Consumer Action

It doesn't help matters that home sales numbers are as moody as a celebrity marriage. According to data released by the Commerce Department Friday, sales of new single-family homes fell 10.5% to a seasonally adjusted annual rate of 1.08 million since January.

At the same time, a report on existing home sales data for February released a day earlier by the National Association of Realtors (NAR) showed a 5.2% increase in sales over January.

?Also See

A Home Buying Primer Tips for First-Time Home Buyers

So is the market cooling, or is it picking back up? According to experts, it's moving from a full-on boil to a simmer.

"Nationwide, the numbers clearly indicate the market is cooling, but cooling from the record sales pace in 2005," says Lawrence Yun, an economist with the National Association of Realtors. "Now, we're experiencing what we characterize as healthy levels."

NAR estimates that in 2006, overall new and existing home sales will still decline by an average 6.6%, meaning that about 400,000 fewer people will purchase homes compared with 2005. (New home sales are expected to decline more than existing home sales.) Still, home prices will continue to increase, albeit at a much milder pace than in previous years: an expected 4% to 6%. (Keep in mind that those are average nationwide figures. Regionally, prices in certain markets will fall, while others will continue to grow. For more on that, see the sidebar.)

This is good news for buyers. Housing inventory is back to normal, with an average of 5.2 months' supply as of the end of February. This means that the supply of homes pretty much matches demand, according to NAR spokesman Walter Molony. "When you have a rough balance between buyers and sellers, you have about a six months' supply of homes on the market," he says. "The last five years have been very, very tight, averaging probably a 4.5 months' supply. It was very much a sellers' market." (A buyers' market, on the other hand, is one with a housing supply of nine months or longer.)

In hot markets like New York and California, the change is obvious. "The beginning of 2005 was probably the most extraordinary period in the history of real estate," says Pamela Liebman, CEO or the Corcoran Group, a New York-based real estate firm. "We had almost no inventory, every day was a bidding war." Rolling into this year, Liebman says, inventory build-up has brought the market down to much healthier shape. "There are more apartments to look at so buyers can be more selective," she says. "We don't have the same sense of urgency. Buyers are looking for a longer time, they're taking longer to sign contracts. But eventually, a healthy portion of them are signing."

Thinking of taking the plunge yourself? Here's what you need to know.

	Annual Price Growth 2004	Annual Price Growth 2005
Soft Markets (Slowest Price Growth)
Detroit	-0.5%	-0.4%
Cleveland	2.7%	-0.9%
Cooling Markets
Washington, D.C.	26.5%	20.6%
Miami	30.1%	23.9%
Las Vegas	47.3%	12.3%
San Diego	24.8%	6.6%
Accelerating Markets
Salt Lake City	6.5%	14.2%
Portland, Ore.	12.6%	19.6%
Raleigh, N.C.	5.5%	15.2%

Source: National Association of Realtors. Data as of March 20, 2006.

Take a Long-Term View
Realtors may be talking about a back-to-normal healthy market as much as they want. But for a potential buyer, softening prices can lead to many a restless night: What if I buy now and my home's value falls?

As long as you can afford your payments and are willing to ride out any possible downturns, this shouldn't be a concern. "If you're buying for investment, it's more important to try and time the fluctuations of the market cycle," says Liebman. "If you're buying to live there, you should buy because of the cycle of your life."

Historically, real estate prices go up at the rate of inflation plus about 1.5%, according to NAR.

Make the Right Offer
Six months ago, offering the asking price or more within minutes of seeing a property wasn't uncommon in many parts of the country. Now, you may have a chance to make an offer that's well thought through.

First, ask your agent to run a check on homes in the area that have recently sold and those that are still for sale in the area and price your offer accordingly, says Steve Roberson, owner of Century 21 My Real Estate in Downey, Calif. This should help you get an idea of what's a reasonable offer.

When pricing their homes, sellers have different motivations. Some hope to maximize their gain and ask more, others want to sell fast — and price low. "If a home is priced right on the money or even under market value, you could offer full price," Roberson says. It doesn't mean you're getting a bad deal. If the house has already lingered on the market for a few months, however, the seller should be willing to lower the price — so don't hesitate to negotiate.

Protect Yourself
In sizzling real estate markets, desperate buyers occasionally went to such extremes as to forego home inspections in order to snatch a home as fast as possible. "Eight months ago it wasn't uncommon in the marketplace to have 15 to 20 offers for a property," says Anthony Marguleas of Amalfi Estates, a Los Angeles-based real estate company. "And it wasn't uncommon for people to waive all their contingencies."

This included loan contingencies, which basically allow a buyer to back out of a contract if financing doesn't come through, and the home inspection contingency, which lets you off the hook if the home inspection turns up something you don't like. In today's softening market, such desperate sacrifices aren't required.

Get the Right Financing
The good news: Interest rates are still relatively low. The average 30-year fixed-mortgage rate was 5.86% as of March 24, according to Bankrate.com. NAR projects the average mortgage for the year will be around 6.6%. Locking a 30-year-fixed mortgage will ensure your payments stay the same as long as you live in the house. An adjustable-rate mortgage, on the other hand, is riskier. Say you get a 5/1 ARM, which switches to a floating rate five years from now. If rates are much higher at that time and your payments increase to a level you can't support, you may be forced to sell your home, even if its value has fallen.