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Real Estate: The New Rules for Buying a House

Many prognosticators believe the next few years will see tepid returns in the stock and bond markets — but what's in store for the post-crash real estate market? For anyone shopping for a house, the news could be good. Indeed, if there's a ray of sunshine anywhere in the "new normal" economic outlook — slow economic growth, unemployment hovering above 8 percent, more regulation, less borrowing — it is shining on homebuyers.

Given record inventories and continued high foreclosure levels, home prices will bounce along the bottom for a while, at least according to the crystal ball wielded by David Berson, chief economist with mortgage insurers PMI Group. And Berson sees little indication that you’ll have to pay more than 5.5 percent for a mortgage this year, maybe 6 percent in 2011. All of which means real estate is a solid buyer’s market. You can get the house you want at a good price, and you can take your time finding it. Just keep these five rules in mind:

1. Don’t Expect Big Profits

You should not buy a house because you think it’s a terrific investment. “Maybe we should be calling this the ‘old normal,’” says John Burns, CEO of John Burns Real Estate Consulting: a return to a time when you viewed home ownership as a way to lock in your housing costs with a fixed-rate mortgage, pay it off after 30 years, and retire with no housing costs beyond property taxes and insurance. “For the last six or seven years, the notion has been of your house as a cash machine,” he says. “Those days are gone.”

2. Make a Real Down Payment

To qualify for a home loan, you’ll have to meet those quaint, old-fashioned standards of actually documenting your income and debt. If you want to take advantage of the best mortgage rate, you’ll have to put 20 percent down. “FHA will still do loans up to 97 percent. Mortgage insurers are still there for 90 percent loans,” says Burns. “But if you’re putting less than 20 percent down, you’re going to be paying a higher interest rate and higher mortgage insurance premiums because of it.” And 100 percent loans are history.

3. Run the Numbers

“One of my favorite strategies is spinning off income from your assets, whether it’s paper assets or hard assets,” says David Rosenberg, chief economist and strategist for investment firm Gluskin Sheff. “I wouldn’t suggest buying real estate in anticipation of any price appreciation, but if it can provide an income stream, that’s different altogether.” Just keep in mind that vacancy rates nationwide are close to a record 11 percent, and that puts downward pressure on rents. “Don’t expect to see much of an increase in the rental income stream for a while,” he says.

4. Plan to Pay Higher Property Taxes

With slower economic growth comes lower tax revenues at all levels of government. Homeowners are an easy target when state and local budgets need balancing.

5. Get Real About Your Current Property

The bubble didn’t just burst, it evaporated, so forget the price you could have gotten for your house at the peak — unless you have years to wait. With slow economic growth and high unemployment rates, “I expect housing prices to remain flat through 2010,” says Berson. “They’ll increase maybe 1 percent to 2 percent next year, 2 percent to 3 percent the year after that, and the long-term average should be about 4 percent.” Do the math, and you’re looking at least nine years before houses regain the 30 percent they’ve lost since 2006. Flip side? Housing prices are up about 25 percent since 2000, so if you didn’t buy during the real estate bubble, you’re probably sitting on some equity.

“The ‘new normal’ isn’t just about economic theory,” Rosenberg says. “It’s a real secular shift in consumer attitudes. If you ask a typical homeowner what he would do if he could turn back the clock, he’d move back into the house he had before he traded up to a McMansion — the house he loved, the house he raised his family in. The bubble was all about bigger cars, bigger homes. The ‘new normal’ is about getting small.”

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