Fiscal Cliff Approval and Real Estate

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Real Estate Tax Provisos for 2013

 

Finally, “fiscal cliff” debate is over! For months now, it’s been impossible to turn on the TV or radio without getting an earful of breathless and mostly unwanted information.  Even though most of us now regard Congress as on a par with cockroaches, what happens there does have an impact on our lives. All the more reason for members of Congress to act like grownups, but that’s another topic…

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Real Estate Tax Deductions

Rushed through at the last minute, the “fiscal cliff” legislation contains a number of important provisions and none more important than those that relate to real estate.  Here are a few of the most salient.

  • Short sale taxation relief extended for another year until January 1, 2014
  • Deduction of mortgage insurance premium is retroactive to 2012 and extended to 2013 for incomes under $110,000
  • 10% tax credit [up to $500] for energy-saving home improvements retroactive to 2012 and through 2013.
  • Capital gains tax stays at 15% except for those earning over $400,000 [single filer] or $450,000 [joint] and then it’s 20%.
  • $250,000/$500,000 [single/married] exclusion on capital gain from sale of principal residence remains unchanged.
  • Estate taxes on first $5 million for individual and $10 million for family estates are ZERO.  Above those amounts, the rates are 35% and 40% respectively.

Effect of Real Estate Provisos of 2013

Given these provisos, it’s clear that real estate remains in a privileged position as far as federal taxes go. Not only do homeowners get a tax deduction  for the interest in their mortgage payments, which is unheard of in other developed countries, such as Australia and Canada, but we can deduct mortgage insurance premiums which are only applied if the equity in the home is less than 20%. By extending this tax deduction, Congress is implicitly encouraging home ownership among those who do not have the traditional 20% down payment. Is this a good thing? Considering the recent mortgage meltdown, maybe not.  It does help lenders and real estate professionals, though.

Homeowners also get to purchase equipment for their homes and then deduct some of the cost–just so long as it saves energy and fits the criteria.  Naturally, no one can argue that energy-saving is bad, but here the government supports homeowners and no one else.

Additionally, estate taxes on the first $5 or $10 million, depending, amount to nothing. This also supports homeowners since a large proportion of most estates of this size is made up of real estate holdings, both principal residence and investment properties. Again, the tax code is supporting home ownership and investment in property.

Last, but not least, the tax code encourages home ownership by not taxing any capital gain up to $250,000 or $500,000 respectively. This means that home owners can sell their homes frequently, pocket the gain or purchase a more expensive home, without worrying at all about taxes. This has been part of the tax code several decades, though the amounts have increased, and does encourage home ownership. In fact, it encourages or at least does not discourage serial home ownership.  Of course, this benefits those who change jobs and must change jobs, but it also benefits lenders and real estate professionals.

Extending the tax relief to those who short sale their homes is in a different category. So long as underwater homeowners face no tax penalties for short selling their homes,  they will usually prefer it to the foreclosure alternative. At the same time, short sales are a much faster way of  dealing with an inability or unwillingness to pay the mortgage in underwater homes.  Short sales help to clear the vast inventory of underwater property which has been clogging the system for the past few years making it difficult for the real estate industry to recover.

 

Is The Housing Crisis Over and Out?

Housing Is On The Upswing

The Good News

The worst of housing times may be slowly working its way into a dim memory as home buyers are returning to the marketplace. The national housing stats are suggesting that the terrible pain of the last six years may, at last, be coming to an end.  According to the National Association of Realtors [NAR], national home sales rose 3.4% in April for a total of 4.6 million homes sold  and the median home price for the nation rose to $177,400, a full 10% over last year. Of course, the  NAR has a vested interest in the health of the housing sector and its stats may be on the rosy side, as many commentators have pointed out. Still, 10% increase in value, even 5%, is terrific news.

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For more good news,  purchases of new homes rose almost 10% over last year. At the same time the purchase price of these new homes rose almost 5% to a national median of $235,700. Housing starts are up over 50% from their 2009 low.  So, it does seem as if there is some ground for optimism. Finally, the combination of  incredibly low mortgage rates and low home prices has begun to attract the public, still stunned from the worst economic downturn in decades.

Why Is This Happening?

For the millions still underwater and behind in outrageous payments, even thinking that the housing crisis may be on its way out is a cruel joke. Nevertheless, there are some solid reasons for an eventual and actual end to the housing crisis of the last few years.  Our U.S, labor market has been improving over the last two years ever so gradually, diminishing the ranks of the unemployed slightly month by month. Add to that enticing mortgage rates which remain at historic lows and it makes sense that home buyers with the wherewithal would begin to have enough confidence in their future prospects to make that big home purchase.

Rent vs. Buy

Rental rates have been rising throughout the country and renting has many advantages over owning a home. Nevertheless, rental rates are still much higher than the cost of owning a home in great swaths of the country. This is based on purchasing a home with 20% down and owning the same home for at least 5 years  Additionally,these stats take into consideration only the purchase price of the home,  not the ongoing costs of maintaining it.

Though for the most part  in Southern California rental rates are still cheaper than owning a home, the allure of home ownership is still a strong pull both for the younger, first-time buyers as well as older, more experienced ones. The many young people who have returned to live with Mom and Dad or those who have rented with roommates for several years are now yearning to live free–in their own homes.

Is The Crisis Finally Over?

Millions of homes are still underwater. Millions of homeowners are still faced with foreclosure or the prospect of short sale. With that in mind,  the housing crisis is certainly not over.  Despite the modest recovery in the U.S., now our global trading partners are starting to slow down or even crash themselves, especially the EU and the BRIC countries [Brazil, Russia, India, China], which had been keeping the economic engine stoked.  This country is recovering and we may manage to keep up the trend going mainly by satisfying pent-up internal demand, especially in housing.

 

Should I Buy Or Sell Now?

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It seems clear that now and for the rest of this year, it’s a good time to buy a home. Prices are still very low and mortgage rates are very low. Both of these factors are likely to extend through the end of the year and into 2013.

For those thinking of selling, it’s a more mixed picture. For those deeply underwater, home prices are unlikely to spike in the next few years, so better to bite the bullet and sell now.  For those who want to move up, this  seems to be the ideal time to make the move. And, of course, many have little choice in the matter: whether it’s through marriage, divorce, new babies or new jobs, selling is really the only option.

 

 

Housing Prices: The Infamous Double Dip Is Here!

We’ve been expecting it for a year and hoping we were wrong, but the double dip is here as home prices are plunging again. It seems that last year’s uptick was a result of the Congressional tax credits for home buyers. That pumped some life into the otherwise moribund housing sector, but the air all leaked out this year.

How bad is it? Nationwide, home prices are down 5.1% from last year to levels not seen since 2002. Home prices have now lost an average of 32.7% since the highs reached in 2006. Almost 30% of homes with a mortgage are now underwater and many of the rest are hanging on by their fingernails. Here’s a graph from CNN Money that shows the decline from 2006, the uptick last year and the plunge again this year.

It’s starting to look like Niagara Falls, and it appears poised to get worse. What is actually causing this depressing negativity in real estate? Why can’t the nation and our Golden State seem to pick ourselves up and start all over again?

Causes of the Continuing Decline In Housing

Many factors are contributing to this stubborn stalemate–high unemployment, lack of consumer confidence and spending, outsourcing of jobs–but the major reason is the same as at the beginning of the recession–the big banks.

Most of us now understand that the push for deregulation of the banking industry which culminated in the lifting of the 1930s-era Glass-Steigal Act functioned like a giant gold rush for the so-called financial services industry or, better yet, a red flag to a bull. The Wall St boys almost literally went crazy dreaming up creative ways to make money [for themselves] without much consideration for the consequences.

In those heady days, intoxicated with the freedom from almost all regulation, the banks shoveled out loans. Almost anyone could get a loan. Bad credit scores, no down payment, low or no income–none of it mattered. The bankers had a loan for everyone and raked in the money doing refi after refi as everyone cashed out their new-found equity as the housing  bubble grew.

When it burst, the first to explode were the sub-prime loans. That was back in 2007 and 2008. Those were the really terrible loans with horrendous interest rates given to completely unqualified buyers. That was the first wave of foreclosures and short sales.

Since then we have been dealing with the ARM loans, the adjustable rate loans that so many qualified buyers anxious to get into the hot housing market  were advised by their lenders to undertake “to get into the property.”  At the time lenders pitched these as  “starter loans”  because down the road, when they adjusted, buyers were told, with the rise in equity, you could easily refi when the rates went up.

Now we know better of course. Those ARM loans, so lucrative for lenders five years ago,  are now time bombs exploding all over the place. Here’s another graph showing how all these  3- and 5-year ARMs are now adjusting. Owners can’t refi now due to plunging real estate values. On the other hand, they can’t pay $1500 more a month either. Naturally, the banks aren’t budging–no help for you, partner.

Thanks to Sean Chapman for the graph.

This year, as we can plainly see from the graph, we can expect a huge number of resets for these adjustable mortgages. Since the properties are usually now either underwater or nearly underwater, even those who could pay will quickly determine that it is not in their financial interest to do so. The result will be an even deeper crisis for the housing market as home values plummet ever downwards.

News From the Housing Trenches

Good News and Bad News

The latest housing figures are now in with mixed results.  The good news is that the number of seriously delinquent loans is down to a bit less than 10% of all loans, so it does look that with short sales, loan mods and, perhaps also, the home buyers’ tax credit, the combined efforts of the federal government, lenders and home owners are finally having an impact.

But, another bit of statistical news is troubling. After a solid year of declines, the first-time mortgage delinquency rate has gone up. The most likely cause is, of course, the continuing crisis we are facing in employment.  After months without work,  eventually resources run out and unemployed homeowners must face the inevitable and start missing mortgage payments.

Choices If You Are Unwilling or Unable to Make the Mortgage Payment

So, what are the resources available to homeowners with underwater mortgages and/or no jobs? Well, with time we now have some clarity about the choices open to us.

One choice is to try for a refinance under the government program. With this, homeowners can get up to 125% of their property’s value. The catch is  the homeowner needs a job to apply and in California, at least, usually even this amount is not enough to cover the shortfall in value.

Another option is to search for a loan mod.  These fall normally under HAMP , the federal government’s Home Affordable Modification Program. This and all loan mod programs have been spectacularly unsuccessful as indicated in several previous posts. Suffice it to say, that even those who actually succeeded in obtaining these loan mods are now back in default in record numbers. The main reason is that the average mortgage, tax and debt loan for such homeowners is around 65%–a recipe for failure.

So, that leaves short sales. Even there we now have two flavors of short sales-regular and HAFA. The difference is that particpants in HAFA, the government-backed plan, must have first applied for a loan mod under HAMP. Having done that, though, such HAFA short sellers are guaranteed no deficiency judgment after the sale  by the participating lenders.  HAFA short sellers also get $3000 at close of escrow to help them move.

Which Is the Best Choice?

Short sales in my view are the way to go. Homeowners do eventually lose their homes, but statistically, that is taking quite a long time. The average homeowner in foreclosure is now an incredible, unbelievable 461 days behind in his payments. That is, short sellers are living  rent-free for months or even more than a year-on average. The stigma of short selling is now mostly gone. Those who short sale their homes can expect to be accepted for a new loan in as little as 18 months, provided that is the only negative on the credit.

Why Do A Short Sale?

Short sales offer many advantages to homeowners. Many homeowners, though, never take the trouble to even call their banks when they find themselves in financial difficulty. Granted, many banks greet their borrowers with a formidable voice maze, but, gradually, even the most clueless are realizing how dumb that is.

So, if you are upside down in your mortgage or experiencing financial challenges, at least call me at 626-641-0346 for a free consultation or email me at drdbroker@gmail.com. A short sale is a great option to avoid foreclosure. Let me personally tell you some great tales of borrowers rescued from the brink of financial disaster by doing a short sale.

Advantages of a short sale:

1. You may walk away owing nothing. You are often able to negotiate away all the debt. Banks know they will net more money with a short sale versus foreclosure. In fact, a recent study showed banks would net 20% more money with a short sale v. foreclosure.

Because of this, most short sale banks completely forgive the debt. Yes, they might be losing $100,000, or more. However, they would rather cut their losses and let you go free.

2.You will be able to buy another home much faster. If the rest of your credit report looks good, you may qualify for a mortgage as soon as 18 to 24 months after the close of your  short sale.  If you have some money and are current before beginning the short sale process, you mayeven be able to buy a new home right then and there.

3.  You will be able to get a good night’s sleep. You will no longer have to worry about that Notice of Default posted on your door or how you will come up with all the money to pay your debts.

4. Your credit will suffer much less. Your credit score typically drops by 250 to 300 points on a foreclosure. With a short sale, your credit may only drop by 50 points, provided you are current on all your obligations.

Disadvantages of a Short Sale:

1. You have  no guarantee your bank will accept the short sale offer. Working with a short sale specialist, such as myself, however, will give you a much better chance. Plus, banks are working very hard to improve their short sale processes, so at least with some banks, it’s getting easier.

2. You will have to  document all your income and assets. This, obviously, is to protect the banks and is similar to what you must go through to obtain a loan.

3. Your short sale may drag on for months. Some short sales I’ve negotiated have taken as long as a year, depending on the bank. This process is hard on your psyche, but, on the other hand, most sellers are not paying their mortgages during all that time.

4. You may have to bring money to the table. Whether your buyer insists on repairs or the bank insists on a promissory note, you may have to pay something out-of-pocket, though the months of not paying your mortgage may help you there.  Usually, the costs are minimal and I have yet to see a bank demand a promissory note, though it remains a possibility.

A short sale is a good option for most homeowners. It allows you to get rid of the debt and move on with your life. Many people rent another home for less than their mortgage payment or, as mentioned above, may purchase a better home for less than they owe on their current one.

I’d be happy to fill you in on the details not covered here. Just give me a call at 626-641-0346 or email me at drdbroker@yahoo.com.

Save Money: Don’t Pay the Mortgage

Sounds awful, doesn’t it? Contrary to the frugal rules your parents taught you or maybe your grandparents. Well, the Great Depression was a long time ago and we’ve come a long way, baby. No more do trivial items like mortgage contracts bother us because, well, the other partner in the contract, the banks, are showing how little they care for us.

I’ve discussed loan mods ad nauseam in this blog. The fact is for most borrowers either the bank refuses to offer one for a variety of reasons [too much income, not enough income, current in payments] or the loan mod proffered after months of paper-pushing is too draconian for the homeowners who soon fall into arrears again.

What’s the solution?

As mentioned in a recent NY Times article, in practice passive resistance rules . Homeowners simply stop paying on their underwater mortgages. Now, living “rent-free”, they take  whatever money they have and pay down bills, eke out an existence, put it away for the post- foreclosure rent deposit  or do whatever they have to do to make ends meet.

What about the foreclosure?

Don’t the banks swoop down and grab the house throwing its occupants into the streets? That’s what most of us think of when we think foreclosure, but the simple fact is the banks are swamped. In fact, today,  the average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

In my travels I’ve met plenty of homeowners who manage to stay in their homes rent free for months, even years. Not so long ago I talked to a man whose home in the Hollywood Hills had been in foreclosure for 24 months before the bank even threatened to evict him. He also had a guest house and had been collecting rent for the entire time. By law, his tenant was allowed to stay for another 60 to 90 days, though not rent-free.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier. In California, a non-judicial foreclosure state, the process can be fairly rapid, 3 months and 21 days from start to finish. That’s theoretically and legally possible, except, again, it rarely happens. In California, the average is now 415 days and lengthening every month. The reason is the overwhelming number of defaulting mortgages.

Even in short sales, the banks seem to be in no rush to consummate the transaction as borrowers forced to wait for 3 to 6 months have discovered. In the meantime, the homeowner lives rent free or collects rent from tenants Everyone lives in a kind of limbo knowing the ax will fall sometime and some would much rather just move out and get on with their lives and reconstructing their credit reports. For  many, it may not be  much, but it is some small revenge again the behemoth banks who took all that bailout money and turned a tidy profit while the nation’s homeowners bore the brunt. Yes, a small but satisfying revenge.

New Rules: Short Sales on Steroids

The new federal guidelines for short sales, called HAFA [Home Affordable Mortgage Alternative] came into being November, 2009 and just recently became operational. Most loan servicers and banks are now using HAFA.

What’s So Great About HAFA?

Really,  what’s the big deal? Everybody knows short sales are tedious, take forever and are a last resort for the homeowner, right? Not exactly–HAFA does streamline the process, shorten the time periods and provide significant incentive s for both short sellers and their banks. In short, it’s a win-win for all parties.

If you’re a homeowner considering a short sale, then,  it’s a fairly big deal, assuming that it works out as envisaged by the federal government.  Home sellers can get up to $3000 in relocation money from the transaction. That’s very helpful to distressed homeowners who may want to rent and need to pay a deposit. And, another very big deal is that homeowners would be guaranteed from their banks to have no deficiency judgments. Coupled with the 2007 law foregoing any tax on defaulted income, that leaves short sellers really free and clear once they close escrow on their underwater properties.

What Do the Banks Get Out of HAFA?

We have to ask why would the banks want to do this? What’s in it for them? Here, too, are some very positive reasons. Banks prefer short sales over foreclosures because banks save about 20% on average by doing the short sale. This program simplifies the process, streamlines it, and allows the mortgage servicers $1500 to cover administrative costs with an additional  $2000 to the investor who actually owns the loan.  Banks do better with this program. Altogether, sellers, servicers and investors are collecting $6000 on each HAFA transaction. Not too shabby.

Now the Big One: Who is Eligible?

If your principal residence qualified for a loan mod under HAMP [Home Affordable Modification Program]  and you can’t pay or have fallen behind you are eligible. If this is an investment property or rental, you are not eligible.  If your loan is FHA or VA, you are not eligible. Both FHA and VA have their own short sale programs with different rules.

Having applied for the HAMP program is crucial. If you applied and were rejected, you are eligible. If you entered a trial period and fell by the wayside, you are eligible. If you received a permanent loan mod under HAMP and have missed at least two payments, you are eligible.

Let’s say, you discover you probably are not eligible for HAMP or HAFA, what should you do? Don’t worry. The servicer will still do a short sale; it will simply not be using the HAFA guidelines. We’ve been doing what seems like zillions of short sales for the past three years, so the process there has become more streamlined as well. If you need help or want to do a short sale, make sure to call me at 626-641-0346. I can even help if you are outside of California.

Oh-one last thing-if you are an investor who would like to purchase a HAFA short sale then flip it, you must wait for 90 days.

Here’s the National Association of Realtors’ video on the topic

NAR on HAFA