How to Profit From the Housing Downturn

The housing crisis has driven the economy to the brink of -- or possibly into -- a recession.

But there's a silver lining to the situation, particularly when it comes to real estate.

You can take advantage of the downturn, even if you are happy in your home.

Many analysts predict that home prices will stabilize this year, with improvements coming sometime in 2009.

Combined with high inventory of homes for sale and low prices in many areas of the country, these factors make now a particularly good time to buy, especially if you're in one of the following categories:

First-Time Buyer

The market downturn is a great opportunity to move from tenant to homeowner.

Some phenomenal bargains are available to prospective buyers who can secure the proper financing. Lenders have tightened restrictions, but they are still approving loan applications -- all it takes is good credit and a little extra paperwork.

You might be able to get an even better deal by taking advantage of incentives -- such as lower interest rates and smaller down payments -- that many states offer for first-time home buyers. Check the database of state and local housing programs compiled by the U.S. Department of Housing and Urban Development for programs in your area.

Upwardly Mobile Buyer

If you're staying in the same market, this could be a good time to trade up. Crunch the numbers to find out.

Say you're in a $300,000 home and want to upgrade to a $450,000 house. To do so in a stable market, you'd have to pay an extra $150,000 (ignoring the extra costs involved with moving). But if both houses suffer a 10% price decline, that difference drops to $135,000: Your home is down $30,000, but the new house drops $45,000.

And not all markets are created equal. The biggest decline in house prices occurred in cities that experienced the largest gains during the boom, such as Miami, San Diego and Las Vegas.

How to Take Advantage of the Current Market

The trick to getting a deal on the home of your dreams is to find a home currently owned by a motivated seller -- someone who desperately wants to offload their home, perhaps because of high mortgage payments, a job offer out of state or simply a deal that's about to close on a new house.

One key indicator of a motivated seller is the number of days a house has been on the market. Another hint is the number of times the sellers have dropped the price.

You'd be hard pressed to find this information on your own. For obvious reasons, sellers -- and their real estate agents -- prefer not to advertise the fact that they really want to sell.

As a result, your best bet for finding a deal is to hire a buyer's agent, who will have access to a wealth of data about the local market. Unlike a seller's agent, who represents the homeowner's interests, a buyer's agent looks out for you. Agents who belong to the National Association of Exclusive Buyer Agents have a fiduciary responsibility to their clients and agree to a code of ethics that prohibits conflicts of interests. Typically, the buyer's agent splits the standard 6% real estate commission -- paid for by the seller -- with the seller's agent.

Your agent's data, including information about what the current owners originally paid for the house, will help narrow your search down to the likeliest candidates.

As you look at houses, remember to take your time. If a house doesn't seem quite right, don't feel like you have to compromise.

With so many houses on the market, you've got plenty more to choose from.