$8,000 Tax Credit

Although, in my opinion, it is still more likely than not that the tax credit will be extended past the November 30, 2009 deadline (and perhaps expanded to include all primary home purchases), there is a disturbing article on page A3 of today's Wall Street Journal.

$139 million was paid out on fraudulent claims regarding the credit to, at minimum, 19,000 people. The most common scam was for people who did not qualify because their income exceeded the cap to use their children's names and social security numbers to file. Although there are simple remedies to ensure this will not continue - such as requiring a copy of the HUD settlement statement - no such measures are currently in place. With that said, many of the proposals to expand the credit include such safeguards. (Source: WSJ)

Let's hope that the negative press attributable to the fraud as referenced above is insufficient to derail any possible extensions of the credit.

Important Mortgage Information

Bank of America, Wells Fargo, Citigroup and J.P. Morgan are all significant players in an experimental government-backed loan modification program. In most cases, in order to qualify for the program, a buyer must be at least 60 days delinquent on the loan. If you think you may qualify, or are heading in that direction, I encourage you to contact your lender. Also, as of now, or in the very near future, standard forms to apply for this program will be available on the govenment website entitled Making Home Affordable (http://makinghomeaffordable.gov). (Source: WSJ 10/9/9).

Also of note in the article referenced above is the following quote. "[S]everal senior House lawmakers expressed support for extending an $8,000 tax credit for first-time home buyers."

Better Late Than Never

I meant to comment on an article in The Wall Street Journal last week, the thrust of which was that holders of distressed mortgages are more inclined to write down principal than they have been in the recent past. While it is more likely for a lender to negotiate an interest rate adjustment, in certain instances they are now willing to reduce principal as a last-ditch effort to avoid foreclosing on homes. 

Regardless of one's political inclinations, this is good news for home values. By way of example, assume you have a neighbor who is under water on his mortgage payments. He cannot afford to sell, because of his home value in relation to what he owes on the property. If renegotiating his interest rate is inadequate to alllow him to make his payments, traditionally there are only two likely results. He would either negotiate a short sale, or let the home go to foreclosure and thus the home would ultimately be sold by the lender. The result would be disasterous regarding your home value. Assuming your neighbor's home is similar to yours, that home (which was sold under distressed cirumstance) would now be used as a comparable home in any appraisal or comparative market analysis of your property.

Now assume in that same instance, the lender writes down the principal of your neighbor's home to such an extent that the mortgage now become affordable. The result is no impact on the value of your home. Your neighbor keeps his home and the bank loses less money than it would going through the foreclosure process. Moreover, the principal write-down should not affect an appraisal or comparative market analysis on your property, as there is no mechanism for this information to come to light when these reports are promulgated.

On a lighter note, I recently heard an amusing interview on CNBC with a woman who follows anecdotal evidence relating to the economy. At the inception of an economic recovery, the rate at which men purchase denim products, pink ties and underwear increases. Take that for what it is worth.

In the Media, Glass is Now Half Full

The headline in today's The Wall Street Journal, page 1, upper right in bold and in the second largest font on the page (just smaller than the name of the publication itself):

"Global Economy Gains Steam"

The subtitle of the same article in roughly half the font size:

"Jobs Still a Worry, but Factory Output Rises in U.S., China, France; Markets Falter"

The first two paragraphs were entirely positive except for the second paragraph's last sentence which placed a positive spin on a negative stating, in pertinent part, the "pace of contraction...slowed markedly."

I take the time to break this down in order to fully illustrate my thesis from my prior entry and to hopefully emphasize the correlation between presentation of information in the media and consumer sentiment. As a practical matter, the more articles written with this slant, the better for a real estate recovery.

Anecdotal Evidence

I reiterate as aforementioned: I hate statistics. They are always backward looking. We are currently analyzing June and July numbers to predict where the real estate market is at this point and time.

So as I was lamenting this flawed system, I recently listened to Ron Insana. A stalwart of empirical data, Insana said, "The economy is getting better. I can feel it. I was just at Disney and it was very busy. Everywhere I go, I see the economy bustling." (I am paraphrasing.) Moreover, at the beginning of last week, positive housing numbers came out across the board. (Mid-week, all positive articles regarding real estate, from The Boston Globe to The Wall Street Journal.)

My thought is this: read three newspapers next week. Look for any articles discussing the economy and/or real estate. If two out of three articles do not articulate any negative economic sentiment until the third paragraph, the recovery has begun. Perception is reality. ("When the legend becomes fact, print the legend." - John Wayne, The Man Who Shot Liberty Valance)

Battle of the Subsidies

Riddle me this...Why should we not have pumped the "Cash For Clunkers" money into the first-time homebuyer tax credit by expanding it to all buyers, or increasing the amount?

From what I understand (under the car program), when a car is turned in, the engine has to be destroyed. Destroying an engine which could have been re-sold for use in other cars appears meritless and will ultimately be an economic burden on people of lower income brackets who generally drive older cars. Supply and demand dictates that scarcity will drive up the price of used engines. Moreover, there is the unintended consequence of the lost revenue of automotive repair centers.

It is universally agreed that the crux of the recession is the housing market and that we cannot have an economic turnaround without a real estate recovery. Further, no tangible asset need be destroyed in order for the tax credit to have its intended effect. Thus, it seems far more efficient and beneficial to invest our limited resources in a housing recovery. That being said, both programs are nearing their demise, so the point is moot, but I thought it was at least worth visiting.

Speaking of the tax credit which is due to expire at the end of November, keep in mind that you must CLOSE by the end of November. This means that as a practical matter, you would need to identify the property and have it under agreement by mid-September. On a positive note, there are more and more rumblings of the credit being extended. (Various drafts of a new tax credit are currently circulating in Washington.) However, if I were a betting man (and I am), I would take the credit now! My instinct tells me the likelihood of an extension is 50/50, but the likelihood of better terms in any new credit is de minimis at best.

As always, I welcome your thoughts and urge you to contact me for any real estate related needs.

Naysayers

For those who refuse to believe that the housing market in the majority of areas and/or price ranges in Massachusetts has bottomed and is beginning to improve, here are some statistics recently released by the Massachusetts Association of Realtors:

The median single family home price for June 2009 was $306,000. This is the first time the median home price has been over $300,000 since August 2008. Moreover, the June 2009 median price is up 21% from its low of $252,000 in February of this year. With that said, this is still a decrease of 8.6% year over year (June 2009 compared to June 2008). As a frame of reference, consider today's prices to be in line with those of 2003. (Source:MAR)

In my opinion, the more important - and thus more impressive - turnaround has been in residential home inventory. (Home inventory is based on a fiction wherein we assume no more homes will become available for sale. In that instance, at the then current rate of sales, how long would it take to sell all the homes on the market at that point and time? The answer represents the "home inventory".) A decrease of 16% in inventory from June 30, 2008 as compared to June 30, 2009 should markedly improve real estate sales conditions. As of June 30 of this year, inventory was at 7.2 months. This is actually considered to be at the low end of the spectrum for inventory levels in a healthy market. (Source: MAR)

In short - and I am not a fan of statistical data - one cannot deny that these numbers show an improvement in the housing market. If you prefer to rely on perception/consumer sentiment as do I (statistics are, by definition, backward looking), pick up a newspaper or turn on the news. Fewer and fewer of the real estate related stories are solely negative. This could not be said three months ago. In fact, as I write this, the story on CNBC relates to the drastic rebound in stock values of home builders.

Tax Credit - Added Benefit

Yet another incenitive has been put forth to entice potential first-time buyers to take advantage of the current real estate market, not that potential buyers should need further enticing given the current climate. With that said, here is the latest carrot to be dangled...

The federal tax credit of up to $8,000 for first-time home buyers is now eligible to be used toward closing costs and/or a down payment in Massachusetts. (Source: MAR)

In order to take advantage of this program, a borrower will need to apply through his or her lender for an $8,000 loan via MassHousing. This loan is now available for homes purchased by December 1, 2009. The borrower must then claim the tax credit on his or her 2010 federal tax return. So long as the loan is repaid by June 1, 2010, the loan is interest fee. In the event the loan is not repaid by June 1, 2010, the loan will be amortized over 10 years at the rate of the first mortgage. (Source: MAR)

Similar programs are currently being developed and implemented by other states. (Source: MAR)

A caveat to the above is that borrowers must first determine whether they qualify for the credit in whole or in part. For an overview of the credit paramaters, refer to my prior entries regarding the same. As always, I recommend consultation with a tax specialist (CPA or tax attorney) prior to making any real estate decisions predicated on tax strategies.

Refinancing Change

The Treasury Department just announced that, as part of its home rescue package, Fannie Mae and Freddie Mac are expanding their efforts to refinance people who are upside down (have negative equity) on their mortgages. Specifically, Fannie and Freddie will now allow refinancing on homes with up to 125% loan to value ratio. Until this announcement, the cap was a 105% loan to value ratio. (Source: CNBC)

Whether this is good or bad news is dependent largely on your priorities (moral hazard, compassion for upside down homeowners, investment opportunity, etc.). However, at least in the short term, this should slow the pace of foreclosures and short sales. This in turn should help to stabilize house prices. The elephant in the room is whether this is merely a stop gap. Will these additional refinances lead to higher losses on bad loans and future increases in foreclosures, or will it buy these borrowers the time to allow house values to return to such a level so as to make it cost-effective to eventually sell these homes? We shall see...

Cramer Calls Bottom

Yesterday, Jim Cramer of CNBC's Mad Money called a "bottom" to the housing market. He relied on certain economic indicators released that day including, but not limited to, increases in building permits and housing starts nationally. Cramer reasoned that the large home builders, as well as the banks financing their projects, are some of the most well-versed institutions regarding the real estate market. Their expertise, coupled with the risk aversion under which they have recently been operating, makes it extremely unlikely that they would risk incurring additional losses resulting from excess inventory. These institutions are simply not interested in compounding their exposure to a declining market. (Source: CNBC)

While Cramer's argument is cogent, I fear that many pockets of the real estate market (including the area in which my company operates) currently have excess inventory and cannot afford additional new home construction. At this point and time, many local markets have between 8 and 11 months of inventory available. My opinion (and that of many experts) is that 6 months of inventory would represent a healthy market. With that said, I am partial to Cramer's position, as a bottom is obviously necessary prior to any rebound in real estate.

A few odds and ends:

If you are preapproved for a mortgage and have not checked in with your lender/broker in the last two weeks, you should do so. Rates on 30-year fixed mortgages increased from roughly 5.0% to 5.8% last week. A swing of that magnitude is significant. You should keep yourself apprised of mortgage rates, as they directly affect your buying power.

If you are a first-time buyer who is depending on the $8,000 first-time buyer tax credit, keep in mind that it is due to expire at the end of November. Also, note that there is a phase-out depending on income level, which may affect your eligibility for the credit.

As always, feel free to contact me at any time with respect to the real estate market and your particular needs.