Matt Woolsey

Feb 14th, 2008

Residents of Sacramento, Calif., where home sale prices for November 2007 fell a startling 18.6% over the year before, are likely breathing a sigh of relief.

That’s because homeowners there stand to benefit from the Bush administration’s initiative, announced this week, aimed at helping homeowners facing foreclosure. Called “Project Lifeline,” and assembled by six of the nation’s largest financial institutions, which service almost half of the country’s mortgages, the program allows qualified homeowners to suspend proceedings for 30 days while providing them with rewriting and refinancing assistance.

The lenders involved–JPMorgan Chase, Bank of America, Countrywide Financial, Citigroup, Washington Mutual and Wells Fargo–say they will contact homeowners who are 90 days or more overdue on mortgage payments and work with them on ways to make their mortgages more affordable.

Slideshow: America’s Free-Falling Housing Markets

“There’ll be homeowners who still take no action, and some will still walk away,” said Treasury Secretary Henry Paulson at a news conference today. “But some borrowers facing immediate foreclosures may find solutions.”

While resetting rates on many of these mortgages are causing homeowners to default, falling prices, which lead to negative equity, are also playing a part. Negative equity occurs when the homeowner owes more on the home than the home is worth, and thus has little incentive to make payments.

Then there are the homeowners who took out “piggyback” loans–getting a second mortgage to pay the down payment on the first–leaving them saddled with mounting debt, yet unable to unload a home that’s dramatically dropping in value.

Behind The Numbers

To assess which cities are hardest hit, we used data from Radar Logic, a New York-based real estate research firm. Radar Logic differs from the more familiar Case-Shiller index in that it tracks more markets (25), includes data on foreclosures, condos and new construction, and is a spot price, not a running average.

ZipRealty, a San Francisco-based real estate tracking firm that aggregates multiple listing service data, provided us with the number of homes on the market that have been relisted below their initial asking prices.

In Sacramento, 43.6% of homes on the market have been lowered in price. There are currently 36,097 homes on the market there, with very few potential buyers.

Just lagging Sacramento is Las Vegas, where between November 2006 and November 2007, prices plunged 17.2%. What’s more, from December 2006 to December 2007, the number of homes on the market surged by 30%, further stalling sales, and likely leading to more price depreciation down the road.

A city you might have expected to see higher on the list– Detroit–finished ninth. Simply put, there just isn’t much further for the city’s housing prices to fall; in percentage terms, it doesn’t look as depressed as other (once over-inflated) markets. In some areas of Motor City, banks are literally giving homes away if the buyer agrees to bring it up to code.

Florida nabbed three spots on the list of 10 fastest-falling markets, with Tampa down 11.7%, Miami depressed by 10.6% and Jacksonville in an 8.7% decline from last year.

The one sign of good news in these markets is that construction has all but stopped, and sellers are starting to get realistic about cutting prices.

For full-year 2007, almost every market experienced an inventory spike, but in the last month of the year, according to ZipRealty’s numbers, inventories started to decline nationwide. Even in Sacramento and Las Vegas, inventory numbers have started to fall, if only marginally.

By KELLY EVANS and SARA MURRAY
February 12, 2008; Page D1

You might think that it’s an especially good time to get a deal on a foreclosed home at an auction.

It isn’t. Despite the growing number of foreclosures across the country, there are few bargains to be found at auctions. For one thing, you’ll be competing against savvy local investors who know how to gauge a property’s real value. What’s more, many properties are mortgaged so steeply that banks often ask for bids that are higher than the properties are worth.

There are other ways, though, for a determined buyer to tap into the foreclosure market. One is buying a home in “preforeclosure” directly from the homeowner. Another, more-promising route: buying a home that failed to sell at auction and has been put back on the market by the bank that holds the mortgage.

The number of foreclosed homes is expected to quadruple this year, adding one million properties to the market in 2008 and again in 2009, according to Lehman Brothers.

Foreclosure laws vary from state to state, and sometimes from county to county, so it’s important to know how the process works in your area. In New York and several other states, foreclosure proceedings begin when the lender sues the homeowner for not keeping up with the mortgage payments. Such a suit is typically filed in county court after the homeowner misses three consecutive payments.

The foreclosure filings are public documents that provide the names and addresses of property owners in default. Interested buyers can find the filings at the county courthouse and can contact the homeowner with an offer. A variety of Web sites will also provide foreclosure listings for a fee.

A preforeclosure deal offers certain advantages over an auction to both buyer and seller. The seller avoids eviction, and the buyer may be able to negotiate a better deal before the property goes to auction and the bank becomes less flexible. In addition, the buyer, with the seller’s permission, can get the house inspected — a crucial step in obtaining a mortgage. But be forewarned: Some homeowners whose property has been listed as being in preforeclosure may not be pleased to get unsolicited calls from potential buyers.

The length of time it takes for a property to move from preforeclosure status to an auction varies from state to state. In New York and other “judicial” states, it can take months or even a year, because the lender has to sue the homeowner. But in most other states, the lender can begin the foreclosure process without having to sue, and the process is much quicker.

This 3-bedroom, 2.5-bathroom bank-owned home in La Grange, Calif., is listed for $350,000 by Caprice Epps of Coldwell Banker Mountain Leisure Properties.

Once the preforeclosure period is over, and homes are slated to go to auction, notices are printed in local newspapers and published on a variety of foreclosure Web sites.

Most people who buy homes at auctions are professional investors who know the market. For amateurs, thorough research is essential, says Jessica Davis, founder of Profiles Publications Inc., a foreclosure-listings service for the New York City area. She says interested buyers should visit the property, even if they can’t get inside, to get a good look at the outside and survey the neighborhood. Plus, she says, it’s crucial to check for outstanding tax liens or multiple mortgages. “You need to work hard and educate yourself,” Ms. Davis says.

HOW LOCAL MARKETS ARE FARING

Compare housing-inventory trends by region and city.

At the auction itself, interested buyers should come armed with cash or a cashier’s check. Most courts require the winning bidder to pay the down payment, and sometimes the balance, on the spot. (The balance is otherwise usually due within 30 days.) Getting a mortgage is usually out of the question, because defaulting homeowners are unlikely to grant access for an inspection. In addition, buyers must take the property on an “as is” basis, so they may have to spend a lot of money to make it livable.

And don’t think you’re going to get a good price just because the property has gone to auction. Because of the sharp run-up in housing prices in recent years — and the increase in huge, and often exotic, mortgages — many defaulting homeowners have paid off little of their loan principal. Banks, at least so far, have been reluctant to sell the houses for less than the money they’re owed, even though houses might be worth less than that because of a softening market.

Some industry professionals say they’re surprised more banks aren’t lowering prices, and suggest they’ll have to do so eventually. “From where I sit, I don’t understand it,” says Ms. Davis. “The smart thing to do would be to move things along.”

Industry experts say first-time buyers are likely to do better with bank-owned properties — sometimes called “real estate owned” houses, or REOs. These are homes that fail to sell at auctions and are then put on the market by the banks that own them.

A bank-owned home, this Detroit 5-bedroom, 3-bathroom house is listed for $144,900 by Paul Endres of Re/Max Properties of Allen Park, Mich.

In some parts of the country, the prices on such properties remain stubbornly high. But that could change as the inventory of unsold homes grows. In the meantime, buyers assume less risk with REOs since they can inspect them before they buy.

“Different banks work in different ways,” says Bruce Lynn, a Realtor in the Dallas-Fort Worth area with Prudential Texas Properties. “Some of the banks will sit [on a property] until they hit their target number — they may get 20, 30, 40 offers before they’re ready to take one.”

Potential buyers should work with a real-estate agent who has experience in the process, Mr. Lynn says, and put in a realistic bid. “You can’t expect to bid 50% of the asking price and hope to get it,” he says.

This Bank of America-owned house in Naples, Fla., has 4 bedrooms and 4 bathrooms and is listed for $450,000 by Robert Sinclair of 100% Real Estate of Orlando.

If no one bids on the foreclosed properties at the auction, the banks then farm them out to real-estate agents to sell on the market. Mr. Lynn says that while the regular homes he sells usually attract two or three bids, foreclosed homes can attract 30 or more offers, all of which he sends to the bank.

For Terry Henson, 47, from Mira Mesa, Calif., a little patience and some extra legwork paid off.

After scouring REO properties for two years, Mr. Henson found a 1,800-square-foot home with three-and-a-half acres of land and a barn in Ramona, Calif. He contacted San Diego REO Specialists, which was representing the bank that held the mortgage. He visited the property and, with a real-estate agent’s help, honed an initial offer of $410,000. The bank turned it down.

So he hired a home inspector, who reported that the home needed important updates such as new cabinets, and that the barn would need up to $15,000 in renovations to be brought up to code. Mr. Henson returned to the bank with the same offer, citing its costly structural problems.

The bank finally accepted his offer, even though the outstanding mortgage was about $580,000. “I think they saw…I was showing due diligence,” says Mr. Henson.

by Jonathan Clements
Wednesday, February 13, 2008provided by

A house isn’t a stock.

To be sure, you probably don’t regularly confuse the bricks and mortar you occupy with the investments listed on your brokerage statement.

Yet thinking about the differences between the two helps explain why folks love owning real estate — but also why some homeowners are in such trouble today. Here are five key ways that homes differ from stocks and stock mutual funds.

A house isn’t a stock.

To be sure, you probably don’t regularly confuse the bricks and mortar you occupy with the investments listed on your brokerage statement.

Yet thinking about the differences between the two helps explain why folks love owning real estate — but also why some homeowners are in such trouble today. Here are five key ways that homes differ from stocks and stock mutual funds.

1. You don’t know the price until you sell.

With a few minutes of spare time and an Internet connection, you can find out the share price of every stock and stock fund you own. But you don’t really know what your house is worth until a buyer makes an offer.

This leaves ample room for mental mischief. You can happily imagine that your house is a wonderfully stable investment, because — unlike your stocks — you aren’t receiving continuous price updates. You can also happily imagine that your home sports some grand valuation.

But if you are a seller in today’s rocky housing market, a happy imagination can be a big drawback. If you insist on getting a lofty price, you likely won’t find a buyer. Indeed, if you have already moved and your house is sitting empty, your stubbornness could cost you big bucks.

2. The expense ratio is huge.

What big bucks? Think of your home as a stock fund with an exorbitant expense ratio. Each year, between maintenance costs, property taxes and homeowners insurance, you might be paying a sum equal to 3% or 3.5% of your home’s value.

In addition, you will have utilities and probably mortgage payments. These costs don’t seem so dreadful if you’re getting good use from your home. But if you have an unoccupied house you are aiming to unload, these costs mean you’re bleeding money every month that goes by without a buyer.

3. You will pay a hefty commission to sell.

Real estate isn’t just costly to hold. It’s also moderately expensive to buy — and horribly expensive to sell.

Purchasing a property can involve home-inspection costs, lawyers’ fees, title insurance, moving costs and mortgage-application fees. Selling can also mean moving costs and lawyers’ fees. But the big hit is the real-estate commission, which might snag 5% or 6% of your home’s selling price.

Trading stocks, on the other hand, is fairly cheap if you use a discount broker.

In fact, you can avoid all trading costs if you favor no-load mutual funds and deal directly with the fund companies involved.

4. You can’t get a margin call.

It’s common to take out a mortgage to buy a house, while only aggressive investors use a margin account to buy stocks. This isn’t a big surprise. Buying real estate with borrowed money is a whole lot safer than buying stocks with borrowed money.

How so? If the stock market plunges and you own shares on margin, you could receive a margin call from your broker, asking that you add more cash or securities to your account. If you don’t pony up, part or all of your holdings will be sold, locking in your losses.

By contrast, as long as you make your mortgage payments, your neighborhood mortgage banker can’t force you to cough up more cash or sell your home, no matter how far your home’s price plunges. This ensures you won’t be bulldozed into a snap decision. Still, because homeowners don’t receive margin calls, it makes it easier to procrastinate over selling and to entertain fanciful ideas about your home’s value.

5. The dividend is impressive — but it isn’t in cash.

If you buy a collection of U.S. stocks today, you might notch a 2% dividend yield. Clearly, the hope is that you will do far better than that, thanks to handsome share-price gains.

Meanwhile, with a home, you shouldn’t expect much in home-price appreciation. According to home-finance corporation Freddie Mac, home prices have climbed at less than 6% a year over the past 30 years, versus 4% for inflation.

Moreover, even if you notch this sort of price gain, much of it will be offset by the 3% or 3.5% “expense ratio” mentioned above.

Instead, with real estate, the biggest part of your gain should come from the dividend, which is the rent you receive. Most of us, of course, don’t have tenants. Rather, we live in our own homes and effectively rent to ourselves.

The good news is, this “imputed” rent is pretty valuable. If you rented out your house, you might collect rent equal to 7% of your home’s value each year. That’s an indication of how much value you’re getting from living in your own home.

An added bonus: It’s tax efficient to rent to yourself, because you don’t have to pay tax on this imputed rent.

So what’s the bad news? You may be getting real value from your home — but you aren’t getting your dividend in cash.

The implication: You want to own a home that’s the right size for you and your family, but no bigger. What if you purchase a house that’s much larger than you really need? It’s like renting a mansion — and living in just two room

By Martin Crutsinger, AP Economics Writer

Administration Announces Program to Help Homeowners Threatened With Foreclosure

WASHINGTON (AP) — Homeowners threatened with foreclosure would in some instances get a 30-day reprieve under an initiative the Bush administration announced Tuesday. Critics attacked the proposal as far short of what is needed to resolve a serious financial crisis that is threatening millions of families with the loss of their homes.Under the new program, six of the nation’s largest financial institutions said they will begin contacting homeowners who are 90 or more days overdue on their monthly mortgage payments. The homeowners will be given the opportunity to put the foreclosure process on pause for 30 days while the lenders look for a way to make the mortgage more affordable.

The new program will be available to the holders of all types of mortgages from prime to subprime and represents a widening of an initiative announced by President Bush in December that offers a freeze on subprime mortgage rates that are scheduled to reset to sharply higher rates for borrowers who qualify for the assistance.

While saying the 30-day pause in the foreclosure process was not a silver bullet, Treasury Secretary Henry Paulson said it could give borrowers valuable time to work out refinancing terms with their lenders. However, lenders would not be required to offer any more favorable financing terms than they are already offering to borrowers in trouble.

Critics said much more assistance will be needed to prevent what is expected to be a tidal wave of foreclosures in the coming two years.

“A monthlong moratorium on mortgage foreclosure is like a Band-Aid when the patient really needs surgery,” said AFL-CIO President John Sweeney.

“Homeowners at risk of foreclosure are floating 50 feet from shore while Project Lifeline throws them a 30-foot rope,” said Sen. Dick Durbin, D-Ill. Durbin is pushing legislation that would let homeowners facing foreclosure alter the terms of their mortgages in bankruptcy proceedings to make their payments more affordable, something current law does not allow.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., who will hold hearings on the housing crisis with Paulson and Federal Reserve Chairman Ben Bernanke on Thursday, said the administration should consider his proposal for a Homeownership Preservation Corp., which would buy mortgages at steep discounts from mortgage firms and banks and then rework the loans based on the reduced value of the properties, making the payments more manageable.

Dodd said the new mortgage moratorium “will not stem the tide of the millions of foreclosures we are facing in the coming months.”

Sen. Chuck Schumer, D-N.Y., said the problem was that the administration’s latest effort does not address the fact that more than 30 percent of homeowners who bought in the last two years owe more on their mortgages than their houses are currently worth, saying the problem will not be adequately addressed until lending institutions cut down on the borrowers’ debt.

The current crisis reflects the steepest slump in housing in more than two decades, a severe downturn that followed a five-year boom that saw home sales and prices both hit record levels, only to come crashing down over the past two years.

Homeowners who had counted on being able to refinance their adjustable-rate mortgages before they reset to sharply higher rates have been caught in the sharp downturn as home sales and prices have plunged in many parts of the country.

The slump in housing has spread to the overall economy, pulling growth to a near-standstill in the final three months of last year and raising fears of a possible recession. Paulson said the $168 billion economic stimulus package that President Bush will sign on Wednesday plus the administration’s various housing initiatives would all help to jump-start economic activity.

He told a news conference that the “worst isn’t over” yet for housing in terms of the estimated 1.8 million subprime mortgages — loans offered to borrowers with weak credit histories — that are scheduled to reset to sharply higher rates over the next two years.

The 30-day mortgage moratorium effort will begin with letters sent by the six financial institutions to homeowners who are seriously delinquent on their mortgage payments, asking them to contact their mortgage servicer.

A sample letter begins, “You are being considered for a loan modification, which is a change in the original terms of your mortgage contract. If you qualify, this could reduce your interest rate or extend the time you have to repay your loan, or both.”

To be considered for the 30-day foreclosure moratorium and a possible loan modification, the homeowners receiving the letter will have to contact their mortgage servicing company at a phone number provided in the letter.

The Mortgage Bankers Association reported that at least 1.3 million home mortgage loans were either seriously delinquent or in foreclosure at the end of the July-September quarter. Private economists are forecasting that the number of foreclosures could soar to 1 million this year and next, about double the 2007 rate.

Under the guidelines, homeowners would not qualify for the moratorium if they are already in bankruptcy or if they have a foreclosure sales date less than 30 days away or if the home had been purchased as an investment property or was not occupied at the current time.

The six participating banks are Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., J.P. Morgan Chase and Co., Washington Mutual Inc. and Wells Fargo & Co. They account for 50 percent of the mortgage servicing market.

They are all members of the Hope Now Alliance, an industry group that is trying to coordinate a response to the mortgage crisis. Officials urged homeowners to call the group’s toll free hot line number at 1-888-995-HOPE for assistance.

AP Business Writer Marcy Gordon contributed to this report.

By Jennifer Levitz
From The Wall Street Journal Online

Eager to move closer to their grandchildren in Tennessee, retirees Allen and Wilma Sawtelle put their home in the Southwestern Nevada town of Pahrump up for sale in August. They got nowhere. “The market is just dead,” says Mr. Sawtelle. At their open house, he says, “I think one guy came, and he’d been drinking.”

Poking around the Internet for home-selling tips, Mr. Sawtelle, a 71-year-old former investigator for a law firm, discovered that anxious sellers like him are trying a new tactic: connecting with other sellers who might agree to “swap” — or buy one another’s property. The Sawtelles found a couple who were looking to move to Nevada, and whose house for sale was within driving distance of their grandchildren.

The concept of trading homes temporarily for vacations has long existed, but now it’s being adapted to the slumping real-estate market as people, particularly in the Sunbelt and other slow spots, scout for ways to unshackle themselves from their property. Anecdotal evidence suggests the number of people doing this is still relatively small, but it has popped up from virtually nothing in recent years.

While some form of bartering has been going on since the beginning of time, experts say they aren’t aware of house swapping being done in previous down housing markets. The technology and access to it didn’t exist several decades ago. The current model is based on new technology that enables computerized matching of a large number of properties and owners’ swap criteria.

Fans say swapping is suited to the current down market, where people are extra nervous about buying a new house before selling their old home.

Not everyone is a potential swap candidate, however. Swapping typically requires one party, or both, willing to settle for a new dwelling that is less than their ideal, either in amenities or exact locale. And searching for a swap is much like using a dating service: The odds can be good but the goods can be odd. Before finding his match, Mr. Sawtelle first had to deal with six unsuitable swap propositions, including one involving 450 hectares — more than 1,000 acres — in Costa Rica.

Getting Financing

Experts say it’s probably best not to get involved with someone who owes more money on their house than what it is worth — because they could have a tough time getting financing. And the transaction itself isn’t without challenges. OnlineHouseTrading.com recommends that both clients use one title company that knows not to complete the deal “until everyone signs off.” Daniel Westbrook, the co-founder of the company says, “the scariest thing that could happen is that you buy someone else’s house and they don’t buy yours.”

Both sides of a swap transaction typically close simultaneously — taking away the risk of being saddled with two mortgages at once, or of having to borrow more after purchasing a new home because your old house didn’t sell for as much as you thought it would. When swap partners meet directly online they also save on brokers’ sales commissions — usually 4% to 7% in most markets. If there are homes of unequal value, one buyer provides the cash or gets a mortgage to make up the difference experts say.

Mr. Sawtelle found his swap via a $19.95 listing on OnlineHouseTrading.com, one of at least six swap sites started in the past year. Four have started in just the past seven months, including OnlineHouseTrading.com, GoSwap.org, DaytonaHomeTrader.com and DomuSwap.com. Together the six sites have roughly 16,000 postings. At Craigslist.org, the popular ad site, the number of “home swap” listings — which includes people trading homes temporarily for vacation — jumped 56%, to 7,392 in the 12 months ending in December, the company says, and much of the growth came from people trying to permanently sell each other their homes.

Developers in the weak market are getting into the act, trying to unload new homes by offering to buy peoples’ older, less expensive ones — essentially taking trade-ins like car dealers. Developers say that they do have to then worry about selling the trade-in home, but it is more important for them to avoid getting stuck with a new subdivision of empty homes, which is bad for their image and their wallet.

Developer Florida Lifestyle Homes in Daytona Beach says it will buy homes of people who will “trade up” to a new home that has a value at least 20% greater than the one they’re in. Patrick Sullivan, the owner of the company, says he has made 21 offers and completed eight trades since early 2007.

Some brokers who don’t want to get cut out of the new trend or lose commissions are introducing their own swap strategies. Mapp Realty & Investment Co. in Sarasota, Fla., has launched a Web site where visitors can view a list of properties available for exchange.

Of the 1,919 houses listed on DomuSwap, 13% — or 250 — were listed by brokers. Some of them see this as a supplement to their other marketing efforts, since it opens up a new market of potential buyers. Others don’t like the intrusion.

David Moskowitz, founder of DomuSwap.com, says “I have been seeing resistance from realtors. …. However, business and technology is moving in this direction.”

Walter Molony, spokesman for the National Association of Realtors, says the industry has long experimented with all kinds of business models, and “embraces all kinds of ideas.”

Within three days of listing their home in October, the Sawtelles were matched with Amy and Roy Farr, a young Georgia couple who needed to relocate to Southwestern Nevada for Ms. Farr’s job with a carpet manufacturer. For a year, the Farrs had been trying to sell their house in Cartersville, Ga. — which, it turned out, is an hour’s drive across the border from the Sawtelles’ grandchildren in Chattanooga.

‘A Little Mansion’

Looking at photos, the Sawtelles liked the Farrs’ house, particularly the pillars out front. “It looked like a little mansion,” says Mr. Sawtelle. The Farrs traveled to Pahrump to see the Sawtelles’ house. “It wasn’t ideal,” Mr. Farr says. It was about half the size of the Georgia house. But it was “cute,” he says, and “we were just very motivated to do something.”

On Nov. 30 in Pahrump, the couples held simultaneous closings, with the Farrs selling their house to the Sawtelles for $285,000, and buying the Sawtelles’ house for $140,000. The Farrs walked away from the Georgia house with cash. The Farrs reckon they saved about $20,000 in brokerage commissions, while the Sawtelles calculate their savings at about 3%, or $4,100.

“We’re tickled pink,” Mr. Sawtelle reports from Georgia. But the Farrs weren’t quite ready for the isolation in Pahrump. “You have to drive 60 miles over the mountain to get to things,” says Mr. Farr. The Farrs now want to trade their new home for one in Las Vegas — closer to their jobs and social activities.

Neighborly Swap

Swaps can also work over shorter distances. Lorry Eible, who owns the Foxy Lady clothes boutique in Sarasota, Fla., had built a 4,000-square-foot Mediterranean-style home as a business venture in 2005, but couldn’t sell it. “For two years, we didn’t really have any legitimate offers,” she says. In December, she added a few words to her “for sale” sign: “Will Consider Exchanges.”

“I immediately started to get phone calls,” she says. She got two offers, and accepted one from a neighbor who wanted to move up to a bigger house. He offered to sell Ms. Eible his smaller house — plus a rental property. In a closing scheduled for tomorrow, Ms. Eible will sell her house for $1.6 million and buy the neighbors’ property for about $1.2 million. She says she’s not getting as much money as she’d hoped, but “what this did do is give us the ability to move on.”

By June Fletcher
From The Wall Street Journal Online

Question: I am buying a condo for about $150,000, with a good location and quality. I expect to pay approximately $1,500 a month, including condo fees and mortgage. People tell me that it’s better to buy a house, but for that, we would have to pay about $2,000 a month, plus utilities and maintenance fees. Which is better to buy, a condo or a house?

– Kawal Sachdev, Toronto

Kawal: Which is better to buy, a dish of chocolate ice cream in a diner, or a chocolate éclair in an upscale eatery? The latter may have more cachet and be more expensive, but if the former is really more to your taste and better suits your budget, then buy that.

I realize that it may be tempting to go for the éclair in your city’s vibrant housing market, where sales increased 12% in December over the year before, and resale prices rose 7%, to $394,931, according to the Toronto Board of Realtors. But don’t let your friends trump your better judgment. The market can change suddenly, just as it did in the U.S. If you’ve spent within your means and aren’t under any compulsion to move, you’ll be able to ride out any storm.

So, what does spending within your means mean? According to MortgagesCanada.ca, most Canadian lenders are looking for a ratio of debt to income of no more than 36% and a down payment of at least 25%. That’s fairly conservative by American standards, but I wouldn’t recommend pushing the limits, even though the Web site says some lenders will accept a debt-to-income ratio as high as 45%. It’s better to keep some money in reserve to eat out, buy some furniture and have a decent car than to tie it all up in your home.

What’s more, although houses historically appreciate better than condos, occasionally the reverse happens. It’s really a case of supply and demand, driven by demographics. (Typically, condos appeal most to the youngest and oldest segments of the population — 35.5% of Toronto’s 5.1 million people are either under 30 or over 55.)Right now, condos in your city are hot: the Realtors report that while condos typically comprise 20% of sales, in December they made up 25% of them.

But keep in mind that one of the downsides of condo ownership is that you have limited control over the expenses you’ll pay in common with other owners through homeowner association fees and assessments. For instance, I own a condo in Florida and have seen homeowner fees rise more than 75% in the four years since I bought the home, mostly because of rising insurance costs and changes in property management. I also had to pay a hefty assessment to help replace roofs in my community that were damaged by Hurricane Wilma.

There wasn’t much I could do about these unanticipated expenses, since the condo board determines what everybody pays. As the owner of a single-family home, I could have shopped around and perhaps have found better deals on insurance and contractors. But that’s the trade off you make when you live in a group environment.

– 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 June Fletcher

Question: My husband and I are first-time home buyers and found a beautiful house being sold as a short sale. It almost seems too good to be true, and our real estate agent referred to short sales as playing a game of roulette. Are the risks and time involved with a short sale too much for us to handle as first time buyers?

– Christine Pellum, Chicago

Christine: A lot of things in life are risky and scary the first time you do them, like going skiing, dancing in public and playing the stock market. But that doesn’t mean you shouldn’t try.

Notice that I didn’t put falling in love on this list, since that’s what you shouldn’t do with this house. A short sale, which involves buying a house for less than the amount the seller owes the lender, can be time-consuming, frustrating, and — if the lender refuses your offer — ultimately unsuccessful. But if it works, you could be getting a very good deal.

Short sales also require some sophistication, skill and patience on the part of a real estate agent, so keep that in mind if you decide to bid on this house. If the agent you’ve been using doesn’t want to get involved, ask him or her to refer you to someone who specializes in this sort of work. You also need to hire an attorney experienced in this kind of transaction.

A short sale usually occurs when a seller can’t make his loan payments because of death, divorce, job loss or other hardship. When homes are rising in value, owners can sell the house and pay back the lender. But when home values are dropping, like they are in many places today, and the owner hasn’t built up much equity, that’s not an option. So some lenders will accept less than the amount owed to avoid the hassle and expense of auctioning the house, providing the owner proves that he doesn’t have other assets to make up what he owes.

Even with experienced people at your side, it pays to arm yourself with facts before you make an offer. Don’t assume that the house is a bargain, since the owner may have bought the house at the peak of the housing cycle and may owe so much that he can only discount it to current market prices. Find out what comparable houses are selling for, whether a foreclosure notice has been filed for the property, who owns the loan or loans, and how much is owed — you’ll have to deal with them all.

The seller may eagerly accept your offer, but he isn’t the final arbiter of the deal — the note holders are. So make your offer contingent on the acceptance of the lender or lenders. Since the lenders want to know that you can back up your offer, include as much information as you can on your financial resources, as well as a preapproval letter from a lender.

Although the property may be advertised as-is, make sure the deal gives you the right to have and approve home and pest inspections by qualified professionals. Short sellers usually have given up maintaining and repairing their homes; you need to know what other expenses to expect.

Also, place a time limit on your offer — ask your agent what is customary in your area –since lenders will sometimes drag their feet, hoping to get a better deal. Short sales rarely take a short time to complete, but you shouldn’t have to wait around forever.

– 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.