From http://www.foxbusiness.com/markets/economy/article/feds-fomc-cuts-slashing-key-rate-05_457958_3.html, Wednesday, Jan. 30 2008
Dunstan Prial and Ken Sweet
FOXBusiness
New York -- Forging ahead Wednesday with an aggressive strategy for warding off a feared recession, the Federal Reserve’s Open Market Committee cut interest rates again.
The central bank slashed its federal funds rate, the interest that banks charge each other, by a half point to 3%, the fifth time rates have been cut since September.
John Lonski, chief U.S. economist for Moody’s Financial Services, said putting the brakes on a skidding domestic economy appears to be the Fed’s top priority.
“The Fed might have some reservations right now on the inflation side,” he said. “But in the view of the Fed, the supply of credit and weakening financial system is a more dire problem.”
The threat of a recession has heightened in recent months as the U.S. fights through a housing slump and credit crunch, both fueled by a surge in foreclosures on homes purchased with subprime mortgages.
Now at 3%, some economists believe the funds rate could fall to 2.5% before the Fed stops easing.
Wednesday’s cut comes on the heels of last week’s surprise three-quarter-point cut which drove the funds rate down to 3.5%. It was the biggest reduction in this rate in more than two decades and the first emergency cut -- so-named because it came between regular meetings -- since shortly after the September 2001 terrorist attacks.
Federal Reserve Chairman Ben Bernanke and his colleagues announced the emergency cut after a turbulent day on world markets when investors fretted over how a U.S. recession might affect global growth.
“I think the knee-jerk reaction of 75 basis points last week was enough to stave off the problems in Europe, but it hasn’t alleviated the problems in the markets,” said John O’Donoghue, co-head of equities at Cowen & Co.
The Fed, he added, will continue to pursue its aggressive strategy “because they want to err on the side of protecting this economy.” Inflation can be dealt with later, he said, predicting that rates could go back up toward the end of 2008 or early in 2009.
While most economists called for a half-point cut, others argued for a quarter-point reduction in response to some better-than-expected recent economic data.
For example, word came on Tuesday that orders to U.S. factories for big-ticket durable goods jumped 5.2% in December, the biggest increase in five months, and demand in a key series that tracks business investment shot up at the fastest pace since last March.
That unexpected strength may be a signal that the current slowdown will not be as severe as first believed, although analysts cautioned against reading too much into one report.
Also closely watched is the broadest measure of economic health, the gross domestic product, but the figures announced Wednesday -- just hours before the Fed’s decision -- weren’t pretty.
The economy nearly stalled in the fourth quarter with a growth rate of just 0.6%, capping its worst year since 2002.
The Commerce Department's GDP report showed an economy that had deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown, even as inflation remained elevated.
Many analysts believe the GDP could fall into negative territory in the current January-March period. One definition of a recession is two consecutive quarters of falling GDP.
Worried about the possibility of a downturn, the House on Tuesday overwhelmingly approved a $146 billion economic stimulus bill. Passage in the Senate could be slowed by an effort to expand the measure.
Cowen & Co.’s O’Donoghue observed, “I don’t see 50 basis points adding steam to the economy; I think we need 50 basis points to save this economy.”
Wednesday, January 30, 2008
Fed Rate Cut Spurs Mortgage Applications
From Realtor Magazine Online, Daily Real Estate News January 30, 2008
Mortgage applications rose another 7.5 percent last week on a seasonally adjusted basis, compared to the previous week, according to the Mortgage Bankers Association’s weekly mortgage applications survey.
On an unadjusted basis, the index increased 10.5 percent compared with the previous week and was up 70.7 percent compared with the same week a year ago.
The increase reflected a rush to refinance even though rates were up slightly from the previous week when the Federal Reserve responded to recession fears by cutting key rates by three-quarters of a percent. The refinance share of last week’s mortgage activity was 73 percent, up from 60 percent the previous week.
Mortgage rates rose:
- 30-year fixed-rate mortgages increased to 5.6 percent from 5.49 percent.
- 15-year fixed-rate mortgages increased to 5.04 percent from 4.96 percent.
- 1-year ARMs increased to 5.7 percent from 5.51 percent.Source: Mortgage Bankers Association (01/30/08)
Mortgage applications rose another 7.5 percent last week on a seasonally adjusted basis, compared to the previous week, according to the Mortgage Bankers Association’s weekly mortgage applications survey.
On an unadjusted basis, the index increased 10.5 percent compared with the previous week and was up 70.7 percent compared with the same week a year ago.
The increase reflected a rush to refinance even though rates were up slightly from the previous week when the Federal Reserve responded to recession fears by cutting key rates by three-quarters of a percent. The refinance share of last week’s mortgage activity was 73 percent, up from 60 percent the previous week.
Mortgage rates rose:
- 30-year fixed-rate mortgages increased to 5.6 percent from 5.49 percent.
- 15-year fixed-rate mortgages increased to 5.04 percent from 4.96 percent.
- 1-year ARMs increased to 5.7 percent from 5.51 percent.Source: Mortgage Bankers Association (01/30/08)
Friday, January 25, 2008
Falling Loan Rates Keep Lenders Busy
From Realtor Magazine Online, Daily Real Estate News January 25, 2008
Mortgage lenders’ phones are ringing off the hook.
The frenzy was triggered by the Federal Reserve’s rate cut, which doesn’t directly affect mortgage rates, but did cause them to fall significantly.
Lenders, who have been battered by the housing slump, are enjoying the mini boom.
The volume of incoming calls jumped 50 percent Tuesday compared to the previous week "and all indications are that [Wednesday] we are even busier," says Dave Doyle, the head of Countrywide Financial's call centers.
Doyle says the only time he could recall that happening was in June 2003, when interest rates bottomed out after a series of rate cuts following the Sept. 11 terrorist attacks.
Countrywide staffers also were busy making sales calls to customers, trying to persuade them to refinance billions of dollars in tricky nontraditional loans into plain mortgages the company could sell.
One big sticking point for those hoping to refinance is the possibility that they won’t have 20 percent equity in their property after the refinance because the property has declined in value.
Source: Los Angeles Times, E. Scott Reckard and Kathy M. Kristof (01/24/08)
Mortgage lenders’ phones are ringing off the hook.
The frenzy was triggered by the Federal Reserve’s rate cut, which doesn’t directly affect mortgage rates, but did cause them to fall significantly.
Lenders, who have been battered by the housing slump, are enjoying the mini boom.
The volume of incoming calls jumped 50 percent Tuesday compared to the previous week "and all indications are that [Wednesday] we are even busier," says Dave Doyle, the head of Countrywide Financial's call centers.
Doyle says the only time he could recall that happening was in June 2003, when interest rates bottomed out after a series of rate cuts following the Sept. 11 terrorist attacks.
Countrywide staffers also were busy making sales calls to customers, trying to persuade them to refinance billions of dollars in tricky nontraditional loans into plain mortgages the company could sell.
One big sticking point for those hoping to refinance is the possibility that they won’t have 20 percent equity in their property after the refinance because the property has declined in value.
Source: Los Angeles Times, E. Scott Reckard and Kathy M. Kristof (01/24/08)
30-Year Mortgage Rates Fall to 4-Year Low
From Realtor Magazine Online, Daily Real Estate News January 25, 2008
Housing industry observers are hopeful that the recent decline in mortgage rates will lead to a recovery in the market.
Freddie Mac reports that interest on 30-year, fixed loans fell for the fourth straight week, landing at their lowest level in nearly four years.
Economists say mortgage rates averaged 5.48 percent for the week ended Jan. 24 -- down from 5.69 percent a week ago -- because of the latest reports about the economy and because the Federal Reserve made its biggest cut in 20 years to a key interest rate.
Freddie Mac also reports that rates on 15-year mortgages declined to 4.95 percent from 5.21 percent, rates on five-year adjustable-rate mortgages dropped to 5.13 percent from 5.4 percent, and rates on one-year ARMs slipped to 4.99 percent from 5.26 percent.
Source: Baltimore Sun (01/25/08)
Housing industry observers are hopeful that the recent decline in mortgage rates will lead to a recovery in the market.
Freddie Mac reports that interest on 30-year, fixed loans fell for the fourth straight week, landing at their lowest level in nearly four years.
Economists say mortgage rates averaged 5.48 percent for the week ended Jan. 24 -- down from 5.69 percent a week ago -- because of the latest reports about the economy and because the Federal Reserve made its biggest cut in 20 years to a key interest rate.
Freddie Mac also reports that rates on 15-year mortgages declined to 4.95 percent from 5.21 percent, rates on five-year adjustable-rate mortgages dropped to 5.13 percent from 5.4 percent, and rates on one-year ARMs slipped to 4.99 percent from 5.26 percent.
Source: Baltimore Sun (01/25/08)
House OKs Lift on Fannie, Freddie Loan Limits
From Realtor Magazine Online, Daily Real Estate News January 25, 2008
The economic stimulus package hammered out between the White House and Congress on Thursday lifts the size of home loans that may be bought or insured by Fannie Mae and Freddie Mac.
The Fannie/Freddie cap would rise to $729,750 for one year. Currently Fannie and Freddie are capped at $417,000.
The measure also would permit the Federal Housing Administration to indefinitely insure loans up to that same level. Currently, FHA loans may not exceed $367,000.
“The stimulus package announced today is a positive step toward strengthening the housing market and our economy," NAR President Dick Gaylord said in a public statement. "The increase in loan limits should provide liquidity to the mortgage market in all parts of the country allowing qualified home buyers who may have been on the sidelines to enter the market."
The measure is also expected to make jumbo loans more affordable because it will make them more attractive to investors, who since summer have shunned home loans that don’t pass through Freddie or Fannie.
“In high-cost states, many home buyers with good credit could save $3,000 to $5,000 per year by not being forced into the current jumbo mortgage market," Gaylord said. "Currently, only families in lower cost areas are able to qualify for these types of affordable loans. Such a move would stimulate home sales and help stem the rise in foreclosures, reducing the number of foreclosures by as much as 210,000."
In particular, prospective home buyers in costly regions like California, Northern Virginia, and New York have faced higher mortgage rates and tougher loan terms, and those areas would get relief under the plan, says Susan Wachter, a professor of real estate and finance at the Wharton School of the University of Pennsylvania.
"This is meaningful because the mortgage crisis and meltdown is geographically concentrated," she says. "This response will assist the stressed areas."
Source: Reuters, Patrick Rucker (01/24/08) and REALTOR Magazine Online
The economic stimulus package hammered out between the White House and Congress on Thursday lifts the size of home loans that may be bought or insured by Fannie Mae and Freddie Mac.
The Fannie/Freddie cap would rise to $729,750 for one year. Currently Fannie and Freddie are capped at $417,000.
The measure also would permit the Federal Housing Administration to indefinitely insure loans up to that same level. Currently, FHA loans may not exceed $367,000.
“The stimulus package announced today is a positive step toward strengthening the housing market and our economy," NAR President Dick Gaylord said in a public statement. "The increase in loan limits should provide liquidity to the mortgage market in all parts of the country allowing qualified home buyers who may have been on the sidelines to enter the market."
The measure is also expected to make jumbo loans more affordable because it will make them more attractive to investors, who since summer have shunned home loans that don’t pass through Freddie or Fannie.
“In high-cost states, many home buyers with good credit could save $3,000 to $5,000 per year by not being forced into the current jumbo mortgage market," Gaylord said. "Currently, only families in lower cost areas are able to qualify for these types of affordable loans. Such a move would stimulate home sales and help stem the rise in foreclosures, reducing the number of foreclosures by as much as 210,000."
In particular, prospective home buyers in costly regions like California, Northern Virginia, and New York have faced higher mortgage rates and tougher loan terms, and those areas would get relief under the plan, says Susan Wachter, a professor of real estate and finance at the Wharton School of the University of Pennsylvania.
"This is meaningful because the mortgage crisis and meltdown is geographically concentrated," she says. "This response will assist the stressed areas."
Source: Reuters, Patrick Rucker (01/24/08) and REALTOR Magazine Online
Thursday, January 24, 2008
Conforming Loans Up To $725,000 !!!
Congressional leaders and the White House today reached agreement on a proposal to increase conforming loan limits as part of a larger economic stimulus package. Raising the conforming loan limits to more accurately reflect the cost of housing in California and other high-costs areas of the nation has long been an objective of California Association of Realtors. While the details remain to be seen, this is a huge win for Californians.
Currently, Californians are forced into more expensive non-conforming jumbo loans, decreasing homeownership opportunities for many and forcing others into more costly – and often riskier – loan products.
Under the terms of the proposed stimulus package, the conforming loan limit -- the maximum loan amount that government-sponsored enterprises like Fannie Mae and Freddie Mac may purchase or guarantee on the secondary market -- will be raised from $417,000 to as high as $725,000 in high-cost areas.
This is great news. But, the Office of Federal Housing Enterprise Oversight (OFHEO) continues to oppose adjusting conforming loan limits. Contact your representatives in Sacramento and Washington and express your support for raising limit. And stay tuned.
Currently, Californians are forced into more expensive non-conforming jumbo loans, decreasing homeownership opportunities for many and forcing others into more costly – and often riskier – loan products.
Under the terms of the proposed stimulus package, the conforming loan limit -- the maximum loan amount that government-sponsored enterprises like Fannie Mae and Freddie Mac may purchase or guarantee on the secondary market -- will be raised from $417,000 to as high as $725,000 in high-cost areas.
This is great news. But, the Office of Federal Housing Enterprise Oversight (OFHEO) continues to oppose adjusting conforming loan limits. Contact your representatives in Sacramento and Washington and express your support for raising limit. And stay tuned.
Mortgage Applications Rise as Rates Fall
From Realtor Magazine Online, Daily Real Estate News January 24, 2008
Mortgage applicants continued their trend upward in response to falling rates, according to the Mortgage Bankers Association’s weekly Mortgage Applications Survey.
The index was at 981.5, an increase of 8.3 percent on a seasonally adjusted basis from 906.4 a week ago. On an unadjusted basis, the index rose 11 percent compared with the previous week and was up 63.7 percent from the same week last year.
“Refinance applications are up 92 percent since the beginning of November and purchase applications are up 7 percent," said Jay Brinkmann, vice president of research and economics for the association, in a statement. "With tighter credit conditions we do not know how many of these applications will become loans, but it is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since Nov. 2 across products."
The refinance share of mortgage activity increased to 66 percent.
Rates were down:
- 30-year fixed-rate mortgages decreased to 5.49 percent from 5.62 percent.
- 15-year fixed-rate mortgages decreased to 4.96 percent from 5.07 percent.
- 1-year ARMs decreased to 5.51 percent from 5.77 percent.
Source: Mortgage Bankers Association (01/23/08)
Mortgage applicants continued their trend upward in response to falling rates, according to the Mortgage Bankers Association’s weekly Mortgage Applications Survey.
The index was at 981.5, an increase of 8.3 percent on a seasonally adjusted basis from 906.4 a week ago. On an unadjusted basis, the index rose 11 percent compared with the previous week and was up 63.7 percent from the same week last year.
“Refinance applications are up 92 percent since the beginning of November and purchase applications are up 7 percent," said Jay Brinkmann, vice president of research and economics for the association, in a statement. "With tighter credit conditions we do not know how many of these applications will become loans, but it is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since Nov. 2 across products."
The refinance share of mortgage activity increased to 66 percent.
Rates were down:
- 30-year fixed-rate mortgages decreased to 5.49 percent from 5.62 percent.
- 15-year fixed-rate mortgages decreased to 4.96 percent from 5.07 percent.
- 1-year ARMs decreased to 5.51 percent from 5.77 percent.
Source: Mortgage Bankers Association (01/23/08)
Lower Rates Should Stimulate Real Estate
From Realtor Magazine Online, Daily Real Estate News January 24, 2008
Now’s the time for homeowners facing resets on adjustable-rate mortgages or dealing with burdensome loans to refinance.
While mortgage rates aren’t specifically tied to the rates the Federal Reserve controls, they are affected by this week’s cuts and they could fall even farther if more cuts follow."
Mortgage rates already have fallen and they still are falling," says Dave Loyst, vice president of retail lending at Stearns Financial in San Diego. "Every deal is a struggle, but we're still doing loans. I think this rate cut absolutely is going to help the real estate market."
"This definitely will help the mortgage situation," Loyst adds. "With rates falling, more people are able to qualify for refinancing and more people who were left out from buying homes before will be able to do so now."
"This is the affordability piece," says Richard Musci, vice president of Charles Schwab Bank. "Consumers should be able to afford more (of their living and discretionary expenses) at these lower interest rates."
Loyst concurred with that assessment: "People will come out looking to buy houses...and it will help slow down the depreciation of real estate (values) in certain areas."
Source: Dow Jones Business News, Jennifer Waters (01/24/2008)
Now’s the time for homeowners facing resets on adjustable-rate mortgages or dealing with burdensome loans to refinance.
While mortgage rates aren’t specifically tied to the rates the Federal Reserve controls, they are affected by this week’s cuts and they could fall even farther if more cuts follow."
Mortgage rates already have fallen and they still are falling," says Dave Loyst, vice president of retail lending at Stearns Financial in San Diego. "Every deal is a struggle, but we're still doing loans. I think this rate cut absolutely is going to help the real estate market."
"This definitely will help the mortgage situation," Loyst adds. "With rates falling, more people are able to qualify for refinancing and more people who were left out from buying homes before will be able to do so now."
"This is the affordability piece," says Richard Musci, vice president of Charles Schwab Bank. "Consumers should be able to afford more (of their living and discretionary expenses) at these lower interest rates."
Loyst concurred with that assessment: "People will come out looking to buy houses...and it will help slow down the depreciation of real estate (values) in certain areas."
Source: Dow Jones Business News, Jennifer Waters (01/24/2008)
2007 Existing-home Sales Fifth Highest
From Realtor Magazine Online, Daily Real Estate News January 24, 2008
Existing-home sales declined in December following several months of stable activity, with total sales in 2007 at the fifth highest on record, according to the NATIONAL ASSOCIATION OF REALTORS®.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – slipped 2.2 percent to a seasonally adjusted annual rate of 4.89 million units in December from a pace of 5.00 million in November, and are 22.0 percent below the 6.27 million-unit level in December 2006.
For all of 2007 there were 5,652,000 existing-home sales, the fifth highest year on record; however, the total was 12.8 percent below the 6,478,000 transactions recorded in 2006.
Lawrence Yun, NAR chief economist, said the market is experiencing uncharacteristic weakness.“Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate,” he said. “Home prices are lower, mortgage interest rates continue to decline and incomes are higher, but many potential buyers are delaying a purchase.”
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 6.10 percent in December from 6.21 percent in November; the rate was 6.14 percent in December 2006. Last week, Freddie Mac reported the 30-year fixed rate dropped to 5.69 percent. “Although interest rates on jumbo loans have fallen somewhat, they remain well above conventional mortgage rates,” Yun said. “It isn’t surprising that the share of single-family homes selling for more than $500,000 fell to 12.4 percent of transactions in December from 14.2 percent a year ago.”
Total housing inventory fell 7.4 percent at the end of December to 3.91 million existing homes available for sale, which represents a 9.6-month supply3 at the current sales pace, down from a 10.1-month supply in November. “The fall in inventory in December is encouraging, but inventories remain elevated and buyers have a clear edge over sellers in many markets,” Yun said.
The national median existing-home price2 for all housing types was $208,400 in December, down 6.0 percent from a year earlier when the median was $221,600. Because home sales have slowed the most in higher cost markets, there is a downward distortion to the national median as the mix of closed sales has changed over the past year. For all of 2007, the median price was $218,900, down 1.4 percent from a median of $221,900 in 2006.
NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said that raising the loan limit on conventional financing is urgently needed. “The most effective way to stimulate housing and minimize the potential for a recession is for lawmakers to raise the limit on conforming mortgages to $625,000, which would open safe and affordable financing to buyers in high-cost areas,” he said. “It is grossly unfair that some Americans do not have access to low-interest rate loans.
This would help people as they move away from risky subprime mortgages and high-interest rate jumbo loans.”NAR projects the higher loan limit would increase annual home sales by nearly 350,000, reduce foreclosures by 140,000 to 210,000, and increase economic activity by $44 billion. “What’s more, this would come at no cost to taxpayers – it’s a policy change that could really boost the economy,” Gaylord said.
Other projections of NAR’s analysis show raising the loan limit would reduce the supply of homes on the market by 1.0 to 1.5 months, and strengthen home prices by 2.0 to 3.0 percentage points. In addition, as many as 500,000 jumbo loans would be refinanced to lower interest rates.
Gaylord said current housing conditions vary widely. “Many local areas continue to have healthy or improving local housing markets,” he said. “For example, we saw higher home sales last month in diverse areas such as San Antonio; Syracuse; Springfield, Ill.; and Sarasota, Fla. If you’re thinking about getting into the market as a buyer or a seller, consult a Realtor® to learn about conditions in your area – they may be considerably different from the composite national picture.”
Single-family home sales declined 2.0 percent to a seasonally adjusted annual rate of 4.31 million in December from 4.40 million in November, and are 21.6 percent below 5.50 million-unit level in December 2006. In all of 2007, single-family sales fell 13.0 percent to 4.94 million.
The median existing single-family home price was $206,500 in December, down 6.5 percent from a year earlier. For all of 2007, the single-family median was $217,800, down 1.8 percent from 2006.
Existing condominium and co-op sales fell 3.3 percent to a seasonally adjusted annual rate of 580,000 units in December from 600,000 in November, and are 24.5 percent below the 768,000-unit pace a year ago. Condo sales for all of 2007 fell 11.0 percent to 713,000 units.
The median existing condo price4 was $222,200 last month, which is 2.5 percent below December 2006. In all of 2007, the median condo price was $226,400, up 2.0 percent from 2006.
Source: NAR
Existing-home sales declined in December following several months of stable activity, with total sales in 2007 at the fifth highest on record, according to the NATIONAL ASSOCIATION OF REALTORS®.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – slipped 2.2 percent to a seasonally adjusted annual rate of 4.89 million units in December from a pace of 5.00 million in November, and are 22.0 percent below the 6.27 million-unit level in December 2006.
For all of 2007 there were 5,652,000 existing-home sales, the fifth highest year on record; however, the total was 12.8 percent below the 6,478,000 transactions recorded in 2006.
Lawrence Yun, NAR chief economist, said the market is experiencing uncharacteristic weakness.“Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate,” he said. “Home prices are lower, mortgage interest rates continue to decline and incomes are higher, but many potential buyers are delaying a purchase.”
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 6.10 percent in December from 6.21 percent in November; the rate was 6.14 percent in December 2006. Last week, Freddie Mac reported the 30-year fixed rate dropped to 5.69 percent. “Although interest rates on jumbo loans have fallen somewhat, they remain well above conventional mortgage rates,” Yun said. “It isn’t surprising that the share of single-family homes selling for more than $500,000 fell to 12.4 percent of transactions in December from 14.2 percent a year ago.”
Total housing inventory fell 7.4 percent at the end of December to 3.91 million existing homes available for sale, which represents a 9.6-month supply3 at the current sales pace, down from a 10.1-month supply in November. “The fall in inventory in December is encouraging, but inventories remain elevated and buyers have a clear edge over sellers in many markets,” Yun said.
The national median existing-home price2 for all housing types was $208,400 in December, down 6.0 percent from a year earlier when the median was $221,600. Because home sales have slowed the most in higher cost markets, there is a downward distortion to the national median as the mix of closed sales has changed over the past year. For all of 2007, the median price was $218,900, down 1.4 percent from a median of $221,900 in 2006.
NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., said that raising the loan limit on conventional financing is urgently needed. “The most effective way to stimulate housing and minimize the potential for a recession is for lawmakers to raise the limit on conforming mortgages to $625,000, which would open safe and affordable financing to buyers in high-cost areas,” he said. “It is grossly unfair that some Americans do not have access to low-interest rate loans.
This would help people as they move away from risky subprime mortgages and high-interest rate jumbo loans.”NAR projects the higher loan limit would increase annual home sales by nearly 350,000, reduce foreclosures by 140,000 to 210,000, and increase economic activity by $44 billion. “What’s more, this would come at no cost to taxpayers – it’s a policy change that could really boost the economy,” Gaylord said.
Other projections of NAR’s analysis show raising the loan limit would reduce the supply of homes on the market by 1.0 to 1.5 months, and strengthen home prices by 2.0 to 3.0 percentage points. In addition, as many as 500,000 jumbo loans would be refinanced to lower interest rates.
Gaylord said current housing conditions vary widely. “Many local areas continue to have healthy or improving local housing markets,” he said. “For example, we saw higher home sales last month in diverse areas such as San Antonio; Syracuse; Springfield, Ill.; and Sarasota, Fla. If you’re thinking about getting into the market as a buyer or a seller, consult a Realtor® to learn about conditions in your area – they may be considerably different from the composite national picture.”
Single-family home sales declined 2.0 percent to a seasonally adjusted annual rate of 4.31 million in December from 4.40 million in November, and are 21.6 percent below 5.50 million-unit level in December 2006. In all of 2007, single-family sales fell 13.0 percent to 4.94 million.
The median existing single-family home price was $206,500 in December, down 6.5 percent from a year earlier. For all of 2007, the single-family median was $217,800, down 1.8 percent from 2006.
Existing condominium and co-op sales fell 3.3 percent to a seasonally adjusted annual rate of 580,000 units in December from 600,000 in November, and are 24.5 percent below the 768,000-unit pace a year ago. Condo sales for all of 2007 fell 11.0 percent to 713,000 units.
The median existing condo price4 was $222,200 last month, which is 2.5 percent below December 2006. In all of 2007, the median condo price was $226,400, up 2.0 percent from 2006.
Source: NAR
Wednesday, January 23, 2008
Dramatic Turnaround: 600-Point Swing for Dow
From FoxNews.com, Uptick, Wednesday, Jan. 23 2008 (Abbreviated)
Wall Street turned a 300-point plunge on the Dow this morning into a 300-point jump this afternoon as traders evidently found stocks at a discount after a series of sell-offs in recent days.
Today’s MarketThe Dow Jones Industrial Average rose 298.98 points, or 2.50% to 12270.17, the Standard & Poor’s 500 index gained 28.11 points, or 2.14% to 1338.61 and the Nasdaq Composite Index picked up 24.14, or 1.05%, to 2316.41. The consumer-friendly Fox 50 rose 13.09, or 1.38%, to 959.72.Similar to yesterday's action, the market found its strength today from some of the weakest stocks over the past few months.
The comeback was a function of a market that has taken huge hits so far this year, with the Dow more than 8% in the red and the Nasdaq even lower year-to-date.
"Guys got tired of selling. Without question things have been oversold. It was only a matter of time until there was a significant bounce in the markets," said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles.
Once again the trading volume was extremely high, with more than 2.8 billions shares exchanging hands today. The typical volume on the NYSE is 1.3 billion.
Wall Street opened this morning with a big 260-point plunge on the Dow then pared most of its losses. The market then sold-off for a second time, placing the Dow 320 points in the red and the Nasdaq Composite more than 3% lower.
The market may have been aided by news that New York regulators are meeting with banks about stabilizing struggling bond insurers, according to Dow Jones Newswires.
Many have said that yesterday’s trading session could have been one of the worst in recent history had Fed Chairman Ben Bernanke not stepped in to ease global and U.S. fears.
“If it wasn’t for Bernanke giving an HGH shot to the market this is what we should have done yesterday. We should have corrected yesterday,” said Peter Boockvar, equity strategist at Miller Tabak.
Wall Street turned a 300-point plunge on the Dow this morning into a 300-point jump this afternoon as traders evidently found stocks at a discount after a series of sell-offs in recent days.
Today’s MarketThe Dow Jones Industrial Average rose 298.98 points, or 2.50% to 12270.17, the Standard & Poor’s 500 index gained 28.11 points, or 2.14% to 1338.61 and the Nasdaq Composite Index picked up 24.14, or 1.05%, to 2316.41. The consumer-friendly Fox 50 rose 13.09, or 1.38%, to 959.72.Similar to yesterday's action, the market found its strength today from some of the weakest stocks over the past few months.
The comeback was a function of a market that has taken huge hits so far this year, with the Dow more than 8% in the red and the Nasdaq even lower year-to-date.
"Guys got tired of selling. Without question things have been oversold. It was only a matter of time until there was a significant bounce in the markets," said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles.
Once again the trading volume was extremely high, with more than 2.8 billions shares exchanging hands today. The typical volume on the NYSE is 1.3 billion.
Wall Street opened this morning with a big 260-point plunge on the Dow then pared most of its losses. The market then sold-off for a second time, placing the Dow 320 points in the red and the Nasdaq Composite more than 3% lower.
The market may have been aided by news that New York regulators are meeting with banks about stabilizing struggling bond insurers, according to Dow Jones Newswires.
Many have said that yesterday’s trading session could have been one of the worst in recent history had Fed Chairman Ben Bernanke not stepped in to ease global and U.S. fears.
“If it wasn’t for Bernanke giving an HGH shot to the market this is what we should have done yesterday. We should have corrected yesterday,” said Peter Boockvar, equity strategist at Miller Tabak.
Mello-Roos: How It Works
1. A Mello-Roos Community Facilities District (CFD) is formed. As I posted before, Mello-Roos is a method of financing government entities (cities, counties, school districts and other special districts) to fund the cost of public improvements. Before government entitits can form a CFD, they must either obtain permission from area landowners or hold an election of registered voters within the CFD.
2. The municipality sells bonds on behalf of the CFD. These bonds are sold to private investors who purchase them to receive tax-free interest income. The money raised through the bond sales becomes the debt obligation of the CFD.
3. Bond proceeds are used to pay for public improvements within the CFD. The types of improvements, which can be funded by a CFD, are much broader than those types of improvements, which can be funded by traditional assessment districts. For example, schools, police stations, fire stations and libraries can be constructed with CFD bond proceeds, as well as roadways, water lines, and other traditional types of public improvements. CFDs can also be formed for the purpose of general public facility maintenance.
4. Money is repaid to bondholders through the Mello-Roos special tax. The service (principle and interest paid the investors) for the bonds is repaid by the levy of a special tax on property within the CFD. The amount of the special tax is determined by each CFD's Special Tax Formula, and may vary between property types (commercial, residential, industrial, etc.). The special tax revenue is used to pay-off the investment. Taxation and repayment continues each year for the life of the bond issue, usually 20 to 40 years.
2. The municipality sells bonds on behalf of the CFD. These bonds are sold to private investors who purchase them to receive tax-free interest income. The money raised through the bond sales becomes the debt obligation of the CFD.
3. Bond proceeds are used to pay for public improvements within the CFD. The types of improvements, which can be funded by a CFD, are much broader than those types of improvements, which can be funded by traditional assessment districts. For example, schools, police stations, fire stations and libraries can be constructed with CFD bond proceeds, as well as roadways, water lines, and other traditional types of public improvements. CFDs can also be formed for the purpose of general public facility maintenance.
4. Money is repaid to bondholders through the Mello-Roos special tax. The service (principle and interest paid the investors) for the bonds is repaid by the levy of a special tax on property within the CFD. The amount of the special tax is determined by each CFD's Special Tax Formula, and may vary between property types (commercial, residential, industrial, etc.). The special tax revenue is used to pay-off the investment. Taxation and repayment continues each year for the life of the bond issue, usually 20 to 40 years.
Mello-Roos
From RealEstateLibrary.com
In 1982, two state legislators, Sen. Henry Mello and Assemblyman Mike Roos - two Democrats - found a way around Proposition 13 and affected the passage of a bill known as the "Community Facilities Act." This act authorized local governments and developers to create Community Facilities Districts for the purpose of selling tax-exempt bonds to fund public improvements. The homeowner then pays a supplemental tax bill to pay back the bonds.
Most NEW neighborhoods in San Diego County have Mello-Roos fees. These help pay for new roads, schools, parks, libraries, and other community services in developing areas. But they also affect the affordability of houses that benefit from such facilities and services. Some of the most important questions you can ask when house hunting are: How much is the Mello-Roos? How long does it last? How does it increase every year?
Do your due diligence. This is very important when considering in which neighborhood you want to purchase your home.
In 1982, two state legislators, Sen. Henry Mello and Assemblyman Mike Roos - two Democrats - found a way around Proposition 13 and affected the passage of a bill known as the "Community Facilities Act." This act authorized local governments and developers to create Community Facilities Districts for the purpose of selling tax-exempt bonds to fund public improvements. The homeowner then pays a supplemental tax bill to pay back the bonds.
Most NEW neighborhoods in San Diego County have Mello-Roos fees. These help pay for new roads, schools, parks, libraries, and other community services in developing areas. But they also affect the affordability of houses that benefit from such facilities and services. Some of the most important questions you can ask when house hunting are: How much is the Mello-Roos? How long does it last? How does it increase every year?
Do your due diligence. This is very important when considering in which neighborhood you want to purchase your home.
Property Taxes on San Diego County Real Estate
From RealEstateLibrary.com
Under State law (Proposition 13), real property is reappraised only when a change-in-ownership occurs, or upon completion of new construction. Except for these two instances property assessments cannot be increased by more than 2% annually, based on the California Consumer Price Index. The property tax rate is 1%, plus any bonds, fees, or special charges.
This adds up to approximately 1.2% of the purchase price. As a rule of thumb, you can calculate your monthly tax payment by dividing the purchase price by 100. For example, if you purchase a $500,000 property, the taxes will be around $500 per month. Unlike some other states, different cities in California do not have greatly different tax rates.
And there is a huge difference in California - taxes go up only 2% a year, for as long as you own the home. It's not like other states where they decide they need more money and re-assess your home. In Florida, the taxes have doubled just because they have a hurricane. That cannot happen in California. In California, there will never be an unexpected jump. Your taxes will go up 2% a year, never any more than that. So if your taxes are $500 a month, next year it will be $510 a month. That's it!
Under State law (Proposition 13), real property is reappraised only when a change-in-ownership occurs, or upon completion of new construction. Except for these two instances property assessments cannot be increased by more than 2% annually, based on the California Consumer Price Index. The property tax rate is 1%, plus any bonds, fees, or special charges.
This adds up to approximately 1.2% of the purchase price. As a rule of thumb, you can calculate your monthly tax payment by dividing the purchase price by 100. For example, if you purchase a $500,000 property, the taxes will be around $500 per month. Unlike some other states, different cities in California do not have greatly different tax rates.
And there is a huge difference in California - taxes go up only 2% a year, for as long as you own the home. It's not like other states where they decide they need more money and re-assess your home. In Florida, the taxes have doubled just because they have a hurricane. That cannot happen in California. In California, there will never be an unexpected jump. Your taxes will go up 2% a year, never any more than that. So if your taxes are $500 a month, next year it will be $510 a month. That's it!
Tuesday, January 22, 2008
Fed Issues Emergency Rate-Cut
From Realtor Magazine Online, Daily Real Estate News January 22, 2008
The Federal Reserve, in an emergency meeting on Tuesday, slashed the key rate to 3.5 percent, citing a weakening economic outlook. The move marks the Fed's biggest rate cut — three quarters of a point — in more than 20 years.
As fears of a recession looms, the Fed said the rate-cut was to help restore confidence in the U.S. economy.
“While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households,” the Fed said in a public statement. “Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”
NATIONAL ASSOCIATION OF REALTORS® Chief Economist Lawrence Yun says the 75-basis-point cut in the Fed funds was a good step in giving the economy the boost and sending a clear message to both the market and to consumers.
“This strong rate cut will help lower mortgage interest rates and lessen the burden of adjustable-rate loans that are resetting in the current environment,” Yun says. “It also could help stimulate business investment in the wake of market uncertainties. We commend the Federal Reserve Board on its bold action, but at the same time we urge it to keep a close watch to see if additional action is needed.”
The Fed also approved a decrease in the discount rate — which, among other things, impacts how consumers pay home equity lines of credit — to 4 percent.
The Fed’s next scheduled meeting is on Jan. 30, where analysts say another rate-cut may be likely.
Source: REALTOR® magazine online and Dow Jones Newswire (1/22/08)
The Federal Reserve, in an emergency meeting on Tuesday, slashed the key rate to 3.5 percent, citing a weakening economic outlook. The move marks the Fed's biggest rate cut — three quarters of a point — in more than 20 years.
As fears of a recession looms, the Fed said the rate-cut was to help restore confidence in the U.S. economy.
“While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households,” the Fed said in a public statement. “Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”
NATIONAL ASSOCIATION OF REALTORS® Chief Economist Lawrence Yun says the 75-basis-point cut in the Fed funds was a good step in giving the economy the boost and sending a clear message to both the market and to consumers.
“This strong rate cut will help lower mortgage interest rates and lessen the burden of adjustable-rate loans that are resetting in the current environment,” Yun says. “It also could help stimulate business investment in the wake of market uncertainties. We commend the Federal Reserve Board on its bold action, but at the same time we urge it to keep a close watch to see if additional action is needed.”
The Fed also approved a decrease in the discount rate — which, among other things, impacts how consumers pay home equity lines of credit — to 4 percent.
The Fed’s next scheduled meeting is on Jan. 30, where analysts say another rate-cut may be likely.
Source: REALTOR® magazine online and Dow Jones Newswire (1/22/08)
Saturday, January 19, 2008
President Bush Pitches Income Tax Relief, Business Incentives to Boost Economy
From FoxNews.com, Friday, January 18, 2008
WASHINGTON — President Bush on Friday urged that an economic stimulus package worth nearly $150 billion be passed immediately to head off a nationwide slump, while expressing confidence that the sagging economy will rebound.
In a well-received address, Bush said the package would consist of income tax relief and tax incentives for businesses, but veered away from specifics. He said it should be temporary and geared to restore money quickly to the pockets of consumers, so they can infuse the economy with new dollars as the housing market slump and other factors put it at risk.
"Passing a new growth package is our most pressing economic priority," Bush said. "We can provide a shot in the arm to keep a fundamentally strong economy healthy ... I’m optimistic about our economic future."
Bush said that to be effective, an economic stimulus package would need to roughly represent 1 percent of the gross domestic product — the value of all U.S. goods and services and the best measure of the country's economic standing.
"This growth package must be big enough to make a difference in an economy as large and dynamic as ours," Bush said.
White House advisers say that, in current terms, 1 percent would amount to around $145 billion, which is along the lines of what private economists say should be sufficient to help give the economy a short-term boost.
Under a White House plan, rebates of up to $800 for individuals and $1,600 for married couples are being considered as one-time tax rebates.
Treasury Secretary Henry Paulson, speaking shortly after Bush's brief remarks, said the key to the plan would be speed and simplicity.
"There are no silver bullets," he said, "But ... to give money to consumers, there's plenty of evidence -- you give money to people they're gonna spend it."
Bush said the income tax relief would help Americans meet monthly bills and pay for higher gas prices.
Also acknowledging the risk of an economic downturn, he said: "The economy's still creating jobs, though at a reduced pace ... Consumer spending is still growing, but the housing market is declining. Business investment and exports are still rising, but the cost of imported oil has increased."
House Republican Leader John Boehner released a statement afterward praising the president's framework.
"Republicans believe this package should focus on putting more money back into the pocketbooks of middle class families and help employers who create jobs for the American people," he said. "These principles give us the framework for doing just that."
Democratic congressional leaders agree that one-time checks should be in the package but are working on a broader measure that would also include aid targeted to the poor and unemployed.
Senate Majority Leader Harry Reid, who was more critical of Bush Thursday, also released a statement praising him for the plan Friday, as did House Speaker Nancy Pelosi.
"I am encouraged and share the President's view that we need prompt bipartisan action to strengthen our economy," Reid said. "I also agree that our focus must be on finding temporary measures that will do the job effectively."
Pelosi said she welcomed Bush's "willingness to work together with Congress to provide urgent relief to the millions of Americans facing economic hardships."
Bush laid out his position publicly for the first time Friday at the White House and pitched it again at a manufacturing plant in Frederick, Md.
White House spokesman Tony Fratto said there are many ways to get quick agreement so a measure can be in place and start working. Bush chose to lay out "principles" with few specifics to the American people now, while bipartisan negotiations with Capitol Hill are taking place privately.
The White House feels Bush was out of the mix for too long, because he was away for eight days in the Mideast while Democratic leaders talked almost daily about the need to stimulate the economy — and how.
Bush has gone down the tax rebate road before. In 2001, he added refunds of up to $300 per individual and $600 per household as a recession-fighting element of the tax cut plan that had been the centerpiece of his 2000 campaign.
Bush urged Friday that Congress make his tax relief permanent.
Economists said a reasonable range for tax cuts in the new package might be $500 to $1,000.
Bush first signaled his support for the approach of income tax rebates for people and tax breaks for business investment in a conference call Thursday with bipartisan congressional leaders.
The Associated Press contributed to this report.
WASHINGTON — President Bush on Friday urged that an economic stimulus package worth nearly $150 billion be passed immediately to head off a nationwide slump, while expressing confidence that the sagging economy will rebound.
In a well-received address, Bush said the package would consist of income tax relief and tax incentives for businesses, but veered away from specifics. He said it should be temporary and geared to restore money quickly to the pockets of consumers, so they can infuse the economy with new dollars as the housing market slump and other factors put it at risk.
"Passing a new growth package is our most pressing economic priority," Bush said. "We can provide a shot in the arm to keep a fundamentally strong economy healthy ... I’m optimistic about our economic future."
Bush said that to be effective, an economic stimulus package would need to roughly represent 1 percent of the gross domestic product — the value of all U.S. goods and services and the best measure of the country's economic standing.
"This growth package must be big enough to make a difference in an economy as large and dynamic as ours," Bush said.
White House advisers say that, in current terms, 1 percent would amount to around $145 billion, which is along the lines of what private economists say should be sufficient to help give the economy a short-term boost.
Under a White House plan, rebates of up to $800 for individuals and $1,600 for married couples are being considered as one-time tax rebates.
Treasury Secretary Henry Paulson, speaking shortly after Bush's brief remarks, said the key to the plan would be speed and simplicity.
"There are no silver bullets," he said, "But ... to give money to consumers, there's plenty of evidence -- you give money to people they're gonna spend it."
Bush said the income tax relief would help Americans meet monthly bills and pay for higher gas prices.
Also acknowledging the risk of an economic downturn, he said: "The economy's still creating jobs, though at a reduced pace ... Consumer spending is still growing, but the housing market is declining. Business investment and exports are still rising, but the cost of imported oil has increased."
House Republican Leader John Boehner released a statement afterward praising the president's framework.
"Republicans believe this package should focus on putting more money back into the pocketbooks of middle class families and help employers who create jobs for the American people," he said. "These principles give us the framework for doing just that."
Democratic congressional leaders agree that one-time checks should be in the package but are working on a broader measure that would also include aid targeted to the poor and unemployed.
Senate Majority Leader Harry Reid, who was more critical of Bush Thursday, also released a statement praising him for the plan Friday, as did House Speaker Nancy Pelosi.
"I am encouraged and share the President's view that we need prompt bipartisan action to strengthen our economy," Reid said. "I also agree that our focus must be on finding temporary measures that will do the job effectively."
Pelosi said she welcomed Bush's "willingness to work together with Congress to provide urgent relief to the millions of Americans facing economic hardships."
Bush laid out his position publicly for the first time Friday at the White House and pitched it again at a manufacturing plant in Frederick, Md.
White House spokesman Tony Fratto said there are many ways to get quick agreement so a measure can be in place and start working. Bush chose to lay out "principles" with few specifics to the American people now, while bipartisan negotiations with Capitol Hill are taking place privately.
The White House feels Bush was out of the mix for too long, because he was away for eight days in the Mideast while Democratic leaders talked almost daily about the need to stimulate the economy — and how.
Bush has gone down the tax rebate road before. In 2001, he added refunds of up to $300 per individual and $600 per household as a recession-fighting element of the tax cut plan that had been the centerpiece of his 2000 campaign.
Bush urged Friday that Congress make his tax relief permanent.
Economists said a reasonable range for tax cuts in the new package might be $500 to $1,000.
Bush first signaled his support for the approach of income tax rebates for people and tax breaks for business investment in a conference call Thursday with bipartisan congressional leaders.
The Associated Press contributed to this report.
Friday, January 18, 2008
Latest Re-Fi Boom Leaves Many Out in the Cold
From Realtor Magazine Online, Daily Real Estate News January 18, 2008
Many home owners are watching from the sidelines, unable to refinance as mortgage rates drop below 6 percent.
At 6 percent about 37 percent of homeowners could refinance their mortgages and save money on monthly payments, estimates Bear Stearns Co., but many of them can’t refinance because in the current environment their mortgage is too big or their credit score is too low.
Those likely to have the best experience finding a mortgage are those who can qualify for a conforming loan of less than $417,000 and who have enough cash or equity to put down 20 percent.
Subprime, Alt-A, and jumbo borrowers aren’t “going to be participants in this refi wave,” says Dale Westhoff, who heads Bear Stearn’s mortgage research.
To get the best rates under the current guidelines, home owners need a credit score over 679, or equity of greater than 30 percent, lenders say.
Source: The Wall Street Journal, Jeff D. Opdyke (01/17/2008)
Many home owners are watching from the sidelines, unable to refinance as mortgage rates drop below 6 percent.
At 6 percent about 37 percent of homeowners could refinance their mortgages and save money on monthly payments, estimates Bear Stearns Co., but many of them can’t refinance because in the current environment their mortgage is too big or their credit score is too low.
Those likely to have the best experience finding a mortgage are those who can qualify for a conforming loan of less than $417,000 and who have enough cash or equity to put down 20 percent.
Subprime, Alt-A, and jumbo borrowers aren’t “going to be participants in this refi wave,” says Dale Westhoff, who heads Bear Stearn’s mortgage research.
To get the best rates under the current guidelines, home owners need a credit score over 679, or equity of greater than 30 percent, lenders say.
Source: The Wall Street Journal, Jeff D. Opdyke (01/17/2008)
30-Year Mortgages Hit Lowest Rates Since 2005
From Realtor Magazine Online, Daily Real Estate News January 18, 2008
Long-term mortgage rates remain in a downward pattern, registering the third consecutive week of decline.
According to Freddie Mac's numbers, average interest on 30-year fixed loans settled the week at 5.69 percent—the lowest level since July 2005. Other rate declines include:
- 15-year fixed mortgages slipped to 5.21 percent from 5.43 percent a week ago.
- 5-year adjustable-rate average retreated to 5.4 percent from 5.63 percent.
- 1-year ARMs fell to 5.26 percent from 5.37 percent.
Observers generally agree that borrowing costs will remain at or near 6 percent for 2008 unless a U.S. recession surfaces—in which case they expect rates to decline further.
Source: Baltimore Sun (01/18/08)
Long-term mortgage rates remain in a downward pattern, registering the third consecutive week of decline.
According to Freddie Mac's numbers, average interest on 30-year fixed loans settled the week at 5.69 percent—the lowest level since July 2005. Other rate declines include:
- 15-year fixed mortgages slipped to 5.21 percent from 5.43 percent a week ago.
- 5-year adjustable-rate average retreated to 5.4 percent from 5.63 percent.
- 1-year ARMs fell to 5.26 percent from 5.37 percent.
Observers generally agree that borrowing costs will remain at or near 6 percent for 2008 unless a U.S. recession surfaces—in which case they expect rates to decline further.
Source: Baltimore Sun (01/18/08)
The Importance of Appraisals in a Declining Market
From RISMedia Real Estate News, Industry Trends, Marketing - Residential & Commercial
By Jason Kotar, President of Diversity Lending Group, Inc.
RISMEDIA, Jan. 10, 2008-Remember when home values were steadily increasing and financing for home ownership had few restrictions or hurdles? Well, as you know that environment has significantly changed and is continuing to evolve as both government and financial markets are attempting to deal with the credit situation.
Along with this, the Comparative Market Analysis (CMA) is taking on more importance. In addition to establishing a relative asking price or market value of properties in an area, the CMA actually impacts how the loan approval process might proceed after the offer is accepted.
Until recently, the CMA was almost an afterthought for many real estate professionals; something that could literally be done on the way to a listing appointment. The comparables of existing home sales were easy to do since so many were within the same subdivision and almost all were within a 90 day window.
The past several years had seen an incredible spike in not only home sales but also home prices. Recently, as home prices have declined along with home sales, how real estate professionals look at CMA’s going forward will impact our market more than ever imagined. Consider the following scenario that many people face on a daily basis in the United States:
Enthusiastic buyers, after weeks or months of looking for just the right home, agree to purchase a home with a sales price of $200,000; and, it has an appraisal (by an independent third-party licensed appraiser) to support that same value of $200,000. The buyers then complete a loan application and figure they should easily qualify for a mortgage loan with income of both husband and wife along with a near perfect credit score of 800. After they submit all the paperwork they are informed by their mortgage loan consultant that the lender has cut the “market” value of their home to $185,000 and that they will require more proof (along with the possibility of a second appraisal) from the appraiser to support the $200,000 sale price. The purchase transaction now has a potential shortfall of $15,000 and may require the buyer and seller to renegotiate on the price.
Unusual? Hardly. This is becoming more and more common as many lenders are using their in-house appraiser or an Automated Valuation Model (AVM) before the loan is even underwritten for approval. An AVM is a purchased service that some lenders utilize to provide property valuations using mathematical modeling combined with a database. AVM’s calculate a property’s estimated value at a specific point in time by analyzing values of comparable properties. The biggest drawback to this method is that a physical inspection of the property does not occur.
Many lenders are using their in-house appraiser or an AVM as an initial validation of the independent appraisal. If the difference between the two appraisals is greater than a certain percentage the lender will often require a second, independent appraisal to settle the issue.
As a licensed mortgage broker that has been in the business before the “purchase/refinance boom” of the previous five years began, I am quite aware of how the major lenders analyze appraisals. However, to give some broader focus to this issue, I surveyed over 20 lenders and put together the following guidelines that lenders are generally using when evaluating a mortgage.
These guidelines are not intended to be all inclusive and may differ depending on the lender. They should be viewed as the minimum requirements used to set the market value by using data for comparable properties.
- Must be within a three to six month period, with similar features such as square footage.
- Must provide days on market for the subject property and comparable sales used.
- Must be within close proximity of the subject property, looking at neighborhood character as well (urban, suburban or rural).
- Must be within a one mile radius of the subject.
- Must provide one current listing or pending sale from the Multiple Listing Service to help support value.
If any of these guidelines cannot be positively addressed or supported in the appraisal, the appraiser needs to provide a detailed written explanation of the circumstances.
In the past, choosing an appraiser and a mortgage lender were mutually exclusive activities, one performed by the real estate agent, the other by the mortgage broker. In today’s environment, a collaborative effort between the real estate and mortgage professionals makes sense when it comes to choosing an appraiser. As a way to potentially minimize these issues before the file is submitted to a lender for approval, the mortgage broker should determine if the lender has a list of approved appraisers that they recommend or get a list of their specific requirements.
It is incumbent that all parties, from the real estate professional to the mortgage broker to the appraiser, to be aware of the constantly changing requirements of lenders regarding appraisals.
By Jason Kotar, President of Diversity Lending Group, Inc.
RISMEDIA, Jan. 10, 2008-Remember when home values were steadily increasing and financing for home ownership had few restrictions or hurdles? Well, as you know that environment has significantly changed and is continuing to evolve as both government and financial markets are attempting to deal with the credit situation.
Along with this, the Comparative Market Analysis (CMA) is taking on more importance. In addition to establishing a relative asking price or market value of properties in an area, the CMA actually impacts how the loan approval process might proceed after the offer is accepted.
Until recently, the CMA was almost an afterthought for many real estate professionals; something that could literally be done on the way to a listing appointment. The comparables of existing home sales were easy to do since so many were within the same subdivision and almost all were within a 90 day window.
The past several years had seen an incredible spike in not only home sales but also home prices. Recently, as home prices have declined along with home sales, how real estate professionals look at CMA’s going forward will impact our market more than ever imagined. Consider the following scenario that many people face on a daily basis in the United States:
Enthusiastic buyers, after weeks or months of looking for just the right home, agree to purchase a home with a sales price of $200,000; and, it has an appraisal (by an independent third-party licensed appraiser) to support that same value of $200,000. The buyers then complete a loan application and figure they should easily qualify for a mortgage loan with income of both husband and wife along with a near perfect credit score of 800. After they submit all the paperwork they are informed by their mortgage loan consultant that the lender has cut the “market” value of their home to $185,000 and that they will require more proof (along with the possibility of a second appraisal) from the appraiser to support the $200,000 sale price. The purchase transaction now has a potential shortfall of $15,000 and may require the buyer and seller to renegotiate on the price.
Unusual? Hardly. This is becoming more and more common as many lenders are using their in-house appraiser or an Automated Valuation Model (AVM) before the loan is even underwritten for approval. An AVM is a purchased service that some lenders utilize to provide property valuations using mathematical modeling combined with a database. AVM’s calculate a property’s estimated value at a specific point in time by analyzing values of comparable properties. The biggest drawback to this method is that a physical inspection of the property does not occur.
Many lenders are using their in-house appraiser or an AVM as an initial validation of the independent appraisal. If the difference between the two appraisals is greater than a certain percentage the lender will often require a second, independent appraisal to settle the issue.
As a licensed mortgage broker that has been in the business before the “purchase/refinance boom” of the previous five years began, I am quite aware of how the major lenders analyze appraisals. However, to give some broader focus to this issue, I surveyed over 20 lenders and put together the following guidelines that lenders are generally using when evaluating a mortgage.
These guidelines are not intended to be all inclusive and may differ depending on the lender. They should be viewed as the minimum requirements used to set the market value by using data for comparable properties.
- Must be within a three to six month period, with similar features such as square footage.
- Must provide days on market for the subject property and comparable sales used.
- Must be within close proximity of the subject property, looking at neighborhood character as well (urban, suburban or rural).
- Must be within a one mile radius of the subject.
- Must provide one current listing or pending sale from the Multiple Listing Service to help support value.
If any of these guidelines cannot be positively addressed or supported in the appraisal, the appraiser needs to provide a detailed written explanation of the circumstances.
In the past, choosing an appraiser and a mortgage lender were mutually exclusive activities, one performed by the real estate agent, the other by the mortgage broker. In today’s environment, a collaborative effort between the real estate and mortgage professionals makes sense when it comes to choosing an appraiser. As a way to potentially minimize these issues before the file is submitted to a lender for approval, the mortgage broker should determine if the lender has a list of approved appraisers that they recommend or get a list of their specific requirements.
It is incumbent that all parties, from the real estate professional to the mortgage broker to the appraiser, to be aware of the constantly changing requirements of lenders regarding appraisals.
Wednesday, January 16, 2008
Democrats, Republicans promise speedy work on economic stimulus legislation
From SignOnSanDiego.com, The Union Tribune
By Andrew Taylor
ASSOCIATED PRESS
1:51 p.m. January 16, 2008
WASHINGTON – Under pressure to act quickly on the sagging election-year economy, Democratic and GOP leaders held talks Wednesday amid increasing optimism that the warring factions might actually agree soon on an economic stimulus bill.
House Speaker Nancy Pelosi, D-Calif., and Republican leader John Boehner of Ohio emerged from a rare meeting promising to develop legislation that would both provide a boost to the economy and pass with little controversy.
“There is an agreement that we will work together to try to put together a package that truly is stimulative, that will happen quickly, and those conversations are going to continue in coming days,” Boehner said.
The promises of cooperation stood in sharp contrast to the poisonous relations between the competing parties last year, especially on the Iraq war and a children's health measure. Now, both sides believe it's imperative to address the economy, and they have no chance of success unless they work together.
Pelosi agreed the session with Boehner, Minority Leader Roy Blunt, R-Mo., and her top Democratic lieutenants was “constructive.” She also held meetings with rank-and-file Democrats in which she spent considerable time tamping down expectations about what might make its way into the legislation.
“This package is not going to be all things to all people,” Pelosi told reporters.
There's no shortage of ideas on how to kick-start the ailing economy, and neither side is willing to state with confidence what a final stimulus measure will look like.
There's widespread agreement, however, that tax rebates along the lines of the $300-600 checks awarded in 2001 are likely to be part of the measure.
Democrats are coalescing around ideas such as extending unemployment benefits, boosting food stamp payments and doling out aid to ailing state governments.
Republicans are promoting business tax breaks such as incentives for investments in new plants and equipment and lowering the corporate income tax rate.
They also say extending tax cuts slated to expire at the end of 2010 would give small businesses greater confidence to make investments now.
Democrats say extending the expiring Bush tax cuts – including breaks on investments and for married couples and people with children – is a nonstarter. Republicans have signaled, however, that they won't insist on extending expiring tax cuts as a precondition of GOP support for the stimulus measure.
House Ways and Means Committee Chairman Charles Rangel, D-N.Y., whose panel writes tax legislation, said that in the spirit of producing a bipartisan bill he is resigned to providing some tax breaks favored by business, despite personal reservations about their effectiveness.
Meanwhile, a House-Senate panel held the first of a spate of hearings on the economy Wednesday, where former Treasury Secretary Lawrence Summers told lawmakers that the economy has worsened to the point where Congress should pass an economic stimulus bill of up to $150 billion.
Summers, an economics professor at Harvard University and Treasury secretary in the later years of the Clinton administration, had previously said $50 billion to $75 billion in tax cuts and pump-priming government spending is needed to boost the sagging economy.
Now, his recommendation is to roughly double that – though perhaps employing a “trigger” that would release the money only if the economy worsens further.
Summers said the advantage of employing a trigger to release a second stage of fiscal stimulus that could take effect without the need for new legislation is to avoid delays that could deliver an economic boost too late.
“The risks here of 'too little, too late' are far, far, far greater than the risk of 'too much too soon,'” Summers said.
Joint Economic Committee Chairman Charles Schumer, D-N.Y., said he had spoken with Federal Reserve Board Chairman Ben Bernanke on Monday and that Bernanke is “generally supportive” of lawmakers and Bush passing a stimulus bill.
“He said that while he wasn't going to endorse a specific plan, if an economic stimulus package was properly designed and enacted so that it enters the economy quickly, it could have a very positive effect on the economy,” Schumer said of Bernanke's views.
Bernanke testifies before the House Budget Committee Thursday.
By Andrew Taylor
ASSOCIATED PRESS
1:51 p.m. January 16, 2008
WASHINGTON – Under pressure to act quickly on the sagging election-year economy, Democratic and GOP leaders held talks Wednesday amid increasing optimism that the warring factions might actually agree soon on an economic stimulus bill.
House Speaker Nancy Pelosi, D-Calif., and Republican leader John Boehner of Ohio emerged from a rare meeting promising to develop legislation that would both provide a boost to the economy and pass with little controversy.
“There is an agreement that we will work together to try to put together a package that truly is stimulative, that will happen quickly, and those conversations are going to continue in coming days,” Boehner said.
The promises of cooperation stood in sharp contrast to the poisonous relations between the competing parties last year, especially on the Iraq war and a children's health measure. Now, both sides believe it's imperative to address the economy, and they have no chance of success unless they work together.
Pelosi agreed the session with Boehner, Minority Leader Roy Blunt, R-Mo., and her top Democratic lieutenants was “constructive.” She also held meetings with rank-and-file Democrats in which she spent considerable time tamping down expectations about what might make its way into the legislation.
“This package is not going to be all things to all people,” Pelosi told reporters.
There's no shortage of ideas on how to kick-start the ailing economy, and neither side is willing to state with confidence what a final stimulus measure will look like.
There's widespread agreement, however, that tax rebates along the lines of the $300-600 checks awarded in 2001 are likely to be part of the measure.
Democrats are coalescing around ideas such as extending unemployment benefits, boosting food stamp payments and doling out aid to ailing state governments.
Republicans are promoting business tax breaks such as incentives for investments in new plants and equipment and lowering the corporate income tax rate.
They also say extending tax cuts slated to expire at the end of 2010 would give small businesses greater confidence to make investments now.
Democrats say extending the expiring Bush tax cuts – including breaks on investments and for married couples and people with children – is a nonstarter. Republicans have signaled, however, that they won't insist on extending expiring tax cuts as a precondition of GOP support for the stimulus measure.
House Ways and Means Committee Chairman Charles Rangel, D-N.Y., whose panel writes tax legislation, said that in the spirit of producing a bipartisan bill he is resigned to providing some tax breaks favored by business, despite personal reservations about their effectiveness.
Meanwhile, a House-Senate panel held the first of a spate of hearings on the economy Wednesday, where former Treasury Secretary Lawrence Summers told lawmakers that the economy has worsened to the point where Congress should pass an economic stimulus bill of up to $150 billion.
Summers, an economics professor at Harvard University and Treasury secretary in the later years of the Clinton administration, had previously said $50 billion to $75 billion in tax cuts and pump-priming government spending is needed to boost the sagging economy.
Now, his recommendation is to roughly double that – though perhaps employing a “trigger” that would release the money only if the economy worsens further.
Summers said the advantage of employing a trigger to release a second stage of fiscal stimulus that could take effect without the need for new legislation is to avoid delays that could deliver an economic boost too late.
“The risks here of 'too little, too late' are far, far, far greater than the risk of 'too much too soon,'” Summers said.
Joint Economic Committee Chairman Charles Schumer, D-N.Y., said he had spoken with Federal Reserve Board Chairman Ben Bernanke on Monday and that Bernanke is “generally supportive” of lawmakers and Bush passing a stimulus bill.
“He said that while he wasn't going to endorse a specific plan, if an economic stimulus package was properly designed and enacted so that it enters the economy quickly, it could have a very positive effect on the economy,” Schumer said of Bernanke's views.
Bernanke testifies before the House Budget Committee Thursday.
Over time, real estate earns 6% per year.
Over the past 30 years, the median price of existing homes has increased an average of more than 6 percent every year, and home values nearly double every 10 years.
Sensationalized headlines and stories about mortgage fraud, foreclosures and crashing markets have far overshadowed the good news. What is that good news? Simply this:
That owning a home is one of the most reliable ways to build wealth for most people.
Sensationalized headlines and stories about mortgage fraud, foreclosures and crashing markets have far overshadowed the good news. What is that good news? Simply this:
That owning a home is one of the most reliable ways to build wealth for most people.
Importance of Luxury Home Market Trends to the Rest of Us
From National Association of Realtors, International Real Estate Report, Wednesday, January 16, 2008
The global luxury residential market has been largely unaffected by the real estate slowdown. Knight Frank's 2007 Annual Wealth Report looks at the behavior and attitudes of high net worth individuals (HNWIs) as they relate to the residential property market.
HNWIs view their residential portfolio as an opportunity for lifestyle enjoyment, individuality and exclusivity. They are aggressive investors and differ from other investors in their attitude toward risk and reward.
HNWIs have a higher than average weighting in residential property and their portfolio is internationally diverse. They are happy to invest in emerging economies and are open-minded to alternative investment locations.
The report names three key drivers of HNWIs in the purchase of a prime residence or a second home:
- Time Poverty (convenience and accessibility),
- Luxury and
- Prestige
These drivers keep HNWIs pushing at the edge of the market, as they seek to keep ahead of the market either by bidding up prices to retain exclusivity or by exploring new markets.
History shows that where this market niche goes in terms of location and property types, the rest of the market will follow.
The global luxury residential market has been largely unaffected by the real estate slowdown. Knight Frank's 2007 Annual Wealth Report looks at the behavior and attitudes of high net worth individuals (HNWIs) as they relate to the residential property market.
HNWIs view their residential portfolio as an opportunity for lifestyle enjoyment, individuality and exclusivity. They are aggressive investors and differ from other investors in their attitude toward risk and reward.
HNWIs have a higher than average weighting in residential property and their portfolio is internationally diverse. They are happy to invest in emerging economies and are open-minded to alternative investment locations.
The report names three key drivers of HNWIs in the purchase of a prime residence or a second home:
- Time Poverty (convenience and accessibility),
- Luxury and
- Prestige
These drivers keep HNWIs pushing at the edge of the market, as they seek to keep ahead of the market either by bidding up prices to retain exclusivity or by exploring new markets.
History shows that where this market niche goes in terms of location and property types, the rest of the market will follow.
Mortgage Demand Reaches 4-Year High
From Realtor Magazine Online, Daily Real Estate News January 16, 2008
Demand for mortgages surged last week, hitting its highest level in nearly four years as interest rates fell, the Mortgage Bankers Association reported today.
Mortgage application volume reached 906.4, an increase of 28.4 percent on a seasonally adjusted basis, up from 706 one week earlier. On an unadjusted basis, the index increased 64.8 percent compared with the previous week, which was shortened by the New Year holiday and was up 39 percent compared with the same week a year ago.
The refinance share of mortgage activity increased to 62.7 percent of total applications, up from 57.7 percent the previous week.
Adjustable-rate mortgages were only 9.2 percent of total applications.
Meanwhile, mortgage rates slipped during the week. They were:
- 30-year fixed-rate mortgages decreased to 5.62 percent from 5.73 percent.
- 15-year fixed-rate mortgages decreased to 5.07 percent from 5.21 percent.
- 1-year ARMs decreased to 5.77 percent from 6.04 percent.
Source: Mortgage Bankers Association (01/16/08)
Demand for mortgages surged last week, hitting its highest level in nearly four years as interest rates fell, the Mortgage Bankers Association reported today.
Mortgage application volume reached 906.4, an increase of 28.4 percent on a seasonally adjusted basis, up from 706 one week earlier. On an unadjusted basis, the index increased 64.8 percent compared with the previous week, which was shortened by the New Year holiday and was up 39 percent compared with the same week a year ago.
The refinance share of mortgage activity increased to 62.7 percent of total applications, up from 57.7 percent the previous week.
Adjustable-rate mortgages were only 9.2 percent of total applications.
Meanwhile, mortgage rates slipped during the week. They were:
- 30-year fixed-rate mortgages decreased to 5.62 percent from 5.73 percent.
- 15-year fixed-rate mortgages decreased to 5.07 percent from 5.21 percent.
- 1-year ARMs decreased to 5.77 percent from 6.04 percent.
Source: Mortgage Bankers Association (01/16/08)
Tuesday, January 15, 2008
Spotting Market Bottoms in 2008, Strategies for Home Sellers
From Wallstreet Journal Online
Resolve to buy in 2008.
Demand for U.S. residential real estate isn't dead, it's just stalled, writes Thomas Kostigen of Marketwatch. He notes that sales of luxury homes have been strong and that "with the value of the U.S. dollar low and real estate prices dropping, it isn't hard to imagine foreigners taking bigger positions in properties here as part of their overall portfolios." Prices and sale volumes are already down 25% in some areas of South Florida, and when overseas buyers see values dropping 50%, they are likely to buy, he says.
"At the first blush of renewed energy, the real estate market will bounce back," he says.
By Lauren Baier Kim
Resolve to buy in 2008.
Demand for U.S. residential real estate isn't dead, it's just stalled, writes Thomas Kostigen of Marketwatch. He notes that sales of luxury homes have been strong and that "with the value of the U.S. dollar low and real estate prices dropping, it isn't hard to imagine foreigners taking bigger positions in properties here as part of their overall portfolios." Prices and sale volumes are already down 25% in some areas of South Florida, and when overseas buyers see values dropping 50%, they are likely to buy, he says.
"At the first blush of renewed energy, the real estate market will bounce back," he says.
By Lauren Baier Kim
The Latest Pending Sales Index and Forecast Release
From National Association of Realtors Research Update, Monday, January 14, 2008
Market Conditions
This week's release shows that over the next few months, existing-home sales are expected to hold fairly steady, then rise later in the year and continue to improve in 2009. Lawrence Yun, NAR chief economist, said there is a pull and tug exerting itself on the market, making the exact timing and strength of a home sales recovery uncertain. “On the one hand, we have a pent-up demand from the four million jobs added to our economy over the past two years of sales decline,” he said. “On the other, consumers continue to wait for additional signs of market stabilization. There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008.”
** The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons.
Market Conditions
This week's release shows that over the next few months, existing-home sales are expected to hold fairly steady, then rise later in the year and continue to improve in 2009. Lawrence Yun, NAR chief economist, said there is a pull and tug exerting itself on the market, making the exact timing and strength of a home sales recovery uncertain. “On the one hand, we have a pent-up demand from the four million jobs added to our economy over the past two years of sales decline,” he said. “On the other, consumers continue to wait for additional signs of market stabilization. There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008.”
** The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons.
Monday, January 14, 2008
Bank of America Deal Gives Confidence Boost
From Realtor Magazine Online, Daily Real Estate News January 14, 2008
Analysts are applauding Bank of America’s $4.1 billion rescue of Countrywide Financial, saying it could give investors worldwide more confidence in the U.S. mortgage industry.
"Hopefully this is a signal that things are a little bit better," says Torsten Slok, senior economist with Deutsche Bank in New York.
The acquisition isn't expected to do much — at least right away — for the thousands of Countrywide borrowers struggling to make their mortgage payments. But consumer advocates are hopeful that Bank of America will do a better job of setting up loan modifications for struggling borrowers.
"What this demonstrates is the ability of the U.S. financial system to deal with a sizable problem in a manner that represents a relatively clean resolution," says Bert Ely, an Alexandria, Va., banking industry consultant.
Source: The Associated Press, Alan Zibel (01/11/08)
Analysts are applauding Bank of America’s $4.1 billion rescue of Countrywide Financial, saying it could give investors worldwide more confidence in the U.S. mortgage industry.
"Hopefully this is a signal that things are a little bit better," says Torsten Slok, senior economist with Deutsche Bank in New York.
The acquisition isn't expected to do much — at least right away — for the thousands of Countrywide borrowers struggling to make their mortgage payments. But consumer advocates are hopeful that Bank of America will do a better job of setting up loan modifications for struggling borrowers.
"What this demonstrates is the ability of the U.S. financial system to deal with a sizable problem in a manner that represents a relatively clean resolution," says Bert Ely, an Alexandria, Va., banking industry consultant.
Source: The Associated Press, Alan Zibel (01/11/08)
A Homebuyer's Checklist
- Identify your housing needs.
- Confirm what you can afford and your price range.
- Estimate your costs to get the deal done.
- Understand the Representation and Agency Relationships - in the absence of a Buyer's Broker Agreement, the agent usually represents the seller, not the buyer.
- Let your Buyer Broker know the types of properties you want him/her to show you.
- Understand the commission arrangements. Typically, the seller contracts to pay his/her Listing Agent a 6% commission. That Listing Agent then offers to pay the Buyer's Agent half of the 6%...or 3%. Therefore, it can be said that the buyer gets the fiduciary services of his/her own real estate agent "for free", unless other arrangements have been made.
- Understand "Procuring Cause." The agent who finds the buyer that completes the deal is called the procuring cause. That agent procured the buyer.
- Understand that some Buyer's Broker Agreements are an outright employment contract between the buyer and his/her agent, whereby the buyer agrees to pay his/her agent out of the buyer's own pocket.
- Know how to choose a lender.
- Understand the purchase contract.
- Complete the loan application and credit report information for the lender to verify you are who you say you are and that you have the resources to pay back the loan in the prescribed manner.
OPEN ESCROW
- Wire or otherwise transfer directly to escrow your 3% deposit.
- The appraisal must be completed within the first 17 days.
- All inspections must be completed within the first 17 days.
- Negotiate any repairs if necessary.
- Always complete and return escrow documents immediately.
- Buyers have 5 days to review documents and to sign their approval/disapproval.
- All contingencies must be removed in writing within the first 17 days.
FINAL LOAN APPROVAL
- The final property walk-through takes place the day or two before escrow is to close.
- Call SDG&E, water & trash, phone, cable and HOA.
- Be sure you notify the Post Office of your new address.
- Sign loan documents at escrow 3-5 days before close of escrow.
- Wire the remainder of your downpayment to escrow 3-5 days before close of escrow.
ESCROW CLOSES
- The property title is recorded in your name.
- Pick up the keys to your new home!
We hope this helps you understand the escrow process. If you have any questions or comments, please email them to drtimjames@prusd.com.
- Confirm what you can afford and your price range.
- Estimate your costs to get the deal done.
- Understand the Representation and Agency Relationships - in the absence of a Buyer's Broker Agreement, the agent usually represents the seller, not the buyer.
- Let your Buyer Broker know the types of properties you want him/her to show you.
- Understand the commission arrangements. Typically, the seller contracts to pay his/her Listing Agent a 6% commission. That Listing Agent then offers to pay the Buyer's Agent half of the 6%...or 3%. Therefore, it can be said that the buyer gets the fiduciary services of his/her own real estate agent "for free", unless other arrangements have been made.
- Understand "Procuring Cause." The agent who finds the buyer that completes the deal is called the procuring cause. That agent procured the buyer.
- Understand that some Buyer's Broker Agreements are an outright employment contract between the buyer and his/her agent, whereby the buyer agrees to pay his/her agent out of the buyer's own pocket.
- Know how to choose a lender.
- Understand the purchase contract.
- Complete the loan application and credit report information for the lender to verify you are who you say you are and that you have the resources to pay back the loan in the prescribed manner.
OPEN ESCROW
- Wire or otherwise transfer directly to escrow your 3% deposit.
- The appraisal must be completed within the first 17 days.
- All inspections must be completed within the first 17 days.
- Negotiate any repairs if necessary.
- Always complete and return escrow documents immediately.
- Buyers have 5 days to review documents and to sign their approval/disapproval.
- All contingencies must be removed in writing within the first 17 days.
FINAL LOAN APPROVAL
- The final property walk-through takes place the day or two before escrow is to close.
- Call SDG&E, water & trash, phone, cable and HOA.
- Be sure you notify the Post Office of your new address.
- Sign loan documents at escrow 3-5 days before close of escrow.
- Wire the remainder of your downpayment to escrow 3-5 days before close of escrow.
ESCROW CLOSES
- The property title is recorded in your name.
- Pick up the keys to your new home!
We hope this helps you understand the escrow process. If you have any questions or comments, please email them to drtimjames@prusd.com.
Sunday, January 13, 2008
Make an Offer, You Get a 17-Day Free Look
First time buyers and seasoned real estate investors often fail to understand the important time frames involved in a real estate purchase. Here's 5 important dates to remember:
- 3 days from when the buyer is alerted that the seller has accepted his offer, the initial deposit of the 1-3% downpayment is due.
- 7 days from the seller's acceptance, the buyer must prove he/she has the cash funds to complete the down payment and to pay the closing costs.
- 7 days from the seller's acceptance, the buyer must be pre-qualified for any mortgage.
- 7 days from the seller's acceptance, the seller must deliver to the buyer or buyer's agent all reports and disclosures as specified in paragraphs 4, 5a, 5b, 6a, 7b, and 12 of the Residential Purchase Agreement and Joint Escrow Instructions.
-17 days from the seller's acceptance: a) Complete all buyer's investigations. b) Approve all disclosures, reports and other applicable information. c) Approve all matters affecting the property. d) Return to Seller signed copies of statuary and lead disclosures.
The critical day is #17 because that's the period when the buyer can back out of the deal and recover up to 3% of the purchase price...i.e., his/her initial downpayment. That's why a prudent Buyer's Representative will not permit his/her client to expose more than 3% of the purchase price until after the 17th day.
For example, let's say one of our buyers enters into a contract to purchase a $600,000 property. At "Home, James!" we advise our buyers to never expose more than that 3%. So the Initial Deposit would not be more than $18,000.
If the buyer is getting a 30-year fixed rate 80/20 mortgage, the bank wants a 20% downpayment by the close of escrow. 20% of that $600,000 purchase price would be $120,000. So if the Initial Deposit was $18,000, at some point prior to the close of escrow the buyer would have to wire an additional $102,000 to escrow to bring the total downpayment to $120,000. And those would be funds dedicated to the lender and the mortgage.
Additional fees the buyer must pay by the close of escrow have been discussed in other blogs. If you have any questions or require further clarification, please submit your inquiry to us by email to drtimjames@prusd.com.
We hope this helps clarify the procedure for purchasing real estate.
- 3 days from when the buyer is alerted that the seller has accepted his offer, the initial deposit of the 1-3% downpayment is due.
- 7 days from the seller's acceptance, the buyer must prove he/she has the cash funds to complete the down payment and to pay the closing costs.
- 7 days from the seller's acceptance, the buyer must be pre-qualified for any mortgage.
- 7 days from the seller's acceptance, the seller must deliver to the buyer or buyer's agent all reports and disclosures as specified in paragraphs 4, 5a, 5b, 6a, 7b, and 12 of the Residential Purchase Agreement and Joint Escrow Instructions.
-17 days from the seller's acceptance: a) Complete all buyer's investigations. b) Approve all disclosures, reports and other applicable information. c) Approve all matters affecting the property. d) Return to Seller signed copies of statuary and lead disclosures.
The critical day is #17 because that's the period when the buyer can back out of the deal and recover up to 3% of the purchase price...i.e., his/her initial downpayment. That's why a prudent Buyer's Representative will not permit his/her client to expose more than 3% of the purchase price until after the 17th day.
For example, let's say one of our buyers enters into a contract to purchase a $600,000 property. At "Home, James!" we advise our buyers to never expose more than that 3%. So the Initial Deposit would not be more than $18,000.
If the buyer is getting a 30-year fixed rate 80/20 mortgage, the bank wants a 20% downpayment by the close of escrow. 20% of that $600,000 purchase price would be $120,000. So if the Initial Deposit was $18,000, at some point prior to the close of escrow the buyer would have to wire an additional $102,000 to escrow to bring the total downpayment to $120,000. And those would be funds dedicated to the lender and the mortgage.
Additional fees the buyer must pay by the close of escrow have been discussed in other blogs. If you have any questions or require further clarification, please submit your inquiry to us by email to drtimjames@prusd.com.
We hope this helps clarify the procedure for purchasing real estate.
Saturday, January 12, 2008
The ABCs of CLOSING COSTS
Tim James and Jeff James, Realtors
Prudential California Realty
1299 Prospect Street
La Jolla, CA 92037
Cell: (909) 702-3220
Email: drtimjames@prusd.com
http://www.homejames-california.com/
http://www.invest-in-california-property.com/
Around the world there are different procedures for transferring title to property. In some countries the process is handled between lawyers. In other countries it is handled through a notario. In many states of the United States, the process is handled "through escrow."
In California, the document used for a transaction involving the sale/purchase of a condo or home is the "Residential Purchase Agreement and Joint Escrow Instructions" or California Association of Realtors Form RPA-CA.
An escrow company is a neutral third party. Once Buyer and Seller sign the Residential Purchase Agreement and Joint Escrow Instructions, that contract is then turned over to the escrow company. Thus, the escrow company "opens" the escrow and oversees the process whereby both sides of the transaction execute their respective obligations.
On the day escrow "closes," the seller surrenders title to the property and the buyer surrenders the proceeds. By this time, both Buyer and Seller will have signed what amounts to a pile of documents. So, rather than have Buyer and Seller confront each other face-to-face during a time when emotions can overpower reason, the escrow company acts as the neutral intermediary.
During the escrow process, many activities take place and each of these generally produces a charge that either the buyer or seller must pay - as is called out in the contract. It's these various fees associated with an escrow that often seem mysterious, so in an effort to help clarify the situation, I have written this paper.
First, understand that these costs are both mortgage-related and government imposed. Although these fees may vary by locality, here is a breakdown of the most common ones:
APPRAISAL FEE
This fee pays for the appraisal of the property. Buyers may have already paid this fee at the beginning of the loan application process, or it may show up in the final escrow statement.
CREDIT REPORT FEE
This fee covers the cost of the credit report required by your lender. Likewise, this fee may have been paid up front when you first applied for your loan or it may show up in the final escrow statement.
LOAN ORIGINATION FEE
This fee covers your lender's loan processing costs, and it is typically around 1% of the total mortgage.
LOAN DISCOUNT
This fee is a one-time charge if you have opted to pay "points" to lower your interest rate. Each point you purchase equals 1% of the total loan. This is also called "buying down your loan."
TITLE INSURANCE
These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous services provided by your title company.
PMI PREMIUM
If you buy a home wih a low down payment, your lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20% equity in the home, however, he or she can normally apply to the lender to eliminate this insurance.
PREPAID INTEREST FEE
This fee covers the interest payment from the date you purchase the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it toward the end of the month. This is the fractional payment, and it depends on the amount of time until your first normal payment comes due.
ESCROW ACCOUNTS
Your mortgage lender can start an account that holds funds for future annual property taxes and home insurance. At least one year advance plus two months of homeowner's insurance premium will be collected. In addition, taxes equal approximately two months in excess of the number of months that have elapsed in the year are paid at closing. (If 6 months have passed, 8 months of taxes will be collected.)
RECORDING FEES and TRANSFER TAXES
This expense is for recording the documents pertaining to mortgages and the transfer of ownership of the property.
Make sure you consult with a real estate professional to find out which fees - and how much - you will be expected to pay during the closing of your prospective home. Keep in mind that you can negotiate these costs with the seller during the offering stage.
As a potential home buyer, there is information you will need to understand about the process of closing an escrow.
Also called "the settlement," the closing is the process of passing ownership of property from Seller to Buyer.
Prudential California Realty
1299 Prospect Street
La Jolla, CA 92037
Cell: (909) 702-3220
Email: drtimjames@prusd.com
http://www.homejames-california.com/
http://www.invest-in-california-property.com/
Around the world there are different procedures for transferring title to property. In some countries the process is handled between lawyers. In other countries it is handled through a notario. In many states of the United States, the process is handled "through escrow."
In California, the document used for a transaction involving the sale/purchase of a condo or home is the "Residential Purchase Agreement and Joint Escrow Instructions" or California Association of Realtors Form RPA-CA.
An escrow company is a neutral third party. Once Buyer and Seller sign the Residential Purchase Agreement and Joint Escrow Instructions, that contract is then turned over to the escrow company. Thus, the escrow company "opens" the escrow and oversees the process whereby both sides of the transaction execute their respective obligations.
On the day escrow "closes," the seller surrenders title to the property and the buyer surrenders the proceeds. By this time, both Buyer and Seller will have signed what amounts to a pile of documents. So, rather than have Buyer and Seller confront each other face-to-face during a time when emotions can overpower reason, the escrow company acts as the neutral intermediary.
During the escrow process, many activities take place and each of these generally produces a charge that either the buyer or seller must pay - as is called out in the contract. It's these various fees associated with an escrow that often seem mysterious, so in an effort to help clarify the situation, I have written this paper.
First, understand that these costs are both mortgage-related and government imposed. Although these fees may vary by locality, here is a breakdown of the most common ones:
APPRAISAL FEE
This fee pays for the appraisal of the property. Buyers may have already paid this fee at the beginning of the loan application process, or it may show up in the final escrow statement.
CREDIT REPORT FEE
This fee covers the cost of the credit report required by your lender. Likewise, this fee may have been paid up front when you first applied for your loan or it may show up in the final escrow statement.
LOAN ORIGINATION FEE
This fee covers your lender's loan processing costs, and it is typically around 1% of the total mortgage.
LOAN DISCOUNT
This fee is a one-time charge if you have opted to pay "points" to lower your interest rate. Each point you purchase equals 1% of the total loan. This is also called "buying down your loan."
TITLE INSURANCE
These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous services provided by your title company.
PMI PREMIUM
If you buy a home wih a low down payment, your lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20% equity in the home, however, he or she can normally apply to the lender to eliminate this insurance.
PREPAID INTEREST FEE
This fee covers the interest payment from the date you purchase the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it toward the end of the month. This is the fractional payment, and it depends on the amount of time until your first normal payment comes due.
ESCROW ACCOUNTS
Your mortgage lender can start an account that holds funds for future annual property taxes and home insurance. At least one year advance plus two months of homeowner's insurance premium will be collected. In addition, taxes equal approximately two months in excess of the number of months that have elapsed in the year are paid at closing. (If 6 months have passed, 8 months of taxes will be collected.)
RECORDING FEES and TRANSFER TAXES
This expense is for recording the documents pertaining to mortgages and the transfer of ownership of the property.
Make sure you consult with a real estate professional to find out which fees - and how much - you will be expected to pay during the closing of your prospective home. Keep in mind that you can negotiate these costs with the seller during the offering stage.
As a potential home buyer, there is information you will need to understand about the process of closing an escrow.
Also called "the settlement," the closing is the process of passing ownership of property from Seller to Buyer.
Friday, January 11, 2008
Bernanke Confirms: More Rate Cuts Likely
From Realtor Magazine Online, Daily Real Estate News January 11, 2008
Federal Reserve Chair Ben Bernanke told a Washington D.C. business group Thursday that more interest rate cuts are in the offing to ward off a further weakening of the economy.
"On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired," Bernanke said. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”
Many economists now believe the Fed will slice its key interest rate by a bold one-half of a percentage point when the Fed meets Jan. 29-30. Some, however, think the Fed will go with a more modest one-quarter point reduction, given concerns that high energy prices could spark inflation.
The Federal Open Market Committee (FOMC), the policy-making arm of the Fed, will be paying close attention to whether the weak housing market spills over to other sectors of the economy. However, so far, Bernanke said, the recession remains just a forecast.
Source: Dow Jones Business News (01/10/08)
Federal Reserve Chair Ben Bernanke told a Washington D.C. business group Thursday that more interest rate cuts are in the offing to ward off a further weakening of the economy.
"On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired," Bernanke said. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”
Many economists now believe the Fed will slice its key interest rate by a bold one-half of a percentage point when the Fed meets Jan. 29-30. Some, however, think the Fed will go with a more modest one-quarter point reduction, given concerns that high energy prices could spark inflation.
The Federal Open Market Committee (FOMC), the policy-making arm of the Fed, will be paying close attention to whether the weak housing market spills over to other sectors of the economy. However, so far, Bernanke said, the recession remains just a forecast.
Source: Dow Jones Business News (01/10/08)
Bank of America to Buy Countrywide
From Realtor Magazine Online, Daily Real Estate News January 11, 2008
Bank of America Corp. announced today that it has agreed to buy Countrywide Financial for $4 billion in stock.
The purchase will make Bank of America the nation’s largest mortgage lender and loan servicer.
"Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers," Bank of America Chief Executive Ken Lewis said in a statement.
The sale will place the responsibility of sorting out the payment issues surrounding millions of dollars worth of troubled loans on Bank of America.
"There's still plenty of risk involved," says Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. "[Lewis] is brave to do it. But I think that it's very likely down the road to be profitable, maybe not immediately, but long-term.
"The agreement has been approved by both companies' boards and is subject to regulatory and Countrywide's shareholders approval.
Source: The Associated Press, Ieva M. Augstums (01/11/08)
Bank of America Corp. announced today that it has agreed to buy Countrywide Financial for $4 billion in stock.
The purchase will make Bank of America the nation’s largest mortgage lender and loan servicer.
"Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers," Bank of America Chief Executive Ken Lewis said in a statement.
The sale will place the responsibility of sorting out the payment issues surrounding millions of dollars worth of troubled loans on Bank of America.
"There's still plenty of risk involved," says Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. "[Lewis] is brave to do it. But I think that it's very likely down the road to be profitable, maybe not immediately, but long-term.
"The agreement has been approved by both companies' boards and is subject to regulatory and Countrywide's shareholders approval.
Source: The Associated Press, Ieva M. Augstums (01/11/08)
Wednesday, January 9, 2008
Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales
From C.A.R. Newsline, What's New and Legal Articles of the Legal section on C.A.R. Online
"...adding insult to injury, owners of real property facing a distress sale, and generally already under financial strain, may be unpleasantly surprised to learn that two types of income can result from a foreclosure, deed in lieu of foreclosure, or short sale: capital gains, and relief of indebtedness income. Both types of income can trigger unexpected taxes for the owner.
This legal article discusses the income tax consequences to the borrower in the event of foreclosure, the event the borrower simply transfers title to the lender (deed in lieu of foreclosure), and if the borrower sells the property to another in a short sale in which a lender accepts less than the balance due on the loan as payment in full.
Q 1. Are foreclosures, deeds in lieu of foreclosure, and short sales subject to federal tax income taxation?
A: Yes. However, the income is taxed differently depending on several factors, including whether there was a foreclosure, a deed in lieu of foreclosure given to the lender, or a short sale (a sale where the lender agrees to reduce the amount owed in order to facilitate a sale), and whether the underlying debt is “recourse” (the borrower is personally liable for the debt) or “nonrecourse” (the borrower is not personally liable for the debt). For federal income taxation as a result of foreclosure, see generally 26 U.S.C. §§ 1001 through 1016. For federal income taxation of short sales, see generally 26 U.S.C. §§ 61, 108 and 1001 through 1016.
TAXATION OF FORECLOSURES OR DEEDS IN LIEU OF FORECLOSURE
Q 2. What is the difference between a foreclosure and a deed in lieu of foreclosure?
A: A foreclosure refers either to a trustee’s sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding). A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property. A deed in lieu of foreclosure is not a special instrument. It is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property. In this way the lender can avoid the foreclosure process to regain title to the property.
However, a borrower cannot simply transfer title to the lender without the lender’s permission. Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, some creative homeowners have quitclaimed the property to the lender anyway, and have recorded the instrument without the lender's permission.
In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender. The lender must record a "notice of nonacceptance of a recorded deed" in the county where the real property is located. Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title. (Cal. Civ. Code § 1058.5.)
A lender may not want to take a deed in lieu of foreclosure because taking title in this manner does not extinguish any junior liens. A foreclosure by a senior lienholder essentially wipes out all junior liens.
Q 3. How does the owner receive “income” from a foreclosure or a deed in lieu of foreclosure?
A: A foreclosure proceeding, whether through a trustee sale or judicial foreclosure, and a deed in lieu of foreclosure given to the lender are treated the same as a sale for income tax purposes. The foreclosure or deed in lieu of foreclosure are reported on the taxpayer’s tax return as a sale or exchange in the year the foreclosure is finalized or the deed in lieu of foreclosure is given to the lender.
In a foreclosure or deed in lieu of foreclosure, the owner can receive “capital gain or loss,” as in any other sale of real property. Additionally, the owner can receive “forgiveness of debt” income. This will depend on whether the debt is “recourse” or “nonrecourse.” If the debt is recourse debt, the owner can receive income from the amount of debt that is forgiven by the lender. If the debt is nonrecourse debt, there is no taxable income from forgiveness of debt, but there may be still be income from capital gains.
Q 4. What is “nonrecourse” debt?
A: Under California law, a debt is considered “nonrecourse” when a loan is made under either one of the following two circumstances:
(1) When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or
(2) When the seller carries back financing for all or a portion of the purchase price of any real property.
(Cal. Code Civ. Proc. § 580b.)
In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency.
Q 5. What is “recourse” debt?
A: Under California law, a “recourse” debt is one in which neither of the two exemptions in Question 4 occurs.
Examples of recourse debt are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans, other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property. The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee’s sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt.
Q 6. How is the amount realized (taxable income) calculated for a “recourse” debt in a foreclosure?
A: A If the debt is recourse debt, meaning the owner may be personally liable for the debt, the amount realized is calculated in a two-step approach.
First, you take the difference between the fair market value (FMV) of the property and the “adjusted basis” in the property. Generally, the “adjusted basis” consists of the purchase price of the property plus any capital improvements (less depreciation, if the property is investment property). This difference is the capital gain or loss. If the amount realized exceeds the amount of the adjusted basis, then the borrower has realized a gain at the time of the transfer (foreclosure). If the adjusted basis exceeds the amount realized, then the borrower has a loss.
Second, you take the difference between the amount of the cancelled debt (e.g., unpaid loan amount) and the sales proceeds at the foreclosure (FMV). This is the forgiveness of debt income and it is treated as ordinary income. This is treated as income despite the fact that the borrower has received no cash at the time of the foreclosure.
RECOURSE DEBT
Example One:
1. The unpaid principal of the loan is $300,000;
2. The fair market value of the property is $250,000;
3. The taxpayer's adjusted basis in the property is $200,000.Assume the lender forecloses and will forgive the underlying debt.
Step one:
FMV ($250,000) less taxpayer’s adjusted basis ($200,000) results in capital gains for the taxpayer.
FMV $250,000
Less Adjusted Basis $200,000
Capital Gains $50,000
Step two:
Amount of cancelled debt (amount owed on loan $300,000) less FMV ($250,000) is ordinary income to the taxpayer.
Amount Owed $300,000
Less FMV $250,000
Ordinary Income $50,000
Note: If a lender chooses to foreclose through a trustee's sale and is barred from obtaining a deficiency judgment by the one action rule under California Code of Civil Procedure Section 580d, it is likely the IRS will still consider that the underlying debt as a recourse debt and it will be subject to debt forgiveness income. (See Rev. Rul. 90-16.)
RECOURSE DEBT
Example Two:
If the amount realized at the foreclosure sale is more than what the lender is owed, there will be no forgiveness of debt and, thus, no ordinary income to the taxpayer.
1. The unpaid principal of the recourse debt is $300,000;
2. The fair market value of the property is $400,000;
3. The taxpayer's adjusted basis in the property is $200,000.
Step one:
FMV ($400,000) less taxpayer’s adjusted basis ($200,000) results in capital gains for the taxpayer.
FMV $400,000
Less Adjusted Basis $200,000
Capital Gains $200,000
Step two:
The debt is fully paid (since the FMV exceeds the loan amount) resulting in no forgiveness of debt income.
Q 7. How is the amount realized (taxable income) calculated for a “nonrecourse” debt in a foreclosure?
A: A If the debt is nonrecourse, meaning the owner is not personally liable for any deficiency (beyond the value of the property), the amount realized is the difference between the greater of the foreclosure proceeds or the entire outstanding debt and the adjusted basis of the property. This amount is treated as capital gains and there is no forgiveness of debt income.
NONRECOURSE DEBT
Example:
1. The unpaid principal of the loan is $300,000;
2. The fair market value of the property is $250,000;
3. The taxpayer's adjusted basis in the property is $200,000.
Greater of foreclosure proceeds (FMV $250,000) or entire outstanding debt ($300,000) minus taxpayer’s adjusted basis ($200,000) results in capital gains to the taxpayer.
Greater of FMV ($250,000) OR Outstanding Debt ($300,000)
Greater of the above $300,000
Less Adjusted Basis $200,000
Capital Gains $100,000
Q 8. How is a deed in lieu of foreclosure treated for tax purposes?
A: A deed in lieu of foreclosure is treated as a sale and taxed just like a foreclosure. See Questions 6 and 7 above.
TAXATION OF SHORT SALES
Q 9. What are the tax implications of a short sale?
A: A short sale where the lender agrees to reduce some or all of the outstanding debt may give rise to forgiveness of debt income (also called "cancellation of debt" income). The amount of the debt that the lender agrees to write off is treated as "ordinary income" (as opposed to capital gains income which is taxed at a lower rate). Even though the lender may be taking this action to facilitate the sale by the owner who is under a notice of default and facing a foreclosure, the agreement between the owner and the lender is considered voluntary and treated as a debt reduction. The taxpayer will generally receive a 1099 tax form from the lender in the amount of the debt reduction.
This "ordinary income" (from the forgiveness or cancellation of debt) under certain circumstances may or may not subject to taxation. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code section 108(a)(1)(E) was added and provides that a taxpayer will not be taxed for cancellation of debt income if the following conditions are met:
- The property sold in the short sale is the taxpayer's principal residence.
- The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h)(3)(B).
- The indebtedness is discharged after January 1, 2007 and before January 1, 2010.
**Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. A refinance cannot exceed $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others.
Any reduction of indebtedness excluded by IRC Section 108(a)(1)(E) will be applied to reduce the basis of the taxpayer's principal residence, but not below zero.
Finally, if the owner has owned the property for some time and has refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well. For example, the borrower has a remaining loan on the property when the borrower refinances in order to buy other investment property (or to buy a car, or to take a vacation, etc.) and now owes $300,000 to the lender. Thus, the taxpayer’s adjusted basis may be lower than the outstanding balance on the loan (as in the example below).
The tax calculation would look like step one in calculating a foreclosure sale of recourse debt.
SHORT SALE
Example:
1. The unpaid principal of the loan is $300,000;2. The sales price (FMV) is $250,000;3. The taxpayer's adjusted basis in the property is $50,000.
Sales price (FMV $250,000) less taxpayer’s adjusted basis ($50,000) results in capital gains for the taxpayer.
Sales Price (FMV) $250,000
Less Adjusted Basis $50,000
Capital Gains $200,000
Additionally, the taxpayer would have ordinary income from the lender’s write off of any debt, which in this example would be $50,000. (** See the discussion above in this question to determine whether or not this would be taxable)
Loan Balance $300,000
Less Sales Price $250,000
Ordinary Income $50,000
TAX EXEMPTIONS
Q 10. Are there any exemptions from the relief of indebtedness income?
A: Yes. There are four other circumstances, in addition to what was dicussed in Question 9 on certain short sales, where the taxpayer can get relief from taxation on forgiveness of debt income:
(1) The taxpayer is insolvent (the taxpayer’s debts exceed their assets as determined under Bankruptcy Code Section 108(d)(3);
(2) The debt is discharged as part of a bankruptcy proceeding;
(3) The debt discharged is qualified farm indebtedness; or (4) The debt discharged is qualified business indebtedness (see 26 U.S.C. §108(c)).
Q 11. Are there any exemptions from the capital gains taxation in a foreclosure, deed in lieu of foreclosure or short sale if the property is a principal residence?
A: Yes. If the sale, whether through a foreclosure or deed in lieu or short sale, generates capital gains and if the property was the seller’s principal residence, the seller may be able to use the capital gains exclusion of $250,000 if single and $500,000 if filing a joint return. This exclusion does not apply to the ordinary income from debt relief.
MISCELLANEOUS
Q 12. Which is better for an owner facing a distress sale: a foreclosure, a deed in lieu of foreclosure or a short sale?
A: Any of these situations will impact the owner’s credit negatively. Additionally, the owner may have a significantly different tax liability depending on the disposition of the property. Consequently, this is a question that the owner needs to discuss with their own tax advisor.
Q 13. Where can readers obtain more information on the subjects covered above?
A: Information is available from a variety of sources, including:
The Internal Revenue Service (IRS) (http://www.irs.gov/), which has detailed publications available for free on many tax related subjects.
The IRS Tele-Tax system, which is an automated voice message information system with recorded information on many commonly asked tax questions. Tele-Tax can be reached by calling 800.829.4477.
Readers who require specific advice should consult an attorney.
"...adding insult to injury, owners of real property facing a distress sale, and generally already under financial strain, may be unpleasantly surprised to learn that two types of income can result from a foreclosure, deed in lieu of foreclosure, or short sale: capital gains, and relief of indebtedness income. Both types of income can trigger unexpected taxes for the owner.
This legal article discusses the income tax consequences to the borrower in the event of foreclosure, the event the borrower simply transfers title to the lender (deed in lieu of foreclosure), and if the borrower sells the property to another in a short sale in which a lender accepts less than the balance due on the loan as payment in full.
Q 1. Are foreclosures, deeds in lieu of foreclosure, and short sales subject to federal tax income taxation?
A: Yes. However, the income is taxed differently depending on several factors, including whether there was a foreclosure, a deed in lieu of foreclosure given to the lender, or a short sale (a sale where the lender agrees to reduce the amount owed in order to facilitate a sale), and whether the underlying debt is “recourse” (the borrower is personally liable for the debt) or “nonrecourse” (the borrower is not personally liable for the debt). For federal income taxation as a result of foreclosure, see generally 26 U.S.C. §§ 1001 through 1016. For federal income taxation of short sales, see generally 26 U.S.C. §§ 61, 108 and 1001 through 1016.
TAXATION OF FORECLOSURES OR DEEDS IN LIEU OF FORECLOSURE
Q 2. What is the difference between a foreclosure and a deed in lieu of foreclosure?
A: A foreclosure refers either to a trustee’s sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding). A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property. A deed in lieu of foreclosure is not a special instrument. It is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property. In this way the lender can avoid the foreclosure process to regain title to the property.
However, a borrower cannot simply transfer title to the lender without the lender’s permission. Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, some creative homeowners have quitclaimed the property to the lender anyway, and have recorded the instrument without the lender's permission.
In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender. The lender must record a "notice of nonacceptance of a recorded deed" in the county where the real property is located. Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title. (Cal. Civ. Code § 1058.5.)
A lender may not want to take a deed in lieu of foreclosure because taking title in this manner does not extinguish any junior liens. A foreclosure by a senior lienholder essentially wipes out all junior liens.
Q 3. How does the owner receive “income” from a foreclosure or a deed in lieu of foreclosure?
A: A foreclosure proceeding, whether through a trustee sale or judicial foreclosure, and a deed in lieu of foreclosure given to the lender are treated the same as a sale for income tax purposes. The foreclosure or deed in lieu of foreclosure are reported on the taxpayer’s tax return as a sale or exchange in the year the foreclosure is finalized or the deed in lieu of foreclosure is given to the lender.
In a foreclosure or deed in lieu of foreclosure, the owner can receive “capital gain or loss,” as in any other sale of real property. Additionally, the owner can receive “forgiveness of debt” income. This will depend on whether the debt is “recourse” or “nonrecourse.” If the debt is recourse debt, the owner can receive income from the amount of debt that is forgiven by the lender. If the debt is nonrecourse debt, there is no taxable income from forgiveness of debt, but there may be still be income from capital gains.
Q 4. What is “nonrecourse” debt?
A: Under California law, a debt is considered “nonrecourse” when a loan is made under either one of the following two circumstances:
(1) When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or
(2) When the seller carries back financing for all or a portion of the purchase price of any real property.
(Cal. Code Civ. Proc. § 580b.)
In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency.
Q 5. What is “recourse” debt?
A: Under California law, a “recourse” debt is one in which neither of the two exemptions in Question 4 occurs.
Examples of recourse debt are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans, other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property. The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee’s sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt.
Q 6. How is the amount realized (taxable income) calculated for a “recourse” debt in a foreclosure?
A: A If the debt is recourse debt, meaning the owner may be personally liable for the debt, the amount realized is calculated in a two-step approach.
First, you take the difference between the fair market value (FMV) of the property and the “adjusted basis” in the property. Generally, the “adjusted basis” consists of the purchase price of the property plus any capital improvements (less depreciation, if the property is investment property). This difference is the capital gain or loss. If the amount realized exceeds the amount of the adjusted basis, then the borrower has realized a gain at the time of the transfer (foreclosure). If the adjusted basis exceeds the amount realized, then the borrower has a loss.
Second, you take the difference between the amount of the cancelled debt (e.g., unpaid loan amount) and the sales proceeds at the foreclosure (FMV). This is the forgiveness of debt income and it is treated as ordinary income. This is treated as income despite the fact that the borrower has received no cash at the time of the foreclosure.
RECOURSE DEBT
Example One:
1. The unpaid principal of the loan is $300,000;
2. The fair market value of the property is $250,000;
3. The taxpayer's adjusted basis in the property is $200,000.Assume the lender forecloses and will forgive the underlying debt.
Step one:
FMV ($250,000) less taxpayer’s adjusted basis ($200,000) results in capital gains for the taxpayer.
FMV $250,000
Less Adjusted Basis $200,000
Capital Gains $50,000
Step two:
Amount of cancelled debt (amount owed on loan $300,000) less FMV ($250,000) is ordinary income to the taxpayer.
Amount Owed $300,000
Less FMV $250,000
Ordinary Income $50,000
Note: If a lender chooses to foreclose through a trustee's sale and is barred from obtaining a deficiency judgment by the one action rule under California Code of Civil Procedure Section 580d, it is likely the IRS will still consider that the underlying debt as a recourse debt and it will be subject to debt forgiveness income. (See Rev. Rul. 90-16.)
RECOURSE DEBT
Example Two:
If the amount realized at the foreclosure sale is more than what the lender is owed, there will be no forgiveness of debt and, thus, no ordinary income to the taxpayer.
1. The unpaid principal of the recourse debt is $300,000;
2. The fair market value of the property is $400,000;
3. The taxpayer's adjusted basis in the property is $200,000.
Step one:
FMV ($400,000) less taxpayer’s adjusted basis ($200,000) results in capital gains for the taxpayer.
FMV $400,000
Less Adjusted Basis $200,000
Capital Gains $200,000
Step two:
The debt is fully paid (since the FMV exceeds the loan amount) resulting in no forgiveness of debt income.
Q 7. How is the amount realized (taxable income) calculated for a “nonrecourse” debt in a foreclosure?
A: A If the debt is nonrecourse, meaning the owner is not personally liable for any deficiency (beyond the value of the property), the amount realized is the difference between the greater of the foreclosure proceeds or the entire outstanding debt and the adjusted basis of the property. This amount is treated as capital gains and there is no forgiveness of debt income.
NONRECOURSE DEBT
Example:
1. The unpaid principal of the loan is $300,000;
2. The fair market value of the property is $250,000;
3. The taxpayer's adjusted basis in the property is $200,000.
Greater of foreclosure proceeds (FMV $250,000) or entire outstanding debt ($300,000) minus taxpayer’s adjusted basis ($200,000) results in capital gains to the taxpayer.
Greater of FMV ($250,000) OR Outstanding Debt ($300,000)
Greater of the above $300,000
Less Adjusted Basis $200,000
Capital Gains $100,000
Q 8. How is a deed in lieu of foreclosure treated for tax purposes?
A: A deed in lieu of foreclosure is treated as a sale and taxed just like a foreclosure. See Questions 6 and 7 above.
TAXATION OF SHORT SALES
Q 9. What are the tax implications of a short sale?
A: A short sale where the lender agrees to reduce some or all of the outstanding debt may give rise to forgiveness of debt income (also called "cancellation of debt" income). The amount of the debt that the lender agrees to write off is treated as "ordinary income" (as opposed to capital gains income which is taxed at a lower rate). Even though the lender may be taking this action to facilitate the sale by the owner who is under a notice of default and facing a foreclosure, the agreement between the owner and the lender is considered voluntary and treated as a debt reduction. The taxpayer will generally receive a 1099 tax form from the lender in the amount of the debt reduction.
This "ordinary income" (from the forgiveness or cancellation of debt) under certain circumstances may or may not subject to taxation. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code section 108(a)(1)(E) was added and provides that a taxpayer will not be taxed for cancellation of debt income if the following conditions are met:
- The property sold in the short sale is the taxpayer's principal residence.
- The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h)(3)(B).
- The indebtedness is discharged after January 1, 2007 and before January 1, 2010.
**Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. A refinance cannot exceed $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others.
Any reduction of indebtedness excluded by IRC Section 108(a)(1)(E) will be applied to reduce the basis of the taxpayer's principal residence, but not below zero.
Finally, if the owner has owned the property for some time and has refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well. For example, the borrower has a remaining loan on the property when the borrower refinances in order to buy other investment property (or to buy a car, or to take a vacation, etc.) and now owes $300,000 to the lender. Thus, the taxpayer’s adjusted basis may be lower than the outstanding balance on the loan (as in the example below).
The tax calculation would look like step one in calculating a foreclosure sale of recourse debt.
SHORT SALE
Example:
1. The unpaid principal of the loan is $300,000;2. The sales price (FMV) is $250,000;3. The taxpayer's adjusted basis in the property is $50,000.
Sales price (FMV $250,000) less taxpayer’s adjusted basis ($50,000) results in capital gains for the taxpayer.
Sales Price (FMV) $250,000
Less Adjusted Basis $50,000
Capital Gains $200,000
Additionally, the taxpayer would have ordinary income from the lender’s write off of any debt, which in this example would be $50,000. (** See the discussion above in this question to determine whether or not this would be taxable)
Loan Balance $300,000
Less Sales Price $250,000
Ordinary Income $50,000
TAX EXEMPTIONS
Q 10. Are there any exemptions from the relief of indebtedness income?
A: Yes. There are four other circumstances, in addition to what was dicussed in Question 9 on certain short sales, where the taxpayer can get relief from taxation on forgiveness of debt income:
(1) The taxpayer is insolvent (the taxpayer’s debts exceed their assets as determined under Bankruptcy Code Section 108(d)(3);
(2) The debt is discharged as part of a bankruptcy proceeding;
(3) The debt discharged is qualified farm indebtedness; or (4) The debt discharged is qualified business indebtedness (see 26 U.S.C. §108(c)).
Q 11. Are there any exemptions from the capital gains taxation in a foreclosure, deed in lieu of foreclosure or short sale if the property is a principal residence?
A: Yes. If the sale, whether through a foreclosure or deed in lieu or short sale, generates capital gains and if the property was the seller’s principal residence, the seller may be able to use the capital gains exclusion of $250,000 if single and $500,000 if filing a joint return. This exclusion does not apply to the ordinary income from debt relief.
MISCELLANEOUS
Q 12. Which is better for an owner facing a distress sale: a foreclosure, a deed in lieu of foreclosure or a short sale?
A: Any of these situations will impact the owner’s credit negatively. Additionally, the owner may have a significantly different tax liability depending on the disposition of the property. Consequently, this is a question that the owner needs to discuss with their own tax advisor.
Q 13. Where can readers obtain more information on the subjects covered above?
A: Information is available from a variety of sources, including:
The Internal Revenue Service (IRS) (http://www.irs.gov/), which has detailed publications available for free on many tax related subjects.
The IRS Tele-Tax system, which is an automated voice message information system with recorded information on many commonly asked tax questions. Tele-Tax can be reached by calling 800.829.4477.
Readers who require specific advice should consult an attorney.
CBIA CALLS FOR SLOW RECOVERY IN 2008
From C.A.R. Newsline, Wed. 09 Jan 2008 05:58:08 PM PST
The California Building Industry Association (CBIA) is calling for modest recovery this year within the new-home construction sector, but cautions that reforms for streamlining the building process, and promotion of construction of more affordable new homes are needed.
"By mid-2008 the housing industry will show signs of growth," said Alan Nevin, CBIA's chief economist. Continued population growth, a reduction of existing inventory, and a return to normalcy in the credit markets are a recipe for a more positive 2008. As a result, we are projecting a slight increase in new home sales over last year."
The California Building Industry Association (CBIA) is calling for modest recovery this year within the new-home construction sector, but cautions that reforms for streamlining the building process, and promotion of construction of more affordable new homes are needed.
"By mid-2008 the housing industry will show signs of growth," said Alan Nevin, CBIA's chief economist. Continued population growth, a reduction of existing inventory, and a return to normalcy in the credit markets are a recipe for a more positive 2008. As a result, we are projecting a slight increase in new home sales over last year."
Salespeople Change Advice on Mortgage Providers
From Realtor Magazine Online, Daily Real Estate News January 9, 2008
A December 2007 survey of more than 2,400 real estate agents by Campbell Communications, "How Agents View Lender Relationships in Stressed Markets," shows that 40 percent of those polled have altered their lender recommendations in response to the troubled mortgage market.
Most now recommend the lender owned by their brokerages, with Weichert Financial, Coldwell Banker Mortgage, and ERA Mortgage ranking higher than such national lenders as Bank of America, Countrywide Home Loans, and Washington Mutual.
During the past few months, respondents noted that over 33 percent of home purchases were not finalized, with mortgage-related problems responsible in 13 percent of failed deals. Low credit scores and inadequate incomes or down payments were the biggest problems, according to agents, some of whom complain that lenders are taking too much time seeking approvals on mortgages for which the borrower does not qualify.
Source: Originator Times (01/07/08)
A December 2007 survey of more than 2,400 real estate agents by Campbell Communications, "How Agents View Lender Relationships in Stressed Markets," shows that 40 percent of those polled have altered their lender recommendations in response to the troubled mortgage market.
Most now recommend the lender owned by their brokerages, with Weichert Financial, Coldwell Banker Mortgage, and ERA Mortgage ranking higher than such national lenders as Bank of America, Countrywide Home Loans, and Washington Mutual.
During the past few months, respondents noted that over 33 percent of home purchases were not finalized, with mortgage-related problems responsible in 13 percent of failed deals. Low credit scores and inadequate incomes or down payments were the biggest problems, according to agents, some of whom complain that lenders are taking too much time seeking approvals on mortgages for which the borrower does not qualify.
Source: Originator Times (01/07/08)
Mortgage Applications Rise as Rates Fall
From Realtor Magazine Online, Daily Real Estate News January 9, 2008
Thanks to falling mortgage rates and the ending of the holiday season, mortgage loan application index rose 32.2 percent to 706 on an adjusted basis from the previous week, according to the Mortgage Bankers Association weekly survey.
On an unadjusted basis, the index rose 81.1 percent compared to the previous week and was up 8.7 percent compared with the same week a year ago.
The refinance share of mortgage activity increased to 57.7 percent, up from 50.9 the previous week.
Mortgage rates generally declined:
- 30-year fixed-rate mortgages decreased to 5.73 percent from 6.05 percent.
- 15-year fixed-rate mortgages decreased to 5.21 percent from 5.61 percent.
- 1-year ARMs increased to 6.04 percent.
Source: Mortgage Bankers Association (01/09/2008)
Thanks to falling mortgage rates and the ending of the holiday season, mortgage loan application index rose 32.2 percent to 706 on an adjusted basis from the previous week, according to the Mortgage Bankers Association weekly survey.
On an unadjusted basis, the index rose 81.1 percent compared to the previous week and was up 8.7 percent compared with the same week a year ago.
The refinance share of mortgage activity increased to 57.7 percent, up from 50.9 the previous week.
Mortgage rates generally declined:
- 30-year fixed-rate mortgages decreased to 5.73 percent from 6.05 percent.
- 15-year fixed-rate mortgages decreased to 5.21 percent from 5.61 percent.
- 1-year ARMs increased to 6.04 percent.
Source: Mortgage Bankers Association (01/09/2008)
Tuesday, January 8, 2008
Paulson to Lenders: Help All ARM Borrowers
From Realtor Magazine Online, Daily Real Estate News January 8, 2008
Treasury Secretary Henry Paulson yesterday urged the mortgage industry to expedite refinancing or freeze interest rates for all adjustable-rate mortgage holders.
In a speech to the New York Society of Securities Analysts, Paulson suggested the home-loan industry should use a "systematic approach for adjustable-rate mortgages other than subprime if it will benefit home owners and investors."
The response to Paulson’s suggestion was not instantly negative.
"To the extent that servicers can develop and apply systematic approaches to assist them in their efforts to identify appropriate loss mitigation outcomes for adjustable rate mortgages other than subprime, we support those efforts," George Miller, the group's executive director, said in a statement.
Source: The Wall Street Journal, Michael M. Phillips (01/08/08)
Treasury Secretary Henry Paulson yesterday urged the mortgage industry to expedite refinancing or freeze interest rates for all adjustable-rate mortgage holders.
In a speech to the New York Society of Securities Analysts, Paulson suggested the home-loan industry should use a "systematic approach for adjustable-rate mortgages other than subprime if it will benefit home owners and investors."
The response to Paulson’s suggestion was not instantly negative.
"To the extent that servicers can develop and apply systematic approaches to assist them in their efforts to identify appropriate loss mitigation outcomes for adjustable rate mortgages other than subprime, we support those efforts," George Miller, the group's executive director, said in a statement.
Source: The Wall Street Journal, Michael M. Phillips (01/08/08)
Existing-Home Sales to Hold Steady in Early 2008
From Realtor Magazine Online, Daily Real Estate News January 8, 2008
Over the next few months, existing-home sales are expected to hold fairly steady as indicated by pending sales activity, and then rise later in the year and continue to improve in 2009, according to the latest forecast by the National Association of REALTORS®.
Lawrence Yun, NAR chief economist, says there is a pull and tug exerting itself on the market. “On the one hand, we have a pent-up demand from the four million jobs added to our economy over the past two years of sales decline,” he says. “On the other, consumers continue to wait for additional signs of market stabilization. There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. As a result, the exact timing and the strength of a home sales recovery is a bit uncertain. A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008.”
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 2.6 percent to a reading of 87.6 from a strong upward revision of 89.9 in October, but remains above the August and September readings and indicates a broad stabilization. The index was 19.2 percent below the November 2006 level of 108.4.
“Although there could be some minor slippage in the first quarter, existing-home sales should hold in a narrow range before trending up,” Yun says.
Across the Region
Regionally, the PHSI showed the following:
- South: rose 2.3 percent in November to 100.7 but is 19.8 percent below a year ago.
- West: slipped 2.1 percent to 86.6 but is 18.5 percent lower than November 2006.
- Midwest: fell 4.1 percent in November to 82.1 and is 18.6 percent below a year ago.
- Northeast: dropped 13 percent in November to 70.1 from a spike in October, and is 19.1 percent below November 2006.
Existing-Home Sales Forecast
Existing-home sales for 2007 will probably total 5.66 million, the fifth highest on record, then edge up to 5.7 million this year and 5.91 million in 2009, compared with 6.48 million in 2006. Existing-home prices for 2007 are likely to be down 1.9 percent to a median of $217,600, hold even this year and then rise 3.1 percent in 2009 to $224,400.
“Rising home prices in the affordable midsection of the country are likely to offset declines in some of the previously hot markets,” Yun says.
There are wide variations in housing market conditions around the country, with nearly two-thirds of the metropolitan areas showing price gains. Healthy increases in metro prices are occurring in places such as Pittsburgh; Beaumont-Port Arthur, Texas; San Jose, Calif.; and Bismarck, N.D.
“Our consumer survey shows buyers today are in it for the long-haul, planning to stay in their home for a median of 10 years,” Yun says. “This is a wise approach to housing because the data shows the longer you own, the better your investment.”
New-home sales are projected at 773,000 for 2007, and declining to 669,000 this year before rising to 730,000 in 2009. However, that is well below the 1.05 million 2006. With an appropriate slowdown in production, housing starts — including multifamily units — are forecast at 1.36 million for 2007 and 1.09 million this year before edging up to 1.1 million in 2009. Starts totaled 1.8 million in 2006.
The median new-home price should drop 2.1 percent to $241,400 for 2007, and then rise 0.4 percent to $242,200 this year and gain another 5.9 percent in 2009.
Call for Legislative Action
“Some policy changes, such as raising the loan limit on conventional mortgages, would provide a significant boost to home sales, increase liquidity, strengthen home prices and lessen foreclosures, but it is unclear as to if and when the measure will be implemented,” Yun says.
NAR strongly supports raising the Government-Sponsored Enterprise loan limit to at least $625,000 from the current $417,000 so that more consumers will have access to lower interest rates on safe conforming mortgages. “NAR estimates that raising the GSE loan limit will result in interest rates savings for an additional 330,000 home owners,” Yun adds.
NAR also encourages the Fed to make a single lump-sum cut in the Fed funds rate to 3.5 percent at the January Federal Open Market Committee meeting, rather than a series of modest cuts throughout the year.
“Consumers are also looking to market-time interest rates, and the expectations of further rate cuts are pushing some home buyers to delay,” Yun says. “Monetary policy will be much more effective with a one-time large cut, rather than a series of small cuts.”
The 30-year fixed-rate mortgage is expected to rise slowly to the 6.3 percent range by the end of this year, but an additional cut in the Fed funds rate would lower short-term interest rates.
Meanwhile, growth in the U.S. gross domestic product (GDP) is seen at 2.1 percent in 2007, below the 2.9 percent growth rate in 2006; GDP growth will probably be 2 percent this year.
After averaging 4.6 percent for both 2006 and 2007, the unemployment rate is estimated to rise to 5.3 percent in the second half of 2008. Inflation, as measured by the Consumer Price Index, is projected at 2.9 percent for 2007 and 3.1 percent this year; it was 3.2 percent in 2006. Inflation-adjusted disposable personal income is forecast to grow 3.1 percent for 2007, the same as in 2006, and then grow 1.6 percent this year.
Over the next few months, existing-home sales are expected to hold fairly steady as indicated by pending sales activity, and then rise later in the year and continue to improve in 2009, according to the latest forecast by the National Association of REALTORS®.
Lawrence Yun, NAR chief economist, says there is a pull and tug exerting itself on the market. “On the one hand, we have a pent-up demand from the four million jobs added to our economy over the past two years of sales decline,” he says. “On the other, consumers continue to wait for additional signs of market stabilization. There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. As a result, the exact timing and the strength of a home sales recovery is a bit uncertain. A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008.”
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 2.6 percent to a reading of 87.6 from a strong upward revision of 89.9 in October, but remains above the August and September readings and indicates a broad stabilization. The index was 19.2 percent below the November 2006 level of 108.4.
“Although there could be some minor slippage in the first quarter, existing-home sales should hold in a narrow range before trending up,” Yun says.
Across the Region
Regionally, the PHSI showed the following:
- South: rose 2.3 percent in November to 100.7 but is 19.8 percent below a year ago.
- West: slipped 2.1 percent to 86.6 but is 18.5 percent lower than November 2006.
- Midwest: fell 4.1 percent in November to 82.1 and is 18.6 percent below a year ago.
- Northeast: dropped 13 percent in November to 70.1 from a spike in October, and is 19.1 percent below November 2006.
Existing-Home Sales Forecast
Existing-home sales for 2007 will probably total 5.66 million, the fifth highest on record, then edge up to 5.7 million this year and 5.91 million in 2009, compared with 6.48 million in 2006. Existing-home prices for 2007 are likely to be down 1.9 percent to a median of $217,600, hold even this year and then rise 3.1 percent in 2009 to $224,400.
“Rising home prices in the affordable midsection of the country are likely to offset declines in some of the previously hot markets,” Yun says.
There are wide variations in housing market conditions around the country, with nearly two-thirds of the metropolitan areas showing price gains. Healthy increases in metro prices are occurring in places such as Pittsburgh; Beaumont-Port Arthur, Texas; San Jose, Calif.; and Bismarck, N.D.
“Our consumer survey shows buyers today are in it for the long-haul, planning to stay in their home for a median of 10 years,” Yun says. “This is a wise approach to housing because the data shows the longer you own, the better your investment.”
New-home sales are projected at 773,000 for 2007, and declining to 669,000 this year before rising to 730,000 in 2009. However, that is well below the 1.05 million 2006. With an appropriate slowdown in production, housing starts — including multifamily units — are forecast at 1.36 million for 2007 and 1.09 million this year before edging up to 1.1 million in 2009. Starts totaled 1.8 million in 2006.
The median new-home price should drop 2.1 percent to $241,400 for 2007, and then rise 0.4 percent to $242,200 this year and gain another 5.9 percent in 2009.
Call for Legislative Action
“Some policy changes, such as raising the loan limit on conventional mortgages, would provide a significant boost to home sales, increase liquidity, strengthen home prices and lessen foreclosures, but it is unclear as to if and when the measure will be implemented,” Yun says.
NAR strongly supports raising the Government-Sponsored Enterprise loan limit to at least $625,000 from the current $417,000 so that more consumers will have access to lower interest rates on safe conforming mortgages. “NAR estimates that raising the GSE loan limit will result in interest rates savings for an additional 330,000 home owners,” Yun adds.
NAR also encourages the Fed to make a single lump-sum cut in the Fed funds rate to 3.5 percent at the January Federal Open Market Committee meeting, rather than a series of modest cuts throughout the year.
“Consumers are also looking to market-time interest rates, and the expectations of further rate cuts are pushing some home buyers to delay,” Yun says. “Monetary policy will be much more effective with a one-time large cut, rather than a series of small cuts.”
The 30-year fixed-rate mortgage is expected to rise slowly to the 6.3 percent range by the end of this year, but an additional cut in the Fed funds rate would lower short-term interest rates.
Meanwhile, growth in the U.S. gross domestic product (GDP) is seen at 2.1 percent in 2007, below the 2.9 percent growth rate in 2006; GDP growth will probably be 2 percent this year.
After averaging 4.6 percent for both 2006 and 2007, the unemployment rate is estimated to rise to 5.3 percent in the second half of 2008. Inflation, as measured by the Consumer Price Index, is projected at 2.9 percent for 2007 and 3.1 percent this year; it was 3.2 percent in 2006. Inflation-adjusted disposable personal income is forecast to grow 3.1 percent for 2007, the same as in 2006, and then grow 1.6 percent this year.
Monday, January 7, 2008
Rate-Cut Likely at Fed's Next Meeting
From Realtor Magazine Online, Daily Real Estate News January 7, 2008
Analysts are predicting that the Federal Reserve will cut key interest rates when it meets Jan. 29-30.
Such a rate cut — while not directly tied to mortgage rates — does predict their levels. A key rate cut generally means mortgage rates will decline.
Recently released employment numbers "are clear evidence that the economy is beginning to slow," says John Canavan, market analyst at Stone & McCarthy, "and that the housing weakness and credit-market woes are starting to take a bite. At this point, there's no question that the Fed will have to ease again."
The question is how much of a cut. Some observers say a half percentage point is likely to help offset the negative fallout from the subprime mortgage market and weaker job growth.
Other analysts say consumer spending is high and exports are rising. They predict a quarter percentage point decrease.
Source: The Wall Street Journal, Deborah Lynn Blumberg (01/07/08)
Analysts are predicting that the Federal Reserve will cut key interest rates when it meets Jan. 29-30.
Such a rate cut — while not directly tied to mortgage rates — does predict their levels. A key rate cut generally means mortgage rates will decline.
Recently released employment numbers "are clear evidence that the economy is beginning to slow," says John Canavan, market analyst at Stone & McCarthy, "and that the housing weakness and credit-market woes are starting to take a bite. At this point, there's no question that the Fed will have to ease again."
The question is how much of a cut. Some observers say a half percentage point is likely to help offset the negative fallout from the subprime mortgage market and weaker job growth.
Other analysts say consumer spending is high and exports are rising. They predict a quarter percentage point decrease.
Source: The Wall Street Journal, Deborah Lynn Blumberg (01/07/08)
Friday, January 4, 2008
30-Year Mortgage Rates Slide
From Realtor Magazine Online, Daily Real Estate News January 4, 2008
Spurred in part by unexpectedly weak economic data that could signal an impending recession, borrowing costs on long- and short-term home loans dipped during the past week.
Freddie Mac's statistics show a decline in interest on 30-year fixed loans to 6.07 percent from 6.17 percent last week, while 15-year fixed rates slid to 5.68 percent from 5.79 percent.
Adjustable-rate mortgages also registered lower interest, with five-year loans settling at 5.78 percent compared to 5.9 percent a week earlier and one-year products coming in at 5.47 percent for the week, down from 5.53 percent the week before.
Source: San Jose Mercury News (Calif.), Martin Crutsinger (01/04/08)
Spurred in part by unexpectedly weak economic data that could signal an impending recession, borrowing costs on long- and short-term home loans dipped during the past week.
Freddie Mac's statistics show a decline in interest on 30-year fixed loans to 6.07 percent from 6.17 percent last week, while 15-year fixed rates slid to 5.68 percent from 5.79 percent.
Adjustable-rate mortgages also registered lower interest, with five-year loans settling at 5.78 percent compared to 5.9 percent a week earlier and one-year products coming in at 5.47 percent for the week, down from 5.53 percent the week before.
Source: San Jose Mercury News (Calif.), Martin Crutsinger (01/04/08)
California Builders: The Worst is Over
From Realtor Magazine Online, Daily Real Estate News January 4, 2008
A California trade group is predicting that the state's housing slump is near bottom and business will rise steadily.
In a forecast released Thursday, the California Building Industry Association said developers will secure permits for 128,400 single-family and multifamily units this year, up from an estimated 116,250 in 2007. The 10 percent gain is in contrast to the 29 and 21 percent drops in housing permits in 2007 and 2006, respectively.
"We believe that California has weathered the subprime storm of 2007, the market has almost corrected and that 2008 represents an opportunity to move forward," said Alan Nevin, the Sacramento association's chief economist, on a conference call.
Some expert observers were critical of this analysis. Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange, says the number of new homes on the market will remain the same or increase this year as foreclosure and default levels climb. He predicts housing production will fall 8.8 percent to 102,000 units as resale home prices drop by 8 to 9 percent.
"I will not be surprised to see that this cycle will bottom sometime in 2009 or early 2010," says Adibi, citing past patterns.
Source: The San Francisco Chronicle, James Temple (01/04/07)
A California trade group is predicting that the state's housing slump is near bottom and business will rise steadily.
In a forecast released Thursday, the California Building Industry Association said developers will secure permits for 128,400 single-family and multifamily units this year, up from an estimated 116,250 in 2007. The 10 percent gain is in contrast to the 29 and 21 percent drops in housing permits in 2007 and 2006, respectively.
"We believe that California has weathered the subprime storm of 2007, the market has almost corrected and that 2008 represents an opportunity to move forward," said Alan Nevin, the Sacramento association's chief economist, on a conference call.
Some expert observers were critical of this analysis. Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange, says the number of new homes on the market will remain the same or increase this year as foreclosure and default levels climb. He predicts housing production will fall 8.8 percent to 102,000 units as resale home prices drop by 8 to 9 percent.
"I will not be surprised to see that this cycle will bottom sometime in 2009 or early 2010," says Adibi, citing past patterns.
Source: The San Francisco Chronicle, James Temple (01/04/07)
3 Signs of Predatory Lending
From Realtor Interactive Magazine
Here’s a rundown of the three most common strategies predatory lenders use.
By definition, greater upfront costs and continuing higher interest payments are some of the differences between prime lending and subprime lending. While providing opportunities to build equity through homeownership, subprime lending does cost more.
Ideally, responsible, risk-based subprime lenders provide access to credit for prospective home owners with poor credit scores. However, lenders are considered predatory when their practices, although legal, are not in the best interest of the borrowers. These lenders can include mortgage companies, creditors, mortgage brokers, and even home improvement contractors.
Suspect practices include targeting certain groups of people and using pressure tactics to force borrowing decisions while not disclosing valuable decision-making in-formation. In addition, these loans are often bundled with higher interest, lump-sum credit life insurance, excessive fees, and high prepayment penalties without regard to the borrower’s ability to repay.
Most subprime lenders and the loans they make are not subject to federal legislation, so it has been difficult to document how these practices impact predatory lending.
1. Reverse Redlining: Finding Easy Targets
After decades of redlining (when lenders would not make loans in certain communities because of racial composition), today many predatory lenders specifically seek out groups to which it will market these excessive loans. In other words, these groups become the victims of “reverse redlining.” Predatory lenders also seek borrowers who need cash due to medical issues, unemployment, or other debt-related problems, and they look for borrowers who may not be aware of their choices.
Here’s a closer look at the groups that are most often targeted by predatory lenders:
The Elderly.
Many of the older generation have lived in their homes for a long time and have built up equity. They may be “house rich and cash poor.” When they encounter cash problems due to medical, unemployment, or other debt problems, predatory lenders encourage them to turn to cash-out refinancing to solve their cash flow problems. Because they may not have the experience to comparison-shop, they are vulnerable to contractors and their lenders who suggest the only way to find the money for repairs is to sign papers through the contractor or loan officer, who then charges rates that do not correspond to the risk of the loan. They may be pressured into borrowing money with payments that are so high they are unlikely to make the payments on their fixed incomes.
Minorities.
Although minorities have greater access to credit than ever before, many African Americans and low-income families are paying far more for their credit than corresponding whites. According to the analysis by three reporters from the Charlotte Observer of more than 2.2 million 2004 mortgage applications, in 2005 blacks and Hispanics continued to pay more in interest rates than did whites — no matter high how their incomes.
Immigrants.
Many immigrants are eager to invest in their own homes, and, in fact, owning their own homes may be one of the reasons they immigrated to the United States. However, immigrants can lack the language skills and previous homebuying experience to enable them to effectively analyze loan terms and their implications. They may also lack the bank accounts and credit histories that would qualify them for traditional loans, thus making them easy prey for predators with “alternative” loan programs.
Individuals with Low Credit Scores.
Low credit scores do not always indicate poor credit risks. Sometimes, borrowers fall behind in payments due to circumstances that are not likely to be repeated: unforeseen medical bills, an unexpected job layoff. However, they can end up with unscrupulous subprime lenders who use abusive practices.
2. Charging Unnecessary Costs
As if loan predators have not found enough ways to soak these borrowers, they can always pack in more unnecessary or nonexistent products and services (generally overpriced insurance), sometimes to borrowers who have no beneficiaries. Lenders have especially added to the cost of manufactured homes by folding in overpriced fixtures, appliances, and even free trips. Before borrowers make their first payments, these loans are underwater because the market value of the collateral is less than the loan amount.
3. Giving Misleading or No Information About Loans
Predatory lenders can use bait-and-switch tactics by offering loans that seem almost too good to be true. What they initially offer is often lost in the process, and borrowers may not even realize that the cost or loan terms are not what they originally agreed to. Borrowers have been told that the FHA insures against property defects and loan fraud, neither of which is true.
Borrowers should take time to shop around and compare houses, prices, estimates, and referrals. No reputable lender will ask a borrower to sign a blank contract or loan documents, because blank forms only present the opportunity for dishonest individuals to fill in false information.
Predatory lending is a problem in today’s economy. However, this practice is not being perpetrated by all loan officers, and not all mortgage brokers are crooks. The key to changing the climate is to educate borrowers, and it's to that end that we have provided this article.
Here’s a rundown of the three most common strategies predatory lenders use.
By definition, greater upfront costs and continuing higher interest payments are some of the differences between prime lending and subprime lending. While providing opportunities to build equity through homeownership, subprime lending does cost more.
Ideally, responsible, risk-based subprime lenders provide access to credit for prospective home owners with poor credit scores. However, lenders are considered predatory when their practices, although legal, are not in the best interest of the borrowers. These lenders can include mortgage companies, creditors, mortgage brokers, and even home improvement contractors.
Suspect practices include targeting certain groups of people and using pressure tactics to force borrowing decisions while not disclosing valuable decision-making in-formation. In addition, these loans are often bundled with higher interest, lump-sum credit life insurance, excessive fees, and high prepayment penalties without regard to the borrower’s ability to repay.
Most subprime lenders and the loans they make are not subject to federal legislation, so it has been difficult to document how these practices impact predatory lending.
1. Reverse Redlining: Finding Easy Targets
After decades of redlining (when lenders would not make loans in certain communities because of racial composition), today many predatory lenders specifically seek out groups to which it will market these excessive loans. In other words, these groups become the victims of “reverse redlining.” Predatory lenders also seek borrowers who need cash due to medical issues, unemployment, or other debt-related problems, and they look for borrowers who may not be aware of their choices.
Here’s a closer look at the groups that are most often targeted by predatory lenders:
The Elderly.
Many of the older generation have lived in their homes for a long time and have built up equity. They may be “house rich and cash poor.” When they encounter cash problems due to medical, unemployment, or other debt problems, predatory lenders encourage them to turn to cash-out refinancing to solve their cash flow problems. Because they may not have the experience to comparison-shop, they are vulnerable to contractors and their lenders who suggest the only way to find the money for repairs is to sign papers through the contractor or loan officer, who then charges rates that do not correspond to the risk of the loan. They may be pressured into borrowing money with payments that are so high they are unlikely to make the payments on their fixed incomes.
Minorities.
Although minorities have greater access to credit than ever before, many African Americans and low-income families are paying far more for their credit than corresponding whites. According to the analysis by three reporters from the Charlotte Observer of more than 2.2 million 2004 mortgage applications, in 2005 blacks and Hispanics continued to pay more in interest rates than did whites — no matter high how their incomes.
Immigrants.
Many immigrants are eager to invest in their own homes, and, in fact, owning their own homes may be one of the reasons they immigrated to the United States. However, immigrants can lack the language skills and previous homebuying experience to enable them to effectively analyze loan terms and their implications. They may also lack the bank accounts and credit histories that would qualify them for traditional loans, thus making them easy prey for predators with “alternative” loan programs.
Individuals with Low Credit Scores.
Low credit scores do not always indicate poor credit risks. Sometimes, borrowers fall behind in payments due to circumstances that are not likely to be repeated: unforeseen medical bills, an unexpected job layoff. However, they can end up with unscrupulous subprime lenders who use abusive practices.
2. Charging Unnecessary Costs
As if loan predators have not found enough ways to soak these borrowers, they can always pack in more unnecessary or nonexistent products and services (generally overpriced insurance), sometimes to borrowers who have no beneficiaries. Lenders have especially added to the cost of manufactured homes by folding in overpriced fixtures, appliances, and even free trips. Before borrowers make their first payments, these loans are underwater because the market value of the collateral is less than the loan amount.
3. Giving Misleading or No Information About Loans
Predatory lenders can use bait-and-switch tactics by offering loans that seem almost too good to be true. What they initially offer is often lost in the process, and borrowers may not even realize that the cost or loan terms are not what they originally agreed to. Borrowers have been told that the FHA insures against property defects and loan fraud, neither of which is true.
Borrowers should take time to shop around and compare houses, prices, estimates, and referrals. No reputable lender will ask a borrower to sign a blank contract or loan documents, because blank forms only present the opportunity for dishonest individuals to fill in false information.
Predatory lending is a problem in today’s economy. However, this practice is not being perpetrated by all loan officers, and not all mortgage brokers are crooks. The key to changing the climate is to educate borrowers, and it's to that end that we have provided this article.
Wednesday, January 2, 2008
Making Hard Cash in a Soft Real Estate Market
From Realtor Magazine Online,
Quick Skim
The slowdown in the real estate has sent some investors fleeing from the market. But those bailing out may be missing opportunities, say the authors of Making Hard Cash in a Soft Real Estate Market (Wiley, 2007). There are still big bucks to be made — even in a down cycle. In fact, authors Wendy Patton and Justin Ryan argue that “more money has always been made in a down market than in an up market.” They highlight how investors can snag the best buys, master market-timing and risk management, and prepare finances — all to better help you become a savvy investor in any type of market.
From the Book: 5 Investor Tips in a Slower Market
Slower markets can offer rich opportunities for investors: real estate sellers are more open to negotiate and lower home prices — and combined with low interest rates — can help you get properties at bargain levels. Yet, some buyers are reluctant.
“The market may not look perfect,” the authors write. “This is why prices haven’t taken off yet” — and why you want to get in before they do! The book offers the following tips:
1. Timing is everything. Enter the market cycle early. “When it’s quiet, when the media isn’t saying ‘record levels of appreciation,’ that’s when you want to jump in,” the authors write. As billionaire oilman J. Paul Getty once said: “Buy when everyone else is selling and hold until everyone else is buying.”
2. Get financially ready. Before you buy, consider holding costs, tax implications, and cash flow potential. Many things can go wrong when buying investment properties — such as a vacant rental or a property that won’t sell. Have cash reserves (get a partner if you don’t have any) and you’ll be prepared to ride out any market cycle. Identify your risk level and what you want: For example, an investor who wants to turn a quick profit with low holding costs would want to sell their new-home property before construction is complete. On the other hand, an investor looking for a bigger return with less capital gains tax would want to hold the property until after construction is complete and keep it as a rental property for at least one year.
3. Buy and hold. In a distressed market, this can be a smart move. A buy-and-hold strategy can help give the property an opportunity to appreciate over time. Buy at the right price, though. Compare the home’s price to what homes are selling for over a reasonable time period in that community and what you expect is the lowest price the market will reach. Get in at that price. Consider lease option investments so you can rent the property to cover payments, having the property practically pay for itself each month. Also, continue to pay down the mortgage and eventually you may even have the home paid off — an ideal position for an investor!
4. Find best deal. In a slow market, you can get great deals — and some extras. Builders overbuilt during the housing boom, resulting in high inventories of unsold properties. Now, many builders report slashing prices, offering free upgrades, absorbing all financing points for their buyers, and paying closing costs or fees. Extras aside, other good investment properties include homes five years old or less and properties in the $200,000-range, which can particularly be desirable to a large pool of buyers. Also, look for a property in an emerging market. Some indicators: sales of existing homes and new construction permits are starting to trend upward, supply is steadily dropping, mortgage loan defaults are high but starting to fall, days-on-market move below 90, and low interest rates.
5. Have an exit strategy. Have a selling strategy in place before you buy so you’re not just randomly banking on the property appreciating and then doing a quick sale. Come in with a solid selling plan. For new construction investing, your selling options might be to assign your purchase contract during the construction period, sell when construction is complete, lease and then sell, or a lease option. Reduce the taxable impact of selling your real estate investments by talking to your tax adviser about a 1031 exchange or self-directed IRA. “Know how you will get out before you get in!” the authors advise.
Sneak Peek
“When markets go soft, things get interesting. Even though an abundance of opportunity exists in a soft market, many people still won’t take action. Why is this? Because by nature, people follow a ‘herd’ mentality. Most people believe that for something to be the ‘right’ thing to do, many people need to be doing it. Actually, this is not true at all. … An experienced insider’s secret — that many folks don’t want you to know — is this … When the markets go soft the playing field is being ‘reset.’ Short-term opportunities are removed and an abundance of opportunity gets created for the seasoned investors who know how things really work.”
About the Authors
Wendy Patton, also the author of Investing in Real Estate With Lease Options and Subject-To Deals (Wiley), is a broker with several real estate offices nationwide. She, along with her co-author Justin Ryan, also are real estate trainers, on such topics as lease options and pre-construction investing. Ryan is also a real estate practitioner in Michigan.
Quick Skim
The slowdown in the real estate has sent some investors fleeing from the market. But those bailing out may be missing opportunities, say the authors of Making Hard Cash in a Soft Real Estate Market (Wiley, 2007). There are still big bucks to be made — even in a down cycle. In fact, authors Wendy Patton and Justin Ryan argue that “more money has always been made in a down market than in an up market.” They highlight how investors can snag the best buys, master market-timing and risk management, and prepare finances — all to better help you become a savvy investor in any type of market.
From the Book: 5 Investor Tips in a Slower Market
Slower markets can offer rich opportunities for investors: real estate sellers are more open to negotiate and lower home prices — and combined with low interest rates — can help you get properties at bargain levels. Yet, some buyers are reluctant.
“The market may not look perfect,” the authors write. “This is why prices haven’t taken off yet” — and why you want to get in before they do! The book offers the following tips:
1. Timing is everything. Enter the market cycle early. “When it’s quiet, when the media isn’t saying ‘record levels of appreciation,’ that’s when you want to jump in,” the authors write. As billionaire oilman J. Paul Getty once said: “Buy when everyone else is selling and hold until everyone else is buying.”
2. Get financially ready. Before you buy, consider holding costs, tax implications, and cash flow potential. Many things can go wrong when buying investment properties — such as a vacant rental or a property that won’t sell. Have cash reserves (get a partner if you don’t have any) and you’ll be prepared to ride out any market cycle. Identify your risk level and what you want: For example, an investor who wants to turn a quick profit with low holding costs would want to sell their new-home property before construction is complete. On the other hand, an investor looking for a bigger return with less capital gains tax would want to hold the property until after construction is complete and keep it as a rental property for at least one year.
3. Buy and hold. In a distressed market, this can be a smart move. A buy-and-hold strategy can help give the property an opportunity to appreciate over time. Buy at the right price, though. Compare the home’s price to what homes are selling for over a reasonable time period in that community and what you expect is the lowest price the market will reach. Get in at that price. Consider lease option investments so you can rent the property to cover payments, having the property practically pay for itself each month. Also, continue to pay down the mortgage and eventually you may even have the home paid off — an ideal position for an investor!
4. Find best deal. In a slow market, you can get great deals — and some extras. Builders overbuilt during the housing boom, resulting in high inventories of unsold properties. Now, many builders report slashing prices, offering free upgrades, absorbing all financing points for their buyers, and paying closing costs or fees. Extras aside, other good investment properties include homes five years old or less and properties in the $200,000-range, which can particularly be desirable to a large pool of buyers. Also, look for a property in an emerging market. Some indicators: sales of existing homes and new construction permits are starting to trend upward, supply is steadily dropping, mortgage loan defaults are high but starting to fall, days-on-market move below 90, and low interest rates.
5. Have an exit strategy. Have a selling strategy in place before you buy so you’re not just randomly banking on the property appreciating and then doing a quick sale. Come in with a solid selling plan. For new construction investing, your selling options might be to assign your purchase contract during the construction period, sell when construction is complete, lease and then sell, or a lease option. Reduce the taxable impact of selling your real estate investments by talking to your tax adviser about a 1031 exchange or self-directed IRA. “Know how you will get out before you get in!” the authors advise.
Sneak Peek
“When markets go soft, things get interesting. Even though an abundance of opportunity exists in a soft market, many people still won’t take action. Why is this? Because by nature, people follow a ‘herd’ mentality. Most people believe that for something to be the ‘right’ thing to do, many people need to be doing it. Actually, this is not true at all. … An experienced insider’s secret — that many folks don’t want you to know — is this … When the markets go soft the playing field is being ‘reset.’ Short-term opportunities are removed and an abundance of opportunity gets created for the seasoned investors who know how things really work.”
About the Authors
Wendy Patton, also the author of Investing in Real Estate With Lease Options and Subject-To Deals (Wiley), is a broker with several real estate offices nationwide. She, along with her co-author Justin Ryan, also are real estate trainers, on such topics as lease options and pre-construction investing. Ryan is also a real estate practitioner in Michigan.
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