Being “upside down” simply means that you owe more on your home than it’s worth. Getting into this condition can come about in a variety of different ways.

For example, a buyer who purchases using a “125 percent” mortgage (the loan is for more than the home’s value) is immediately upside down. Buyers who purchase using adjustable-rate mortgages (ARMs), particularly those who purchase with nothing down and interest-only loans (which typically convert to ARMs within a few years), can quickly become upside down if interest rates go up.

A declining real estate market, of course, is the most likely way owners get to be upside down. When there are many homeowners who are upside down, it’s a bad sign for the market and indicates prices are likely to be falling. While this is generally a poor time to invest, it can also be an opportunity for investors if they can buy using a “short payoff” (where the lender accepts far less than the full mortgage amount just to be rid of the property). Ask a good mortgage broker about the number of owners who are upside down in your area.

 
Are there many FSBOs in the market?

Properties for sale by owner (FSBOs) are indicators of two kinds of markets. One is a very hot market where sellers are concluding that properties sell so fast they don’t need an agent. Hence, they list with themselves. The other is a very slow market where sellers have had little success in selling through an agent and now, in desperation, are trying to sell by themselves. When there are relatively few FSBOs, it suggests that the market is relatively calm, appreciating slowly. You can simply drive down neighborhoods you are considering and count up the number of FSBOs, That should give you a good indication of where the market in your area is.

 
Are there many repos in the market?

Few people will let their house go to repossession, whatever the circumstances, in a hot market. Why should they? It’s so easy to just put it up for sale, find a buyer, and sell your way out of foreclosure. On the other hand, when the market’s very slow, it can be difficult, if not downright impossible, to sell quickly and avoid foreclosure.

Thus, the number of homes in foreclosure at any given time is a strong clue as to the market’s condition. You can determine the homes in foreclosure by asking a savvy agent who is on top of the market. You can also go to Web sites that specialize in foreclosures, such as http://www.foreclosures.com/ or http://www.4clnse.com/. And you can check national statistics at the Department of Commerce (http://www.cominerce.gov/).

Are sellers cutting their prices?

The opposite of a market in which there are multiple offers is one in which there are few to no offers. This indicates a weak market, one where prices are stagnating or even falling. It’s the place where a savvy investor can come in with lowball offers and hope to get them accepted. It’s a bargain hunter’s paradise. (Beware, however, of getting your low-ball price only to find the market dropping below it!) Also, sometimes sellers will cut their prices even in a hot market simply because they started out too high. Ask agents whether price cuts are a common occurrence or a rarity.