. It would raise some taxes only as much as it cuts others. The real target is the alternative minimum tax (AMT), designed years ago to prevent millionaires from avoiding tax, but now increasingly encroaching upon the middle class. Next year the AMT will raise the burden of 21 million taxpayers earning as little as $75,000. But to replace the $1.2 trillion that the tax would bring in over the next 10 years, something sacred had to go, and that's where mortgage deductions come in. Of course, not extending the recent tax cuts due to expire by 2010 (capital gains, estate, child credit) would do the same trick, economists say. But under the President's orders, that option was off-limits.
On some levels the mortgage deduction has outlived its usefulness, anyway. Homeownership in the U.S. is among the highest in the world. Deductible mortgage interest appears to be subsidizing vacation homes and McMansions now, not entry-level housing. As a nation we are throwing so many resources at real estate that we may be underinvesting in other critical parts of the economy. While spending on homes is at a record 18% of GDP, our savings rate is nil and the stock market is going nowhere.

But don't worry: the proposal won't get past the blueprints soon. "We all realize the home-mortgage deduction is near and dear to the taxpayer," says James Poterba, an economist at M.I.T. who was on the panel. "But whenever we get to the moment of truth, Congress and the President are going to have to look at it. We believe we've provided important guidelines." In fact, the debate may have another, hidden benefit. If it stirs concern, maybe we'll start to rethink our move-up plans, put our money someplace more productive--and gently let air out of the housing bubble before it's too late.