Ways to cope despite real estate's dire outlook

If you'd asked housing economist David Seiders at this time last year to forecast the real estate industry's future, he would have told you to expect "a recovery year" in 2008.

"That outlook has been cut dramatically from what I was saying a year ago," Seiders, chief economist for the National Association of Home Builders, concedes. He's slashed his projection for home construction by 35% and says 2008 will be "another down year" for housing overall.

How far down? Most economists caution that their real estate forecasts for this year stand on shaky ground. The depth of the downturn will depend on whether the overall economy slips into recession, how fast and how sharply home prices fall, whether more turmoil rocks the credit markets and how many more foreclosures lie ahead.

"We're really in a danger zone in terms of overall economic activity," says Seiders, who sees a 40% chance of recession this year, up from his earlier estimate of 30%.

Mark Zandi, chief economist at Moody's Economy.com, calls the current real estate recession the gravest since World War II. He expects home sales to hit bottom in the first half of this year, with prices continuing to fall until early 2009.

An even more pessimistic economist, David Rosenberg at Merrill Lynch, goes so far as to warn, "Real estate pricing in general can expect to be in the doldrums through 2012."

The biggest problem is the glut of homes for sale — more than 10 months' worth. And about 2 million of those homes (about 2.6%) are vacant, with banks or builders trying to get them off their hands.

The number of vacant homes is expected to rise further this year because a record number of homes are entering foreclosure. And hundreds of thousands of homeowners with subprime, adjustable-rate loans will face higher monthly payments. For some, it will be the last financial straw.

Meanwhile, many would-be buyers are having trouble qualifying for loans.

Half of senior loan officers surveyed by the Federal Reserve in October said they had tightened their standards from July. Gone are loans for people who have trouble paying their bills on time. Gone are mortgages for 100% of the home price. Gone are loans requiring no proof of income or assets.

The stricter rules will deliver an especially severe punch to such areas as Arizona, California, Nevada, Florida and in and around Washington, D.C., and Manhattan, where those types of mortgages accounted for about 60% of purchase loans last year, according to Economy.com.

"A lot of (buyers) haven't come to the realization that the subprime market no longer exists," said Ritch Workman of Workman Mortgage in Melbourne, Fla. "Mortgage brokers are turning away more and more borrowers."

That isn't likely to change. The Federal Reserve last month issued hand-slapping rules for all lenders and mortgage brokers to end the riskiest lending practices. The new rules will take effect early this year, after a public comment period.

For buyers who have built up stellar credit and lots of cash in the bank, there are loans aplenty. Interest rates also remain historically low, and falling prices in many areas are making homes more affordable for more families.

In such a risky market, what's a buyer or seller to do? What follows are some strategies for buyers, sellers and homeowners that will help, no matter how grim the housing recession gets.

Here are some strategies for sellers, buyers and homeowners in a high-risk real estate market:

Buyers

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