Slow-market crisis: Stuck with two homes

(Money Magazine) -- When Chicagoans John and Judy Peeler decided to move to Philadelphia last spring, they blithely assumed they'd get more space for their money. Indeed, the couple quickly found a 2,500-square-foot, four-bedroom colonial in a well-regarded school district for $440,000, just about what they figured their 2,000-square-foot Windy City condo would fetch.

Perfect. Or so they thought.

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Since then the seemingly ideal move has devastated their finances. The Peelers' Chicago condo has generated little interest, even after they dropped the price - twice - to its current $389,000. And it has been four months since they relocated, which means they've been carrying two mortgages and a home-equity line of credit at a cost of $4,000 a month.

Having depleted their savings to pay for this, they've had to seriously cut back on spending. They went without air conditioning this past summer, despite sweltering heat and the fact that Judy was eight months pregnant.

They've also put off fixing the brakes of their second car, which the mechanic says should be replaced soon. "We don't spend money on anything that isn't critical," says Judy. "Everything goes toward the mortgages."

The Peelers are among the increasing ranks of "tweeners," or people who've inadvertently ended up juggling the costs of two homes as a result of the slowing market. Many victims of this fearsome financial trap have been wooed by the upsides of the new buyer's market: increased choice and better prices.

"But they forget the other side of the equation," says Albert Hepp, owner of BuySelfRealty.com in Minneapolis. Only when they try to unload their old house do they realize just how hard it is to sell.

Then, like the Peelers, they find themselves stuck with one more property and one more mortgage than they'd like or can afford.

Though no group has tallied the number of tweeners out there, it's clear that there are more of them around now and that they're bound to multiply if the housing market continues its current trend.

Nearly 4 million homes are for sale in the U.S., according to the most recent data from the National Association of Realtors (NAR). That's a million more sellers looking for buyers than this time a year ago.

What's more, the number of houses sold nationwide in August fell 12% from last year. For those who've just signed contracts to buy, it's less and less likely they'll be able to sell their old houses before closing on their new ones. To understand what that means, do the math: In Massachusetts, a state particularly slow for sales, it takes the average seller 114 days to find a buyer. That's almost four months of double house payments.

With a $300,000 mortgage, you'd pay about $10,000 in interest, taxes, upkeep and insurance while house No. 1 sits on the market.

Even the savviest sellers can get stuck in this situation. NAR head Tom Stevens is himself a tweener: He's been trying to off-load his Virginia home for more than a year. "The housing market is going through a period of adjustment," he told Congress. "I have experienced this firsthand."

Yes, it's grim out there for sellers, but consequently, it might just be the best time in years for buyers to trade up. So how can you take advantage of this market without getting hurt by it? By doing the following:

Sell First, Fall in Love Later Indeed, it's hard to resist the bargains. All that inventory! Your dream home is finally on the market! But your best bet is to avoid shopping until you unload your current home. Better to get the harder part over with first.

Buying will be comparatively easy; in this market, there will always be another house to fall in love with. Even if you have to live in a hotel while you look, you will likely come out ahead compared with carrying two homes.

Price Like a Buyer If you can't avoid buying before you've sold, however, there's a fallback plan: sell smarter. According to Chang-Tai Hsieh, professor of economics at the University of California at Berkeley, the growth of tweeners is caused not so much by a lack of buyers as by the inability of sellers to accept that prices are falling.

Owners grow attached to their homes, he says, and they find it difficult to reduce the price enough to get buyers interested. "It's not that you can't sell; it's that you can't sell at the price you want."

Thus you must think like a buyer when pricing your house. Start your research by visiting open houses of similar homes in the area. Consider not just what the house is listed for but what you'd offer for it. Apply that to your house. (Forget charging more because you have a newer kitchen; these days upgrades may get your house sold but usually won't get you more money.)

Then cut your price by at least half of your potential carrying costs, suggests Chicago financial planner Richard Potter. To calculate these, multiply your monthly expenses by the average selling time in your area, which a broker can tell you.

Leave Yourself a Loophole Contingency clauses, which require the seller to wait until the buyer has sold his house to close, all but disappeared in the early 2000s. Back then most sellers had more than one buyer for a property, and bidding wars were common.

Now, realtors say, contingencies are making a comeback. "Sellers are realizing that they have to give buyers more time," says Mary Kaljian, a ReMax realtor in Los Banos, Calif. If a seller won't accept a traditional contingency clause on a property you want, ask for a 72-hour clause, which allows him to keep marketing his house while you try to sell yours.

If he gets a better offer, he must give you three days' notice to decide if you want to be a tweener or to let the other buyer have the home.

Going for it? Buy yourself extra time by asking for the longest closing period possible. Most sellers will agree to 90 days; some, 120.

Already stuck? Or think you're about to be? While you try to sell, these methods can ease the hit you'll take from the down payment and double mortgages.

Borrow From Yourself To help you with the down payment on your new house, lenders will try to sell you on so-called bridge loans, short-term interest-only loans designed for buyers whose assets are tied up in another house. But these have up-front fees and interest rates of up to 10%.

"Avoid them if at all possible," says Chicago financial planner Todd Lebor.

There are two ways to do this: If you have not yet put your house on the market, open a home-equity line of credit, which can be as much as two percentage points lower than the average bridge loan. Most banks won't issue a HELOC on a house that's for sale, however. In that case, you might consider borrowing against a 401(k), says Lebor.

Though 401(k) loans normally are not recommended, rates on your retirement account will be as much as one percentage point better than those on a bridge loan and you'll pay the interest back to yourself.

Become a Landlord Another way to use your vacant house to float you: rent it out. A combination of more renters and fewer units is expected to drive rents up 5% next year on average nationwide, according to the NAR, and that may be a boon to struggling sellers.

After Jeff Greene's company relocated him from Tampa to Boulder in June, he and his wife put $15,000 into their home to get it ready to sell. Didn't work. They cut the price $60,000. Still no takers.

Carrying the house while it sat on the market 90 days cost them $7,500; meanwhile, they were also paying the mortgage on their new house. It was fast becoming impossible for them to hold on to both.

Then, by chance, they found a renter. The $2,500 a month they collect covers mortgage, insurance and taxes. They now plan to rent their house out until the market recovers. "We still don't have as much freedom with our budget as we'd like," says Jeff. "But it's definitely stopped the bleeding."

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