A year ago, a group of investors offered $20 million to buy the Pontiac Silverdome, the seldom-used, dome stadium that used to be the home for the Detroit Pistons and Michigan Panthers. The deal eventually fell through. In a sign of the state of the commercial real estate market, the winning bid for the Silverdome in auction this week was $583,000.

It cost $55.7 million to build the stadium 35 years ago, but today the location where Pink Floyd surprised fans in 1994 by playing Dark Side of the Moon in its entirety for the first time since 1975 is worth less than the new houses down the street from me.

The lucky buyer is a Canadian company that is said to want to bring soccer to Detroit, but Major League Soccer disavowed any knowledge of these plans.

The whole situation seems suspect. What happened in the last year to drive the market price down from $20 million to less than a McMansion? Did the Canadians get a deal that’s too good to be true? Or should this be expected considering Pontiac’s proximity to Detroit, a city in desperate need of economic recovery?

Photo credit: Dave Hogg
Silverdome sale price disappoints, Mike Martindale, November 17, 2009

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Pontiac Silverdome Sold for Less Than a House

It’s official. Today President Obama will sign a bill into law that extends the $8,000 First Time Home Buyers’ Tax Credit, recently set to expire on November 30, until April 30 next year. The tax credit, originally part of the American Recovery and Reinvestment Act of 2009 was intended to stimulate the real estate industry, and Congress has been talking about extending the credit for months.

1.8 million home buyers have qualified for the $8,000 first time home buyers’ tax credit so far or will qualify by the end of November. According to the National Association of Realtors (who have a vested interest in seeing the credit be extended and expanded) says 335,000 of those home buyers would not have purchased a new house if not for the credit.

With house prices still lower than their highs and not much activity in the market, the industry wants more stimulation. And the industry is getting more than the $8,000 stimulus. Formerly, the tax credit was available only to home buyers who hadn’t owned a house in the past three years. The new bill adds a $6,500 tax credit for current home owners who buy a new house, and who have lived in their current house for at least five years. The extensions comes at a cost of $10.8 billion over 10 years according to the Joint Committee on Taxation

In order to qualify for either credit, the purchase contracts need to be signed by April 30, 2010 and the closing must take place by June 30, 2010. The value of the purchased house must be less than $800,000. There is an income limitation as well, but it has been increased with the passing of this bill into law. If your adjusted gross income is above $125,000 (single filers) or $225,000 (joint filers), the maximum credit you are allowed to claim is phased out.

The extension of the home buyers’ credit was included within H.R. 3548 (Unemployment Compensation Extension Act of 2009), a bill which increases unemployment benefits for Americans for up to 20 weeks.

Do you think this extension is a good idea or with the economy beginning to improve, should we cease creating more stimuli?

Photo credit: pnwra

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President Obama and Congress Extend the $8,000 Home Buyers’ Credit

The $8,000 tax credit for first-time home buyers is set to expire at the end of November, but lawmakers don’t want this benefit to end. While there have been some positive signs in the real estate market, the current credit hasn’t done much to stimulate house prices or the economy overall. All year, some senators and representatives have been suggesting improvements designed to further jump-start the real estate industry, none of which have been passed yet. Here are some of the enhancements they have been considering.

• Extending the deadline from November 30, 2009 to May 30, 2010 or November 30, 2010.
• Expanding the credit to all home buyers rather than just those who have not owned a house in the past three years (otherwise known as “first-time” home buyers).
• Increasing the credit from $8,000 to $15,000.
• Eliminating the income cap for qualification of $75,000 (or $150,000 for married filers).

These changes, if signed into law, would redirect the focus of the credit from the average consumer who needs a little boost to purchase a primary residence to investors and speculators. Flippers would still be discouraged because the bills currently under consideration in the House and the Senate both call for paying back the credit if the house is sold within two years or if the purchaser is not a primary resident sometime within two years.

For many people, $8,000 is not a big enough incentive to buy a house if they aren’t financially ready to do so. I don’t think increasing this to $15,000 would change much. This credit, if the changes become law, is a bailout of the housing industry, just like Cash for Clunkers was a benefit for the auto industry.

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Congress Plans to Extend the First-Time Home Buyers’ Tax Credit

My wife and I enjoy our apartment, but we’re preparing for the day when we can make the jump to a house. We could use the extra space, and we’re ready to get away from some of the ticky-tack regulations and rules that landlords love to use.

Financially, however, our preparation is lacking. It isn’t because we’re not trying, but we’ve decided that we’d like to have a sizable down payment and know exactly what we’re getting into. We haven’t had much debt in our marriage so far, and so in some ways, we’re reluctant to dive in.

For this reason, buying a foreclosed home is something that has been very interesting to us. I was first sucked in by hearing radio commercials announcing homes for sale for just $12,000 or $22,000. I naïvely thought, “wow – $12,000? We can swing that. We’ll be in a house in no time!”

Turns out, such was not the case. While properties going for those prices are available, most foreclosed homes can be found going for between 20-40% off the value of the home, according to AOL Money. While this isn’t rock bottom, it’s still quite a bit more affordable than a full-priced home.

According to the same AOL Money article, there are five tips that can make buying a foreclosure a realistic choice for many potential home buyers.

1. Find a property. The article recommends checking two sites: Foreclosure.com and RealtyTrac. Both charge a fee, but they each list thousands of properties. The best places to look are areas that are places that have a high grouping of “distressed properties.” Doing a bit of research about the local economic situation can help as well – you’ll obviously have better luck in areas with more foreclosures.

2. Skip the auctions. At an auction you’re usually buying a home without seeing it first. Before you make any serious offers on a property you’ll want a full inspection, and that’s hard to do with properties that are auctioned off by a court. You may also be responsible for back taxes on the property, something that might not be disclosed during the action. The best thing to do is to wait for the bank to put the home back on the market. They’ll usually pay off any taxes or debts, and fix the home up a bit to attract potential buyers. This is a much safer way to buy.

3. Know local home values. As the article states: “Just because a home is being sold b the bank, doesn’t necessarily mean it’s a bargain.” If you find a property your interested in, use a site like zillow.com to compare values of the homes around it to make sure that you’re not getting ripped off.

4. Get Financed Before You Shop. Apparently many banks won’t make a loan for you to buy a ‘distressed property,’ so it’s a good idea to get pre-approved for a mortgage before you start seriously shopping for home. Other banks base their loan on the condition of the property, so to avoid any problems, get your financing set up first.

5. Get an Inspection. I’ve already mentioned this earlier, but an inspection is key. You want to know as much as possible about a house, and paying for a professional inspection is worth it. Homes in foreclosure can be hiding serious problems, since the previous owner probably didn’t have money to make major repairs, or even perform routine maintenance.

With an inspection you’ll know not only the condition of the home, but what kind of repairs are needed and how much you can expect to pay for them.

While we’re still a while from seriously shopping for a home, we’re planning on checking out foreclosures for sure. Any money we can save on a home would be a leg up financially, and put us that much closer to being debt free again.

What thoughts or experiences do you have with buying a foreclosed property?

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Is Buying a Foreclosed Property Realistic?

A few years ago, a coworker formed an investment partnership in speculative real estate. He promised investors a 10 percent annual return and was using the capital to invest in Florida real estate, earning 15 to 20 percent overall. As most of the real estate had not even been inhabited or built yet, the investments were pure speculation. I haven’t been in contact with this individual, but I am wondering how this business is doing in this real estate market.

If you have a mortgage on a house you purchased recently, there is a good chance you now owe more on this loan than your house’s market value. These chances are even greater if you bought into the speculative markets in Arizona, Nevada, or Florida like my former coworker.

Owing more on your loan than the house is worth is not the worst financial situation, but it is risky. If you need to sell your house, you would still have to raise more money to pay off the remainder of the loan. If, on the other hand, you are lucky, you can remain in your house long enough to continue paying off the loan and to wait for home prices to return to the average rate of appreciation of about 3 or 4 percent. Eventually you could come out ahead.

If you find yourself in this position and you care not to be, you can make the time work harder for you rather than against you by increasing the payments towards your mortgage. A pure analysis of the numbers might say that it’s better to invest in the stock market rather than pay off your mortgage faster, but that doesn’t account for the risk of staying in a house whose loan is under water, and that risk can be measured differently by different families in different situations.

Robert Kiyosaki popularized the idea that a house is a liability. He is, of course, technically wrong. A house, and anything you own is an asset, while a mortgage, and anything you owe, is a liability, despite any marketing materials that try to redefine the words. But when your mortgage is higher than the market value of your house, you have negative equity, and that asset is not looking so helpful on your balance sheet.

This negative equity is mostly a result of speculative investing. The news that so many homes are under water invites criticism of home owners who bought a larger or more expensive house than they could afford and have now suffered the effect of a downturn in the real estate market or interest-only mortgages than have now adjusted to include principal payments. But that is only a small problem in this market, it is the speculative investing that accounts for the under water loans.

The areas that were identified as the largest contributors to the total number of home loans under water were the locations that saw some of the biggest increases in home prices as investors gobbled up as much property as possible. These investors intend on selling more frequently than a typical home owner, so they are more vulnerable to the market downturns that result in negative equity.

Are you under water with your home loan? Are you doing anything about it now or are you waiting for home prices to return?

Almost one-third of home loans under water, Emily Glazer, MarketWatch, August 13, 2009
Photo: respres

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One-Third of Home Loans are Under Water

“Now is a great time to buy.” That has been the advertising mantra of the National Association of Realtors regardless of the state of the housing market. The NAR certainly has a purpose; its mission and vision is clearly displayed on the organization’s website: “The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful.”

The NAR looks out for its due-paying members. Notice that the mission of this non-profit organization is not to help consumers either find bargains when buying a house or to help sellers find the highest bidders. Real estate brokers, particularly those who qualify as Realtors (which according to the organization, should be represented in all uppercase letters, include the registered trademark symbol, and be pronounced in the unnatural American English combination of phonemes “REAL-TORE”) stand to be more “profitable and successful” by increasing the number of transactions they broker.

From what I understand about commissions, a 6% commission is often split between the buying agent and the selling agent, and if the agent is part of a realty company, the 3% is split with the company. A real estate agent holding out for a buyer’s asking price of $250,000 rather than $220,000, a difference of $30,000, stands to increase his income approximately $450. That seems hardly worthwhile if it takes several months before the asking price is met. The $450 is hardly an incentive for the broker; he could do better by closing the deal and moving on. On the other hand, the $28,200 (the $30,000 in price difference minus the 6% paid to the agents) is a significant difference for the seller. This just illustrates that real estate agents have little incentive to work hard for either the seller or the buyer except to create a good relationship in order to foster referrals.

That’s not the point. The point is that the National Association of Realtors’s only goal is to encourage more real estate transactions, and this is why they have been saying that, “Now is a great time to buy,” no matter what’s going on in the world around them. This is also why any data provided to the public by the NAR should be regarded as marketing rather than a true gauge of the economy.

For a well-accepted measure, media generally turn toward the Case-Shiller Price Index (CSPI), measured by Standard & Poors (a company with its own conflicts of interest as well). The CSPI shows that home prices increased for the first time in May. Other positive data include June numbers: new housing starts and existing home sales were both up 3.6% and sales of new homes were up 11%.

Is this a sign that the housing crisis is over? It must mean that there is increased confidence in the ability to find the right price as well as increased availability of loans.

There are some problems, though. Unemployment continues to rise, so consumers may find themselves in financial trouble. That could result in fewer purchases and more mortgage defaults. The increase in purchases may be due to speculators trying to snag deals rather than families moving from apartments to houses. Even if we are at a bottom, the numbers could mean that real estate is leveling without significant increase for some time.

What do you think? Are we headed for a recovery or are there still dark clouds ahead?

Looking for a Housing Recovery, Casey B. Mulligan, New York Times, July 29, 2009.

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House Sales Improved in June, But is the Housing Crisis Over?

The real estate recession doesn’t discriminate. While foreclosures have soared to one out of 84 households over the course of the first six months of 2009 and the Obama administration is considering more aid to help families in this situation, the threat is also affecting famous properties.

The owner of the famous Watergate Hotel in Washington, D.C., Monument Realty, has defaulted on its loan. The lender, PB Capital, wasn’t able to agree on new terms for the loan, and the city’s foreclosure notice expires today according to the Washington Post. The property, made famous by President Nixon, is going up for auction next week.

Are you bidding? I see a lot of potential in this property, despite the fact it has been empty for a while, due to its iconic status. And if I see the potential, there is a good chance a number of savvy real estate investors do as well, driving up the price on the auction block. But who has the money?

Photo credit: brownpau

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The Watergate Hotel is in Foreclosure

Update: The first-time home buyer tax credit has been extended and expanded. Click here for the latest details. The information below is now out-dated.

The Senate is considering a number of changes to the $8,000 first-time home buyers credit. Spurred on by Sen. Johnny Isakson from Georgia, the adjustments being considered seek to expand the credit to spur the real estate industry.

Here are the changes some Senators would like to make to the original law.

Expand the maximum credit from $8,000 to $15,000. When the first-time home buyer credit was first suggested as an amendment to the Senate’s 2009 Stimulus Bill, home buyers would stand to receive a credit worth 10% of the purchase price of the house up to $15,000, and the credit would be distributed over a course of two years. This amendment did not end up in the final law. The limit was reduced to $8,000.

Eliminate income limits for the credit. In the current law, the amount of the credit phases out when the taxpayer’s modified adjusted gross income is over $75,000 (single) or $150,000 (married) and fully eliminated when income reaches $95,000 or $170,000.

Make the credit available to all home buyers. Home buyers qualify within the “first-time” label if they have not owned a home in the past three years. The current credit is limited to the first-time home buyers, but the new legislation making the rounds would change the rules so any home buyer would receive the credit.

These changes will benefit many people who are deciding whether to buy a house in this market. It should continue to increase activity in the real estate industry and provide more work for real estate agents. It could, however, encourage buyers to spend more for a house than they believe it is truly worth.

Real estate investors (speculators) will also like these new rules for the tax credit if they become part of the law. Overextended consumers and real estate speculators led us to overpriced real estate values, a bubble was formed, and eventually deflated or collapsed. Will these changes to the law, if enacted, just put the real estate industry back into a precarious position or will they put is back on the right path?

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Extending the $8,000 First-Time Home Buyer Credit to $15,000

The latest data show again that you shouldn’t expect to make more money from buying and selling the house you live in than you would from investing in stocks. In fact, you could do better with government-issued inflation-protected bonds. This isn’t just a result of the recent decline in home prices, 19% over the past year. The long term figures show that real estate barely beats inflation.

This doesn’t consider the annual expenses you pay to maintain and live legally in your home, like insurance, association fees, and taxes. In order to compare return from the sale of your home with that from a sale of any other investment, you need to consider the total cost, including the above as well as closing costs, broker fees, and the amount you pay the people who stage your house with fake furniture when you sell. People I have talked to like to take their selling price, subtract their buying price, and state that as their real estate profit, ignoring all the costs they wouldn’t have had if they hadn’t purchased their house.

Gurus have long touted real estate as the best method for “getting rich,” but this concept does not compute if your only purchase is the home in which you live unless you get quite lucky. And unless you rent when you sell your house or downsize to a smaller house or a less expensive location, you won’t be able to enjoy the profit, if any.

Rather than looking at your own home as an investment, consider it a cost center that you should try to reduce as much possible to make the most of your purchase.

Is Your Home A Good Investment?, Brett Arents, Wall Street Journal, May 27, 2009
Case-Shiller shows slowing in home-price decline, Reuters, May 26, 2009
Photo credit: jblyberg

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Your House Is Not a Good Investment

In February, Congress passed the American Recovery and Reinvestment Bill of 2009, otherwise known as this year’s stimulus bill. One small part of this bill allows first time home buyers (anyone who hasn’t owned a home in the past three years) to qualify for a $8,000 tax credit.

For individuals or families hoping for some help to move into a house within their reach of affordability, this is an amazing offer. Not only does it help home buyers, it will in theory help stimulate the real estate industry by keeping housing prices from falling further and allowing more people to afford to buy homes.

Even better, this year’s credit does not need to be paid back to the government unlike last year’s $7,500 credit for first time home buyers. The rules for claiming the home buyer credit are not as helpful as they could be, however. If you qualify for the credit, you need to buy the house first, using funds you have or a loan, and then later apply for the credit either in an amended 2008 tax return or your 2009 tax return.

The U.S. Department of Housing and Urban Development wants this benefit to assist home buyers differently. HUD is pushing for the rules to be changed to allow lenders to borrow against the tax credit. If the buyer qualifies, he or she can receive their tax credit up front to be used for completing the down payment or paying closing costs.

If HUD models the first time home buyer’s loan after similar programs offered by a select number of states, the loan would be interest-free as long as it is paid back within a reasonable amount of time. I imagine the grace period would be determined when the rules are set if HUD is successful in getting the rules changed.

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HUD Wants to Let First Time Home Buyers Use $8,000 Credit for Downpayment

(Or… What on Earth is an Affidavit of Financial Hardship?)

Today the U.S. Treasury announced the details of their “Making Home Affordable” Loan Modifications. This link to the financialstability.gov Web page about the plan should help you answer whether you are eligible to receive help with your “underwater” mortgage.

Here’s a good summary from a PDF linked from the above Web site that helps explain who the program is for:

The Home Affordable Refinance program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-
to-value ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.

The one thing I found while reading about this that I wasn’t familiar with is a requirement to sign an Affidavit of Financial Hardship. Googling for it resulted in a number of State-specific PDF forms, but I did find a generic Affidavit created by Fannie Mae so you can at least have an idea of what to expect.

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Do I Qualify for a Loan Modification?

In the real estate boom, many homebuyers extended themselves financially to buy a house that may have been beyond their means. With the exuberant market, people were encouraged to buy with low introductory interest rates and interest-only loans, the belief that their income would increase to meet their payments, predictions that real estate prices would never fall. As should have been predicted, adjustable-rate mortgages have adjusted and monthly mortgage payments are higher and income hasn’t increased. More people have fallen behind with their mortgage payments.

With declining home prices and interest-only mortgages, more families owe more on their mortgages than their home is worth. Financially, it could make sense, at least in the short term, to walk away. In this state of negative equity, abandoning the mortgage and the house would actually be financially beneficial.

Here is why:

If the house you purchased for $400,000 is now worth only $300,000, but thanks to an interest-only mortgage, you still owe $400,000, your net worth increase by $100,000 simply by wiping the mortgage and the house from your balance sheet. Of course, if this is your primary residence, you still need a place to live. But from this point you could buy a more affordable house or rent for a while.

There is a major drawback to abandoning your responsibilities. If you walk away, you will trash your credit rating, making it more difficult or impossible to rent an apartment, qualify for a new mortgage, and perhaps get a job.

Freakonomics addresses this dilemma (if it is a dilemma at all):

My new wife and I bought our home in Temecula, Calif., as a place for us to start a family… We bought the house in early 2007 for $445,000 and put $50,000 down… Now that the market has crashed in our area, our house is worth about $250,000.

Although our monthly mortgage payments are high, we can still afford to make them, but should we? If we walk away and buy another house with my parents cosigning on the loan (or even just rented a place), we could save almost $1,000 a month in payments and maybe even have positive equity in the next few years. If we stay in our home, we’ll be stuck for many years, and if the market ever does get back to what we paid, the best option we’ll have will be to break even with a sale and then buy another house with an inflated value.

I’m certainly concerned about the ethical side of it, and know that walking away is not “the right thing to do.” But my question is from a purely economic perspective and I’d be saving a significant amount of money by lowering my monthly payments and erasing $140,000 in debt.

What should this family do? Are there ethical considerations, or is it simply a question of math? Credit rating aside, the financially responsible option may be to walk away, accept your mistakes, and start over. But if people can simply walk away from their obligations, what incentive is there for people to buy houses they can afford and work hard to continue making payments responsibly?

New laws are now in place to help families facing foreclosure, which should encourage people to choose options other than abandonment. But they may not help every family that finds itself in this predicament. What should they do?

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Should You Walk Away From a House and Mortgage?

If real estate is truly the root of the economic recession, then this new proposal from President Obama should help. The plan calls for $75 billion to help 9 million homeowners who can no longer afford their monthly mortgage payments and are at risk for foreclosure.

Here is how this plan would help.

If you owe more than 80% of your home’s value, this plan will help you refinance your mortgage. How will the value of your home be determined? Will they use the purchase price, current estimated market price based on other similar homes sold recently (which could be considerably lower), or some appraised value?

If you’re at risk for foreclosure, the $75 billion would be used to subsidize your mortgage interest rate. This would lower the interest rate you see while the lenders still receive their money from the government. The goal is to keep payments below 31% of income. But what happens when income suddenly drops to zero through the loss of a job? 31% of zero is still zero.

If you declare bankruptcy, a judge will have the authority to modify your mortgage. This is good news for consumers with no other options.

There are a number of other measures that affect lenders rather than consumers. The plan offers incentives for lenders to help at-risk borrowers who are not yet late with payments. $10 million will be set aside to protect lenders against further home price declines.

At this stage, this is just a proposal. The Senate and the House of Representatives will both draw up their own versions of this proposal and eventually agree on a bill. This could take some time, and as sentiment turns away from helping citizens directly, particularly if it is widely believed that homeowners generally find themselves in trouble due to their own choices and actions, there may be a struggle to turn this proposal into an agreed-upon law.

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Obama Sends $75 Billion to Homeowners in Foreclosure

When is your house a liability? Does the fact that you have a mortgage make your house a liability? Or do you have to owe more than the house is worth? What is a liability, anyway?

Well, it depends. Looking at your house from a financial perspective, which you should do because if you’re like many people in the United States, most of your wealth is “tied up” in your house, it is not a liability. A liability is defined as something you owe to someone else. You do not owe the house to the person from who you purchased it, nor do you owe the house to the bank. You may owe the balance of your mortgage.

A house, like any other object that comes into your possession, is classified as an asset. An asset is something you own. A house has a value. Whether you assign the value as the price at which you purchased the house or the price at which you believe you can sell the house, that amount is how much your house is worth.

You can offset the value of the asset with the value of the mortgage, your liability. Your house, an asset, subtracted by your remaining mortgage, your liability, results in your wealth due to your house. That’s commonly called your “equity,” but that has a murky definition, too.

So why do so many people claim that your house is a liability if it’s clearly incorrect from a financial standpoint? Most of this stems from one personal finance “guru.” Robert Kiyosaki, a successful marketer of products, believes an asset is anything that provides cash to you, while a liability takes your cash away. These are not the traditional meaning of the words, but this establishes a framework for the ideas Kiyosaki tries to sell. Kioysaki believes you should strive to increase the assets that provide positive cash flow (Kiyosaki-assets) and reduce the assets that require negative cash flow (Kiyosaki-liabilities).

The concept is sound, but Kiyosaki’s use of the words “asset” and “liability” angers those of us who understand finance and prefer not to confuse the general public by redefining words. But taking a step back from finance, consider this:

There is at least one other legitimate definition or “sense” of liability. In a broader sense, a liability is anything that puts an individual at a disadvantage. Yes, debt is a liability, both financially and generally. You may love your children, but if they’re chronic behavior problems, they may be a liability.

If you own a business that makes millions of dollars each year — and wouldn’t that be nice — chances are you could sell that business if you need to, and command a very high price. That business is a good example of an asset (even if the business itself contains assets such as buildings and liabilities such as debt). But if that business is legally risky, and there is possibility of being arrested for operating it, you could argue that the business is a liability to your ability to continue living freely.

Once you start looking at the big picture, the line between asset and liability, usually neatly drawn down the center of the balance sheet, looks a little fuzzier.

Ask anyone with a financial background whether your house is an asset or liability, and they will unequivocally tell you that it is an asset, contributing to the total of your net worth. but that definition only takes you so far. If owning your house prevents you from using your money for better purposes, you could argue that it is a liability in the broader sense of the word.

Just don’t try to put the value of the house on the right side of your balance sheet.

Update: In response to this post, Mighty Bargain Hunter shares his thoughts about the practicality of Kiyosaki’s redefinitions.

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Is Your Home an Asset or Liability?

In 2003, John Talbott predicted the housing market crash, in a way. It’s true that when the real estate market is exuberantly celebrating an uncharacteristic increase in home prices, you can predict a crash and just wait for it to come true. Here’s what Talbott, a former Vice President at Goldman Sachs and author of The Coming Crash in the Housing Markets (2003) and Sell Now!: The End of the Housing Bubble (2006), said in an article on CNN Money in August 2003 about the “worst-case scenario” in housing.

… Rising interest rates drive down home prices, leaving an alarming number of homeowners — particularly those who’ve cashed out or borrowed against their equity — holding more debt than their house is worth. If they sell, they would actually owe money.

Under this scenario, foreclosure rates jump as high as 5 percent, pushing down home prices and wreaking financial havoc all the way to the top of the housing food chain at Freddie Mac and Fannie Mae. With the collapse of these financial behemoths, investors would lose money, taxpayers would be stuck paying for a bailout and confidence in the banking industry would be as good as gone.

And your home? A 30 percent drop in home values isn’t inconceivable.

“It’s 1929 all over again,” said Talbott… “This is big Depression-type stuff.”

It didn’t play out exactly as Talbott predicted. The latest housing crisis probably didn’t occur due to high interest rates. The primary driver was more likely excessive speculation; as prices continued to rise throughout a bubble, more investors wanted to get into the market with the goal of selling at a higher price. Credit was freely available, even to risky individuals, because banks felt they could sell the debt to investors on the other side of the coin, passing off the risk to another party.

The signs were there.

Your home: Worst-case scenario, Sarah Max, CNN Money, August 8, 2003

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Housing Market Crash Predicted in 2003

This text refers to the original $15,000 tax credit amendment for all homebuyers which has now been superseded. The tax credit is now $8,000 and is available for people who purchase a house between January 1, 2009 and November 30, 2009. Here is how to claim the $8,000 home buyer tax credit on your 2008 or 2009 tax return.

As senators jockey for position and work to coming to an agreement that will best help the American people and the overall economy, the stimulus plan originally pushed forward by Barack Obama is changing. Last night, the Senate voted to include an amendment to the bill which would provide a tax credit for homebuyers. If the bill passes the Senate, and if this amendment remains included when the Senate and House negotiate, and if the President signs the bill into law, anyone who purchases a house after the bill is signed into law will be entitled to a tax credit.

The credit would be 10% of the purchase price of the house, up to $15,000. This idea is modeled after a $2,000 tax credit for homebuyers that helped the country rise from a recession in 1975. The credit would be spread over two years. For example, if you buy a house with a purchase price of $300,000, you would qualify for the maximum credit of $15,000. The first year you claim the credit, you would receive $7,500, and you would receive the remaining $7,500 the next year.

Additionally, in its current form, the requirement to repay the credit over time will be waived. The estimated cost of this amendment is $18.5 billion. This credit, which was once set aside for first-time homebuyers, would now apply to anyone who purchases a house, including investors, speculators, flippers, and any family struggling to afford a place to call home.

So does it make sense to go out and buy a house this year if you weren’t planning to, just to receive this tax credit? I’m not so sure. The main driver for buying a house — one in which you plan to live, not one you with which you plan to invest, or more accurately, speculate — should be necessity. Incentives for purchasing an asset stands to prop up the price of that asset beyond the price the market sets for it on its own. This boost helps real estate agents and investors more than families.

Please keep in mind that the plans for this credit are subject to change until it the bill is signed into law by the President of the United States.

Are you more inclined to buy a house this year with the knowledge that you will receive up to a $15,000 tax credit if this bill is signed into law as it currently stands?

Update: the current text of this amendment stipulates that only houses purchased after the bill is signed into law will qualify for the $15,000 tax credit. The final rules will depend on what the Senate and House of Representatives agree to before sending the bill to the President.

February 11 Update: As of this moment, the idea of the $15,000 tax credit may be nothing more than a dream. According to reports following the compromise between the House of Representatives and the Senate, this benefit has been “significantly reduced.” It may be another day before we know exactly what that means.

February 12 Update: The $15,000 tax credit has been confirmed as being “significantly reduced” to $8,000 for first-time homebuyers only and only houses purchased before the end of November will qualify. This $8,000 tax credit will not need to be repaid, unlike the current $7,500 first-time homebuyers credit.

February 13 Update: The Senate and House of Representatives have both passed the compromise version of the stimulus bill. Read the complete stimulus bill here, and you’ll be a step ahead of many of the congressmen who didn’t have a chance to read it before voting.

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Senate Amendment to 2009 Stimulus Bill: $15,000 Tax Credit for Homebuyers

As Barack Obama’s 2009 economic stimulus plan makes its way through Congress, the Senate is taking the opportunity to modify the bill with the intent of providing assistance to the lagging housing market. Rather than allow the market to continue correcting itself, the government would like to encourage consumers to jump into the market, allowing prices to begin climbing again.

Republicans and Democrats in the Senate would like to see 30-year fixed-rate mortgages at 4%, improvements to the first-time home buyer credit, and a 90-day moratorium on foreclosures.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., told reporters last week that he would like a provision in the stimulus package that would impose a 90-day moratorium on foreclosures. Dodd may consider other housing measures as well. (CNN)

People facing foreclosure are unlikely to qualify for a typical mortgage refinance, a tool for those who have been able to pay their monthly bills but who would like to take advantage of lower rates. A 90-day moratorium would give those in danger of losing their homes more time to negotiate with lenders. There are some instances in which this might improve the situation.

I can imagine that someone who has been out of work and unable to pay the mortgage — usually the last payment to be affected when an emergency arises — could be given more time to find a new job. But in this economy, is three months enough time for someone to get back on his or her feet?

The goal of economic stimulus is to prevent another Great Depression or a repeat of Japan’s extended slump during the 1990s. The theory seems to be for the government to throw everything it can at the economic downturn, including the kitchen sink, and see what sticks.

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Senate Amendment to 2009 Stimulus Bill: Moratorium on Foreclosures

This text refers to the original amendment to the stimulus bill, which has now been superseded in the final law. The first-time home buyer tax credit is now $8,000 and is available for people who purchase a house between January 1, 2009 and November 30, 2009. Here is how to claim the $8,000 home buyer tax credit on your 2008 or 2009 tax return.

30-year fixed rate mortgages at 4% aren’t the only the only benefits the Senate wants to offer taxpayers as it has the chance to shape the 2009 economic stimulus before the bill is sent to the Office of the President to be signed into law. A number of amendments are on the table, designed to address the housing market by encouraging people to start buying again.

Here’s another amendment under consideration.

Senate Budget Committee Chairman Kent Conrad, D-N.D., said last week he would propose an expansion of a temporary $7,500 first-time home buyer credit so that it applies to all purchases of primary residences. Some Republican senators have called for an increase in the credit to $15,000. (CNN)

The current law offers a tax credit of $7,500 to buyers purchasing their first home. The tax credit is a loan that must be paid back over the course of 15 years, starting two years after the credit is taken. It only is available for houses purchased between April 9, 2008 and July 1, 2009. Individuals earning above $75,000 (or couples earning above $150,000) will see the maximum credit phased out.

Without an amendment, the 2009 stimulus bill would remove the requirement that the credit be paid back over time, as long as the house isn’t sold within three years.

Buying a first home is one of the most difficult purchases to make. In addition to learning about all the requirements of owning a house for the first time, working with real estate agents, and in most cases, hiring lawyers, first-time home buyers need to raise money for the down payment and other fees. Purchasing subsequent houses are often less stressful, and money is often raised by sale of the first home. There are many programs to help first-time home buyers, but help more from the government might increase the possibility of a quicker recovery in the housing market.

February 13 Update: The Senate and House of Representatives have both passed the compromise version of the stimulus bill. Read the complete stimulus bill here, and you’ll be a step ahead of many of the congressmen who didn’t have a chance to read it before voting.

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Senate Amendment to 2009 Stimulus Bill: First-Time Home Buyer Credit

Updated March 20, 2009: The stimulus bill is now a law. Read our roundup of the many ways you can benefit.

Without any Republican support, the 2009 stimulus package pushed by President Obama passed the House of Representatives. The bill is now making its way through the Senate, and it won’t come up for a vote without discussion and amendments. A number of likely amendments, proposed by Republicans and Democrats, address housing issues. Housing — specifically, the housing bubble, is considered by many to be the root of the economic downturn.

Here is one of the amendments being considered.

Senate Republicans are likely to introduce a provision that would encourage lenders to offer a 30-year fixed rate mortgage at 4% for a limited period of time. The loans would only be available to credit-worthy home buyers and homeowners seeking to refinance. (CNN)

When housing prices increased the level of affordability for most buyers, people stopped buying houses and prices, on average, stabilized or fell. If this is a root cause of the economic downturn, the necessary correction would involve allowing prices to fall further until reaching a level at which more people were willing to buy. In the mean time, supply would be reduced as home builders continue to slow down production. But this amendment would do the opposite.

Giving more people access to credit will allow people to qualify for bigger mortgages to afford higher-priced houses. This would keep prices inflated. On the other hand, giving people access to more credit will help people feel they are in a better financial position. Economic downturns are partly psychological; good sentiment can go a long way to turn the economy around.

A 30-year fixed-rate mortgage at 4% is a great deal. The difference between the market rate and this benefit would be paid by an addition to the stimulus package. Like the rest of the stimulus, it would be paid through government debt issued mainly to overseas investors.

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Senate Amendment to 2009 Stimulus Bill: 4% Fixed-Rate Mortgage

Six or seven years ago, a couple I knew married each other and bought a house right away. I can’t claim to know their personal financial details, but I am sure the value of the house was well beyond three times their combined income. The husband explained to me that house values never go down, so the purchase was a good investment.

It’s true that for many years, the New Jersey county they lived in has seen incredible increases in average housing values. And according to the Housing Price Index (HPI) offered by the Office of Federal Housing Oversight, it’s quite possible that prices in their area continued to increase, although data on their town is not available. A nearby locality has seen consistent price increases from 1997 through 2006, followed by decreases in 2007 and 2008.

The methodology for determining this index is not perfect. This area has seen almost constant development in the past ten years with larger and more expensive homes being built. The HPI only counts single-family residential properties that have had two mortgages originated by Freddie Mac or Fannie Mae. Eventually, these new homes would increasingly have two mortgages as described, some sooner than others. When these larger, bigger homes enter the index, they skew the numbers higher.

While part of the index represents actual increases in house values, some of the increase is due to newer construction and the tendency to build bigger.

Meanwhile, another housing price index, the S&P Case-Shiller index, has posted the biggest decrease ever, 18% down from the same time last year. This is the 27th consecutive month showing a year-over-year decrease.

Home prices post record 18% drop, CNN Money, December 30, 2008

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Home Prices Keep Falling

When you sell one house and buy another, the overall market conditions don’t matter as much. Unless the two houses involved are in areas with drastically different market conditions, you are exposed to the buy side and the sell side at roughly the same time. Whether it’s a “buyers’ market” or a “sellers’ market,” you will in theory have the advantage with one deal and the disadvantage in the other.

The situation is different when you’re buying your first home. Financial wisdom would say that it would be beneficial in the long run to understand the market condition and buy only when the pricing makes it advantageous, in reality you buy your first house when it’s time. Usually external forces drive that decision.

No matter what the market condition, consider these ten suggestions from MSN Money for buying a home.

1. Determine your limit and stay within your budget. You may have heard recently that the United States is experiencing a credit crisis. Banks are freezing up their capital and not sharing with borrowers. However, if you were well qualified for a mortgage before, you can most likely still get one now. I have noticed that I’ve stopped receiving poorly targeted spam email with home loan offers, so it’s possible the more risky mortgages have dried up. But for those who qualify for a mortgage, stick to a reasonable, affordable amount.

2. Find the right real estate agent for you. A co-worker of mine had a horrible time dealing with a real estate agent provided by our company as one of our “benefits.” The agent called incessantly, wouldn’t respect her price range, showed her houses that were a poor fit, and wasted her time. She fired the agent and tried again a year later with a new agent recommended by a friend and had a much more pleasant and fruitful experience.

Before working with an agent, interview them. Discover how they like to work and whether you will be compatible.

3. Research beyond the information provided by your agent. For this I recommend a useful tool: the Internet. Search listings to find houses you’d like to see. Find out as much as possible about the community in which you are considering living. If it’s relevant for your family, look into the local public school system. Find blogs written by residents about the community.

4. Visit the neighborhood. I can explain from first-hand experience why this is a good suggestion. for me, it has applied to my search for apartments in the past. Don’t only visit the neighborhood, visit the neighborhood at night. the character of the community might change, either for better or worse.

5. Be ready to negotiate. Houses are usually priced with negotiation in mind. This also goes back to your choice for agent. Since they may receive 3% of the sale price if split with another agent, they might not be extremely motivated to work with you to negotiate a lower price. Also, if the same agent represents the buyer and seller, it’s in the agent’s best interest to keep the price high.

If the house has been on the market for a while or if the local market is weak, you may have the ability to offer a price 20% lower than what the seller is asking.

6. Use caution when buying foreclosed properties. Across the country, foreclosures are at all-time highs. These homes can present great values, but they can be risky. It’s going to be difficult to snag a great deal because the best foreclosed houses in the best areas are priced knowing that there will be a lot of interested buyers. The best deals are left for the people who are willing to put a lot of work into fixing up a house to get it to the point that it is appealing for living.

7. Find the right lender and mortgage. MSN Money suggests dealing with lenders with roots in their communities but still look for the best deal. If you’ve been saving for a down payment and you have good credit, you’re in a good position to find the best interest rates.

8. Find a good home inspector. The same co-worker who had problems with her agent had problems with her inspector. They did not keep appointments and did not complete the job. Stay with the inspector while he or she walks through and around your prospective purchase and ask questions about anything that looks suspicious.

9. Buy long-term. Try not to view the house you plan to live in as an investment. Yes, it is a major purchase and will provide you with a major asset, but don’t go into home ownership thinking that you’ll make a lot of money. First of all, to see any appreciation, you’d have to sell the house. most likely you’ll buy a new house with the proceeds (if any) when you sell. Over the long term, real estate barely beats inflation. And keep in mind that if you consider your house an “investment,” your mortgage interest, maintenance costs, community fees, and any other house-related expense should be considered your “cost basis.” That will reduce whatever you consider your “profit” when you sell.

10. Don’t time the market. For the last four years or so, people around me have told me that the best time to buy a house, when the prices will be at their lowest and homes will be most affordable, will be in 2009. The best time to buy a house is when you need to buy a house (if ever).

10 home-buying tips for uneasy time, David Koeppel, MSN Money

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10 Tips for Buying a House in Any Market Condition

The “condominium” (or “condo” for short) is generally seen as the missing link between renting an apartment and owning land with a house. Commonly, at least in my experience, a condominium is an apartment building in which the units are individually owned but the common spaces are jointly owned by all individual owners.

There is one primary advantage in owning a condominium unit above renting: your equity an an asset with a possibility of appreciation. There is also one primary advantage above owning a house and land, the probability of finding a comfortable dwelling for a lower price.

The disadvantages are numerous:

Lifestyle of dwelling. Living in a condominium is much like living in an apartment building. You are close to your neighbors, and no matter how things appear initially, the walls and ceilings are never as thick and sound-proof as they appear to be initially. If I want to hear the children living downstairs screaming at 3:00 in the morning, I’d prefer to stay in an apartment.

Price won’t increase as much as a single-family house. Even when the real estate market is in an upward trend, beneficial to sellers, the price of condominium units won’t increase as much as the price of houses. There seems to be an endless supply of condominiums. Apartment buildings are often converted to condos when the market is favorable to such a move. Houses, and more importantly the land they sit upon, are much more limited in supply. If you own a condominium you own a certain cubic feet of air within your particular enclosure. You do not own the biggest driver for appreciation, the land.

Association fees. The common areas in a condominium are owned jointly and are usually governed by a board of directors or another group of representatives. In addition to your mortgage and taxes, you will also be responsible for association fees. These fees ensure there is enough funding to mow the lawn, fix the roof, insure the owners against liability, and advertise unsold units.

Association rules. Rules vary from one condominium to another, but they are designed to keep the appearance of the buildings professional and uniform. This supposedly keeps property values higher. Don’t expect to be able to paint the outside of your unit in a way that reflects your personality. Your landscaping options are limited. In many cases, you won’t even be allowed to erect a small flag on your door frame or window. Some associations don’t allow pets.

While I reserve the right to change my mind, I’d rather skip “Apartment Living Part 2″ when it’s time for me to “upgrade” my living situation. My intention is not to insult condo owners, it is only to discover what is best for me.

Photo credit: edkohler

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Why I Will (Probably) Never Buy a Condominium

As first-time homeowners, we watch more than our share of DIY Network / HGTV / buying and selling home shows. My wife and I work as a team: she concentrates on making home improvements, and I’m concerned with making sure things don’t fall apart. I also worry sometimes that any project we undertake might be a waste of money, or at least, not realize the return that some people promise.

I’m sort of haunted by this phrase that shows up in a commercial for DIY Network’s show “Sweat Equity”, where the host Amy Matthews is heard to say, “You’ll get two dollars back for every dollar you spend.” That might have been true when she said it, depending on which project she was talking about in the specific real estate climate she was in at the time. I asked my parents, who have dozens of years of real estate experience between them, and my father, who is as scientifically-minded as I am, found me a good resource:

Remodeling Online has a “Cost vs. Value Report” that analyzes the average cost of 29 common projects one might undertake to increase the resale value of a home – if not the resale value, at least the likelihood that someone will buy it.

What’s more, they have specific information for different regions of the country, even down to the City level in some cases. Where we live, for example, remodeling the bathroom will recoup 90.9% of what it cost us, when the national average is 78.3%. But none of the projects listed indicate a cost recoupment of over 100%, nationally or regionally, so we’ll probably never get even one dollar back for every dollar we spend. But that doesn’t mean we’ll stop making improvements. It just means that the main reason to make home improvements is for the sanity of the current owners. I’m okay with that.

(Here’s a direct link to where the average numbers come from, as well as complete descriptions for each project analyzed.)

Update: Justin points out in the comments (below) that my comparison isn’t quite fair, since in the Sweat Equity scenario, you’d be doing all the work yourself. The Cost vs. Value table assumes that you’re paying full price for labor, so there’s bound to be some percentage that you’d be saving / recouping by doing it yourself.

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Home Improvement Cost vs. Value (2007)

This article was written for Consumerism Commentary by Antelope, an entertainment lighting designer working hard to achieve financial security.

In the last year, my wife and I have sold a house in one city, and bought and sold another house in another city. After a bad experience with a home inspector when we were buying our second house, we learned a ton about home inspectors. You can do all of the research you would like, but sometimes you learn things in the School of Hard Knocks.

Believe it or not, some states have no certification requirements for a person to call themselves a “Home Inspector.” if you live in Delaware, Colorado, Florida, Hawaii, California, Idaho, Maine, Minnesota, Missouri, Michigan, Nebraska, New Hampshire, Utah, Vermont, Washington, Ohio, Wyoming, Kansas, Iowa, or New Mexico, your state does not have licensing requirements for home inspection companies. This means that a person could call themselves a Home Inspector, charge you $300 for an inspection, and completely miss major issues. Even when dealing with an inspector in a state with licensing requirements, you are not protected from bad experiences. My wife and I had one such experience with an inspector in Oklahoma City — Oklahoma has licensing requirements — who lied to us during the inspection. After we realized we had to immediately drop $20,000 for a new roof, the inspector told us he thought the seller was a criminal and we should have never bought the house. Unfortunately for us, we had already signed a document holding the inspector for a monetary amount covering only the cost of the inspection.

If you’re interested in finding out what each state requires for its Home Inspectors to undergo for licensing, check out this information provided by Kaplan. States are all listed with the requirements and classroom hours each inspection candidate needs in order to complete state licensing. The Independent Home Inspectors of North America has useful information on this topic as well.

It also helps to check up on references of home inspection companies. Check places like Angie’s List to find reviews for inspectors or their companies and the Better Business Bureau to see if a particular inspector is involved with any disputes or lawsuits. Even searching Google for your selected company can reveal issues with their reputation.

Unfortunately, sometimes you just get dealt a crappy inspector who delivers a crappy inspection. Life isn’t perfect, and real estate often brings out the worst of it.

If you enjoyed this article, please stay tuned to Consumerism Commentary for more from Antelope.

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Inspect Your Home Inspector

I really enjoy good “data visualization”, which is a fancy, but more succinct way of saying “a way to look at information as more than just numbers.”

Last year, before most of us were aware of the “mortgage crisis,” some enterprising individual took a list of average housing prices in the United States since 1890, adjusted them for inflation, and then plotted them as if they were altitudes on a roller coaster ride. Watch the video, and you won’t be so surprised why the housing market took a downturn:

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The Real Estate Roller Coaster