The much anticipated housing market rescue bill is now law. The Housing Assistance Act of 2008 allocates billions in benefits to mortgage and real estate markets intended to provide relief for homeowners on the verge of bankruptcy, victims of bank failures and just about everyone else whose lives are topsy-turvy this year.
The single largest provision in the package of housing tax incentives is a measure allowing First Time Homebuyers to take a tax credit of up to $7,500 of the purchase price. Qualified homebuyers can subtract the credit amount from their federal income tax when they buy a home and even get a refund if the credit exceeds the tax.
Big Caveat, though, so listen closely. This is a so-called "credit" which must be paid back. Last time I checked, that was called a "Loan". Yes, indeed, these homebuyers will be required to pay the credit back over 15 years. Here are the details:
home must be located in the U.S. and be the principal residence (main home)
buyer(s) must not have owned another principal residence in the three years prior to purchase. So, certain buyers who have been renting for three years are eligible
must have been purchased from April 9, 2008 through June 30, 2009
special rule allows the taxpayer to claim the credit for 2008 rather than 2009
credit is equal to 10% of the price paid for the home, up to $7,500
credit is phased out for individual taxpayers with AGI above $75,000
credit is refundable, meaning that those who have no tax to offset can receive payments
repayment begins In the second year after purchase, with equal installments over 15 years,
and no interest charge
if the home is sold (for a gain) before complete repayment of the credit, any remaining credit is due on the
tax return for the year in which the home is sold
if the home was sold (for a loss), repayment of the remaining credit is forgiven to the extent of
the loss.
For more information, contact Tricia or Bart at www.reinvestgroup.net 
Besides being responsible for that interesting creature known as "Private Mortgage Insurance", most of us do not know that this company provides an invaluable service to many in the business of forecasting Economic and Real Estate Trends. PMI Group, Inc. today released its Summer 2008 U.S. Market Risk Index(SM), which ranks the nation's 50 largest metropolitan statistical areas (MSAs) according to the likelihood that home prices will be lower in two years. The U.S. Market Risk Index shows risk further diverged along two distinctly different paths during the first quarter of 2008, continuing a trend that began in the fourth quarter of 2007. In general, risk continued to intensify in many of the MSAs where home price growth had significantly exceeded historical norms during the housing boom, but continued to decline in many other areas across the country.
At this point, it is worthwhile to recall that notion of Volatility which we often turn to when trying to explain the concept that all markets are local and, as such, should be viewed accordingly. This study does just that. And, by way of example, notes that the highest risk of future price declines remains in Riverside-San Bernardino, CA, Fort Lauderdale and West Palm Beach, FL --- 95.5, 92.2, and 91.9 respectively. Conversely, those areas with the lowest risk of price declines includes some well known SMA's such as Fort Worth-Dallas, TX, and Pittsburgh, PA, and our very own, Denver-Aurora SMA -- all with a probability of less than 1%. Now, think for a moment and answer this question: If you are a Buyer, when are you likely to have the most optimal conditions? Repeat after me, "now is the time". But I digress. Back to the rest of the story.
The risk of lower prices in two years declined in 35 of the nation's 50 largest MSAs, and among all 381 MSAs, 326 experienced a decline in risk. Among the top 50 MSAs, 16 ranked in the two highest risk categories, and among those, 15 were in California, Florida, Nevada, and Arizona. Risk of lower prices in two years is greater than 50 percent in all of these MSAs.
Here are a few more, well known examples (and their associated risk probability) from the top 50 MSA list:
Las Vegas, NV 88.1
Los Angeles, CA 85.7
Phoenix, AZ 79.6
San Francisco, CA 35.7
Boston, MA 11.8
Portland, OR 8.7
Atlanta, GA 2.0
Denver, CO <1.0
About this study: The Risk Index is a proprietary statistical model that measures geographic house price risk by predicting the probability that home prices in the nation's 381 largest metropolitan statistical areas (MSAs) and metropolitan statistical area divisions (MSADs) (as measured by the House Price Index from the Office of Federal Housing Enterprise Oversight (OFHEO)) will be lower in two years. The PMI U.S. Market Risk Index is based on data including the OFHEO House Price Index, labor market statistics from the Bureau of Labor Statistics, and the PMI Affordability Index, which uses local per capita household income, home price appreciation, and a blended mortgage rate to calculate the local share of mortgage payment to income relative to its baseline year of 1995. The PMI U.S. Market Risk Index scale ranges from one to 100 and translates to a percentage. For example, a score of 50 indicates a 50 percent chance that home prices will be lower in two years.
Among the financing tools gaining importance these days, are FHA insured loans. Though, ostensibly for "owner occupants", there are cases where FHA financing works well for certain investors (see below). Demand for these once-neglected mortgages has surged because they do not require the hefty down payments or stellar credit scores that lenders have come to expect from borrowers -- a typical down payment is around 3%. Also, the amount of money people can borrow on these loans went up dramatically this year, and many homeowners have found them attractive for refinancing. This growth spurt was facilitated by federal legislation that has temporarily raised the FHA loan limits nationwide, broadening the number of people who can use these loans. In most parts of this region, the limit is now capped at $729,750, up from $362,790. They might not be the cheapest loans around, but they are the best fit for some borrowers -- and the only option for others -- as lenders continue to toughen their standards in response to the subprime meltdown.
The number of FHA loans issued shot up 126 percent in the first quarter, compared with the same time a year ago, even though they still make up a small part of the market. The volume of loans at Wells Fargo, one of the nation's largest lenders, has increased 342 percent this year from the same time in 2007, said Greg Gwizdz, the company's national retail service manager.
It's important to remember that FHA does not lend money directly. It provides mortgage insurance to borrowers through private lenders. That means the FHA will pick up the tab for defaulted loans using premiums it collects from all of its borrowers.
The agency lost relevance when home prices soared and borrowers turned to subprime loans with lower upfront costs. When those loans started defaulting at an alarming rate, many subprime lenders shut down and the FHA started slowly regaining its footing. Its market share is now about 10 percent, up from 2 percent in 2005, according to Inside Mortgage Finance, a trade publication.
As mentioned previously, these loans are designed for "owner occupancy", a term which suggests investors need not be interested. In fact, some variations of those rules work just fine for beginning investors wanting to combining elements of both. A number of clients have done so, recently. For examples, contact us via our website link on this page. Also, remember, when applying for a loan, ask your mortgage broker if they can do FHA loans. Not all brokers do.
It's no secret that prices on property are dropping in many areas, including our own. While that is bad news if you're looking to sell, it puts the ball in your court if you're interested in buying. Buying rental property in a down market can be a lucrative investment but there are some factors you should consider before you jump in. Consider these four tips:
* Find out where renters want to live. Location, location, location takes on added economic urgency when purchasing a rental property. Ask your real-estate agent to show you properties that have an established rental track record going back two or three years. Determine the degree and severity of vacancies during this time. Were there extreme examples of vacancies. As part of the "Due Diligence", be sure to review the income and expense statements on the properties for at least two to three years to determine trends in repairs and general maintenance.
* Do the math. Using the analysis tools which we provide, try to answer this basic question: Will rents cover your expenses and permit you to achiever your profit goals? Your rent survey, together with our market experience will help you determine how much yearly rental income you are likely to receive. And, of course, remember to include a vacancy factor in your analysis. The model will take into account all the remaining variables to be assessed - expenses, appreciation, depreciation - ultimately resulting in an estimate of before and after tax cash flow plus a Return on Investment to be expected. At this point, you are in a position to make a purchase decision. If the numbers don't look right, either negotiate a lower price or continue hunting.
* Assess the tax consequences. Anything left over after expenses is taxed. You can depreciate the cost of residential rental property, but not the land it sits on, over 27.5 years -- even if it is increasing in value. Suppose you paid $200,000 for a rental property, assessed at 80% for improvements, or $160,000. Your depreciation benefit each year would come to nearly $5,800 a year, or, put another way, you could have that much rental income without paying taxes on it.
* Choose tenants carefully. Neophyte landlords often fail to conduct a thorough background check on prospective renters. Such a lapse can be costly if the tenant stops paying rent or damages the property. Don't approve tenants until you have checked both their credit and criminal histories and talked to references and employers. The lease should lay out rules about pets, parties, rent due dates and late fees. If tenants already occupy the property when you buy, you will have to honor their lease until it expires.
• 3,344 sq. ft., 4 bath, 5 bdrm 2 story "Victorian " - $189,900 - 4-plex under $200K
Fort Morgan, Morgan County - 4-Plex, over 3300 square feet, 2 buildings, 1-2 bdrm, 3-1 bdrm, Detached garage,storage
20% down pmt yeilds positive cash flow from day one. Central location close to everything with outstanding rental history. Excellent financial profile with these exceptional features: $23K gross income/year, Gross Rent Multiple: 8.2, Price per square foot: $67, Cap rate 7.2%, and 20% Rate of Return (pro forma).
Property information
For real estate owners, inflation can be beneficial ... yes, beneficial. Consider this:
* Rising inflation raises people's income and their home prices. Usually, the increases would be nominal in terms of what you actually receive in paychecks and the listing price you would set to sell your home. Of course, we are not in normal times. Along with very high housing inventory, we have CPI inflation and income rising by 3 to 4 percent while home prices are falling in many local markets. But if inflation were to really get out of hand and rise by 10 percent (which happened in the '80's), then the higher associated rise in income would help home prices recover, though not necessarily in real inflation-adjusted terms
* Improving home prices from rising CPI inflation tend to protect homeowners' housing equity and reduce the mortgage burden. Fixed-rate mortgages are most prevalent in the marketplace. That means, the vast number of homeowners have fixed mortgage monthly payments. Higher income with fixed mortgage payments is a winning combination for homeowners. Consider a typical U.S. homeowner in 1970 - when inflation was just picking up. They would have purchased a typical home for $23,000 (this is not a misprint). By 1980, the typical home price reached $62,200. Family income grew from $9,800 (also not a misprint) in 1970 to $21,000 by 1980. So, while home prices and income grew, the monthly mortgage payment would have been fixed at $160 per month (assuming $23,000 mortgage at 7.5 percent interest rate). While the homeowner was undoubtedly angry about rising food , energy , and other prices back in the 1970s, they were not complaining about the mortgage payment.
Sluggish housing markets are filled with listings that are lingering on the market, prompting many home sellers to ponder a price cut. One of the most predominant statements heard of realtors these days is, "We still have sellers who are in denial of the market and don't want to price properties where they need to" . They are often shocked to learn how much prices have fallen.
How can sellers tell if their homes are overpriced? Look for the following signs:
1. Not enough showings. A home is likely overpriced if it doesn't get any showings in the first couple of weeks it's on the market. Though people are interested enough to take information from brochure boxes and there have been a substantial number of hits on its Web site listings, buyers still aren't scheduling showings. (Ed note: since our website, www.reinvestgroup.net tracks listing hits, we can easily measure such activity). For a free, no-obligation evaluation, visit instant home evaluation.
2. Some showings, but no contract. Perhaps the number of showings isn't a problem, yet there still have been no offers. If you're getting showings but not getting a contract, that means you're still not quite low enough. Consider this guideline: 10 showings and no offer or two weeks with no showings, you are probably overpriced for the current market. This is true especially in this very competitive market.
3. Similar homes are now selling for less. In markets where the median price is falling, it's important to regularly monitor what homes are selling for. Besides tracking the number of hits on the website, we can provide clients with up-to-date information on the market to determine whether the home is still priced correctly. Historical data isn't quite so powerful anymore. Its more important to look at what is selling now.
4. Repeated negative feedback. If buyers who do walk through the home have the same negative reactions to it, that could be another red flag that the price needs to be dropped.
5. You've cut the price, but not by enough. If a price cut is in order, don't cut by small increments. Several smaller decreases could make a seller look desperate, but a larger decrease will generate more interest. We are, in fact, seeing instances of large price reductions spurring increases in offers. Those increases, in turn, result in prices being bid back up. Again, a big mistake is pricing the home too high from the start. Not only could overpricing lengthen the time on the market, but it could also cause the home to sell at a greater discount in the end as prospective buyers get the impression that there's something wrong with stale listings or, worse, buyers assume the seller is desperate and willing to accept a much lower price.
Your first three weeks are critical -- you'll have your most showings with the most potential, qualified buyers, those that are out there waiting for something that matches their needs to come on the market -- don't blow it by overpricing.
Most of us, by now, have heard that foreclosure relief for struggling homeowners (in the form of the Foreclosure Prevention Act) is working its way through the halls of congress. Unfortunately, as is the case with so many well-intended legislative attempts, what started out as relief for homeowners is being hijacked by the homebuilder industry lobby. Changes proposed include extending the number of years allowed to offset losses - an amount estimated at up to $15 billion in benefits to homebuilders at the expense of the Treasury.
MDC, parent of Richmond Homes, recently staged their annual shareholder meeting at their Denver headquarters. Also present, were demonstrators from the Laborer's International Union of North America. Dressed in pink pig uniforms, they protested that HomeAmerican Mortgage, MDC's lending arm, though responsible for causing the mortgage crisis -- the number of subprime loans originated tripled from 746 in 2005 to 2,333 in 2006 -- is now asking Congress for a bailout. So, besides losing $15 billion in wealth (our tax dollars out the window), we can look forward to home values being driven down by the effect of homebuilders dumping their existing inventory to take advantage of said tax breaks. Compounding all this bad press is the stunningly brazen vote by shareholders to approve proposals making it easier for MDC's execs to receive performance bonuses while exempting them from the effects of stock options rendered worthless by recent events. So, what do you think? Time to pick up the phone and call your congressman?
Four factors are widely seen as affecting whether a housing market is a good one for sellers:
Forbes magazine recently used a variety of resources to determine how the country’s 40 largest metro areas fared according to these measures. The result is this list of top 10 cities for sellers:
San Jose, Calif. Because of a tough regulatory environment, new home construction dropped 63 percent last year.
San Francisco. When the conforming loan limit recently jumped from $417,000 to the maximum $729,750, that made credit much easier to get for many of the city's home buyers.
Salt Lake City. The 3 percent annual job growth rate, paired with a declining inventory of existing homes and one of the nation’s sharpest declines in construction made this market a good one for sellers.
Austin, Texas. Texas is very affordable, plus the city has the nation’s fastest job growth at 4.1 percent.
Kansas City, Mo. The number of unsold, vacant houses dropped by 40 percent last year.
San Antonio, Texas. Jobs are growing by 3 percent and construction starts have dropped by 42 percent.
Denver. The 49 percent drop in construction starts paired with the 2 percent rise in new jobs are good news for sellers.
Providence, R.I. Vacancy rates at 1.6 percent combined with a 42 percent cut in inventory help sellers.
Charlotte, N.C. Moderate prices and strong job growth bode well for sellers.
Seattle, Wash. Strong job growth and a 42 percent decrease in new home construction are good news for sellers.
We are often asked a question that goes something like this:
Q: I am currently renting and would like to launch my real estate investing career soon. How do I go about purchasing my first home and subsequently converting it to a rental?
A: If you are looking to buy your first home, here are some ideas to consider. A home gives you a place to live, pride of ownership, tax deductions, and with a little planning, it can become an additional retirement tool. Of course, you will want your home to fit your needs, but also consider some other ideas to make it a good investment.
Find the neighborhood that you like and then complete a rent survey as if you were going to rent it out immediately. Do a rent survey of the area by looking at ads in the classified section of the newspaper and determine what the rents for a similar property are. With interest rates below 6%, you need to secure monthly rents of about .006% times the value of your home. As an example, a $200,000 home should rent for about $1,200 a month. If the rents seem OK and the home is located in a growth area, it will probably be a good investment.
Then consider the following strategy: After you have purchased your first home, live it in for one or more years, then purchase a second home. Your first home is usually purchased with little or no money down. There are many first time homebuyer loan programs to take advantage of. Your second home can also be purchased with no money down. Normally, this is done by securing an 80% first mortgage and a 20% second mortgage. Then, rent out the first home. Yes, you will probably have a negative cash flow for a year or two, but liken it to a contribution to a 401K or IRA. You are using these funds for the same reason, saving for your retirement. In the third to fifth year, purchase the next property to reside in and convert the second to a rental as well. Since you can obtain the best interest rates as an owner-occupant, it is to your advantage to utilize this type of financing.
Under current tax rules, if you live in your home for 2 years or more, you can rent it for three years, sell it, within the three years and pay no capital gain tax. You will pay back most of the tax savings you had on depreciation, but this can be a great way to get mostly tax free money to invest in other rentals.
Over the years, we've learned that many of our fellow real estate investors tend to share common characteristics which are predictive of success (and lack thereof) in this business. Two of the more common "types" of players in this game are what we call
tire kickers and
deal makers.
Tire Kicker
|
Deal Maker
|
| Looks at dozens of properties and talks a great game, but doesn't really know enough to take decisive action. |
Knows how to close the gap between the offered and asking price and successfully close deals. |
| Has little knowledge of the market or what he is looking for. |
Knows where to invest because he has researched the market, knows what to look for, and doesn't waste time looking at properties that do not fit his criteria. |
| Has not established lender relationships or business plan and asks every seller for 100% financing |
Has existing lender relationships, can bid an all-cash price, or can assume existing loans. |
| Figures he can manage the property cheaper--not by improving the operation, but by cutting corners |
Knows exactly how he will manage and improve the property and anticipates the costs. |
| Bases the valuation on the operations as stated |
Uses a normalized, forward-looking projection that reflects his operation of the property and the effects of an improvement plan |
| Attempts to make one deal structure fit every situation (e.g., seller financing) |
Discovers the seller's most pressing need and structures the offer accordingly. |
| Will capitalize the net operating income at a "market rate" for valuation |
Will be more aggressive and use a rate that reflects their own return and loan requirements. |
| Figures he can manage the property cheaper--not by improving the operation, but by cutting corners |
Knows exactly how he will manage and improve the property and anticipates the costs. |
Interestingly, years of experience does not automatically mean a buyer
is a dealmaker, nor is a new investor a guaranteed tire kicker. The
determining factor is the extent of the investor's preparation. In a
nutshell, dealmakers take the time to think things through. True dealmakers are easy to spot. They know their financial capacity in cash and credit; they have criteria for property type, market, and minimum return requirements along with a business plan that addresses those criteria. They use the tools of financial measurement to quickly evaluate the property, then formulate a game plan and deal structure that allow achievement of their goals. They are ready to act when the opportunity appears.
Well if you aren't, then you have lots of company. In a feverish attempt to turn around the economy, congress passed and Bush signed the $168 billion economic package which calls for $600 to $1200 rebates to wage earners in hopes that we'll venture forth and stimulate the economy. If only it were that easy. As reported by the AP recently, just 19 percent of respondents said they planned to spend the money. 45% said they'll use it to pay off bills. That figure is almost identical to the results of our own poll of investors. Visit our home page here to take that poll and compare your opinions with fellow Real Estate investors.
Interestingly, the highest percentage of respondents (68%) of those same opinion givers said what the government really should do for the economy is get out of Iraq. Stimulated now?
Many of you may be thinking that recent Fed rate cuts will automatically have the effect of lowering mortgage rates. After all, rates did fall, right? Well, yes, but there is more to it than meets the eye. "If you are looking to purchase a home or to refinance, I'm not so sure you'll see mortgage rates fall," said Bob Walters, chief economist for Quicken Loans. "Mortgage rates don't have that much room to fall."
Recently, the average rate for a 30-year fixed mortgage was 5.48%, one of the lowest rates since 2004, according to Freddie Mac's survey. The Federal Reserve's Open Market Committee again lowered the target for the federal funds rate by 50 basis points to 3%. In a space of eight days the Fed has cut rates by 1.25 percentage points, the fastest pace in 20 years.
So, why would mortgage rates not be lowered accordingly? Well, remember that Fed rate cuts act exclusively on short term rates (3-month and 6-month bills). They fell sharply. So, interest rates for Adjustable-rate mortgages (ARM's) and some credit card rates can be expected to fall. And, those of us with HELOC's have, and will continue to benefit from lower rates in the near term. "Consumers will see rates on home-equity lines and credit cards tumbling over the next two months," said Greg McBride, senior financial analyst at BankRate.com. McBride goes on to warn, "Particularly with credit card debt, don't use the lower rates as an excuse to pile on more debt, or put your debt repayment plans into hibernation."
Now, conversely, after the Fed move mentioned above, market rates for long term obligations such as 30-year notes and 10-year bonds rose steeply. Fixed-interest mortgage rates are set by markets based on long-term money rates, not short-term rates. If bond investors fear that the Fed is letting inflation get out of control, then long-term rates could rise, as they did recently after the rate-cut decision. If weakness in the economy continues, however, long-term rates will be restrained from rising too much. Bill Hampel, chief economist for Credit Union National Association, said he doesn't see mortgage rates soaring. "Mortgage rates are going to be attractive for quite some time,"
This is the time of year when we homeowners get our property tax notices from the County Assessor. Now, if we are lucky our County Assessor has accounted for the fact that, unlike past assessment periods, the values of our properties may be declining rather than appreciating. So, what to do in the event your assessment suggests a value much higher than you feel is the case right now?
First you need to be objective. Have your Realtor give you some comparable homes that have sold fairly recently. If you feel your home is assessed at a higher value than is realistic, you should protest the assessment. Before doing so, here are some things to consider:
The current year actual value in the Notice of Valuation (NOV) is required by law to be the Assessor's opinion of the value of the property as of the date specified in your tax notice from the previous year.
In reviewing this valuation, you, as the owner, should think about what the property was like at that time. Is the inventory on the NOV correct as of that date? What was the property used for on that date? What was its condition on that date?
With this information in mind, you should investigate what the property would have sold at that point in time, not today. Often the best way to get information about value is to look at similar properties that sold during the that period. This is what Assessor's do and often they can provide you with a list of properties in the area that sold during that time frame.
Once you have reviewed sales of similar properties in the area and accounted for the differences between your property and the ones that sold, does the current year actual value on the NOV seem to be a fair estimate of value relative to your results? If it is close, you may want to go no further, the tax saving one can anticipate is only about $5-$11/year per $1,000 value adjustment for residential properties (depending on the total mill levy in the area).
If the NOV current year actual value is substantially higher than your research indicates it should be, you may want to protest/appeal the valuation. The first step in the appeals process is to protest the Assessor's valuation. To do this you may protest by mail or protest in person, but you must do so before the close of business on the dealine specified on your tax notice. In your protest, state why you think the NOV current year actual value is wrong and what you think is the value of the property.
The Assessor will review your protest and send you a written Notice of Determination that will either adjust the value or deny your protest. If the Assessor adjusts your value to an amount you feel is fair, your taxes will be calculated on that value. If you are not satisfied with the value in the Notice of Determination, you may appeal to the County Board of Equalization (CBOE).
To appeal to the CBOE, you must file yet another written notice of appeal with the CBOE within the time frame specified in that Notice of Determination. Again, you will receive a written notice of determination from the CBOE. If the result of this process is not acceptable, you may then appeal to the State Board of Assessment Appeals, to District Court, or through arbitration.
Finally, if you find a mistake in your assessment in a previous year that you did not protest/appeal, you may ask that the mistake be corrected by filing for an abatement of taxes for up to two years prior. Again, you will be asked to document the mistake in writing to the CBOE and request a refund of excess taxes paid due to the mistake.
Most County Assessors have excellent web sites that explain the assessment and appeals process as well as providing valuable property information. Assessor's web sites can be helpful, free information resources for property owners and real estate professionals alike.
How does that old adage go? Something about all the statisticians in the world being unable to reach a conclusion. This story reminds me very much of just such a dilemna. It seems everyone - homeowners, buyers, sellers, and investors alike - have been wondering what's happening to home prices. Are they falling, rising, or stabilizing? Consumers have to be confused by these sometimes contradictory reports. For example, why does NAR's monthly median home price index tend to be higher than recent prices reported in the Case-Shiller index? So, who is right? The answer: both are. Why? The devil is in the details. And like those statisticians, "truth" can often be shaded by perspective. Add to the mix a, shall we say, "tendency" for the media to favor drama in their reporting.
NAR's most recent data showed that two-thirds of the metropolitan markets have seen positive growth in home prices
At the same time, a Case-Shiller report concludes that 17 markets had seen price declines. And, some headlines suggested that home prices in a majority of markets had decreased.
Case-Shiller tracks 20 metro areas; many of these are in California and Florida. It also gives greater weight to more expensive homes - a price decrease in a $1 million home is 10 times greater than a decrease in a $100,000 home.
NAR metro price series tracks 150 metro areas, and all home values are treated equally.
So, what's the import of all this? I guess my answer would be to dredge up another old adage in hopes of shedding some light. Remember that "All Real Estate is Local" and therefore, statistics, conclusions and perspectives must all be viewed through that prism. For more on this subject, visit the companion blog on Lawrence Yun's visit to Lakewood