Real Estate and Home

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

by Flexo on September 18, 2009

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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Is Buying a Foreclosed Property Realistic?

by Jeff on August 20, 2009

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

by Flexo on July 30, 2009

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

by Flexo on May 20, 2009

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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The Unownership Society

by Flexo on May 6, 2009

in Consumer

Seven years ago, when people I knew were buying houses they couldn’t afford with the philosophy that real estate prices always go up, and the go up fast, I was sitting on the sidelines. I had no money, no desire to settle down, and no belief that real estate in the form of home ownership was such a sure thing. Years later, I had a chance to see the real numbers behind the true cost of owning a house for 30 years, and I was not impressed. For all that people say about real estate appreciation, there is a lot you don’t hear about often.

To truly determine how much you earn on a house from the moment of purchase to the moment of sale, you can’t ignore all the maintenance costs and other fees you are required to pay in order to live in that home. Buying a house for $500,000 and selling for $600,000 two years later is not a real 20% return when you consider you spent $30,000 in taxes, $15,000 for a new patio, $10,000 for a remodeled kitchen, your closing costs when you purchased the house, and the Realtor’s commission when you sell. The home you live in barely beats inflation over the long term when you factor in all costs, unlike long-term investing in a broad selection of stocks like an S&P 500 index fund.

MP Dunleavey mentioned that more people are beginning to think the same way I have been thinking, and taking this approach much farther than I have. These “transumers” eschew ownership wherever possible in favor of a more transient existence, supported when necessary by renting and leasing. “Rather than spending your money on individual things, which you then have to keep (suddenly an old-fashioned idea), you purchase access to an array of objects and experiences. It can save time as well as cash: The more you own, the more you have to worry about, maintain and upgrade.”

Renting is often cheaper than owning, even over the long term.

When you count gas, maintenance, insurance, repairs, loan payments and depreciation, the average cost of car ownership is $8,095 a year, according to AAA. Yet the majority of cars in North America are driven only 66 minutes a day, according to a 2008 study by Susan Shaheen of the University of California, Berkeley. That works out to about $20 an hour, two to three times the hourly cost of car sharing.

I don’t think a service like Zipcar would work for me because most of my driving is my daily commute, but the transient lifestyle lends itself to leasing a car. Leasing usually includes a contract that is not favorable to the consumer, and most related financial advice warns to avoid leasing a car. But in cases where leasing is more expensive in the long run than buying, or you have no asset at the end of the contract, you could consider the increased cost the price you pay for not needing to deal with the pains, headaches, and expenses of owning the car.

Every time you add to your possessions, you add to your responsibility and in many cases your expenses. Rather than being tied down to material objects, you can spend your money on experiences or save for the future.

Why Own When You Can Rent?, MP Dunleavey, MSN Money, May 6, 2009

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Should You Walk Away From a House and Mortgage?

by Flexo on February 20, 2009

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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Home Prices Keep Falling

by Flexo on December 30, 2008

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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