(MONEY Magazine) – When low interest rates and a peppy economy boosted house prices 4.6% last year--more than 1 1/4 percentage points higher than the rise in the consumer price index--many American homeowners rejoiced; many assumed the housing market was once again on an inflation-beating roll. But hard-eyed realists knew better, including Mark Zandi, chief economist at West Chester, Pa. consulting firm Regional Financial Associates. With demand for homes flagging in the face of higher interest rates (recently 7.85% for a 30-year fixed-rate mortgage, vs. 7.3% a year ago), Zandi forecasts that house values nationwide will barely keep pace with inflation this year. He expects, however, that prices in a few fast-growing cities, such as San Francisco and Portland, Ore., will outpace this year's estimated 3% CPI gain by roughly two percentage points. (For a listing of RFA's 1997 house-price forecasts for each of the nation's 50 largest cities, check the MONEY Website (http://money.com).

More important, though, a shrinking number of first-time buyers suggests that the housing market is no more likely to return to its '70s glory days--when prices outran inflation by three percentage points a year--than Congress is to reform campaign fund raising. By 2010, the 25-to-44-year-old age group that generates the most first-time buyers is projected to drop by more than 7%, from 83 million people today to 76.8 million. With such an erosion of potential demand, says Zandi, "I expect house prices overall will match but probably not beat inflation in the foreseeable future." He says his forecast wouldn't change even if Congress and President Clinton eliminate capital-gains taxes on the sale of most homes this year as expected (see MONEY Newsline, page 24).

Given this muted outlook, it's crucial for home buyers, owners and sellers to dump outdated notions about real estate and master the new realities of today's market. Our single biggest tip: You can't go it alone. "The housing market has gotten increasingly competitive and complicated over the past decade," explains Peter G. Miller, author of Buy Your First Home Now (HarperCollins, $13.50). "To get a winning edge, you must have a team of sharp, professional advisers."

This story will help you assemble just such a roster of housing All Stars. If you're thinking about hiring a builder to create a custom home, check out the excerpt from the new Money book: Your Dream Home: A Comprehensive Guide to Buying a House, Condo or Co-op on page 153. And if you're planning to refurbish your existing homestead, the story on page 154 will offer advice on finding and getting the most from the best renovation experts. All in all, our Housing '97 package will show you how to gain the home-team advantage and get the best return on your housing dollars in this tricky market.

BUYING AT THE LOWEST PRICE

Before you begin seriously shopping for a house, the first pro you should seek out is a relatively new breed of agent called a buyer-broker. Unlike traditional real estate agents--who actually represent the home seller's interests--buyer-brokers work to negotiate the best deal for the home buyer. Typically, you don't have to pay a buyer-broker from your own pocket. Rather, he or she usually splits the 5% to 7% sales commission with the seller's broker, although the buyer-broker may ask you for a retainer of $200 or so, which gets deducted from the final fee.

A knowledgeable buyer-broker can lead you to the right neighborhood and house for your needs, plus help you decide how much of your financial resources to devote to a potential home given local appreciation prospects. More often than not, ace buyer-brokers today will advise you to buy only as much house as you need to live comfortably, rather than following the old rule of stretching for as much house as you can afford.

The biggest advantage to hiring a buyer-broker, however, is that he or she can help you negotiate the best possible price and loan terms. "House hunters who enlist a buyer-broker can wind up paying at least 5% less than shoppers who rely on traditional agents," says Joseph Eamon Cummins, author of Not One Dollar More! How to Save $3,000 to $30,000 Buying Your Next Home (Kells, $19.95; 800-875-1995). Such savings are especially valuable today given the limited prospects for price appreciation.

Thomas Forrester, 48, an executive at a waste-management company, and his wife Eva, 47 (pictured opposite), found out just how profitable hiring a buyer-broker can be when last year they began looking for a house in Orinda, Calif., near Oakland. Frustrated after house hunting in vain for three months, the Forresters decided to hire their own advocate, Soheila Smith, a broker whose practice is split between sellers and buyers. Says Tom Forrester: "I worked with a number of agents until I found the one to help us get what we wanted." Within two weeks, Smith steered the family to a 1,400-square-foot, three-bedroom with a panoramic view listing for $279,900. Smith then helped the Forresters drive down the price to $268,000. Next, she persuaded the sellers to fork over $12,000 for repairs and kick in another $3,000 toward closing costs. All told, Smith saved the Forresters $26,000, more than 9% off the list price in one of the country's hottest housing markets.

For names of buyer-brokers in your area, call the National Association of Real Estate Buyer Brokers (415-591-5446). To assure that the broker is working solely for your benefit, try to hire an exclusive buyer-broker--that is, someone who represents buyers only. There are only about 2,000 or so such purists nationwide, however, so like the Forresters, you may have to hire an agent who also takes seller listings.

Be sure to have your pro sign a buyer-broker agreement that legally obligates her to put your interests above all others, including sellers represented by brokers in her agency. Before choosing, interview at least three candidates. Pick the one who can refer you to at least three recent clients and who displays the keenest understanding of home values in your area--past and future.

FINANCING AND REFINANCING WISELY

Whether you're lining up financing for the house, condo or co-op you plan to buy or trying to refinance a home loan you already have, you'll face a Jedi-like challenge sorting through the panoply of mortgage options offered by lenders today. For help, you'll probably want to hire a mortgage broker, as about half of last year's 7.5 million mortgage borrowers did. The best of these pros can steer you to banks or mortgage companies offering the lowest loan rates. Often a top mortgage broker can save you a quarter of a percentage point on your rate. Equally important, these brokers can help you select the most appropriate mortgage. In exchange, the broker typically charges 1% to 2.5% of the mortgage amount, although the lender usually picks up the tab. For names of mortgage brokers in your area, call or e-mail the National Association of Mortgage Brokers (703-610-9009; cdf@namb.com) or ask your real estate attorney for a referral.

Caveat: A recent class-action suit in Virginia accused some mortgage brokers of pocketing cash kickbacks for steering clients to lenders offering high-rate loans. The case has yet to be decided. So make sure the rate on the loan your broker suggests is within a quarter of a point or so of the average mortgage rates listed in your newspaper. Also, call your state banking department to see if your state is one of the 43 that license mortgage brokers. If it is, check that your broker's record lists no violations.

Perhaps the greatest service a mortgage broker can offer is matching you with the type of loan that best suits your housing profile. For example, if you expect to be among the 40% of homeowners who sell a house within seven years of buying it, a broker might suggest one of the increasingly popular hybrid adjustable-rate mortgages (ARMs) rather than a 30-year fixed-rate loan. By opting for a so-called 5/1 ARM, for example, you'll get the security of knowing that you can lock in a below- market rate for five years (recently 7.19%), after which the rate is adjusted annually. On a $150,000 mortgage, choosing a 5/1 ARM over a 30-year fixed loan would reduce your monthly payment by 6% to $1,017--and save you $4,996 in interest in the first five years of the loan.

If you lack cash, a resourceful mortgage broker can direct you to a lender offering low-down-payment loans. Despite the enduring myth that you need to put down 20% of the purchase price of a house, the reality is that half of all buyers in 1996 made down payments of 10% or less--and nearly all mortgage lenders now offer loans that let you get in for as little as 5%. Such mortgages usually carry the same rate as conventional loans, but if your down payment is less than 20%, lenders typically require that you buy a mortgage insurance policy, guaranteeing your loan will be repaid if you default. Figure on paying up to 0.75% of the mortgage amount annually, or about $78 a month for a $125,000 loan.

Borrowers may also want to enlist government officials to join their housing squad. Reason: Federal, state and local government agencies oversee a variety of programs designed to help cash-short, lower- and middle-income people buy homes. For example, the Federal Housing Authority runs a program--with an appropriately bureaucratic-sounding name, the FHA 203 (b) plan--that helps buyers qualify for mortgages with as little as 3% down. The amount you can borrow, however, is limited to between $81,548 and $160,950, depending on housing costs in your area. In October 1996, Freddie Mac, a government-sponsored private corporation that buys mortgages from lenders, launched a similar plan--Affordable Gold 97--that also provides 3%-down loans and lets you get some of the cash from relatives. While FHA and Freddie Mac insure the mortgages in these programs, the loans are actually made by local banks and mortgage companies. To get the names of affiliated lenders near you, call the FHA at 800-225-5342 or visit Freddie Mac's Website at www.freddiemac.com.

Remember also to check your state and local government housing offices for mortgage deals. They not only make low-down-payment loans, but often offer grants to help cover closing costs and teach classes explaining financing alternatives to would-be home buyers. In December 1995, for example, David Mareira, 31 (pictured above), manager of a Boston furniture delivery business, attended a home buying class offered by the city of Boston. Not only did his class instructor, Doreen Treacy, explain all the financing options offered by city and state agencies, she became a key member of his housing finance team. Treacy helped Mareira secure a 5%-down loan from the Massachusetts Housing Finance Agency (MHFA) and grab a $750 grant from the city of Boston for closing costs. Last September, Mareira bought a two-family house for $160,000 in Boston's revitalized Dorchester neighborhood, becoming the first person in his family to own a home; his girlfriend, Nicole Manny, 30, lives with him. Says Mareira: "The city offered a step-by-step plan, and Doreen helped me follow it."

If you already have a mortgage, you might want to consider trading in the loan for one with a lower rate--as long as you expect to stay in the house long enough for the lower monthly payments to compensate for the closing costs, usually 2% to 3% of the loan amount. Don't bother refinancing if you think you'll stay in the house less than five years, unless the rate on your new loan is at least one percentage point lower than that of your existing mortgage. That's because it'll take you three to five years to recoup closing fees. So with 30-year fixed loans recently at 7.85%, you will probably want to refinance only if the rate on your current mortgage is 8.85% or more. But if you're certain you won't sell your home for five years or longer, investigate replacing your loan even if you'll cut your interest rate by as little as half a percentage point.

SELLING AT THE HIGHEST PRICE

To get top dollar when you sell in today's housing market, you need to recruit a real estate agent with plenty of experience selling your kind of home in your specific area. Why? Because demand and resulting appreciation rates for different types and prices of houses can vary dramatically even within the same city.

For example, prices for starter homes in Cleveland (median price: $60,000) shot up 14.4% in the past two years, according to Cambridge, Mass. housing research firm Case Shiller Weiss, in part because of aggressive government lending programs designed to increase home ownership among lower-income residents. During that same period, however, prices for Cleveland trade-up houses (median price: $152,000) rose a mere 1.2%, reflecting slack demand for luxury homes. Says Case Shiller Weiss president Allan Weiss: "It's a mistake to assume that the economics of your city automatically drive home prices in your neighborhood." To get top dollar when you sell, therefore, look for an agent who specializes in selling homes in your neighborhood and monitors prices there daily.

When they wanted to unload their house in Denver's historic Congress Park district last May, attorneys Matt Dalton, 44, and wife Gigi, 43 (shown on page 145), signed up real estate broker Sonja Leonard Leonard largely because she had scads of experience selling there. "Sonja had been selling homes in our area for 17 years and knew more about our neighborhood than any other broker," explains Gigi. Based on her knowledge of the local market, the broker advised the couple to list their house for $315,000, or about 4% higher than the average asking price in the neighborhood for comparable homes. The Daltons received (and eventually accepted) an offer for $312,000 in just 10 days, much quicker than the 45 to 60 days the average home spent on the market at the time.

To find such a sales champ, interview at least three candidates at different real estate brokerages. In his book How to Sell Your Home Fast, for the Highest Price, in Any Market (Hyperion, $12.95), author Terry Eilers lists more than two dozen questions to ask prospective agents. The most essential one: What listing price do you recommend for my house and why? (A broker should have a ready list of prices that homes like yours have recently sold for, as well as a strategy for selling your house within 90 days.)

Choose a broker who shows some creative marketing skills as well. Leonard Leonard's repertory includes, for example, an Internet site, customized color brochures for each client's house and attention-getting events such as hosting English "high teas" in houses that she is selling. "A broker has to be prepared to pull out all the stops, especially for a house that may be a tough sell," she says.

Finally, don't forget to ask each prospective broker for a list of former clients. They'll know best whether the pro you're considering has the potential to be a Most Valuable Player on your team.

For tips on buying a custom home, see page 153.

Reporter associate: Roberta Kirwan