First-time buyers breathe life back into the housing market

srael and Brenda Villanueva saw a foreclosure deal fall through, then bid for a second short sale house before they finally made the winning offer for a four-bedroom home in Rockville.

Washington area home shoppers are facing a different market than they did last year or even just six months ago, thanks in part to a surge in interest by first-time buyers. Things are looking up, at least at the bottom of the local price range, where demand has been spurred this year by the $8,000 first-time buyers federal tax credit included in the economic stimulus bill President Obama signed in February.

“About 70 percent of my customers right now are first-time buyers,” said Danny Sadoun, a Realtor with Realty Pros in Rockville. “A lot of them weren’t in the market in January but decided to buy now to take advantage of the tax credit.”

Area sales numbers document renewed buying interest, with the median price for existing homes up 14.2 percent during the second quarter over the prior three months, according to the National Association of Realtors. Of course, conditions are beginning to look good because of how bad they looked previously. Area home prices in the last quarter were still down 14.1 percent compared to the same period in 2008.

Local house hunters seem to be very much aware of the tax credit deadline looming in November, judging by the rapidly shrinking supply of the lower-priced homes most attractive to most first-time buyers.

There were 10,397 single-family homes and townhouses listed in the $200,000 to $400,000 range at the end of July in the region stretching from Frederick County in Maryland to Prince William County in Virginia, according to Metropolitan Regional Information Systems. MRIS, which tracks home listings and sales, says that’s down from 11,141 at the end of January and 15,079 at the end of July 2008.

“Housing affordability is hovering near record highs and there’s a wide selection of homes, but first-time buyers need to move quickly to take advantage of the $8,000 tax credit because they have to finalize the transaction by November 30,” said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth.

Bargains far and near

Some of the best housing bargains may be in far-flung newer neighborhoods built during the real estate boom earlier this decade. Prices in some neighborhoods are now are below what people paid three years ago.

In Maryland, that’s the case for wide swaths of luxury communities in Prince George’s County, in Germantown in Montgomery County and along the I-270 corridor stretching into Frederick County. The outer suburbs of Loudon and Prince William Counties in Virginia are among the hardest hit communities in the entire nation.

In these areas, there are lots of new residents who are eager to escape bad investments and banks that loaned money on homes whose values have fallen below owners’ mortgage debt.

“People who bought in 2007 and 2006, they’re all under water now,” said mortgage broker Corbin-Riddle, who is also a Realtor with New Solutions Realty based in Frederick County.

But the epidemic of foreclosures in many close-in suburbs also means buyers can also find good deals in older communities. Relatively high rates of bank sales and short sales also mean there are more homes in that price range in Arlington and Falls Church in Virginia and along the Route 1 corridor that runs through Hyattsville in Prince George’s County. Even wealthy Montgomery County has been effected.

“There are a lot of homes between $300,000 and $400,000 range in Aspen Hill and Rockville and in Silver Spring along the Georgia Avenue corridor north of downtown and up Route 29,” Sadoun said.

Foreclosures present opportunities and risks

But, no matter how good the deal, buyers still have to present solid credit and savings information for a bank to consider an offer, said mortgage broker Kay Corbin-Riddle. That means buyers should not bank on reducing their down payment or offsetting closing costs by using their $8,000 tax credit.

“The credit matters a little bit but not so much as income and savings patterns,” she said.

Dealing directly with a bank that has taken back a property can mean a speedy transaction, assuming the buyer can document funds for a down payment and prior mortgage approval. A good offer might be accepted immediately and a deal can be struck in one day.

But the process can drag on for weeks if the bank is entertaining other offers or insisting on getting market value for a home. Similarly, when bargaining with an underwater home seller on a short sale, a buyer might get stuck with a lengthy wait until closing because the mortgage lender must approve the deal.

Another option is to buy from an investor who already bought a home at a foreclosure auction. But it is important to choose the right property to make sure the owner has the right to sell it and doesn’t stick you with a list of “as is” repair issues.

“The house must be habitable for FHA approval. There can be no violations,” Sadoun said.

The Villanuevas discovered some of these buyer’s hazards when the young couple began looking in April to move from their cramped rental on Capitol Hill to Rockville with their 100-pound Rottweiler.

They first made a deal on a home acquired in a bank foreclosure only to learn that the new owner failed to disclose that he did not wait 90 days to sell it, as required under FHA mortgage rules to discourage speculators from buying and “flipping” properties. On their second attempt, they thought they’d made the winning bid on a short sale property only to have the deal rejected by the mortgage holder.

Finally, their $339,000 bid was accepted on a third Rockville home, which should close in a few weeks. The property – a four-bedroom rambler built in 1958 – has had extensive renovations since the foreclosure.

“They do all the work for you by buying the property from the bank and they fix it up to meet FHA standards,” said Israel Villanueva, who will be closer to his software job in Rockville. “They did a new kitchen and new bathrooms.”

Assuming that the closing goes smoothly, the Villanuevas will be able to claim the $8,000 tax credit on their 2009 income tax return.

But for buyers willing to wait and risk not making a deal before the November 30 tax credit deadline, the market might grow more advantageous as even more homeowners declare bankruptcy or lose their homes in foreclosures.

Nationwide, foreclosure activity jumped a record 7 percent in July over the prior month, which is up 32 percent from the same period last year, according to RealtyTrac. And with home prices nationwide expected to drop another 14 percent through the first quarter of 2011, Deutsche Bank forecast that 48 percent of all home values could fall below their owner’s mortgages in the same period.