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.

Economic Indicators

Just a few odds & ends I thought were worth reporting:

Both Lowes and Home Depot had better than expected quarters. This is a positive sign for the construction industry, as is the fact that builder sentiment was up for the second straight month according to the National Association of Home Builders, which attributed the gain in part to the $8,000 tax credit for many first-time buyers. (Source: WSJ, CNBC)

Although the above is favorable news and indicates a stabilization of the housing market in the near future (stabilization, not rebound), there are still a few shoes to drop, such as impending defaults on commercial real estate loans and the effect of those defaults on small to mid-sized banks. A Wall Street Journal study predicated on similar criteria as those used by the federal government for the large bank stress tests shows potential losses of $100 billion for 900 small to mid-size banks relating to commercial real estate loans. These losses would dwarf the losses from residential loans, anticipated to be approximately $49 billion for these same banks. (Source: WSJ)

In Jamie Dimon's conference call for JP Morgan today, he had harsh words for the TARP program relating to the lack of clarity as to the means by which the government will allow repayment. He also noted that it is possible we are seeing a bottom in the economic downturn. (Source: CNBC)

In short, a mixed bag...

Misconception

Regarding the most recent stimulus package which is now in effect, the $8,000 tax credit for first-time home buyers is in fact a true credit. As a practical matter, it replaces the $7,500 "tax credit" which preceded it and which was actually a loan. The only caveat is that a homeowner must retain ownership of the property for three years, or the $8,000 will be recaptured. (I believe the entire $8,000 out of the proceeds of the sale will be recaptured. However, I am not certain if the amount recaptured is predicated on the amount of the capital gain on the home. In other words, is the amount recaptured capped by the gain if the gain is less than $8,000?) In addition, this credit is gradually reduced for individuals whose income is over $200,000 per year and couples whose income is over $250,000 per year. (Sources: MAR, WSJ)

As an aside, President Obama's budget calls for a reduction in the Mortgage Interest Deduction on a graduated basis for individuals whose income is over $200,000 per year and couples whose income is over $250,000 per year. (Sources: MAR, WSJ, CNBC)

Without getting too political, people should look long and hard at the economic philosophy underlying the graduated phasing out of benefits as referenced above based on income ratios. Does this comport with your economic school of thought, along with your goals and aspirations?

$15,000 Credit Update

According to Fox Business, part of the compromise regarding the stimulus package was the watering down of the $15,000 tax credit for the purchase of a primary residence. Originally, the credit was to cover the purchase of any primary residence, regardless of the number of homes one had owned in the past. However, it now appears that the credit will be applicable only to first-time buyers.

This is obviously a blow to real estate professionals including, but not necessarily limited to, real estate agents & brokers, mortgage lenders & brokers, and home builders. Weren't these stimulus packages, TARP, etc. designed to stabilize the housing market? After all, it is the general consensus that the crux of the economic distress rests with the real estate meltdown. Hmmm...

$15,000 Tax Credit

As of yesterday, February 4, Republicans were making great strides toward inserting a powerful real estate stimulus into President Obama's proposed stimulus package. According to the Associated Press, Republicans appear to have been successful in negotiating a $15,000 tax credit into the package. Specifically, the tax credit is for 10% of the value of the home, with a cap of $15,000. (The current credit is for $7,500.) Purportedly, the breadth of the credit will also be expanded to include all home buyers, as opposed to only first-time buyers. (Source: Associated Press)

In the event that this credit comes to fruition, the positive ramifications for the market should not be discounted or underestimated. I envision this credit being a tipping point for the countless people who want to sell their current homes and then purchase new homes. Many people are not selling because they fear they will not be able to afford to buy another home. For many, this tax credit could be the answer. This credit will offset a large portion of the costs associated with buying and selling. Similarly, first-time buyers who are on the fence as to whether to pull the trigger will have another reason to dive into this buyer's market.

As an aside, here are some statistics for the local housing market (15 towns from Boxford through Littleton, MA) covering trends for December as compared year over year (December '08 as compared to December '07): Single-family home sales increased 7%, but the most dramatic shift was an increase of 158.1% in sales of multi-families. In contrast, condominium sales slid by 39.4%. The drastic increase in multi-family sales is explained in large part by the steep decline in the median price, which fell by 36.2%. Prices for single-family homes and condominiums fell by 10.5% and 15%, respectively. All three types of properties described herein are still sitting on the market for an average of 4 to 5 months. (Source: Northeast Association of REALTORS).

Mortgage Developments

The Senate reached an agreement in principle with Citigroup wherein Citigroup is giving its blessing to legislation allowing for bankruptcy judges to cram-down mortgages. The cram-downs will allow judges to reduce the principal and/or interest on troubled mortgages so long as the homeowner shows that they attempted to negotiate with the lender prior to filing bankruptcy. Further, the mortgage at issue would need to predate the legislation. The proposed legislation, in its current form, would only apply to Chapter 13 bankruptcies. (Source: WSJ)

Whether the above will be a positive or a negative is anyone's guess. Will this stabilize the real estate market, or just increase Chapter 13 bankruptcies, prolonging inevitable sales with another layer of red tape? Moreover, will this move chill the already frigid environment for mortgages, further restricting the flow of credit?

On a more decidedly positive note, Fannie Mae, in conjunction with Bank of America (through its subsidiary, Countywide Financial Corp.) has implemented a pilot program regarding short sales, the bane of many Realtors' existence. This program is not yet available locally, but calls for the lender to preapprove the price on a short sale, thus enabling Realtors, sellers and buyers to have a much clearer view of the playing field and increasing the likelihood of a completed transaction. (Source: WSJ)

If anyone sees a downside to preapproved short sales, please enlighten me at your earliest convenience. It appears to me that this approach is long overdue.

FED Rate Slashed

The FED just cut the target rate to between .25% and 0% and said it will do all things necessary to keep mortgage rates and the cost of money low. It will likely keep the target rate at this level for quite some time. The FED will also be aggressively buying mortgage-backed securities and does not appear to be concerned with inflation. (Source: CNBC)

My simple advice with regard to real estate: Buy! Buy! Buy! Upsize! Do not sell and/or downsize for the next few months. From a cyclical perspective and in light of the posturing of the FED, the market from a seller's perspective may look better in 3 or 4 months as mortgage rates are likely to decline, thus helping to stabilize prices. Again, I must stress - as I have in the past - that I am not overly optimistic with respect to a quick turnaround. I am looking for a bottom and then a very gradual uptick in prices and sales volumes.

Second Bailout Package

FED Chairman Ben Bernanke is currently testifying on Capitol Hill and giving his blessing to a second stimulus package should Congress deem it appropriate to pass such a measure. He is stressing that any package should focus on freeing up the credit market. In addition, Mr. Bernanke is encouraging Congress to ensure that any package be fashioned in such a way so as to not unduly burden the budget deficit. (Source: CNBC)

My understanding is that the first package (somewhere between $700 billion and $850 billion) was inclusive of the $250 billion that the government is in the process of funneling into the banks. Roughly half of that money will go to nine major banks with the other half being distributed to smaller banks. This action and the remainder of the first package was also intended to free up the money supply and/or credit.

My questions are as follows:

Where is the remainder of the money from the first package going and/or what are the remaining details of the first package? (There is talk of writedowns of principal on mortgages, restructuring of mortgages to certain homeowners and the purchase of certain debt on the open market.)

Should we not allow the first package to be fully implemented prior to passing a second package, or, at minimum, have a clear explanation as to why the first package will be insufficient?

How are we going to pay for these packages, particularly if the government buys bad debt at above market prices? Are we simply delaying the inevitable with regard to the cyclical nature of the economy, and thus causing a larger financial crisis in the not-so-distant future?

How long does the government intend to be an owner/investor in major financial institutions which have previously been the province of the private sector (excluding Fannie Mae and Freddie Mac)?

In my opinion, most importantly:

With respect to any writedowns of principal on mortgages, is this going to be done uniformly for all homeowners and, if not, what will protect the equity for homeowners who are excluded from the writedowns? Will the excluded homeowners not immediately lose equity as a result of writedowns on principal of similarly valued comparable properties?

In the event that these proposed writedowns are not uniform and certain homeowners are excluded, this will be tantamount to a vast redistribution of wealth. Whether one agrees with such actions by the government is not my concern for purposes of this blog, but let's be clear on what the intended and unintended consequences of these action will be on the economy as a whole, certain classes of people and you, the reader of this blog.