Across the nation potential homebuyers have sat on the sidelines in fear or waiting for home prices to drop more. And in many real estate markets I get that. Prices have been dropping, and jobs remain a concern for some people. Those are issues not to be ignored. However, there are several issues I take with sideline sitters.

One, prices in most markets are very sticky, meaning prices do not correct downward 30% overnight. If you are expecting a big drop, you had better plan on waiting a long time. That means 5-10 years, not one year. And that means being a renter a long time, losing out on tax breaks a long time, and being subject to the whims of your landlord, with possible multiple moves thanks to being a renter.

Two, we have already seen big drops in many markets, if you are waiting for a 30% downward price drop, and we have already seen 20% – 25%, do you really think you can be a brilliant market timer and nail the timing perfectly to get the last 5% – 10% (if its even coming)?

Third, there are some markets that are stable, and a few that are even positive! Yes, the Case-Shiller national home price index decreased between 1.1 percent and 1.2 percent in 2011. House prices have been falling in general for about 5-6 years. However, Detroit and Washington, DC posted increases in house prices in 2011. Detroit's good news is likely due to the fact that its real estate values were pummeled by 45%, and possibly have nowhere to go but up at this point (or at least stay stable). Washington DC has good news more based on the reality of the strength of its local economy, jobs market, etc. You'd have to believe the federal government is going to magically and voluntarily downsize, and dramatically, for real estate to begin to have a gloomy outlook in Washington DC. And there are numerous other positive things going on in Washington DC besides the growth of the federal government.

Real estate values are driven in part by average annual salaries, and salaries were not hyper inflated from 1999-2005 during the real estate boom like real estate prices were. Any rookie economist could have told you the real estate boom would not end well. There was no basis in reality for real estate prices to do what they did, and I said this every year through the early and mid 2000's, and was told I was a fool.

So did real estate prices have to correct? Yes. Are all real estate prices local? Yes. Do you need to analyze lots of different data, like job growth, population growth, etc? Yes. Should you buy in a market that has shown strength, or at least stability? Yes. Should you avoid buying in some markets still? Possibly. It depends on how badly you need a house. If you are a family, renting is not a good option, so maybe being a market timer and waiting longer is foolish. Maybe you should simply buy, just make sure you buy the right home for you and can stay for the longer haul if needed.

The bottom line is that there are a lot of moving parts to deciding if buying a home is right for you. In a weak market that clearly has more room to fall, you may be a genius by waiting. In a stable market or a market that has already been beaten up, it may be time to dive in. In a strong market, like Washington DC, you will be a renter for a long time, and may end up looking foolish, if you decide to wait and time the market.

Here are my ten predictions for 2012. Some of these are mortgage/real estate related, and some are not. Some are serious, and some are not; and some are just wishful thinking. You figure out if you can tell which are real. By the end of 2012 we will have seen:

.Median cost of a home in the U.S. will be down from 2011, by 4%.

.Median cost of a home in Washington DC: up slightly, by 1%.

.Stock market: down over 20% from 2011.

.Los Angeles real estate market: down slightly, by 2% from 2011.

.Interest rates: up .50% from 2011.

.Presidency: for the first time ever we will experiment and run the country with no President until 2016, at which time we will convert to a monarchy, appointed every 6 years by a reality TV show.

.The U.S. dollar will be worthless, we will experiment with using popsicle sticks.

.Greece will pull out of the European Union, which will start the downfall of the euro and the EU.

.Super bowl winner: Green Bay Redskins (as a result of of a mid year merger).

.Rex Grossman of the former Washington Redskins was traded to the Maryland Terrapins.

.Number of earthquakes in Washington DC: zero.

(the real answers will be printed, upside down, on the bottom of all Wheaties cereal boxes you see on your grocer's shelves next week)

Do you think real estate prices are on a straight line down? Wrong. Remember when everybody thought real estate prices were on a straight line up? Wrong! Real estate prices are up and down, and all-around. They are up in some places, down in others, and up and down in others. And of course real estate is very local, down to the state, county, community and sometimes even down to the street. You really have to dig down into the details to find out the true value of a house.

If you look at the chart in the above graphic, you will see that on average Washington DC real estate values has been mostly up in price. The operative word in that last sentence is “average”. There are some parts of the city that may be dragging down the average, so if you are interested in a strong real estate neighborhood like Capitol Hill or Dupont Circle, the numbers above may not accurately reflect the strength of the market. And if buying in a weak part of Washington DC, you may have more leverage than you think in negotiating the price.

And look at what is going on in the Los Angeles area, Los Angeles real estate values were down in March, and up in April. But that is on average. There may be neighborhoods that were up both months, and have been up for quite some time. And there may be some neighborhoods that have been down for quite some time. And there may be a particular home that you love on a certain street, that is a very cute house and well priced, and it may have sold for above asking price in a neighborhood or county with declining average real estate prices. The averages do not mean much.

San Francisco real estate prices were down slightly in March, but were up strong in April. As usual with real estate, you have to dig into the details, and look at the specific house, the lot, the finish, square footage, then the street, then the neighborhood, then the county, and then the state. And there are multiple factors to look at besides real estate prices, like job growth (or lack thereof), population growth, new construction building (or lack thereof), available land, etc. It is so difficult, in fact, to determine where real estate prices are going, and why, that is why it has become important again to buy a house as a home, and not as an investment. If you buy a house as a home, and because you love the immediate area, then you will be more protected against price swings since you can stay in the home longer to accommodate for those price fluctuations if necessary.

A house has always been a home. In the last boom market in the early 2000's (technically from 1998 – 2006) when a home became an investment, and even worse a speculative investment, we all lost sight of what a house is. It is a home. Nothing more, nothing less.

Looking at the above maps of foreclosures in California, Maryland/Washington, DC and Virginia (these are the states I operate in) is interesting.

California clearly has problems north and south, but not in the middle. And the heaviest foreclosures problems are inland not on the coast, near Stockton to the north, and near Riverside to the south.

Whereas in Maryland and Washington, DC foreclosures are spread out all over the state from a geographic standpoint. But there does seem to be a bulk of the foreclosures happening in Charles County, Prince Georges County, Baltimore, Hagerstown and the Eastern Shore.

And Virginia's problems are spread out all over as well.

All of the heaviest foreclosure areas follow one pattern, high jobless rates. If I had maps of unemployment rates to overlay on top of these maps, you'd see the areas with the highest unemployment also have the highest foreclosures. That is an obvious statement, anyone could have guessed that. So, it seems the answer is to focus on jobs.

Create jobs, fix unemployment. Fix unemployment, fix foreclosures. Fix foreclosures, fix the economy.

So I say we all put aside our politics for now, and focus on one thing…JOBS! Let's stop debating health care, the environment, cap & trade, minimum wage and left versus right and Democrat versus Republican. In my book, everyone is responsible for where we are no matter what their political leaning.

All legislation, tax policy and efforts should be geared towards one things…JOBS! We can debate about the rest later, let's put food on the table and a roof over everyone's head first!

Why does it seem that almost all real estate starts out at an unrealistic price point to some degree, whether it is a little over priced like 2% or 3%, or a lot overpriced by 10% or 20%? And then there are some homes that get bid up from the asking price, but that seems to be the exception to the rule. Is it simply that human nature says that when you own something and you go to sell it, you always hold it more dear than others that may buy it? Or is it that a buyer is always looking for discount, and never thinks anything is worth the asking price? Some people point the finger at the real estate industry and say that Realtors almost always overprice listings to convince the buyer to go with them to list the property, and to make them think that they can win the highest price, when in reality the market will only bear whatever it will bear. This is called “buying the listing.”

It may be a question that never gets answered. But it would be nice to have some insight into the topic, so that sellers have a better grasp of how to price their property for sale.

Some people say that the price of a house is solely a marketing tool, and that a house is worth what it is worth, and what you ask for it does not have anything to do with what it will sell for. In that case, to attract more people to your property, this logic says you should always under price property and it will stand out, and it will get bid up to its natural price point with more attention.

If you believe in a free market, then maybe this is true. Maybe an asking price is irrelevant to what a house will sell for. eBay may be an interesting analogy. No matter what you are looking for on eBay there are usually other items for sale that you can compare the one you want to buy to. And ultimately the item sells for whatever it sells for, after being posted, and reposted, and possibly reposted again and again. So if you put your crystal bowl on eBay for $34 dollars knowing that you think its worth $100, will it get bid up closer to $100 by default? Or because you priced it so low to start will it only draw low bids?

I have one client who responded with the following when we were talking about how sellers and Realtors price property for sale: "My solution to brokers who give you highest selling price only to win the listing, is to make their commission contingent on the final selling price and use a sliding scale down based on what the buyer nets from the sale of the transaction. This is a great way to tell if they really think you can get the price they want to put the house on the market for."

I talked a little bit about how Realtors get paid, here. Feel free to weigh in with ideas of your own.

When is a 2 unit a 2 unit? A 2 unit home, sometimes referred to as a duplex, is a home where there is a rental unit, usually in the basement. Over the years I have seen much confusion surrounding what officially defines a home as a 2 unit. I can tell you that an appraiser, banks and Fannie Mae (all the people that count when you need mortgage financing) will be looking for the following:

-Is there a Certificate of Occupancy (C of O) for the rental unit?

-Is there separate metering for the utilities for both units?

-Are there separate exterior entrances for each unit, in the front and rear of the home?

-Is there interior access to the lower unit from the upper unit?

-Is there a tenant currently occupying the lower rental unit?

If you have a C of O, with no interior access, with separate meters, separate entrances and a tenant, then you have a 2 unit.

If you have no C of O, with interior access, with common metering, with separate entrances, and a tenant, you have a single family home with an "in-law suite".

There are numerous other variations I won't bore you with. You may have some of the traits of a 2 unit and some of a single family with an in-law suite. It will ultimately be up to an appraiser to make the final decision, and the underwriter will interpret based on the appraisal.

It is important to know what your home may be called by a lender for several reasons:

-A 2 unit appraisal is more expensive than a single family with an in-law suite (by $150-$250).

-A 2 unit home can borrow up to $533,850 and still be called a Conforming loan, while a single family with an in-law suite can only go to $417,000 as a Conforming loan.

-A 2 unit home will be charged a higher rate, usually .25% in rate or 1% discount point higher.

-Some loan programs state that only single family homes (even with an in-law suite) are eligible, so a formal 2 unit may not qualify at all.

Obviously how your home is defined, if you have a rental unit, is very important. Make sure to ask your lender a lot of questions as to how your property may be defined, how it impacts your eligibility for whatever loan you are applying for, and if it changes the terms.

If someone told you that the first level of your home was an unfinished basement, and did not count towards the livable square footage of your home, would you be upset? It would be as if someone arbitrarily erased part of your home, and made it smaller than it really was! This is a really important story for more people than you might think.

Many traditional homes sit on flat lots and are uniformly situated. They may have an unfinished or partially finished basement, then a 1st level with kitchen, living room and dining room, and then a 2nd level with bedrooms. But what about the surprisingly large number of homes that sit on odd lots and don't have a basement. These homes may find that part or all of the first level is below grade. Fannie Mae, banks and underwriters will tell you that if a home's first level is below grade at all, that level cannot count towards the "gross living area", and as a result greatly reduces the value of the home since it will be counted as a basement instead of living space. Here is what one bank representative had to say about this:

"With regards to areas below grade, it is common for the appraiser to not include areas in Gross Living Area (GLA) as per Fannie Mae Guidelines XI 405.05 and ANSI Standards Z765. Which are consistent in definition by stating: The above grade finished square footage of a house is the sum of finished areas on levels that are entirely above grade. The below-grade finished square footage of a house is the sum of finished areas on levels that are wholly or partly below grade. Any level that is partially below grade makes the entire area ineligible for being determined in GLA."

A duplex with a traditional fully finished living unit below grade with the main house above grade, with a Certificate of Occupancy for both units, is an exception to this situation. But, I had a client who had a three level contemporary home in a neighborhood with rolling hills and a lake. As a result, the first floor of the home, which contained one bedroom, one bathroom, and a recreation room, sits partially below grade at the back of the house. Her home is almost 3,000 square feet of total living space in the real world. But in the banking world, based on the Fannie Mae definition of what creates GLA, the appraiser counted my client's house as closer to 2,000 square feet with a basement! Hence, instead of the $900,000 appraisal we were confident in getting in order to refinance the home, we got an appraisal of $780,000 and the refinance had to be canceled.

Imagine telling someone who raises a child in that 1st floor bedroom, and entertains and lives in the recreation room, that the square footage has now been erased from the ability to be counted as Gross Living Area! It seems absurd. If the market will bear a price of $900,000, why wouldn't it be able to be appraised that way.

And the more frustrating part of this story is that when my client bought the home in the real estate boom of the early 2000's, Fannie Mae and the banking industry interpreted their own rules much more loosely, so this issue did not come up when my client bought the home. So now the client may have trouble selling the home, because potential buyers will have trouble getting the proper appraisal to support the contract price.

There are more homes than you may think that fit this scenario. I have seen homes in urban settings where the 1st level is entirely below grade to some degree, and I have seen many homes in areas that are not flat where part of the 1st floor is below grade. Take a look around you the next time you are driving around a neighborhood, and see how many homes have a 1st floor that is not a basement, that are partially or completely below grade.

As an aside, below is the oddball potential solution my client and I considered at the time:

"I just had an odd idea pop into my head on the issue of the first level being partially below grade, which Fannie Mae uses as an excuse to dismiss all of the first level and not use it as Gross Living Area. I am getting ready to go through a similar scenario on another appraisal right now, and was trying to come up with something for what I know will be a problem for those clients. And it just hit me, and it may sound crazy to you but I wanted to run it by you nonetheless, how about digging out around the first level, re-landscaping, and magically make the whole first level above grade!?

I ran it by my other clients who will have this issue, and they are considering this and are going to get estimates to dig it out, make it pretty with new landscaping, and then we can use the whole first level as Gross Living Area, and get the appraisal that we deserve. Obviously we do not want to do something that would ruin the way the house sits and looks against the landscape and the yard, and we also would not want to do something that would be expensive, but just a thought I wanted to run by you."

Imagine having to dig out part of your first level, rip up shrubs, plant new landscaping, painting, and paying for all of it, just to be able to sell or refinance!

I think there should be a variance on this rule, with some logic introduced into each situation. Obviously if a house has "some" of the yard pushed up against it on 1/3rd of the house on the backside, and the 1st level has plenty of light, windows and gets used a living area, an exception should be made!

Does anyone know how Realtors really get paid? I know people love to complain about Realtors and how they "get 6%" of the sales price, but that is not the whole story. It's barely any of the story. I love to beat up on any industry with grossly overpaid and inefficient workers as much as the next person, but only if it is merited.

First, each Realtor will only get their share of the total commission. If the total commission is 6%, then each Realtor gets 3%. But they really don't get 3% each. Each Realtor's employing broker will take their share first. Let's assume that our imaginary Realtors in this story are on an 80% split, that means they each get 2.4% after their employing brokers take 20%. We are already a long way from 6%…

And as for the listing agent we'd have to deduct expenses to further show an accurate picture of their earnings on each deal. Since it is part of a listing Realtor's job to advertise the home for sale, and those costs come out of the Realtor's pocket BEFORE ANY EARNED COMMISSION, we have to net those costs out as well.

Let's assume, and this varies, that the average Realtor spends about .5% to 1% of the sales price to advertise (this percentage may go way up on a smaller sales price, and it may go down on a larger sales price) the home for sale. So now the listing agent's net commission is down to:

3% gross
x 80% split
=2.4%
-.5% to 1% ad costs
=1.4% to 1.9%

On the sale of a $600,000 home, for example, $8,400 to $11,400 is a final net commission.

There are lots of variables to this story, so we could debate it endlessly. I know that a seller paying a 6% commission for a house that sells in a week with multiple bids sounds wrong, and some think the seller should pay less in this situation. But would a homeowner pay 9% for the house that sits on the market for 6-9 months and takes an enormous amount of marketing costs that comes out of the Realtor's pocket? Likely not.

So some Realtors get sales that are quick and easy, some get sales that take a long time and involve a lot of hours and cost, and some work with clients for numerous hours only to never get paid because the house never sells or the buyer buys through someone else! So when you average it all in, I don't know that Realtors are as overpaid as everyone thinks they are. As a matter of fact, the average Realtor makes a very modest living.

When I choose a Realtor I want to work with someone who makes a LOT of money, and I hope they profit greatly from their exchange with me. When you work with successful Realtors you get successful results. When you beat up on a Realtor for making too much money, or if you ask them to cut their commission, I am not sure you are doing yourself a favor. Buyer's agents are less likely to show a house that offers a reduced commission, and selling agents won't have as much inducement to spend as much money on marketing when they are getting paid a reduced commission.

Now, different models of selling and buying real estate (online Realtors, fee for service Realtors, For Sale By Owner, etc.), and different models of compensation for those different ways of buying and selling real estate, is a whole different discussion, and one I will blog about in the near future.

But for now, it seems 97% of all real estate is sold in the traditional way, with traditional Realtors, being paid traditional commissions, and trying to deviate from that may cause you to end up shooting yourself in the foot.

Alexandria Virginia was hoping that Verizon would bring its high speed internet and video service called "Fios" to the area, and Verizon chose not to. Now Alexandria Virginia is hoping to be a test site for a new high-speed internet service being developed by Google. And anyone that owns real estate in Alexandria should hope this happens!

Having high speed internet access, while one factor of numerous factors that affect real estate values, would be good news for real estate in Alexandria. The speeds for data are supposed to be 100 times faster than most sources. I, for one, might lean towards buying a home in Alexandria for this reason alone! And if having this type of high speed advantage were to win over more people, that creates demand, which pushes up real estate prices.

Alexandria Virginia hopes to be selected as a test city. Google calls this nationwide project the “Fiber for Communities Project”. I'd call it the "Fiber For Real Estate Benefit Project', that is how much I believe in these types of technology infrastructure improvements, and there power to create population movement and real estate demand.

You can find an FAQ on Google's site about this, click here. The deadline for responses from interested communities was March 26. I hope everyone that wanted to get in, got in! I hear that Montgomery and Prince George’s counties in Maryland were also interested in the Google project. I hear that Google will decide by the end of 2010 who is in, stay tuned.

What affects real estate prices? Perception. The macro-economy. The city. The neighborhood. The street. The curb appeal. The house. The square footage. The bedroom count. The view. The neighbors. The local economy. The condition of the house. Local zoning issues, if any. Access to transportation. Marketing. Government. Tax breaks. Interest rates. Rents. The weather. The landscaping. The Realtors involved. The sellers. The buyers. Emotion. Local income patterns. Local employment. Competition. Supply. Demand. Chocolate chip cookies…and more?

I cringe when I hear someone try and find a small handful of factors as being responsible for the value and direction of real estate. There are so many factors I don't even think that most people could discuss them all in one conversation. It would take a book, let alone one blog post. It would take a series of books!

So instead of trying to discuss each factor that influences real estate prices, I'd just like to say that we all need to keep in mind that real estate is multifaceted, as is the value of anything. It is local, and its national. It can be higher in Summer and lower in Winter. It can be higher in Winter and lower in Summer. It can be perception. It can be supply versus demand. It can be smelling freshly baked chocolate chip cookies when walking into an open house, that triggers a childhood memory, that makes you want to bid a bit more than you may have under non chocolate chip cookie circumstances. It is everything. It is nothing. It is a business. It is emotion. It is a science. And it is random.

This is the whole point of the "free market", it usually cannot be explained and pinpointed, it just "is". When some other economic system tries to make a science of something, that is when the problems begin. The "market" is simply too big to understand and break down into small bits and sound bites.

The bottom line is that sellers try and sell for as much as they can, and buyers try and buy for as little as they can, and things usually work out from there and the final selling price is accurate most of the time. If sellers did not get the price they wanted, then that price was never realistic. If buyers feel they overpaid, they likely paid a market price. There was no specific reason, like "my Realtor was not effective", or, "we did not have enough open houses", or, "it rained the whole month we tried to sell", or, "I should have painted the bedrooms a neutral color." Things sell for what they are worth, most of the time, period. The marketplace is very effective, most of the time.

There are usually hundreds of forces at work, many unseen, culminating in a selling price for a house. Embrace the chaos, as a buyer or seller, and you will sleep better at night.