By June Fletcher
From The Wall Street Journal Online

Question: I have been considering relocating to Charlotte, N.C., where I can purchase more home for the money. With the recent housing slump and increase in foreclosures, I figure it’s an opportune time to purchase an affordable property. My questions: Is this a good time to buy, and if so, where can I find bargains? Also, where can I locate foreclosed properties without having to join an online site that charges a membership fee?

– Johnna Richard, New York. N.Y.

Johnna: In good markets and bad, real-estate agents are constantly announcing that “now” is the best time to buy. With housing prices weakening, inventories rising and sales slumping, this attitude has drawn a lot of ridicule in the press.

But you know what? Now may actually be a very good time to buy, or at least start looking seriously.

Though no one can really tell when the downward-trending housing market will reach its nadir — most economists predict it will bottom out sometime in 2008 or 2009 — there’s no doubt that sellers have let go of bubblelicious notions of what their homes are worth. According to S&P/Case-Shiller, existing home prices dropped 4.5% nationally in the third quarter over the year before; price appreciation was even slowing in Charlotte, one of the few cities that the research group covers that showed price appreciation year-over-year. It rose at a tepid rate of 4.7%.

The media makes this out as a tragedy, but it’s really not. For buyers, a market that’s nearing its bottom is only a concern for flippers, who need a rising market to make money. For buyers making a long-term investment, it’s a reason to rejoice.

Yes, loans are hard to find, but they are still being made, especially if you have good credit. While the qualifications for getting a loan are becoming stricter — but no more strict than they were in the mid-1990s — mortgage money is still cheap by historical standards and will likely remain so in the near future. The Mortgage Bankers Association projects that 30-year fixed rates will hover around 6% throughout 2008 and the first two quarters of 2009.

Meanwhile, as you have noted, bargains abound, particularly in foreclosure properties. While many Web sites sell foreclosure information (sometimes after letting you sample the Web site for a week-long free trial), you don’t have to pay an online membership fee to find them. Title companies, real-estate agents and lenders — including credit unions — all have information on homes in various stages of foreclosure.

Homes that are being auctioned are listed in the legal notices section of the main local newspaper and can usually be found on the newspaper’s Web site.

But generally, you will get a better deal if you buy a house before it goes to auction, or after — if it doesn’t sell on the courthouse steps. Bidders at an auction sometimes get caught in the heat of the moment and push up prices.

For a simple and up-to-date explanation of the foreclosure process, you may want to read “Finding Foreclosures” by real-estate investor Danielle Babb and mortgage broker Bill Nazur (Entrepreneur Press; 2007). But keep in mind that the book was prepared with RealtyTrac, an online database of foreclosure and pre-foreclosure properties, and promotes that Web site heavily.

– June Fletcher is a staff reporter at The Wall Street Journal and the author of “House Poor” (Harper Collins, 2005). Email your questions about the residential real-estate market. Please include your name, city and state. If you don’t want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.

By Alex Frangos
From The Wall Street Journal Online

There is one big question looming for homeowners and commercial real-estate investors this year: How much worse will it get?

The past year was the most painful in decades for residential real estate, as defaults on loans to less-creditworthy borrowers created a broader credit squeeze. House prices fell, home ownership dropped, foreclosures soared, and the housing market emerged as the soft underbelly of the economy.

Commercial real estate hit its peak early in 2007, when private-equity firm Blackstone Group LP paid $23 billion for office giant Equity Office Properties Trust, and then did an about-face. As credit tightened throughout the economy, commercial-property values tilted downward for the first time in several years.

Housing prices are likely to slide further this year, as credit remains tight and interest rates on many mortgages are set to rise, or “reset,” and could trigger more defaults.

The commercial real-estate market, which includes properties such as offices, apartment buildings and shopping centers, could continue to soften as slower economic expansion causes rents to rise more slowly than in the past.

Residential Blues

Relief from the housing woes is unlikely anytime soon. “It will be another very bleak year with the worst of it occurring in the first half,” predicts Mark Zandi, chief economist at economic-research site Moody’s Economy.com. “Inventory is only growing and needs to be worked off before the market finds some stability,” he said.

Through the third quarter of 2007, slightly more than 2.5% of all houses, or more than two million, were for sale and vacant, according to the U.S. Census Bureau. Since the first records were kept in 1965, that figure had never been higher than 2%, until the fourth quarter of 2005.

Demand is likely to stay depressed, keeping prices low, as high-risk borrowers who in the past would have qualified for subprime loans find themselves locked out of the market. Borrowers with little, if any, money for a down payment and those who don’t want to document their finances also are likely to find the going tough.

House prices have fallen 6.5% as of October, since peaking in June 2006, according to the S&P/Case-Shiller Home Price index, which measures home values in 20 cities. Daniel Mudd, chief executive of government-sponsored mortgage investor Fannie Mae, expects prices to decline another 4% to 5% in 2008.

Among the hardest hit residential markets is Florida, where thousands of high-rise condominiums under construction are expected to be completed in 2008. Although buyers put deposits on many of those units during the housing boom, developers worry that the drop in property values and credit tightening will cause buyers to renege.

“People won’t answer the bell to close,” said Lewis Freeman, a Miami bankruptcy consultant who said he is busy with failed condo projects. If enough buyers fail to close, entire projects could be sent into default on construction loans.

This year will be difficult for home builders faced with slow sales. In November, Levitt Corp.’s Levitt & Sons unit filed for bankruptcy-court protection. Tousa Inc., of Hollywood, Fla., said it is considering several “in- and out-of-court restructuring and reorganization” options, including a possible Chapter 11 bankruptcy filing.

Mr. Zandi’s models predict a bottom to the housing market sometime in 2008, but only if the economy stays relatively strong. “If it slides into broad-based recession, it won’t be until the end of the decade that the market finds a bottom,” he said.

Commercial Cracks

Optimism about commercial real estate is tempered by the credit crunch and a slowly expanding economy.

“Rent increases will continue to slow over 2008, as we face weaker demand and slower growth in the broader economy and jobs,” said Sam Chandan, chief economist at Reis Inc., a property-research firm based in New York.

About 15% of property investors expect prices for office buildings to rise, according to a survey by real-estate services firm Marcus & Millichap Real Estate Investment Services Inc., of Encino, Calif. Two years ago, 39% of property investors expected price increases.

In 2007, Blackstone’s acquisition of Equity Office marked the high point of the commercial real-estate market. The $23 billion deal was the largest real-estate transaction ever in dollar terms. Blackstone quickly turned around and sold many of the properties at prices so high that buyers weren’t likely to see big first-year returns on their investment.

The frenzied deal making came to symbolize the frothy valuations investors were paying for commercial real estate.

Moody’s Investors Service, a subsidiary of Moody’s Corp., in April said lenders’ underwriting standards had become too lax during the run-up in prices. The warning scared investors and led bankers to raise interest rates and require borrowers to pour more of their own money into deals.

The change in the credit markets deflated commercial-property values. At the end of May, Tishman Speyer Properties, along with Lehman Brothers Holdings Inc., announced they would buy Archstone-Smith Trust, one of the largest apartment-building companies in terms of market capitalization, for $15.2 billion. Before the deal was announced, Tishman Speyer and Lehman had lowered their bidding price, citing credit markets and unforeseen tax issues.

Rents and occupancy rates — the fundamentals of real-estate values — are expected to stay relatively firm in 2008. Mr. Chandan predicts landlords will be able to charge 6.2% more for office space this year. In 2007, rents increased 10.4%.

Any downturn in commercial real estate will be different from the past, said Harvey Green, chief executive of Marcus & Millichap, because unlike the residential market, there has been relatively moderate production of new supply.

“We haven’t been in a long cycle of rent growth to justify that much new construction,” said Mr. Green.

By Amy Hoak
From The Wall Street Journal Online

If your New Year’s resolution is to sell a home in 2008, it’s probably time to start thinking about how to make that home stand out from the rest.

But before planning any projects, beware: Homeowners aren’t recouping as many improvement costs as they could in recent years, according to a recent study by Remodeling magazine. In fact, real-estate agents advise clients not to overdo it, regardless of what the local market conditions are like.

“It’s more important that it’s neat, it’s clean and it looks spacious, rather than making sure it’s the top of the line,” said Cheri Kuhn, owner-broker of Waters Realty in Minnetonka, Minn. She cautions her clients to bypass projects that aren’t necessary.

“The thing I find with sellers: If they do a lot of remodeling, they will take the cost of the remodeling and add it to the cost of the home and ask the buyer to pay for it,” she said. Often, though, sellers won’t get that higher price.

The reason is that asking prices are based largely on comparisons with similar homes in the area, Ms. Kuhn said. And in the many markets that aren’t exactly booming right now, buyers have more negotiating power over the price of a home.

To keep costs down and spend remodeling dollars wisely, consider the following tips.

1. Ask for advice. Before making any remodeling plans, clear your home of clutter and rent a storage unit, if necessary, to hold extra stuff while the home is on the market, said Shannon Aldrich, a Realtor licensed in Maine and New Hampshire with Keller Williams Coastal Realty. Then, get some advice from a local real-estate agent on how the home stacks up against the competition.

“I see more houses in a month than most people see in their lifetimes,” said Ms. Aldrich, whose blog includes a series about getting rooms ready to sell. Sellers can use that experience to their advantage when deciding what projects to do.

When Ms. Kuhn first meets with clients — sometimes six months before the house is listed — she makes a prioritized list of improvements that will make a difference. Cleaning the carpets, painting the walls and removing wallpaper are common fixes. It is wise to budget for these tasks before putting money aside for more expensive projects.

2. Dig deeper. It also could pay to look below the surface by getting a home inspection before listing the property. That way, problems that could hold up a sale are addressed in advance, said Dan Steward, president of Pillar to Post, a home-inspection company in Tampa, Fla.

Some estimate that for every dollar of perceived defect, buyers want a $2 to $3 discount, Mr. Steward said. If that’s true, it might pay to spend $2,500 to replace an old furnace.

Also, replacing something as necessary as a furnace helps create a favorable perception of how well a seller took care of the home, Ms. Kuhn said. If there is a problem with an essential element of the house, a buyer might think, “If that was neglected, what else was?” she said.

3. Look outside. Pay attention to exterior details like the condition of siding and windows, Ms. Aldrich said.

According to Remodeling magazine’s 2007 Cost Vs. Value Report, a wooden-window replacement recovers on average 81.2% of its cost at resale, and siding replacement recovers on average 83.2% of its cost. The payoff for those projects is much better than for an upgrade that a buyer might not need. A home-office remodeling, for example, recovers 57% of its cost on average. The estimates are national averages for midrange homes, not upscale ones.

4. Spend time in the bathroom. Freshening up the bathroom doesn’t have to be expensive, but it could be important.

“People will put up with a lot of cosmetic challenges in a house if they know they could use the bathroom right away,” Ms. Aldrich said.

It’s most important for the bathroom to be clean, but sellers should also consider replacing the fixtures, tub, sink and toilet — if they need it, she said. Replace cracked tiles and curled linoleum.

The replacements don’t have to be expensive, Ms. Aldrich added. A toilet can cost less than $250, and she recommends taller, handicap replacement toilets to appeal to an aging population.

5. Keep it small in the kitchen. The other room that often sells a house is the kitchen, but it might be best to keep renovations modest. Remodeling magazine’s report found that homeowners could recover 83% of the cost of a minor kitchen remodel at resale, compared with 78.1% of a major kitchen remodel.

Ms. Kuhn cautions her clients not to replace refrigerators, stoves or dishwashers. Buyers considering remodeling the kitchen will likely have their own preferences, she said.

Along those same lines, sellers should replace a countertop if it is crumbling but not if its only fault is that it is outdated, Ms. Kuhn said. Even then, seriously consider material costs: There is no need to update to granite unless the competition has granite countertops as well.

Real-estate brokerage Brown Harris Stevens released another rosy report on Manhattan’s residential market today. Prudential Douglas Elliman also reported record average prices in the Manhattan market. (Full Brown Harris Report | AP Story)

Elliman said the average Manhattan apartment price, which includes cooperatives and condominiums, jumped 17.6% in the fourth quarter to a record $1,439,909 from the year-ago period, while Brown Harris reported a 34% increase to $1,430,514, another record. The Brown Harris Stevens report shows that the median sale price of a Manhattan apartment jumped from $725,000 in the fourth quarter of 2006 to $828,000 last quarter, a rise of 14.2%. (See a post on Brown Harris Stevens’s third quarter report)

While the fourth-quarter report doesn’t detail home sales, Brown Harris chief economist, Gregory J. Heym, says that apartment sales fell 1% from 2,557 in Q4 2006 to 2,531 in Q4 2007, while the average amount of time homes stayed on the market dropped from 97 days to 84 days. “Things are selling faster,” he says.

An architectural rendering of 15 CPW.

While the “rate of growth” has slowed, Manhattan’s market continues to be propped by a high number of luxury-home sales and by interest from foreign buyers, Mr. Heym says. He notes that the number of homes sold at prices over $10 million has tripled from a year ago and that the fourth quarter’s average apartment prices are “somewhat inflated by the high-end of the market.”

Also lifting the average price tag paid for a Manhattan apartment last quarter was a significant amount of new construction, with closings on new condos at The Plaza and 15 Central Park West -– at an average price of over $6.95 million -– accounting for 7% of all condo sales, he says.

But should conditions on Wall Street grow dimmer, that could certainly affect Manhattan’s residential market, he says. “I think the concern is whether Wall Street layoffs will grow larger than what was announced and whether that will slow down the local economy,” he says.

Meanwhile, New York’s regional market is showing weakness. A recent article from the New York Times notes that prices for single-family homes in the New York metropolitan area fell by 4.1% in October 2007 from October 2006. Homes in Westchester and Connecticut are staying on the market longer. Home prices have dropped 1% a month the last few months in New Jersey and median prices on the North Shore of Long Island decreased 7.7% in the third quarter from the third quarter of 2006.

Readers: Do you think Manhattan will show strength or cracks in 2008? — Lauren Baier Kim

By Greg Ip
From The Wall Street Journal Online

U.S. house prices “likely would have to fall considerably” to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.

The study, which doesn’t necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.

Of course, the link between house prices and rents can remain out of whack for years.

The U.S. study is by Morris Davis, an economist at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed; and Andreas Lehnert and Robert F. Martin, staff economists at the Fed.

The authors’ methodology was based in part on previously published work by Fed economist Joshua Gallin. The same approach is used by many other analysts, including the Congressional Budget Office, which arrived at similar conclusions.

In an interview, Mr. Davis said lower long-term interest rates can explain only a small part of the drop in the ratio. “To justify current price levels, you need rapid growth in rents.” But it’s hard to imagine the scenario that would justify such rapid growth in rents, he added. Indeed, it’s possible rents will grow more slowly than 4%, reflecting the overhang of unsold homes that might be rented out.

Mr. Davis said the authors postulated a five-year horizon for the rent/price ratio to return to normal by looking at previous downturns. “When a downturn begins, it will last for a while.”