The trade group’s application index rose to 421.6 during the week, from 419.3 a week earlier, which had been the lowest index level in nearly eight years. Refinance volume rose 0.3%, while purchase volume increased 0.6% during the week. Refinance volume accounted for 35.2% of all applications.

The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.

An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume. A reading of 421.6 means mortgage application activity is 4.216 times higher than it was when the MBA began tracking the data.

The survey provides a snapshot of mortgage lending activity among mortgage bankers, commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.

Application volume increased slightly as fixed-rate mortgages dipped. The average rate for traditional, 30-year fixed-rate mortgages fell to 6.44% from 6.47% during the prior week. The average rate for 15-year fixed-rate mortgages, often a popular option for refinancing a home, decreased to 5.94% from 5.99%.

The average rate for one-year adjustable-rate mortgages increased to 7.15% from 7.07%.

Type	Overnight avgs

Buyers are in the driver’s seat and they know it. They’re using that leverage to pry more concessions out of desperate sellers than they ever dreamed of during the bubble.

“‘Now it’s my turn,’ is the attitude,” said Mike Byrd, a real estate agent with SLO Home Store in San Luis Obispo, Calif. “Some buyers are really putting the screws on.”

In New England, buyers are demanding that sellers pay to fill up a home’s heating oil tank. In California, sellers are forking over closing costs. Nearly everywhere, buyers are insisting that sellers purchase a home service contract providing a one year warranty on all of a home’s appliances.

New central air-conditioning systems, a year of condo association fees and even two weeks in Hawaii are just a few of the incentives that sellers are having to employ these days, according to Byrd.

And buyers are getting it all in writing.

“[During the boom] buyers usually accepted the property as-is, and we even occasionally offered to pay the seller’s state and county transfer taxes,” said Washington D.C. based agent John Sullivan, who is also president elect of the National Association of Exclusive Buyer’s Agents. “No more.”

Upon closer inspection
It used to be that sales contracts had clauses that made a purchase contingent upon whether a home passed inspection, if a buyer was able to get a mortgage, or even if they could sell their own house.

Those safeguards fell by the wayside during the bubble; if a buyer balked, the seller just moved on to the next highest bidder. Buyers who signed deals without these protections and had to back out often lost their deposits.

But lately, buyers have expanded the number of clauses they put into contracts, according to Benjamin Clark, an agent in Salt Lake City with Homebuyer Representation.

“Some of these items include availability of high speed Internet, cost and availability of homeowners insurance,” he said. “They cover environmental aspects of the home and neighborhood, as well as local services and amenities.”

Instead of a single inspector, the home inspection now includes specialists in radon, lead-based paint, roofs and masonry, as well as fireplaces. Sellers must fix any flaw or pay for the buyer to correct it.

“Sellers are much more flexible on issues that come up on the home inspection - and I mean big ticket items like roofs and furnaces,” said Ed Bartlett of Spokane Home Buyers in Washington State. “And this is after they have already been flexible on the price.”

A detailed inspection was a lifesaver for clients of Clark’s, who were buying a six-bedroom, four-bath rambling ranch in Bountiful, Utah, that was listed $344,900.

After the buyers got the price down several thousand dollars and signed a contract, the home inspectors went to work. They turned up some minor issues, which the sellers agreed to fix, including $875 for some electric work, $150 for plumbing, $242 for a new kitchen faucet and $735 for chimney pointing and repair.

But bigger problems emerged. “There were termites,” said Clark, “and masonry issues. The deck needed to be demolished.” Based on these findings, he got the price down to $324,000.

For some buyers, the negotiations don’t stop right up until the closing.

Don Plourde, a Coldwell Banker broker in Waterville, Maine, recently had a client squeeze a last minute concession out of a seller on a three bedroom starter home that needed some work. The asking price was very low - just $75,000 - but even so, the buyer was able to negotiate that down to $72,500.

But just before the closing, the buyer demanded that the seller leave behind three quarters of a tank of heating oil - 200 gallons worth $800 - for free. The seller caved.

“He just wanted to move on,” said Plourde.

Free closing
These days, sellers almost always pay the closing costs instead of the buyers, according to John Rygiol, an Exclusive Home Buyer Brokerage agent in Orange County, Calif.

“It’s hard to ask for that after already getting a price reduction,” said the agent, who recently got a seller to pony up $10,000 for closing. “But it’s a buyer’s market and sellers are attuned to that.”

Even local taxes are on the table these days, according to Adele Hrovat, the owner of The Buyer’s Realty of Las Vegas. She got the bank that was selling a four-bedroom, three-bath, house to pay an $11,000 tax assessment on top of $6,000 in closing costs. And that was after the price was slashed from $489,900 to $399,000.

With the housing market bad as it is - slow sales, dropping prices and inventories rising - sellers are going to have to stay flexible.

“We’re finding that buyers make an offer and if it’s not accepted, they just go on to the next seller,” said Don Plourde.

Median home price (2007): $124,900
Median family income: $65,744

If the thought of freezing winters gives you the chills, head for North Augusta, where winter temperatures hover at a relatively balmy 40°F, and summers are warm but not scorching. Residents stay healthy by jogging along the Savannah River. Horse-lovers can take in barrel racing and other equestrian competitions at the Hippodrome event complex.
Spacious three-bedroom homes along the riverfront cost around $450,000; comparable condos cost about $295,000. Many developments feature shared boat docks, though some homes have their own. For a weekend outing, drive half an hour to Strom Thurmond Lake for camping, hunting, fishing, and picnicking.

Downsize home downsize expenses Here’s what a family of four could save annually by moving from a 2,800-square-foot home to a 1,800-square-foot one.

	Utilities savings	Property tax savings
Atlanta	$1,217	$983
Boston	1,922	3,962
Chicago	1,281	4,545
Denver	1,179	1,779
Houston	1,755	6,162
L.A.	1,153	4,958
Miami	1,243	9,089
Philadelphia	1,665	1,159
U.S. Avg.	$1,300	$2,597

“The location of our old home dictated that we drive to the grocery store, pharmacy and cleaners,” says Suzanne, 57, a retired lawyer. Their new digs are across the street from Whole Foods and within easy walking distance of other stores and restaurants. They love the low-maintenance life.

“We have no worries about upkeep. No worries about lawn care. No worries about snow removal,” says Rick, 68, also an attorney.

Maybe you too have caught the bug. After decades of hankering after the most expensive and enormous house you could afford, owning a smaller place is starting to look appealing.

Imagine the possibilities! You could move into a posh new condo with everything from a fitness center to a concierge - or into an energy-efficient little cabin on a lake Your commute could be shorter, giving you time in the evening to do something more than watch TV like a zombie.

And, maybe, just maybe, downsizing could save you some dough. Chuck Petitti, a Boston-area real estate agent, says many of his clients right now are empty-nesters who realize, “Hey, I could be traveling or doing something else with all the money I am paying for utilities and property tax on this big house.”

If that’s what you’re thinking, you’re by no means alone. A 2006 survey by Hanley Wood, a market research firm, found that 58% of affluent baby boomers say they are very likely or somewhat likely to move to a smaller home within the next 10 to 15 years.

And therein lies a big fat problem. With millions of boomers competing for smaller homes, you may find it hard to catch a break on price. Even though the downsizing trend is in its infancy, over the past five years smaller homes (under 1,200 square feet) have shown a greater rise in value than larger houses (over 3,000 square feet) - 5.2% a year as opposed to 3.5%, according to Zillow.com.

On top of that, you have to get money out of your old house - not an easy proposition with prices in the 20 largest metropolitan areas down 18.4% from their July 2006 peak, according to the S&P/Case-Shiller index. As of July there was an 11-month backlog of existing homes on the market nationwide. The happily downsized Pepins have yet to receive an offer close to the $1.25 million asking price on their old home.

What’s more, smaller isn’t necessarily cheaper. Depending on where you move, you may face carrying costs that are as high as or even higher than you pay now.

The trade-offs are complicated. You may cut gasoline costs by moving closer to your job in the city and using public transportation, but those savings could be eaten up by costlier car insurance. You could move to a small condo nearby but be unprepared for the dues and fees that condo living entails.

So you have to plan carefully, sizing up the finances underlying both new and old houses, or the savings you’re counting on could be skimpier than you anticipate.

Get the prices right
To start you need a clear-eyed assessment of the two markets that make up your downsizing, the one in which you’re selling and the one in which you plan to buy. A real estate agent can give you an idea of your home’s value, but you should also check how much houses in your area are selling for on Zillow.com, which lists sales prices of comparable houses.

Hanging on to past high prices only delays a sale. Dodi Christiano, 55, a psychotherapist, and her husband, Paul Waldrop, 56, a producer of TV public-service announcements, put a price of $850,000 on their 4,000-square-foot Fairfax, Va. colonial last year - about what nearby homes had fetched a couple of years earlier.

For six months they received nary a nibble. Finally, after slashing the price by more than $100,000, they were able to sell. “We had to face the fact that not everybody loved our home as much as we did,” says Christiano.

You can’t assume that a home’s price is simply a function of its square footage. The national median sales price for condominiums, which are typically smaller than single-family houses, is now 5% higher than that for houses, according to the National Association of Realtors.

If you hope to reduce costs dramatically, you may have to buy your new place in another town or state. Think Decatur, Ill. or Mishawaka, Ind., where single-family houses cost just $79,400 and $80,900, respectively.

George Pollock, 67, a retired engineer, and his wife Marian, 66, wanted to get rid of the mortgage on their house in suburban San Francisco. Pollock worried that if he died before his wife, she wouldn’t be able to meet mortgage payments with the 50% portion of his pension that she would receive.

No matter how much they shopped, however, they couldn’t find a place they could afford in the Bay Area (median price: $701,700) without a mortgage. So they moved to much less pricey Sacramento (median price: $258,500), where their two grown children live. There they bought a 1,400-square-foot home for $380,000, leaving them with nearly $250,000 extra.

Says Pollock: “My wife is closer to the kids, and I know she has long-term financial security.”

Downsize carrying costs
Buying without taking out a mortgage would certainly reduce expenses. At the very least you should look for a house whose price is low enough to allow you to buy with a mortgage that’s smaller than what you have now.

If you’re at or near retirement, taking on a new 30-year mortgage is overwhelming. You may be long gone before you can repay. Consider one with a 15-year maturity; the payments may look daunting, but you will save money. The interest rate is only about 0.10% lower than that of a 30-year mortgage, but over the life of the loan, you would save about $141,000 in interest.

Another option: Take out a traditional 30-year fixed-rate loan that does not charge a prepayment penalty. Then just send in extra payments each month as if you were on a 15-year repayment plan. You’ll be saving by paying the mortgage off quicker, but if you run into unforeseen financial trouble, you’ll be able to make lower payments.

Runzheimer International, a management consulting firm, estimates average annual savings of $1,300 in utility costs and $2,600 in property taxes from down-sizing from a 2,800-square-foot house to one with 1,800 square feet.

But the devil is in the downsizing details: You need to crunch the numbers to calculate your net savings. Start by totting up the annual cost for ongoing expenses such as property tax, utilities, lawn service and snow removal. As you shop for a new place, you should be gathering comparable information.

Other potential cost savings: If you move from suburb to city, you may be able to ditch one of your cars and its trailing expenses - insurance, financing, taxes, maintenance and fuel. If you gave up your 2006 Honda Accord, for example, you’d save nearly $26,000 in the first five years, according to Edmunds.com.

On the other hand, some costs could rise. In a condo or a house that is part of a homeowners association, there are monthly maintenance fees, and every so often you’ll be on the hook for assessments to replace the roof or carpet the lobby.

Before buying, ask how much fees have risen over the past five years and whether new assessments are in the offing. If your new place is appreciably smaller, make room in the budget for new purchases to replace an oversize sectional or a king-size bed that won’t fit.

Sell before you buy
Tempting as a pristine new condo looks next to your drafty old five-bedroom Victorian, don’t plop down earnest money until you have a buyer with solid financing. Otherwise you could get stuck with two mortgages, two property tax bills and - well, you get the idea.

At least have your lawyer include a contingency clause in the sales agreement that obligates you to close only if you manage to sell your home by a set date. In the bubble-licious sales frenzy of yesteryear, sellers could make bidders do somersaults and had no incentive to agree to such a clause. But with so many homes on the market for months, sellers may now show mercy.

What downsizers learned
Don’t price your house like it’s 2006. Paul Waldrop and Dodi Christiano of Haymarket, Va. asked the same amount that nearby houses had sold for two years earlier. “We had to realize that what had happened during the boom was not the norm. It took six stressful months to sell,” says Dodi.
Get the old place sold first. Rick and Suzanne Pepin of Minneapolis moved into their dream condo but now can’t sell their house. “Don’t wait to put your home on the market if you decide to buy. We waited for renovations on our new condo to be complete, and by then we couldn’t sell,” says Rick.
Plan for smaller rooms. John and Polly Smart of Houston had the wrong stuff. “Smaller rooms may not accommodate your old things. We spent about $20,000 on new furniture and more on a smaller Silverado because the old one stuck about two feet out of the garage,” says John.
Do you (and your spouse) make more than $170,000 annually and worry about tax-efficient retirement planning? . We will be providing advice to a family in this situation in an upcoming article - and it could be you!

In the wake of the government’s takeover of Fannie Mae and Freddie Mac last weekend, the 30-year fixed rate has dropped from 6.26% last Friday to 5.79%. But only buyers with a credit score of 740 of above - and a 20% down payment - can qualify for such a low rate. During the boom, borrowers only needed scores of 640 to land the lowest rates available. Even a 580 score would get them very close to the best rate.

During the credit crisis, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to lend is crucial to the housing market. To that end, the Treasury will buy mortgage-backed securities from the two firms, and lend them money if necessary, all in an effort to make credit more available to home buyers.

But that doesn’t mean that lenders won’t continue to subject borrowers to strict criteria, according to Keith Gumbinger of HSH Associates, a tracker of mortgage loan information. The aim is to make mortgages more available, but only to the most qualified borrowers.

“All the emphasis on credit scores is not going to go away,” he said.

High score, low rate
As the housing market has imploded, lenders have battened down the hatches on mortgage underwriting, consistently raising the credit scores necessary to qualify for the most favorable terms, and adding to borrowing costs to compensate for any extra risk factors they find. That’s not going to change.

“Credit score affects your rate more than they ever have before,” said Steve Habetz, a mortgage broker with Threshold Mortgage in Connecticut who has more than 20 years experience in the business.

An individual’s credit history is scored between 300 to 850, with 300 very low and 850 perfect. The median score, in which half of the borrowers have a lower score and half have a higher one, is about 720. Only those with very high credit scores are getting the best mortgage deals.

And Fannie and Freddie have raised fees for borrowers with lower credit scores as the housing crisis worsened - they’ve increased twice this year alone. The lower the score, the larger the fee.

For example, Fannie charges a 1% up-front fee (raised from 0.75% this summer) for borrowers with a credit scores of 680, even when they’re paying 20% down on their homes.

Even people with the very favorable scores, between 720 and 740, pay a small fee equal to an up-front charge of a quarter point. That’s a big change from the past. Habetz had a client recently with a 735 credit score putting down 20% -a very solid applicant -and the client still didn’t qualify for the best rate.

“You tell people with 730 credit scores paying 20% down that you have to charge them a quarter point extra and they look at you like you’re crazy,” he said. That comes to an extra $30 a month on a $200,000 loan.

Borrowers with scores below 600 may have to pay a fee of a full percentage point or more, adding $120 to the monthly costs of the average loan.

Nervous investors
Investors in mortgage-based securities are simply demanding that they be compensated for any extra risk that a borrower represents, according to Jon Kaempfer, a loan officer with Vitek Mortgage Group in Sacramento, Calif.

Kaempfer had a client with a 635 credit score recently who wanted to do a cash-out refinancing, a deal in which an existing homeowner takes out a loan for more than the mortgage is worth. The homeowner gets a bundle of cash, which this client wanted to use to pay for some home improvements.

The lender wanted to charge 1.5% of the mortgage principal up front simply because it was a cash-out deal, plus 2.5% more because of the home owner’s modest credit score. Those fees, folded back into the mortgage, added about a percentage point to the client’s interest rate.

“You have to be golden, have at least a 680 score or a 720 if you’re making a smaller down payment, to qualify for the best rates,” said Kaempfer.

Gumbinger expects lending standards to remain tight for the foreseeable future, as long as home prices continue to fall. The risk of foreclosure is of course much higher in a falling market, and lenders need to shield themselves.

If and when prices do improve, says Gumbinger, borrowers with less than perfect credit scores may get some breathing room.

The federal government’s takeover of Fannie Mae and Freddie Mac may save the battered real estate market from a complete meltdown. But financial experts say the bailout won’t lead to a housing recovery just yet. Instead, some on Wall Street said the housing sector is in as tough shape today as it was before Sunday’s rescue by the Treasury Department.

“This isn’t curing the patient. This is preventing the patient from developing a new problem he can’t survive,” said Barry Ritholtz, CEO and director of equity research, Fusion IQ.

Ritholtz and others pointed to a series of problems plaguing housing that the bailout of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) does little, if anything, to address.

In particular, there is still a large supply of unsold homes on the market and an increasing number of foreclosures that threatens to add to the glut.

What’s more rising unemployment and increased job losses should add to the woes for lenders, brokers, builders and others tied to the housing sector.

“Now we have a recession,’” said Dean Baker, co-director of the Center for Economic and Policy Research.

Baker added that even with home prices declining at a rate not seen since the Great Depression, the housing bubble hasn’t completely deflated yet.

In fact, some argue that considering the rise in home prices during 1996 to 2006 when compared to inflation, incomes and rents during the same period, home values need to fall another 50% in order to get back to normal.

Bailout should lead to lower mortgage rates…
Still, the Fannie and Freddie rescue is likely to help bring mortgage rates down.

That’s because it should help lower the gap between mortgage rates and Treasury bills, a spread that had risen in recent months on investor concerns about the firms and the rising mortgage defaults.

Fannie and Freddie also warned last month that they would cut back on the growth of their mortgage loan portfolios as they tried to preserve the capital they would need to cover rising losses.

With the Treasury Department now standing behind the firm, most experts expect additional money will be made available to mortgage lenders.

Those two factors prompt some to believe that the rescue will be a significant help for housing markets, even if it doesn’t solve all the problems.

“You’re going to have to work through all those other issues in order for there to be a meaningful recovery,” said Timothy Speiss, head of the wealth management arm of accounting firm Eisner LLP. “But this is a significant step in the right direction: improving credit availability and affordability.”

…but it’s not a ‘magic wand’
Lawrence Yun, chief economist for the National Association of Realtors, said his group’s members are hoping lower rates will help change the attitude of potential buyers about whether it’s a safe time to re-enter the market.

“Whether it’s a game changer or not, we can’t say. We have to see how far rates fall, or whether or not they continue to lack confidence even with these low rates,” he said.

Thus, even if the bailout does have a positive impact on the real estate market, one economist said it will probably be limited and relatively slow to take effect.

“By no means is this a magic wand to rejuvenate the housing recession that has just entered its fourth year,” said Rich Yamarone, director of economic research at Argus Research.

The Pending Home Sales Index fell to 86.5, after gaining 5.8% in June, according to the National Association of Realtors (NAR). It now stands 6.7% below July 2007’s reading of 92.8.

The index is a forward-looking indicator of housing sales, based on contracts signed during the month.

“This is more evidence that the housing market is still in a malaise,” said Michael Larson, a real estate analyst with Weiss Research.

Tighter lending standards have made it hard for buyers to get loans, which is hurting sales.

“Overly stringent lending criteria imposed by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in the past month no doubt held back contract signings,” said NAR chief economist Lawrence Yuan.

The Midwest was the best performing region in July, with sales contracts up 2.8%. The index fell in the Northeast by 7.5% and in the West by 10.6%, while the South region was unchanged.

The July result was disappointing, according to Richard DeKaser, chief economist for National City Corp. (NCC, Fortune 500), but not unexpected. The index has held in a range between 83 and 89.4 over the past few months, but saw a sharp jump in June to 89.4.

The good news, according to DeKaser, is that the index has plateaued, indicating that a bottom in existing home sales may have been reached. And that bottom may mean that prices could stabilize in some areas, although at lower levels than they once were.

Bargains in areas of the country hard hit by the bust are drawing house hunters back into a few local markets, said Larson.

“We have seen sales pick up in some areas where homes are being basically liquidated for just about any price the sellers can get,” he said.

That could provide a boost to sales volume in the coming months.

Sales have been flat despite the fact that home prices are way down. The most recent S&P/Case-Shriller report found that home prices fell 15.4% nationally during the 12 months ended June 30.

“Pricing remains attractive, but the ability of home buyers to obtain financing has been made more difficult,” said DeKaser. “Lending standards had gotten increasingly tight.”

The weekend takeover of Fannie and Freddie, the two mortgage giants that were created to promote mortgage lending, should help. Funding costs for Fannie and Freddie will be significantly reduced, according to DeKaser, and those savings will be passed on to consumers.

Already interest rates have fallen to 5.88% from 6.26% a week earlier, according to Bankrate.com.

“We want to see if the mortgage rate decline stands,” said Larson. “That would help to stabilize things.”