Seven Ways to Save for Your Down Payment
by Nancy Dunnan msn.com

Very few things in life are quite as exciting as buying your first home. It’s part of the American dream. And although home prices keep rising, ownership is within the realm of possibility, even for those who don’t make humongous salaries. Of course, the larger your down payment, the lower your monthly payments. And if you can come up with 20 percent, you avoid paying expensive private mortgage insurance (PMI).

Why you want to avoid paying PMI: PMI typically costs about 1/2 of 1 percent of the loan. For example, if you put down 10 percent on a $100,000 house ($10,000), your annual PMI costs will be $450. And, these payments are not tax deductible. If your down payment is less than 20 percent of the sale price, you must take out PMI.
Here are seven ways to begin on your mission of ownership…

Step one: Get with the program

The first step toward saving enough money for a down payment is a psychological one—desire. You (and your spouse or friend) must REALLY want to buy a house. With enough passion for ownership, you’ll find yourself motivated to save every penny you can.

To boost your desire, spend a weekend looking at houses or condos within what you think is your price range. Saving will be a whole lot easier if you have a vision of a two-bedroom, two-bath house with white shutters on Elm Street dancing in your head. This vision will make it easier to say no to shopping sprees, buying a second car or going on an expensive vacation.

Take pictures of your favorite properties and tape them to your refrigerator door or better yet, prop them up on your desk next to your checkbook.

Step two: Review your budget

Or, if you’re budget-free, draw one up. Get help making a budget here. Then list those areas where you can cut back on spending and earmark that money for your special Down Payment Account (DPA). Don’t cut out everything that’s fun…you want to enjoy life BH (Before the House), but do start to be more cautious.

Here are some savings tips to get you in the right frame of mind…add your own to the list.

Drive at the speed limit. Traveling at 65 mph versus 55 mph increases fuel consumption by a whopping 20 percent. (GM Motor Club)
Clip coupons. If you save $25 a month with food and drug coupons, that turns into $360 a year.
Take your lunch to work. If you’re spending $8 a day on a sandwich, Coke and an ice-cream cone, that’s $2,000 a year, assuming two weeks out for vacation. And that’s not counting those in-between snacks of chips, pretzels and cappuccino. Figure out what you spend per day on lunch; then on the days you brown bag it, put that amount into your DPA.
Carpool. Or, walk, bike or take the bus to work. Taxis are a guaranteed way to spend $5 in five minutes.
Talk less. Make sure you have the cheapest calling plan. And if you make a lot of long distance calls, get a prepaid phone card. Begin by searching for discount calling plans and phone cards here.
Skip the babysitter. Set up a co-op arrangement with friends and neighbors.
Stop smoking. Quitting a pack-a-day habit will save you about $1,095 a year.
Cut back on dining out. Send the amount you save to your DPA.
Never open a catalog. Toss them out immediately. If you peek inside you’re bound to find something you like.
Don’t carry much cash. If you leave your ATM card, your credit card, your debit card, your checkbook, and most of your cash at home, it will be hard to spend much. Instead, carry enough cash for the day plus one bank check and for emergencies, several traveler’s checks.

Step three: Open a DPA

You’ll need a special account to hold your savings. Start researching high-yielding bank savings accounts and certificates of deposit (CDs) here.

Keep in mind that bank CDs have a definite advantage over a money market or savings account: The money in a CD is tied up until it comes due. In other words, you’ll be penalized if you take the money and run before the maturity date. Bottom line: You’ll be less apt to use this money for something other than your house. CDs come in a variety of maturities from one to five years. Figure which time horizon matches your ownership goal.

$Tip: Be sure to read Certificates of Deposit: Tips for Investors, a free SEC publication. Find it here.

Step four: Tell your family

If your parents or other relatives send you presents for your birthday, anniversary or the holidays, they might instead contribute to your DPA. Don’t insist—some parents prefer to shop for special gifts for their kids. However, it won’t hurt to let them know about your goal.

Step five: Go automatic

If you don’t see it, you won’t spend it. Arrange for a certain dollar amount to be taken out of each paycheck and automatically transferred to your savings or money market account at your bank or credit union. If you’re self-employed, set up the same type of plan at your bank and have money transferred each month from checking to savings or to a mutual fund.

Step six: Reduce credit card debt

Always pay at least the minimum due each month on your cards to avoid high interest rates. Better still: Pay each bill in full and completely avoid high rates on unpaid balances. And make certain you mail the check (or transfer the money) well in advance of the payment date. A growing number of credit card issuers are hitting customers with late arrival penalties.

$TIP: Ideally, you should wipe out credit card debt as quickly as possible. Begin by paying down the credit card with the highest interest rate first.

Step seven: Keep on a-paying

When you pay off a car loan or education loan or get rid of a credit card debt, continue to write a check for that same amount every month—but put it into savings. You’ve learned to live without that money, so now you can sock it away.

Nancy Dunnan is a New York-based financial advisor and analyst

Beware the “Bait-and-Switch”

Where’d my low rate go?

Avoid any lender that promises one rate, then gives you another. One standard bait-and-switch tactic is to advertise a low, low rate, then tell customers that it only applies to certain borrowers or that the rate has already changed.

The non-committal loan commitment

A lender may quote you a rate over the phone, then quote you another in person. Ask for a loan commitment in writing.

Consistent loan documents

Make sure they match your written loan commitment from the lender.
Settling settlement issues
Your lender must give you a good-faith estimate of closing costs within three days after you apply for a loan. Any significant change is cause for complaint and possibly legal action. Any agreements with the seller to pay closing costs should be in writing, preferably in the purchase contract.

“Using Encompass Realty & Investments LLC, we ensure the lender will give you all the written good-faith estimates, and we insure there is not bait-n-switch”. says Manny Caballero, Broker

“I spoke to a gentleman 3 weeks , who got a quote from our preferred mortgage company which we knew noone could honestly beat our quote at the time, but the gentleman said his orginal broker could beat it, and cancelled his appointment. Today I get a call from the same gentleman today, and guess what, he wants our help. …
I couldn’t after the fact. I just want the general public to understand, that we offer a service that is second to none and if you put some faith in us we will put that faith back to you with the best interst rate that will save you thousands of dollars in 5 years to 30 years. But remember when you use Encompass Realty we are the one stop shop for your real estate and preferred mortgage needs…

Manny Caballero
Encompass Realty ™& Investments LLC
480.695.6485

It’s said “hindsight is always 20/20.” And it’s true. We always know more about something after we’ve been there, done that.

There are so many things to consider when buying a home that it’s easy for even the smartest people to make mistakes—especially the first time around. Yet you can avoid many of the more serious blunders by not moving too quickly and doing a little planning ahead. Keep in mind that mistakes are the result of buyers rushing into a decision, based on their emotions or the pressure of time.

To help you with your big decision, here are four steps to take before you buy a home.

Step 1. Test the neighborhood
Unless you’re incredibly rich, once you purchase a house you’ll have to live in it for at least a year or two. So before you get to a contract, test the waters. Visit the neighborhood for at least an overnight—perhaps staying with family or friends who live nearby or at a local hotel or motel. Check out the shopping, playgrounds, tennis courts, movie theaters, library, restaurants, community center, cultural life, bike paths—whatever is important to you and your family. And, if you have children, make an appointment to look at the local schools while classes are in session.

Even if you’re considering a house that’s relatively close to your present one, spend time on the new street during the day, at night, on a weekend and on a weekday. Is it quiet? Too quiet? Full of traffic? Bombarded with airport noise? If there is a school nearby, will buses bother you? Is a shopping mall hidden behind a thick grove of trees? A parking lot or garage?

I know a couple that purchased a city apartment with a huge terrace. They were so captivated by the terrace that they failed to notice two of the bedrooms were over the door to the building’s garage. They were plagued day and night by the opening and closing of the heavy and noisy garage door.

And personally test the commute. The seller may say it’s only a 20 minute drive to your office, but is that really the case? Is the train or bus journey direct or will you have to make transfers? Can you walk to the station, subway or bus stop? If not, how convenient is parking? How expensive?

$Tip: If someone in your family has allergies, speak with a local physician about the conditions in the area.

Step 2. Check the floor plan
If your dry run is a success, the next step in avoiding buyer’s remorse is to re-examine the house’s floor plan. It’s easy to get carried away by lavish landscaping. Beautiful in-ground swimming pool. Three-car garage. Wrap-around deck. But most of life is spent indoors.

Walk through the house one more time. Stay focused on practical things. Are there enough bathrooms? Is there space for your antique dining room table? Would you prefer an eat-in kitchen? What about your home office? Your workbench? Your sewing room? Your studio? The new baby? Make absolutely certain that the layout and room sizes match your lifestyle.

Step 3. Continue with contingencies
Now that you’re positive about the neighborhood and the floor plan, it’s time to draw up a protective purchase contract. The contract should include at least three contingencies—a financing contingency, an inspection contingency and a title contingency, and perhaps additional contingencies.

A financing contingency lets buyers out of the contract if they cannot get a mortgage. It should include:

The terms of the mortgage you will be applying for
The type of loan (fixed, adjustable)
The interest rate
The points

If you are turned down, this contingency gives a legal basis for getting out of the contract.

The financing contingency should also include a time period for loan approval—typically 30 days.

$Tip: Before removing your financing contingency, get a written copy of your loan approval directly from the lender with the date by which the transaction must close in order to keep the initially agreed upon interest rate.

With an inspection contingency, the sale hangs on a professional inspector giving the house his or her official stamp of approval. If the inspector discovers any hidden flaws, structural damage or faulty systems, you can renegotiate with the seller about the repairs or back out of the deal and have your deposit returned.

To be on the safe side, ask for at least two weeks to run an inspection, longer if it’s a hot market and the top inspectors are extremely busy.

With a title contingency, the sale depends on the property having a clear title.

Your lawyer “OR Realtor” may also suggest an appraisal contingency, which will come to your rescue if the home doesn’t appraise for the offered price. You can then cancel the sale and either renegotiate the price or get back your Deposit.

Step 4. Do an inspection
In a hot seller’s market you often hear about buyers waiving the inspection in an effort to nail down the house of their dreams before someone else does. Sellers, of course, love offers that don’t contain an inspection contingency because it allows them to sell their house “as is.”

Don’t be foolish. Buying property without an inspection can be a direct route to becoming a buyer’s remorse victim.

How to pick a professional inspector
Real estate agents often give buyers the names of several local inspectors. Nice. But the agent wants the sale to go through so he’s likely to recommend someone who will facilitate—not hinder—that process.

To sidestep any potential conflict of interest, use an agent who is a member of the Independent Home Inspectors of North America (www.independentinspectors.org) or the American Society of Home Inspectors, Inc. (www.ashi.com). The non-profit Independent Home Inspectors group requires members to sign a pledge refraining from soliciting real estate agents for client leads. Members of the larger ASHI, must pass a test and agree to abide by a code of ethics.

A general inspector is well able to cover the basics: appliances, roof, heating and air conditioning, general drainage, windows and doors, dampness and the overall structure. However, some of the more complicated parts of the property are often best examined by a specialist:

Electrical system
Mold
Pests
Septic tanks
Swimming pools
Termites and carpenter ants
Trees

Note: If the house has a pool, the inspector (often an independent pool builder) should examine it when it is full of water and operating. Key problem areas: ladders, diving boards, pumps, filters and the heater.

$Tip: If you’re buying a house that is 75 years or older, look for an older-home inspection specialist.

After you buy your new house
If indeed you wind up making a mistake and you’re deep into buyer’s remorse, don’t throw up your hand in despair. Make a list of the drawbacks, highlighting the two or three that are really intolerable. Then…

Do a makeover
It may be that remodeling the kitchen, putting up a high fence or adding on a deck will solve the problem. Devise a two or three-year time frame—focusing on when your budget will allow you to put in a stand of trees, update the bathroom, add another bedroom, build a family great room. Within several years, the makeover may turn an ugly duckling into a house that you enjoy.

If a makeover is too extensive, too expensive or simply does not address the problem, you have four options:

Rent your house. Perhaps with an option to buy and live somewhere else on a temporary basis.
Trade spaces. Swap your house for six months or longer with someone who wants to live in your area. During this time, begin looking for more suitable housing. (Note: The home exchange contract should spell out when you will be putting the house on the market and the day or times it can be shown.)
Go to court. If a serious defect comes to light after the closing, ask your lawyer to look into your state’s disclosure laws. If they’re tough, you may be able to pressure the seller into repairing the problem or compensating you financially. If your state’s laws are soft or non-existent, review the pros and cons of going to court.

Sell. Realize that hindsight is 20/20 and that you’re unlikely to make the same mistakes the second time around.

by Nancy Dunnan
MSN.COM

Pros and Cons of Contingent Sales Offers
Seller may raise price to offset risk
By Robert J. Bruss
Content provided by imannews

For years, sellers flat out rejected contingent sale offers. Now, some buyers are finding sellers more receptive to offers that are made contingent on the sale of another property.

Sellers don’t like contingent sale offers because they tend to be riskier than offers that aren’t dependent on another home selling. One fear is that buyers might ask too much for their home and it might not sell at all. In this event, the sellers could waste time while their home is off the market and then find themselves back at square one looking for a new buyer.

In a real estate market that’s moving full steam ahead, there’s little room for contingent sale offers. When the demand for listings outstrips supply, sellers can easily find non-contingent buyers with whom to negotiate. Why accept a less-than-certain offer if you don’t have to?

However, when the market slows, as it has in some areas and in some price ranges, sellers can’t afford to be as choosy. Recently, a seller of a home in Piedmont, Calif., decided to take a chance on a contingent sale offer. The seller had previously received two offers, both for less than the asking price. She rejected both offers. Eventually, a full-price offer appeared. The seller accepted it, even though it was contingent on the sale of the buyer’s home.

In this case, the seller was willing to accept higher risk in return for a higher price. This is often the case. Another property in a desirable neighborhood of Oakland, Calif., recently sold to a contingent sale buyer. The property was priced well over $1 million, which is a slower price range in this area. After months on the market with no action, the seller decided to give a contingent sale buyer a chance.

So, a benefit to a seller of accepting a contingent sale offer is that you might receive a higher price than you would from a buyer who doesn’t have to sell in order to buy. On the buyer’s side of the equation, you may have to pay more to entice a seller into accepting a contingent sale offer.

It may be worth it to the buyers to pay more for the security of knowing that they won’t end up owning two homes at the same time. With a contingent sale offer, if your home doesn’t sell, you aren’t obliged to buy the other home.

However, if the sellers insist that your contingent sale offer include a release clause, you risk losing the house to another buyer if your home doesn’t sell in time. A release clause allows the sellers to continue marketing their home until you remove your sale contingency from the contract.

Suppose the sellers accept an offer in backup position. If there’s a release clause in the contract, the sellers can notify you that you must remove your contingency within a certain time frame (often 72 hours). Otherwise, you will have to withdraw and the home will go to the backup buyers.

Another drawback to contingent sale buyers is that they may feel pressed to sell quickly in order to keep from losing the home they want to buy. This could mean accepting a lower price.

Sellers who accept contingent sale offers should make sure that the buyers’ home is salable and that it will be listed at a reasonable price. In some areas, the lower priced market is selling much more quickly than the $1 million-plus market.

The closing: In this case, it may be worth it to a seller to accept a contingent sale offer from a motivated and realistic buyer who has a house to sell that’s in a more desirable price range.

Think you’ve found the home of your dreams? So did Hansel and Gretel.

The fact is, every property has its dirty little secrets that only the owner knows about.

In a perfect world, owners would come clean about the quirks and glitches in the old homestead when they fill out the property condition disclosure form that many states require. But as Hansel and Gretel found out, real estate is fraught with subterfuge.

Real estate agents routinely caution sellers to dummy up and clear out during showings lest they inadvertently spill information that might give the buyer leverage to negotiate a lower price. For this reason alone, it’s rare that seller and buyer actally get together prior to closing.

But if you happen to meet the seller or pepper the agent, as query intermediary, with the right questions, you may just wheedle enough information to satisfy yourself that you’re getting what you’re paying for – or justify trying to pay less.

Here are the top 10 questions home sellers don’t want you to ask.

1. Why are you selling?
Your first order of business as a buyer is to find out the seller’s motivation; that is, how desperate are they to sell?

“If you hear something like, ‘Well, we’d like to move out into the country,’ you don’t have a motivated seller and quite often you’re just not going to get a decent deal on a house that way,” says Tom Wemett, president of the National Association of Exclusive Buyer Agents and a buyer’s broker in Rochester, N.Y.

“But if you find out that they’ve already bought another house and are about to carry two mortgages, there’s motivation. A divorce, loss of a job or job relocation, now there’s motivation.”

Continued below

Sometimes the seller will be forthcoming, other times not. In the latter case, says Wemett, “you need to use some intuition and gut feel. With divorce, for instance, you see women’s clothes but no men’s clothes. You have to take whatever is told to you by the seller or the listing agent with a grain of salt.”

2. What did you pay?
When the homeowners moved into their house and how much they paid for it are matters of public record, so it’s futile for sellers to try to withhold this information. Nevertheless, they don’t want you to know these particulars, again because they can help enormously when it comes time to write an offer.

Generally, if a homeowner has been in the house for many years, they probably bought it at a relatively low price, built up considerable equity and benefited from appreciation. Conventional wisdom holds that this seller may be more inclined to come down on their asking price than someone who has only been in the home a short time and built up little equity in the property.

3. What can you tell me about the neighborhood?
Such a lovely loaded question! By keeping it open-ended, you may stumble upon references to the garage band next door, the dog kennel over the fence, the upcoming picnic to raise money for the neighborhood class-action suit.

“You can also find out positive things,” says Wemett. “For instance, if you are a family with kids, are there other families with kids in the neighborhood?”

It’s always a good idea to drive, walk or bike through the neighborhood at different times of the day and night to try it before you buy it. And don’t forget to chat with the neighbors, especially about your prospective new address.

4. How old is the roof?
Aw, jeez, doesn’t every seller hate that one? The seller may have to disclose that on the property-condition form, but if the roof predates the current homeowner, he can truthfully say he doesn’t know.

Consider this follow-up: Who was the previous owner and how can I contact him? It’s cheaper to do a little digging now when you can still haggle over a full or partial roofing credit than to foot the whole bill yourself later.

5. When was the last time the furnace was cleaned?
Who cares? You do!

“That’s a huge gauge that I use,” Wemett admits. “Furnaces should be cleaned every year. If it has been and there is a nice service record on the side of the furnace, chances are the rest of the house has been cared for. If that furnace hasn’t been cleaned in three or four years and it’s just filthy and has dirt and dust and so forth, I would say the rest of the house is probably the same and has not been cared for.”

6. Is this house haunted?
Laugh if you like, but some home buyers will turn heel and exit promptly from houses that have been the scene of murders or suicides. Some states require sellers to disclose the presence of ghosts, poltergeists or paranormal activity on a property.

The seller likely won’t rush to disclose that the place shakes, rattles and rolls after dark, but you may be able to draw the information out of them gradually.

“It could be divulged by asking why the house is on the market,” says Wemett. If the answer is, “It’s an estate sale,” it’s reasonable to ask how the guy died. You just might get the reply, “Well, it was a young guy and he was murdered in the house.”

“Talking to neighbors might do the trick, too,” Wemett adds.

7. Has this property ever been rented?
Any landlord will vouch that rentals take far more abuse than residences. If the property was used as a rental at some time, it speaks to the general condition of the place and may convince the seller to dicker on the sticker price.

8. What is your impression of the area schools?
If real estate is all about location, a top priority is a quality school district.

“You get two types of buyers: Those who are school district buyers and will look at that priority first and choose their towns and even neighborhoods based on it, and house-based buyers who don’t need the absolutely top-tier school district but are looking for a certain housing level,” says John Herman of The Buyer’s Representative in Connecticut.

If schools are a priority for you, chances are you are already aware of the district’s strengths and weaknesses. By asking the seller about schools, you may gain additional valuable information, such as whether they send their children to public or private schools.

9. Do you mind if I schedule a few inspections at my expense?
Some inspections, such as termite checks, may be required before a home can change hands. Increasingly, however, buyers are asking for professional inspections of chimneys, furnaces, roofing, air ducts and to detect the presence of Radon and other household gases.

“This is your one shot to learn about this house,” says Wemett. “Litigation is expensive. Maybe the seller moves out of state. So you better figure out ahead of time and not rely on the seller to give you the information you need when it comes to the condition of the property. At least you have the opportunity to ask the seller to make repairs or write in a repair credit so you can go back and fix something.”

10. Would you mind showing us around?
This is the one that selling agents fear above all others.

“That gives an opportunity for my buyer to schmooze the seller and to start a relationship so that if that is a house they’re going to buy, it will help us in our negotiation,” Wemett says.

“I had one case where the seller fell in love with my client and ended up dropping the price five grand just so my client could buy the house, and it was solely because of the relationship that had developed between them. Listing agents should tell their clients to get as far away from the house as possible.”

By Jay MacDonald • Bankrate.com

As home prices continue to climb, borrowers increasingly turn to 100-percent financing, and especially home loans that sidestep the need for mortgage insurance.

One such loan is known as the 80-20 mortgage. The home buyer takes out two loans – the first for 80 percent of the purchase price, and the second for 20 percent of the home’s price. The borrower is expected to come up with the closing costs.

“It allows people to buy without a down payment, or for those people who would prefer not to touch their savings to get into a house,” says Anthony Hsieh, president of HomeLoanCenter.com.

“What we’re seeing is a lot of young professionals,” he adds. “People who have gotten out of college and have good jobs. They have good credit, but they haven’t had the opportunity to accumulate a lot of savings.”

Getting off the rent treadmill
These mortgages are targeted at people who feel stuck on the rent treadmill. They can afford monthly rent that costs roughly the same as a house payment, but after they pay their monthly bills, they can’t save much money toward that down payment. Many of these people watch home prices rising faster than their incomes and feel that they’re falling further behind with each month that they rent.

Plenty of mortgage programs allow borrowers to buy houses with little or no money down, but they usually require private mortgage insurance, or PMI. Mortgage insurance protects the lender from the costs of foreclosing on a house when the borrower falls too far behind on the loan payments. The lender benefits, but the borrower pays. Generally, mortgage insurance is required when the loan amount is for more than 80 percent of the home’s price.

The way to avoid paying mortgage insurance is by getting a “piggyback loan” – a second mortgage to back up the first mortgage. The first and main mortgage is for 80 percent of the home’s price. The piggyback loan is for 20 percent of the home’s price, minus the down payment, if any. If you see mention of an 80-15-5 loan, it means that the borrower got a main mortgage of 80 percent of a home’s purchase price, a piggyback loan for 15 percent, and made a 5-percent down payment. Myriad combinations, such as 80-10-10, are possible. The 80-20 uses a piggyback loan without a down payment.

Second loan, higher rate
Except in unusual cases, the interest rate on the piggyback loan is higher than the rate on the first mortgage. But the combined payment usually costs less than a loan of greater than 80 percent of the home’s value, plus mortgage insurance. This is especially true if the homeowner itemizes deductions on federal income tax, because mortgage interest is deductible but mortgage insurance is not.

“It pretty much comes out to a straightforward mathematical evaluation,” says Bob Walters, senior vice president of Quicken Loans. You merely compare the cost of an 80-20 piggyback loan with a loan that includes mortgage insurance. The piggyback loan usually costs less each month.

Ready to find a mortgage? Check rates in your area.

Lenders structure 80-20 loans in many ways. At Hsieh’s HomeLoanCenter, the first mortgage generally is a 5/1 ARM – a loan with a fixed rate for the first five years, and which adjusts annually after that. The piggyback loan is a home equity line of credit that changes with the prime rate. These loans, Hsieh says, are designed to be refinanced in three to five years.

With Countrywide Home Loans, the 20-percent piggyback is always an equity line of credit pegged to the prime rate, and the 80 percent first mortgage can be a fixed-rate, adjustable-rate or interest-only loan.

Pros and cons
The 80-20 loans have their pros and cons, says Vijay Lala, vice president of product development at Countrywide. “The pros are that you can get into a home with almost no money down,” he says. “You just have to have your closing costs, and you can get your payment as low as possible with the interest-only feature.”

The main drawback is a biggie. If the house loses value – a possibility in overheated markets where these loans might be especially tempting – the owner ends up owing more than the house is worth. That becomes a problem if the owner needs to sell the house or wants to refinance the loan. In such a case, the owner has to come up with cash to repay the loan in full.

An 80-20 loan isn’t just for the cash-strapped borrower. Some home buyers have ample down-payment money, but the money is invested and they don’t want to liquidate it.

“For relatively wealthy people, it’s a cheap way of borrowing money at these low interest rates,” says Diane Saatchi, who deals with plenty of wealthy clients as president of Dayton-Halstead Real Estate in East Hampton, N.Y.

By Holden Lewis ? Bankrate.com

There?s a frenzy that?s feeding the real estate market and that has a lot of people talking and speculating. Sorry to say this ?bubble? is very real, but no matter how loud educated policy pontificators say it, this ?bubble? won?t POP!

What is feeding this frenzy in real estate? Two major trends have given fuel to the fire that won?t die down anytime soon.

On a beautiful Sunday afternoon in Los Angeles right after New Year?s with temperatures hitting 80 degrees, many people?s choice of a drive with the convertible top down is to view Open Houses, not cruise Pacific Coast Highway.

One of the economic demands putting continued pressure on real estate prices is the unavoidable rise in rents. While prices have soared for single-family residences, the same can be said for income property, fueled in part by homeowners? desire to put their equity from their personal residences into income-producing real estate. The rent for an average one-bedroom apartment in most urban centers in the United States now exceeds $1,000 per month, plus utilities paid by a renter with after-tax dollars.

When a renter realizes the average payment on a 30-year mortgage on a $250,000 home is less than the rent he or she has been paying, it?s not hard to do the math and start looking to buy.

In 2003, some Fannie Mae and Freddie Mac loan programs required only a 3 down payment on owner-occupied homes. And rents keep going up. In some areas, these same economic forecasters have seen vacancies increase as landlords try to increase rents after making improvements or selling the property to a new owner who is trying to cover the monthly expenses and generation a positive cash flow on the investment. That?s creating demand in the first-time home buyer marketplace and new home starts as well as trade-up demand.

The second reason this frenzy isn?t a ?bubble? is that the current real estate runup in prices began May 7, 1997, the day President Bill Clinton signed the bill that gave mortgage appreciation relief to millions (okay, hundreds of thousands) of American taxpayers. Previously, sellers had to roll taxable profit on the sale of their personal residence into a new home purchase of greater value than the sale price of the home sold. The amount of the tax-free income generated by the 1997 law is astounding–$500,000 for married couples and $250,000 for single taxpayers.

Even more incredible when one peels back the layers of the real estate onion is the fact that homeowners can take advantage of this tax windfall every two years. Suddenly, everybody and their brother is buying real estate to rehab and flip. Yes, they?re suffering through living with the renovations, but many have switched their profession and become part-time mini developers.

So on this beautiful Sunday in Los Angeles, more than 150 shiny new cars park precariously on a hillside for a peek at a new listing that needs some TLC. And the math is simple: Can you put down 20 percent on a $1.2 million home (that used to be worth $650,000), invest $150,000, then sell it for $1.9 million?

Subtract the real estate commission of 2.5 percent since one of the homeowners now has a real estate license to take advantage of the seller-side commission, and it?s a no-brainer profit of $352,525, plus the tax deduction for home mortgage interest while you?re living there.

This gold rush of real estate is a gift from the government that is bigger than any of President George W. Bush?s tax relief programs and not a word has been heard about pulling the plug on this program that probably is benefiting upper-middle class taxpayers more than people lower on the taxpaying food chain.

Let the economists who predict there is no housing bubble shout it from the highest rooftops in the land. This is one time they may be right. As for me, I took my $500,000 (twice now since May 1997) and am sitting on the sidelines waiting for it to POP!

Julie Brosterman is an independent consultant to the real estate, mortgage and servicing industry.

Copyright 2004 Julie Brosterman