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Let The House Hunting Begin

Spring is the traditional house hunting season, so financial advisor Ray Martin explained on The Saturday Early Show what to expect from the housing market this year.

Over the past few ugly economic years, how many times have you heard the refrain: "Real estate is your best investment?" The economy is picking up speed, but Martin says homes remain a hot commodity and a good investment.

Median home prices climbed 7.5 percent last year -- the biggest increase since 1980 -- according to the National Association of Realtors. Experts predict that prices will rise 7.4 percent again this year.

Some markets have seen double-digit price increases over the past three or four years. The 10 metropolitan areas that have seen the largest increases over the past three years are:

  • West Palm Beach-Boca Raton, Fla. - 76.9 percent
  • Providence-Warwick-Pawtucket, R.I. - 73.5 percent
  • Nassau-Suffolk, N.Y. - 72.9 percent
  • Sacramento, Calif. - 68.7 percent
  • Monmouth-Ocean, N.J. - 68.7 percent
  • Bakersfield, Calif. - 64.5 percent
  • Riverside-San Bernardino, Calif. - 64.5 percent
  • LA-Long Beach, Calif. - 64.3 percent
  • Redding, Calif. - 63.7 percent
  • Fresno, Calif. - 62.7 percent

    Source: Fidelity National Finance Inc.

    Despite the rising prices, more people than ever are buying homes. Freddie Mac predicts that home sales will reach a record 7.3 million this year. Martin says that home sales have seen amazing growth and, in some areas such as New York, San Francisco and Los Angeles, the market has literally been a frenzy of sales.

    Low interest rates and increased demand are driving the booming housing market. Interest rates remain at some of the lowest levels in the past 45 years, so more people can afford to shoulder a mortgage. Prices are really being driven by demand, Martin says, and the supply-demand balance is out of whack right now for a variety of reasons.

    He explains builders do not want to over-build and risk having homes sit empty; strict zoning laws restrict growth in some areas; and in cities such as New York City or San Francisco, there's simply no room to build more homes. Finally, many homeowners are reluctant to sell. They've re-financed and have a cheap mortgage. If they sold, they could wind up with a more expensive mortgage. Also, homes have increased in value so high-end homeowners would make a significant profit if they decided to sell. This sounds like a good thing, until you take a new capital gains tax into account. Put simply, if you earn more than $500,000 on the sale, you're socked with a huge tax.

    Martin says there are whispers of a possible "bubble" in the market. And, some people are concerned that they may lose money by investing in real estate now -- they fear that they will buy at the height of the market and then their new home will suddenly decrease in value. History shows this fear to be unfounded: there has been no decline in home values since the government began tracking this data 30 years ago. That said, real estate is a local game and market behavior will change state-to-state, and neighborhood-to-neighborhood.

    There are eight states that economists have deemed "risky." In the other 42 states, economists say that increased housing prices mirror increases in income. In the eight states with the most volatile housing markets, however, prices increases are much higher than wage increases.

    These states include:

  • Hawaii
  • Connecticut
  • New Hampshire
  • California
  • Rhode Island
  • Massachusetts
  • New Jersey
  • New York

    Yet even these markets probably won't see homes lose value. Instead, they may see prices level out. Homes probably won't continue to enjoy double-digit increases in value.

    Martin offers the following advice to anyone hoping to buy a home in today's hot market.

    Be an Informed Consumer
    In today's market, you need more information than ever before. Visit a real estate agent to find out the average price of homes in your area, how much they are appreciating in value, and how fast homes sell once they hit the market.

    Be Prepared for a Contest
    This isn't your father's real estate market; competition for homes is like nothing you've seen before. For example, in early March a home in San Francisco that was listed for $559,000 almost immediately received 48 offers and sold for more than 25 percent over the asking price. Homebuyers are offering to forego inspections in order to land a house, and even sending personal letters to the current owners, explaining why they deserve to win the bidding war.

    Martin says if you feel uncomfortable passing up an inspection but don't want to lose a house to the competition, consider bringing along an inspector on your final walk-through of the home. At least you will have an idea of what may need attention once you move in.

    By all means, if you're looking to live in a competitive market, get yourself pre-approved for a mortgage. Also, bring along an initial contract that will get the ball rolling if you're interested. Finally, Martin says to consider a best-offer clause. This clause puts a price on your offer but also states that you'll pay $1,000 more than any higher offer.

    Only Buy What You Can Afford
    Typically, about 30 to 40 percent of your income should go toward housing costs. In response to the current housing market, banks have been offering a new range of mortgage products that allow people to buy more home than they can truly afford. Some loans allow borrowers to pay only interest in the early years of the loans, while piggyback loans combine a traditional first mortgage with an equity line of credit.

    Perhaps the most significant trend in mortgages is the growing popularity of adjustable rate mortgages. Over 25 percent of all new mortgages last month were ARMs, according to the Mortgage Bankers of America. Even Federal Reserve Chairman Allen Greenspan said in a recent speech that more Americans should consider ARMs instead of the current gold standard - 30-year fixed rate mortgage. Martin agrees that ARMs are a smart choice if you know that you're not going to be in the home for more than five to seven years.

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