Gabriel Libutti

What I bought with my $8,000 tax credit These 7 new homeowners stepped up their house-hunting to take advantage of the first-time buyer tax credit -- before it expires on Dec. 1. 1 of 7Jonathan and Vanessa Lee Vanessa Lee, 22, with her husband, Jonathan, 24, and their two children. He is a floor care technician at a hospital and she works as an insurance broker. • Act fast! Homebuyer tax credit ends soon • Most affordable cities to buy a house Location: Adelanto, Calif. Property: 4 bed, 2 bath Spanish-style Price: $73,000 Prices may have come down a lot in this area, but we still had to scrimp real hard. Last year, we downgraded from a two-bedroom apartment to a one-bedroom to save some money. That's not easy with two kids. We shopped hard for a home. We looked at a lot of places put bids on both short sales and lender-owned properties, which are nearly the only homes available here. We lost out to higher bids several times, but we finally got initial approval four weeks ago on a short sale of a Spanish-style house. It cost $73,000. We're waiting for final approval. I don't know if it will come before the tax credit expires. I hope it does, but banks are so slow at processing things right now. I really want the tax credit. We'll use it to do repairs on the home, which has been slightly neglected. We also need to upgrade one of our cars. One of them is getting pretty old. It's okay where we are now, but to get to the new house there will be a big hill and that would be hard on the old car. Regardless of whether we get the $8,000 credit, we're going to go through with the purchase. We want -- and need -- the home.

The housing recovery mirage With home prices rising even in California, it might seem that the worst is over for the housing market. But the good vibrations may be short lived. Is the housing bust over? Shares of Toll Brothers (TOL), Hovnanian (HOV) and KB Home (KBH) and other builders have surged. The exchange-traded fund that tracks the group has nearly doubled since March. Home starts have risen for five straight months, while sales of new homes recently hit their highest level since last September. Prices are up as well: the Case-Shiller index of national house prices rose 2.9% in the second quarter, ending a three-year decline. These signs -- as well as anecdotal reports about house shoppers growing more willing to write a deposit check -- have executives at homebuilding firms declaring the worst is over. "We believe declining cancellations and more solid demand indicate that the housing market is stabilizing," Toll Brothers chief executive officer Bob Toll said this month in a conference call with investors and analysts. But housing boosters have forecast turnarounds repeatedly since the market peaked in 2006, only to be proved wrong by plunging prices. And skeptics say they're wrong again now. They argue that a deeply indebted consumer, a weak job market, expiring incentives and rising foreclosures spell a quick end to any housing rebound. "We're entering the phase where the homeowner has to earn his way out of this mess," said Mark Hanson, who runs a California real estate research firm. "This summer is shaping up as the gateway into the next move down." Sales shift Hanson attributes the much-ballyhooed recent house price gains to a shift in the types of properties changing hands. Earlier this year, as many as half of all transactions nationally were resales of foreclosed properties, largely at low prices. Since then, so-called organic sales (those not involving distressed properties) have risen while foreclosure sales have remained stable. This improved mix -- together with cheap financing and a couple of popular tax incentives -- helped to revive prices in some hard-hit areas. Thus, house prices in California have risen for three straight months, according to data provider MDA DataQuick. Foreclosure sales there have dropped to about a third of recent transactions from a high of 57% earlier this year. But with schools opening up again and the summer home-selling season winding down, sales by nondistressed sellers are likely to fall in coming months, Hanson said. Adding to the pressure on prices, the end is in sight (or already here) for some popular housing subsidies. An $8,000 federal tax credit for first-time home buyers is due to sunset in December. A $10,000 California tax credit for buyers of newly constructed houses expired last month. Prime problems Another concern is that the housing woes appear to be spreading well beyond the questionable borrowers who were at the center of the first stage of the financial crisis. 0:00 /2:48Banks leave foreclosures hanging While many mortgage defaults in 2007 and 2008 stemmed from frauds perpetrated at the height of the bubble, a greater share of problems now are being driven by the weak job market. That's evident in the fact that more so-called prime borrowers -- those with the best credit histories -- are falling behind on their payments. Prime fixed-rate mortgages now account for about a third of foreclosure starts, according to the Mortgage Bankers Association. MBA chief economist Jay Brinkmann said in a statement earlier this month this is "a sign that mortgage performance is once again being driven by unemployment." Some 44% of prime borrowers fell behind on payments last year because they lost a job or income. That's up from 36% in 2006, according to data from Freddie Mac. Other numbers bode ill for a housing recovery as well. The inventory of houses for sale has come down from a recent peak but remains "high on a historical basis," Office of Thrift Supervision economist Sharon Stark said this month. "The supply of homes continues to be a drag on home prices and the ability for home prices to recover," she added. An orgy of homebuilding over the past decade has driven vacancy rates higher. The Census Bureau said 14.3% of rental and owner-occupied housing units were vacant in the second quarter, compared with 9.7% a decade ago. And Hanson said the pace of foreclosures could soon accelerate as mortgage servicers catch up on foreclosures they have delayed while grappling with new mortgage modification guidelines. "There could be a big wall of foreclosures once the servicers get running again," he said. Even Toll, who was talking about housing markets "dancing on the bottom or slightly above that" as long ago as December 2006, has been saying lately that the homebuilders could use a hand -- from taxpayers, of course. Toll said on a conference call Aug. 12 that the government should consider a Cash for Clunkers type plan for the housing market: giving consumers a rebate to scrap an old home and buy a new one. Toll argued that a four-month program that offered people $15,000 vouchers for new home construction could "put twice as many people to work, twice as fast as what's being done with the auto industry." It won't be a shocker if Toll finds some takers in Congress for that one, given the growing jobless rolls across the nation. But legislators might first want to consider how effective such a plan might be. "It took 10 years to create this problem," said Hanson. "Do people really believe we can correct it all in 36 months?"

How long will low mortgage rates last?

By Chris Kissell • Bankrate.com Highlights

• "Interest rates rise faster than they fall," says an economist.
• End of Fed buying mortgage-backed securities may drive up rates.
• First-time homebuyers who don't close by Nov. 30 will miss $8,000 credit.

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How much lower will mortgage rates go?

That question is on the lips and minds of mortgage shoppers from Seattle to Miami. In recent months, rates have sunk to near historic lows, presenting Americans with a rare opportunity, according to economist Bob Walters.

"The best time to buy a house and refinance -- solely from an interest rate standpoint -- is now," says Walters, chief economist at Quicken Loans in Livonia, Mich.

Still, some shoppers continue to wait, hoping for a perfect world where rates dip south of 5 percent and recently stabilizing home prices resume their epic plunge. If history is any indication, such procrastination may be a mistake, Walters says.

"All of us who have been in the business for a while know that interest rates rise faster than they fall, and they usually rise in a very unexpected time frame," he says. "People could wake up to substantially higher mortgage rates at some point."

While it's impossible to predict what will happen to rates for the rest of 2009 -- and beyond -- many mortgage professionals are advising clients to act now.

"If you have plans to refinance or buy a home, don't wait," says Chris Sipe, a loan officer at America East Mortgage in Frederick, Md. "There is no logical reason to do so."

Fed fallacy

People who dream of lower mortgage rates often pin their hopes on the Federal Reserve. The central bank's Federal Open Market Committee meets eight times each year and sets a target for the federal funds rate. It's widely believed that Fed decisions directly move mortgage rates up or down. But that's not true, says Walters, who contends that "there's not a great correlation" between Fed rate actions and mortgage rate movement. Instead, the anticipated inflation rate provides a better barometer of where mortgage rates are headed, he says.

"Mortgage rates are always going to be some percentage above what the expected inflation rate of the next 10 years or seven years is going to be," he says. "I tell people to watch that more than to watch (the) fed funds (rate)."

Dick Lepre, senior loan officer at Residential Pacific Mortgage in San Francisco, agrees that the Fed's role in moving mortgage rates often is overstated.

"It doesn't make much difference what the Fed does," he says.

Like Walters, Lepre keeps his eye on inflation when forecasting mortgage rate movements. Right now, inflation fears are rising, thanks to two years of massively stimulative monetary and fiscal policy intended to jolt the nation's faltering economy. Looking ahead, two Federal Reserve policies that have kept interest rates low are due to expire in the next few months.

In October, the Federal Reserve begins to wind down its campaign of buying $300 billion in long-term U.S. Treasury securities. A Fed effort to buy up $1.25 trillion in mortgage-backed securities is slated to expire at the end of the year.

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So, it's possible -- although not certain -- the stars are aligning to drive long-term rates higher for an extended period, Lepre says.

"One can easily make the case that we will not see mortgage rates this low for the next 10 years," Lepre says

Is a reverse mortgage right for you? Sure, it's an easy source of extra income. But there are risks. On the face of it, a reverse mortgage sounds like a no-lose deal for older homeowners. A lender gives you what amounts to a cash advance on your home equity -- no minimum income or credit score required. And you don't have to pay it back until you move or die, when the proceeds from the house sale typically will be used to close out the loan. But in fact, reverse mortgages have some serious drawbacks. Here's what you need to know. You may not be able to borrow that much. A provision in the economic stimulus package raised the maximum home value that could be counted for reverse mortgages from $417,000 to $625,500. But you won't be able to tap your home up to its full price. The formula for determining loan amounts takes into account your age (the older you are, the more you can borrow) and current interest rates, as well as your home's value. Anything you owe on your home is subtracted from that amount, as are the loan fees you'll pay. To see how much you might qualify for, use the calculator at revmort.com/nrmla. Expect to pay some pretty hefty fees. A reverse mortgage is an expensive loan. In addition to regular closing costs, you'll pay an origination fee of 2% on the first $200,000 of the loan balance and 1% thereafter, plus a mortgage insurance premium of about 2% and a monthly service charge as well. Though recent legislation has capped the origination fees at $6,000, by the time you add all the other fees you'll have to pay, the total generally reaches $10,000 to $15,000. So a reverse mortgage doesn't make sense if you expect to move anytime soon, says Dallas financial planner Michael Anderson. There's more risk than you think. Reverse mortgages are particularly appealing to retirees looking to supplement dwindling income from a battered investment portfolio -- that's one reason these loans are up nearly 50% over the past two years. The big risk, especially for younger borrowers (you have to be at least 62 to get the loan): You'll live longer than you anticipate, run out of money, and won't have any home equity that you can fall back on. Over the past decade the average age of reverse-mortgage borrowers has fallen from 76 to 72. "One of the first questions to ask yourself is whether you can make the money last," says reverse-mortgage counselor Brenda Grauer. Other options may suit you better. Before you can get a reverse mortgage, you'll be required to attend a session with a counselor who is not affiliated with a lender. This person is supposed to clearly explain the loan's terms and its drawbacks. But a recent study by the Government Accountability Office found that counseling sessions often fail to warn seniors of all the risks. So before you or your folks sign up, make sure you've looked into all the alternatives, such as cutting expenses, taking out a home-equity line of credit, or downsizing your home. Says Grauer: "It's best to put off taking this loan for as long as you can, so that when you really need it, the money is there."

New home sales blast past expectations More people are buying: Sales of new homes hit their highest level since last September. Sales of newly constructed homes leaped unexpectedly in July to hit their highest level since last September. New homes sold at an annualized rate of 433,000 during the month, according to a joint report issued by the Census Bureau and Department of Housing and Urban Development. That far exceeded analysts' forecasts and was up 9.6% from the revised 395,000 rate recorded in June. A consensus of industry experts surveyed by Briefing.com had predicted July sales of 390,000. The news followed other positive housing market reports earlier this month, including a spike in existing home sales, home prices and affordability. "There are many economic conditions that led to the surge," said Bob Walters, chief economist for Quicken Loans. "But certainly low mortgage rates, huge price reductions on the high inventory of new builds, and the first-time homebuyer tax credit have been instrumental in getting consumers to take the plunge into the real estate pool of opportunity." Plus, the psychology of the market is changing, according to Peter Morici, an economics professor at the University of Maryland. "The notion that prices will drift down forever is gone," he said. "Now people are thinking the window of opportunity will not be open forever." "Home shoppers visiting builders' model homes are more likely to purchase than earlier in the year," added Brad Hunter, chief economist for Metrostudy, a real estate research and consulting firm. They are also canceling fewer contracts. Of the 10 markets where Hunter examines cancellation rates, most are running at substantially lower levels. In Phoenix, for example, the cancellation rate lately has been about 4% compared with 7% late last year. It certainly is an attractive market. The median price of a new home declined again last month to $210,100, down only slightly from June but off more than 11% from July 2008. Latest Home Prices in Your City The Housing Market Index, a measure of builder confidence calculated by the National Association of Homebuilders and Wells Fargo, inched up again this month to 18, its highest level in more than a year. That's still low by normal standards: Anything below 50 indicates that more builders think business conditions are poor. And new sales, though rising, are still well below what they were last August, when they sold at a 520,000 annualized rate. But the sales spike did help reduce the inventory: Available new homes dropped to 271,000 -- the lowest total in 16 years -- from 281,000 a month earlier. That's down to a healthier 7.5 month supply at the current rate of sales from 8.8 months in June. Still, when factoring in existing homes for sale, inventory levels remain high, according to Mike Larson, real estate analyst for Weiss Research. He also pointed out that the continued influx of foreclosed properties over the next year or so will replenish supplies. However, supply could creep back up at the end of the year. On Nov. 30, the $8,000 tax credit for first-time homebuyers is also set to expire. And experts worry that the brisk pace of sales will fall off if homebuyers are sidelined once the incentive disappears. But for now, they are optimistimic."This [report] is clear evidence the dramatic cut back in housing starts, plus increasing consumer confidence and the targeted tax cut for first-time buyers, is restoring stability to the new home market," said Larson.