Because of these obstacles, many of tomorrow’s homeowners are using today’s single-family rentals (SFRs) as stepping stones to homeownership. According to the National Survey of Renters, more than 52 percent of renters—including 60 percent of single-family renters and 44 percent of apartment dwellers—said they anticipate becoming homeowners in the next five years.

Additionally, families with three or more members (64 percent) and children under 13 (69 percent) were more likely to become homeowners than the 43 percent of renters who have no intention of becoming owners.

The findings of the survey suggest that families are using SFRs as a step toward homeownership—whether they’re would-be first-time buyers or families displaced by foreclosure waiting to buy again when they can afford to do so.

Families can stay in these SFRs for several years as they prepare financially for homeownership. As they wait, they can enjoy many of the amenities of owning a home, including large floor plans, strong communities, backyards, security, privacy, and proximity to schools and recreation.

Using a SFR as a step toward buying a home means new buyers are better able to tackle the obstacles that await them in the real estate market:

Big down payments

The average down payment today is 9 percent, according to Lender411.com, an online mortgage marketplace. That average includes the large number of FHA loans that require down payments of only 3.5 percent. Many lenders require much larger down payments.

Rules limit who is allowed to give buyers the funds to make down payments; in most cases, the person giving the gift must be a family member or friend with a verifiable, long-standing relationship. The lender will likely require that the down payment is truly a gift and not a loan that will need to be paid back.

These rules leave many buyers on their own to raise the money required for a down payment on a house. While renting their homes, these future buyers have a chance to save that money.

Tight lending standards

According to Ellie Mae’s latest Origination Insight Report, the median FICO score on closed loans was 746 in the first quarter of 2013. In that same quarter, the loan-to-value ratio—the mortgage amount compared to the appraised value of the property—was 80 percent, and the debt-to-income ratio—how much a borrower owes compared to how much they earn—was 23 percent.

Those are tough standards for many young buyers to meet. While not impossible, they will need to get their finances in order, and renting gives them the breathing room to do that.

Low inventories of homes

Inventories of homes for sale are about 40 percent lower today than they were two years ago. In some areas—Northern California, Phoenix, and Denver— the shortage of listings is more severe.

Homes in the lower price tiers, including starter homes for first-time buyers, are especially scarce. First-time buyers with limited pocketbooks are finding themselves on the losing end of bidding wars or unable to compete with cash buyers. Many future buyers continue to rent, waiting for their dream home to hit the market.

While some renters surveyed enjoy that lifestyle and plan to remain renters, many more plan to use SFRs as the first step in their journey toward homeownership.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

Spring is normally the busiest time of year for real estate agents and brokers, and this year looks to be more of the same.

As February’s colder-than-average temperatures started to rise, the real estate market also began heating up. Sales of existing homes rose, as did home prices. In a housing industry forecast, secondary mortgage market player Freddie Mac said this could be the healthiest spring home-buying season since 2007.

Whether you’re a first-time homebuyer or a seasoned investor thinking about buying a home, here are three trends to watch for as the spring home-buying season comes into full bloom:

1. Home prices are on the rise.

Home prices have continued to climb upward. From early 2012 to early 2013, home prices rose by 8 percent—the most since mid-2006.

This increase in home prices is due, in part, to real estate investors dumping money into the housing sector. Investors right now account for a larger portion of buyers compared to recent years or to what is typical in a normal housing market.

But prices can’t go up forever—and certainly not at a rate of 8 percent per year. In fact, it’s likely that the housing recovery will be shaky, with prices fluctuating up and down. At the beginning of 2013, for example, not all real estate markets experienced the same housing sales upturn. Although home prices for all 20 cities tracked by the Case-Shiller home price index rose at the start of 2013, some cities—like New York, Chicago, and Boston—experienced only limited growth.

If investors suddenly drop out of the housing market, or if a large number of homeowners sell at the same time—thereby drastically increasing available inventory—housing prices could take a dive.

2. Housing inventory is limited.

Limited housing inventory (the homes that are available for sale at any single point in time) is what’s driving the housing recovery and contributing to the rise in home prices. March’s housing inventory—with over 1.5 million homes on the market—was down by over 15 percent from the year before, according to Realtor.com.

Tighter supply and increasing demand means buyers will pay higher prices for the homes they want. While home prices are rising, most homeowners can’t afford to sell until prices climb even higher. Due to the high cost of the commission and other closing costs and fees, it can cost up to 10 percent of the sales price to actually unload a property. This is especially true for the 13.8 million owners whose homes were worth less than the mortgage amount owed.

3. Interest rates remain low.

Interest rates remain at historic low levels, and that has propelled interest from buyers in all price ranges.

Since 1971, the 30-year fixed mortgage interest rate has dipped below 4 percent in only 15 months—and those were the 15 consecutive months ending February 2013, according to the most recent data available from the National Association of Realtors.

The national average commitment rate for the 30-year fixed-rate mortgage was 3.53 percent in February, down from 3.89 percent the year before, according to Freddie Mac.

Despite a slight uptick in home prices, low mortgage interest rates are keeping homes affordable in many parts of the country. And while that’s great news for potential homeowners, these affordable homes are also driving more investors to the market. An investor-driven recovery is a shaky one, and if that’s what we’re experiencing, we could be in for a rude awakening.

Ilyce Glink is the author of ten books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask. Her nationally syndicated column, “Real Estate Matters,” appears in more than 125 newspapers and Websites, and her online “Ask Ilyce” columns are read by hundreds of thousands of people every month. She is a top-rated radio host on WSB Radio in Atlanta, the Home Equity blogger at CBS MoneyWatch.com, host of the Internet program “Expert Real Estate Tips,” managing editor of the Equifax Personal Finance Blog, and publisher of ThinkGlink.com.

Mortgage lenders that made bad loans paid dearly with massive losses that drove some, like Countrywide and Washington Mutual, out of business. The survivors changed their lending practices dramatically, raising standards on credit worthiness and ability to repay and requiring better documentation.

The result is that many homeowners who could qualify for a mortgage to buy or refinance a home in 2005 could not today. Many say that the higher standards have gone too far. For example, from 2001 to 2004, approximately 40 percent of residential loans went to homebuyers with credit scores above 740. Currently that number is in the 50 percent range. Economists at the National Association of Realtors estimate that an additional 500,000 to 700,000 home sales could be made if credit conditions return to normal.

However, many policy makers and lenders disagree. Most view the tougher standards as necessary to reduce risk for lenders and ensure that financing is available for mortgages. There’s no doubt that the tougher standards have helped to stem the flood of foreclosures. Defaults on mortgages have declined about 20 percent a year over the past two years, and foreclosures are expected to return to pre-crash levels in two or three years. Federal regulators are making permanent some of the increase standards, including those addressing the ability to repay and the requirements for down payments, in two rules now being finalized. These are known as the QM (qualified mortgage) rule and the QRM (qualified residential mortgage) rule.

If you are thinking of applying for a purchase mortgage to buy a home, or if you are a homeowner seeking to refinance, here are the key standards that you will have to meet.

• Down payments. Last year, the median down payment for all homebuyers was 9 percent, but it was only 4 percent for first-time buyers, most of whom used FHA financing. The QRM rule will encourage lenders to make loans to borrowers who put more down (perhaps 10 percent or more, though a final figure has yet to be determined). Borrowers who put down less will pay higher mortgage interest.
• FICO score. The median FICO score for all mortgages closed in February was 745, according to Ellie Mae, a mortgage-servicing platform that processes more than two million mortgages a year. By comparison, about 60 percent of all mortgages approved before 2004 had FICO scores of 740 or lower.
• Loan to value ratio (LTV). The LTV is a metric that helps your lender determine whether the value of the home you are buying is high enough to cover most of the cost of the loan it is making in the event you should default. The median LTV in February was 80 percent, which means the loan is equal to 80 percent of the appraised value of the home.
• Debt to income ratio (DTI). The DTI is a key metric used to determine a borrower’s ability to repay. All documented income sources are used to compute income. Debt is expressed two ways: all outstanding debt, including consumer debt and alimony, and all debt plus the debt to be incurred by the mortgage for which the buyer is applying. The median DTI in February was 23 percent for all debt except the prospective mortgage. With the mortgage added in, the median was 35 percent.

Mortgage approval rates on the rise

Over the past year, mortgage approval rates have risen nearly 20 percent despite the fact that there is still virtually no evidence that lenders are relaxing underwriting standards.

In February, lenders approved 56.8 percent of all mortgage applications, including purchase mortgages and refinancings. This represents an increase of 18.6 percent from the 47.9 percent approved a year ago. Approval rates have also risen quickly in recent months. For 2012, the average closing rate for all mortgages was 49 percent, 15.9 percent below the February closing rate.

Homebuyers are doing markedly better getting approved than they were 16 months ago when Ellie Mae began releasing its data on mortgage originations. Some 61.7 percent of homebuyers were approved for a mortgage in February 2013 compared to 55.2 percent in November 2011. Better preparation, credit repair, and documentation probably account for the improvement.

Despite the improved percentage of approvals, mortgages are taking a little longer to process than a year ago. Purchase loans took 47 days to close in February, slightly longer than the 45 days it took a year ago, while refinancings are taking 50 days now compared to 44 days a year ago.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

Slim pickings are changing the dynamics between sellers and buyers. When there aren’t many homes on the market from which to choose, buyers have few options—and more chances to make a big mistake by overpaying for a house or settling for a home that they don’t really like.

On the other hand, this is the time for you and your family to decide together what you really do want in a new home in terms of location, size, and amenities. Before you start looking, make a list of must-haves and would-be-nice-to-haves, as well as things that are not essential. This may be the most important purchase you will make in your lifetime, and making a mistake will either cost you a great deal of money or cause you a great deal of regret.

Six tips for house hunting in an inventory drought

1. Scour the listings. Use several good listing sites, not just one. Make sure at least one is a broker’s site, preferably one of the dominant brokers in your market. Sign up to be alerted whenever a new listing is posted in the neighborhoods you are considering.

2. Expand your scope. Can you add some territory to your house-hunting locations? The wider your search, the more houses you will be able to consider.

3. Hire the number one buyers’ agent in your market. Real estate agents specialize by territory and by skill set. Some specialize in short sales and foreclosures, while others specialize in distress sales. Realtors who are certified buyers’ agents can use the Accredited Buyers’ Agent designation (ABR). Hire a buyers’ agent who has access to new listings in your target area before they are posted by the MLS.

4. Go to open houses. Try to meet other agents active in your target area. They are likely to know of listings before they hit the Internet.

5. Don’t get turned off by a poorly created listing. At best, photos and words convey only a general sense of what a house is like. At worst, they can turn you away from a property that just might be the right one for your needs. Look at listings with a critical eye. If the property has the basics you seek, visit it. Badly done listings often keep great houses from selling; by doing due diligence, you just might find a hidden gem.

6. Give yourself plenty of time. With the onset of the spring buying season and increasing prices, inventories have been rising lately. Total housing inventory at the end of February rose 9.6 percent to 1.94 million existing homes available for sale, which represents a 4.7-month supply at the current sales pace. This is up from 4.3 months in January, which was the lowest supply since May 2005. With economists predicting improving prices, more and more sellers are likely to list their homes through the spring and early summer months.

Start looking early, and look at a lot of homes. Be patient as more homes come onto the market. Keep looking for the right house until you find it, and don’t compromise by stretching yourself too far financially or not getting what your family needs. The market should continue to improve, and more homes will be available next spring.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

In California and Arizona, sales contracts are being consummated in 24 hours or less. These flash sales attest to the frenetic fever that’s infecting the hottest real estate markets, where inventories are 30 percent to 60 percent lower than a year ago.

What’s going on? In economics class, we were taught that demand coupled with short supplies results in higher prices, encouraging owners to sell and restoring equilibrium. In real estate markets, however, it’s just not that simple.

Here are the three major reasons that sellers aren’t selling even when prices are rising.

1. They owe more than their houses are worth. Though rising values are lifting many homeowners out of negative equity, 10.4 million homeowners (21.5 percent of all residential properties with a mortgage) were still in negative equity at the end of the fourth quarter of 2012, according to a recent CoreLogic report. Of the 38.1 million residential properties with positive equity, 11.3 million have less than 20 percent equity. These borrowers, referred to as “under-equitied,” may have a difficult time obtaining new financing to refinance or buy a new home due to underwriting constraints.

Under-equitied mortgages accounted for 23.2 percent of all residential properties with a mortgage nationwide in the fourth quarter of 2012. That’s a grand total of 44.7 percent of homeowners with a mortgage. Negative equity is a bigger problem in hot markets like California, Arizona, and Florida than elsewhere because those markets experienced greater swings in home values over the past seven years.

2. They can’t afford to buy. Most home sellers are also homebuyers. In hot markets, move-up buyers are having almost as hard a time as first-time buyers finding affordable houses. Unless they have owned their existing home for ten years or more and will realize a significant profit, move-up buyers may find themselves ending up with a loss.

3. They can’t get financing. Many move-up buyers are having the same (or worse) problems getting financing as first-time buyers. They haven’t been in the mortgage market since the tough new lending standards were enacted. FICO scores and down payments are higher, debt-to-income and loan-to-value ratios are lower, and, most importantly, documentation is tougher today, especially if you’re self-employed, paying alimony, co-signatory on another loan, or retired.

If move-up buyers can’t buy, they don’t sell. The result is a huge logjam in the housing ladder that makes it harder for first-time buyers to find starter homes and for empty nesters to sell the family home for something smaller.

Time will make all the difference. For seven years, most owners have postponed thoughts of selling. Although prices are rising suddenly in some markets, it doesn’t mean that homeowners are prepared to respond quickly. Families don’t easily make a major decision like selling their home and moving to a new one. Even when the decision is made, there are many steps involved in the process: preparing to sell, finding a new home, and rearranging the family’s life. It can take months before a house is ready to be listed.

Time will also see rising values lift more owners out of negative equity to put them in a position where moving will be possible. Sellers will sell in good time, and real estate markets that seem out of control today will return to a degree of normalcy.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

While thereal estate market is still making a slow recovery, there’s more activity on the home renovation front. A strong rebound for home improvement activity is expected in 2013, according to the Joint Center for Housing Studies of Harvard University, which reported that robust spending in the second half of 2012 may have kicked off a remodeling recovery.

“It’s encouraging to see the residential sector finally contribute to growth in our economy,” said Eric S. Belsky, the Joint Center’s managing director.

“Through the first three quarters of 2012, investment in the residential sector was responsible for one out of every six dollars added to our GDP. Moving forward, home improvement spending is expected to make an even larger contribution to GDP growth.”

Even though the home remodeling market is on the upswing, it can still be difficult to find the right design matches that meet your needs both aesthetically and financially.

Before you dive into your next remodeling project, consider these five ways social media can help you get the job done.

1. Organize your ideas

You no longer need to go through the painstaking task of combing through stacks of magazines, tearing out photos and tacking them to a bulletin board. Social media sites like Pinterest offer you a new kind of filing system where you can collect photos from around the Web and organize them into categories—sometimes called idea boards or inspiration boards. If you are renovating your bathroom, for example, you could create an entire board devoted to tiles and aggregate all of your favorite colors and patterns in one place.

2. Get inspired

It’s easy to get burned out when remodeling and hit a creative dead end. Are you renovating your home office and unable to find the right accents to make the room feel warm and cozy? Social media can help you find new inspiration during your remodeling effort by seeing what your friends—or even complete strangers—are doing with their homes. Most social media sites allow you to see the idea boards that other users are making.

If you use the website Project Décor, for example, you can follow other users and keep up with the design and home furnishing products they are finding through a customized news feed. Maybe someone you follow will add a desk chair to a design board, and that chair’s color, style, or designer will inspire you. If you share your own ideas publicly, you might also inspire other remodelers looking for a creative push. On Pinterest, follow the topic “home décor”—you’re bound to discover new ideas and trends.

3. Estimate your costs

You can search for remodeling ideas all you want, but when push comes to shove, you need to know that you will be able to finance your project. It’s fun to be creative and think big, but you also need to stay practical. On Zillow Digs, which is both a website and an iPad app from real estate site Zillow, you can peruse photos of real renovations and determine how much it will cost you to recreate the same remodeling effort. Zillow Digs uses an algorithm that considers the cost of contractors, materials, and labor in your own city. With this cost breakdown, you’ll get an idea of how to budget for your own remodeling projects.

4. Find home professionals in your area

If you are unsure whom to call for remodeling help and you want to see work portfolios before picking an architect or interior designer, social media can be a helpful resource. With a social media app like Houzz, you can easily search for home experts in your area with filters for type of professional, location, and the “most reviewed” or “recently reviewed.” Not only will you be able to access information on the professionals, but you can also see examples of their work. If you are trying to make your home energy efficient, you can also check out architect and design work done on green homes.

5. Collaborate

Social media sites allow you to seamlessly engage, interact, and network with others. If you join a social media network that focuses on home remodeling, you’ve found a space where users with similar interests and hobbies can gather to share ideas. For example, Houzz has a discussion board where you can ask questions of fellow remodelers or provide advice to others based on your own experience. You can also post a photo of an unfinished room in your home and ask for feedback on what type of furniture or decorations you should add. The number of users that will weigh in with useful suggestions that will help you take your project forward—and the speed with which they’ll reply—may surprise you.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

Here are four signs that the housing market is recovering:

1. Unemployment is falling.

In order to have a strong real estate market, you need a strong job market. The unemployment rate fell to 7.7 percent in February, its lowest level since December 2008. February saw 236,000 jobs added to the U.S. economy, which is more than was expected.

2. Home equity is increasing.

Almost two million homeowners moved into a positive home equity last year, according to a recent report from real estate website Zillow.com.

While 15.7 million people had underwater mortgages at the end of 2011, meaning that they owed more on their mortgage than their home was worth, that number dropped by 12 percent to 13.8 million people at the end of last year. Zillow forecasts another 7 percent of homeowners will also have positive home equity by the end of 2013, mostly due to increasing home values.

3. Home values are rising.

Home prices across the country climbed 9.7 percent in January from a year ago, the largest increase since April 2006 and the 11th straight month home prices have risen nationally, according to a new home price index report from CoreLogic. The report showed that all states, except for Delaware and Illinois, saw year-over-year price gains.

4. Home equity lines of credit are rising.

Home equity lines of credit (HELOC) are also on the rise, with a 19 percent increase in originations at the end of 2012. However, this is considerably lower than the pre-recession peak in 2006, according to an Equifax report.

HELOCs can still be difficult to get, and lenders tightened their borrowing requirements after the financial crisis and housing market collapse when they lost billions of dollars worth of loans. While lending has increased, lenders are staying conservative. The average home equity line in October 2006 was more than $100,000. It was slightly below $90,000 in October 2012.

Lenders are giving loans to the people with the highest credit scores, so if you can’t get a loan right now, you might want to spend time improving your creditworthiness. People with lower credit scores might receive higher interest rates or not be able to take out a loan at all.

To see if the housing market is recovering in your neighborhood as spring comes into bloom, watch for more pending home sales and more homes increasing in value.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

Perception vs. reality

The first step in balancing your personal finances with your personal preferences is to assess your true priorities and determine the elements that matter most in your home and community. The key part of this process is to recognize the divide between perception of what you think you want and the reality of what you can receive.

One example of this perception disconnect is the “drive-‘til-you-qualify” trap, where people drive further and further into the suburbs to find more affordable large homes. The perception of what this offers is valid: a lower mortgage, more square footage, a big yard, and a happy family.

However, the reality for many may turn out to be very different. Rising gas prices can cancel out the mortgage savings. The coveted extra space is often left unfurnished. Large yards sit empty as overly programmed kids spend time everywhere but at home. And the happy family drifts apart as long commutes and time spent shuttling between activities replace family dinners and time together.

Balancing the budget with quality of life

In the process of searching for a new home, we often overlook viable alternatives closer to work because, for example, we perceive them to be too small or missing amenities we think we need. Ask yourself this: When was the last time you used any of the elements that led you to aspire for that larger home? When was the last time you went in your double-height foyer or took a bath in your Roman tub? When was the last time anyone other than the person mowing the grass spent time in your yard? How often do you use your spare bedroom?

Now, consider this: What would you do with thirty minutes more each day? What would you trade for your kids to be able to walk to school?

Making the numbers work

The traditional formula for determining how much home you can afford is to allocate roughly one-third of your after-tax monthly income to housing. While this is a good starting point, it doesn’t take into account one crucial variable—transportation. A new study has found that transportation alone can end up costing 25 percent of your monthly income in auto-dependent areas, where in places with multiple transit options, it can be reduced to as much as 10 percent.

Rather than planning for housing alone, a better formula is to anchor your commuting costs into your housing allowance and set aside 45 percent of after-tax income for housing plus transportation. This formula allows for more flexibility by planning for both together. If you can save on transportation, you can invest a little more in housing and still come out ahead.

This year, gas prices could hit record highs. If you are looking at a drive-‘til-you-qualify house, take caution and consider the quality-of-life gains that you might be able to find with a shortened commute. Yes, the house and yard might be a little smaller, but if you examine how you are living in the bigger home, you might find a smaller space is easier to heat, cool, and maintain. This could free up even more of your monthly budget to invest in yourself, and you might end up with a house that feels like you are moving forward, not backward.

Resources to help calculate the total cost of your commute

The following online calculators can be of great assistance in understanding the cost of commuting for a potential new home:

Housing + Transportation Index: This index includes nearly 900 metros—covering 89 percent of the US populations—and it shows what you can expect to pay for housing and transportation neighborhood by neighborhood.

True Cost of Driving Calculator: Presented by the Santa Cruz County Regional Transportation Commission, this tool adds up your direct and indirect expenses relating to commuting (auto insurance, gas mileage for the make and model of your car, and more). You might be surprised at the amount that you are spending yearly.

Marianne Cusato is an award-winning designer and author of the new book, The Just Right Home: Buying, Renting, Moving – or Just Dreaming – Find Your Perfect Match! (Workman Publishing, available April 9).

Foreclosures are definitely on the decline as fewer homeowners are defaulting on their mortgages. The backlogs of foreclosures that built up during the Robogate mess are largely depleted, and more and more homeowners who find themselves in financial trouble are using short sales to get out from under their mortgage debt and move on. In January, only six states and 13 of the largest 100 metro areas reported a year-over-year increase in the foreclosure rate.

In most real estate markets, prices are rising on foreclosures, selection is thin, and home buyers find themselves competing with aggressive investors willing to pay all cash. Experts believe within two or three years we’ll be back to “normal,” e.g., the way things were before housing crash in 2006. Of course, there always have been foreclosures to be found, just not very many—nothing like the 4.2 million foreclosures that have come onto the market since 2008.

Yet there are still foreclosures to be purchased—about 1.2 million are still in the processing pipeline, delayed due to state laws or legal challenges. Some 61,000 foreclosures came onto the market in January, 17.6 percent fewer than a year ago.

Location, location, location

For a variety of reasons, foreclosure inventories and prices vary greatly by geography. Different state laws can slow down foreclosure processing; most of the 1.2 million backlogged foreclosures are located in a few of these states. Local economic conditions still are creating new foreclosures in certain markets. Demand is being driven by investors eager to do deals before prices rise higher. Most of the largest investors are located in the states where most foreclosures have occurred: Arizona, California, Florida, and Nevada.

Recently, RealtyTrac published its recommendations for the ten best places to buy foreclosures in 2013, based on available inventory and the average foreclosure discount (the difference between the median price of foreclosures and the median price of all home sales in the market). To select the best places to buy foreclosures in 2013, RealtyTrac scored all metro areas with a population of 500,000 or more by summing up four numbers: months’ supply of foreclosure inventory, percentage of foreclosure sales, foreclosure discount, and percentage increase in foreclosure activity in 2012.

Topping the list of best places to buy foreclosures in 2013 was the Palm Bay-Melbourne-Titusville metro area in Florida with a total score of 394: 34 months’ supply of inventory, foreclosure sales representing 24 percent of all sales, average foreclosure discount of 28 percent, and a 308 percent increase in foreclosure activity in 2012 compared to 2011.

Five other Florida cities ranked among the top 20 best places to buy foreclosures: Lakeland, Tampa, Jacksonville, Orlando, and Miami.

In addition, the list includes five New York cities, based largely on big backlogs of foreclosure inventory and big increases in foreclosure activity in 2012: Rochester, Albany, New York, Poughkeepsie, and Syracuse.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

While prices are moving upwards, inventories of homes for sale are continuing to fall, which is normal for the winter months. What’s not normal is how much inventories have declined in the past two years and how thin the supply of homes has become, measured on a year-to-year basis. On the huge Realtor.com national database of listings, inventory levels through January were down more than 40 percent from two years ago and were still declining.

In normal times, increased demand drives up real estate prices. These days, lack of supply is the primary driver behind rising prices. A continued scarcity of homes is in the seller’s interest, but buyers want a healthy supply for two reasons: a wider choice and a restraint on prices. At the end of the day, sustained low inventory levels decrease sales and discourage buyers, and everyone suffers.

Low inventories are impacting the lower-priced end of the housing market much more than the top tier. Entry-level homes, starter homes, and distress sales (foreclosures and short sales) are the hardest find. Luxury homes are selling in about 200 days while move-in ready foreclosures (REOs) are selling much faster.

Low inventories result from several factors. The most important is the simple fact that prices have not yet risen enough since the housing crash to create an incentive for sellers. One out of five of all homeowners with a mortgage, about 10.6 million, still owes more on their home than their mortgages are worth. They simply can’t afford to sell.

Even though home values rose last year, the 33.5 million homeowners who bought between 2001 and 2006 would take a loss if they sold today, and they’re not selling unless they have to. Home values lost 34 percent between 2007 and 2009, and they have a long way to go to recoup the loss. Increased demand from investors who see the end coming for large numbers of foreclosures, processing delays in some states, and steady decline in defaults all are reducing the numbers of foreclosures available.

Here are some tips for buyers looking for a home this spring:

• Increase your down payment as much as you can, even if your lender doesn’t require it. A larger down payment earns points with sellers, especially if you are competing against investors paying all cash.
• If you find a house you really love, consider making an offer over the list price. To do so, you might have to increase your down payment as suggested above because otherwise you risk an appraisal of less than the amount you need to borrow, which could kill your deal. A higher offer might put you in a better position than competitors and leave you with a property that should continue to appreciate in the months to come.
• If you are in the market for a foreclosure or short sale, hire a Realtor certified in distress sales. Look for an agent with the letters “SFR” after his or her name. To become SFR certified, Realtors must complete a one-day education program, either in-person or online, as well as three one-hour webinars.
• Do some research to find the agency that seems to handle most of the foreclosures where you want to buy and hire one of its agents. Often, agents within a brokerage will know about new foreclosures or short sales before they are listed. If they can sell you the home, they will make a commission from the lender as well as the buyer’s commission.
• If you’re handy or have friends in the construction and remodeling business, consider a damaged foreclosure. Unlike move-in ready foreclosures, damaged foreclosures are actually languishing in many markets and their prices are falling. HousingPulse reports that the average price for a damaged REO property sold in January was just $88,100. That was not only 17.1 percent below the average damaged REO price recorded a year ago—$106,300—but also the lowest level ever recorded by HousingPulse in its four-year history.

Buying a house in this environment can be tough. Don’t fall in love with one until your offer is accepted and your mortgage is approved. For those willing to work at it, though, the rewards will pay off for many years to come. Real estate people are always saying, “Now is a great time to buy a home.” This time, they’re right.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.