Deal... or No Deal?

It’s a confusing, crazy real estate market out there. Whether you’re planning to buy a house, or itching to sell, here’s our expert advice on getting the most for your money.

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"Watch your step,” Dave Larson calls to me from his back door as  I make my way up his icy driveway on a snowy day last December. “I sold the snow blower in June.” He sold it because in the sunny days of summer, Larson and his wife, Sue, were optimistic that they would be moving long before winter set in. They were eager to start a new chapter in their lives in North Carolina, where they could escape the cold winters and find a smaller house close to their daughter and her three children. By December, that optimism had shriveled and blown away with the autumn leaves.

The Larsons have plenty of company. Homeowners across the state put their homes on the market for what seemed a reasonable price, only to find that buyers, if they bothered to show up at all, expected to spend much less. “We started out at $484,900 in October of 2006,” says Dave. It seemed fair enough for a three-bedroom home on an acre and a half in a quiet corner of Scituate. “We have an in-ground pool, a hot tub, two fireplaces, an in-law apartment above a heated two-car garage,” he says. “The woods out back go on for miles. In the morning we see flocks of wild turkeys in the yard; the other day we saw an eight-point buck.”

They found few who would even look, and those who did found fault. “One complained that there were no streetlights on the road. Another said the neighbors’ houses were too close,” says Sue. “It was unbelievable.” They gave up trying to sell on their own and found an agent, and then a second agent. By December, anxious to get moving, the Larsons had reduced the price to $349,900 and finally gotten a nibble. “Our agent said to us, ‘Take this offer and run!’” says Sue. “And that’s exactly what we intend to do.”

Not long ago, Rhode Island’s real estate market was the hottest in the nation. Between 1999 and 2004, the median price of single-family homes in the state just about doubled. Buyers were eager to catch the wave, driving the demand for risky products such as interest-only and adjustable-rate mortgages. Then the juggernaut faltered. Nationally, the economy cooled down, and prices leveled off. Last summer, the crashing subprime mortgage market reached national crisis proportions. Foreclosure rates rose as adjustable rates ratcheted upward and strapped-for-cash owners couldn’t meet payments.

In Rhode Island, as of late last year, about 1 percent of homeowners faced foreclosure, though up to 6 percent were considered to be on the brink. Those homes go back on the market, adding to the supply and driving prices down. By last October, the median price of a single-family house in Rhode Island was $236,000, about a 10-percent decline from a year earlier. It was the lowest price recorded in almost three years, according to The Warren Group, a Boston firm that tracks real estate data across New England. Last September, almost 7,000 houses were on the market, a ten-month supply, and buyers were scarce.

“Mortgages are harder to get right now,” says Richard Godfrey, executive director of Rhode Island Housing. “I think that’s a good thing. The mortgages being offered now are a little safer.” But it means there are fewer buyers to go around. Also, some buyers are waiting on the fence, hoping prices will drop even more. Other potential buyers who are already homeowners face the challenge of selling their own property if they want to trade up. And investors who were eager to flip properties in the ascending market are nowhere to be found when there’s a decline.

It all adds up to more sellers competing for fewer buyers, driving prices even lower. Forecasts by the Mortgage Bankers Association project a continuing decline in sales and prices nationwide through 2008 before the market starts to slowly recover in 2009. Last December, the New England Economic Partnership predicted the Rhode Island market would decline about 5 percent a year for two more years.

Paul Hogan, president of Hogan & Stone, says he expects a gradual recovery to start as soon as this summer. “There are positive signs that many of the expected foreclosures can be prevented by renegotiating the terms instead,” he says. “And the pipeline for new homes is shutting down.” As the housing supply falls back into balance with demand, he says, the market should respond as prices level off.

The Rhode Island market has another thing going for it—quality of life. “We’re spoiled,” says Ron Phipps of Phipps Realty in Warwick. The coastline, the restaurants, the access to Boston and New York—all of those values remain. And the cost per square foot for saltwater frontage is the lowest in the region, Phipps says. He expects that regional demand will grow faster than supply, and Rhode Island still has room for prices to go up in the future.

Meanwhile, the statewide market reports mask local variations. Olneyville and Washington Park have been hit hard, while the East Side has held steady. Jamestown and Little Compton, where sales are scarce, have escaped the decline altogether. Last September, median sales prices in those towns grew 37 percent and 46 percent, respectively.

Condominium, waterfront and second-home properties all vary from the averages. Homes in the $3 million-plus range generally hold their value. It’s a volatile and complex market, but opportunity lurks. For those with the means to do so, Godfrey says, “Now is a great time to buy.”

As for the Larsons, in December, it is finally time to sell. Their front lawn in Scituate is covered in snow as their daughter calls from North Carolina and says it is seventy-five degrees and sunny outside. More important, her kids are asking when they will see their grandparents again. Like many families in the real estate market, the Larsons have accepted the fact that money isn’t everything. They will have to take less than they had hoped for, and the profit they expected has evaporated, but in the end, being close to family matters more to them. “We’re ready to go,” Sue says, smiling, and Dave nods in agreement.