Breaking News: Deal Announced to Extend New Homebuyer's Tax Credit Through April 2010

The Senate announced a bi-partisan deal yesterday to extend the new homebuyer’s tax credit through April 2010. The deal will extend the $8,000 tax credit, which was set to expire in weeks, on homes with values up to $800,000. While the previous tax credit only applied to homebuyers with salaries of up to $75,000/year for individual and $150,000/couples, the deal raises the requirement, so that the tax credit will now apply to homebuyers with salaries of up to $125,000/year for individuals and $225,000 for couples. This will serve to make the vast majority of homebuyers available for the tax credit. In addition, a new $6,500 tax credit will be available to home owners wishing to move out of their current homes into more expensive ones.

The extension of the tax credit is expected to cost the government $10.2 billion, which will be offset by delaying a tax-break for U.S. based international corporations from 2010 to 2017.

The extension of the tax credit (as well as the new credit for current homeowners) is expected to help the housing market and real estate industry bounce back from the housing crisis. It is hoped that the tax credit, which has been successful in the past year, will help the market return to its former strength in 2010.

US Home Prices Continue Improvement in August

In the Case-Schiller report data released this morning, US home prices continue to show improvement in August. The Standard & Poor’s/Case-Schiller index showed a seasonally-adjusted 1 percent improvement in August over the previous month. 16 of the 20 cities in the index saw their prices rise. Only four–Cleveland, Las Vegas, Charlotte, and Seattle–saw their home prices decline.

While the numbers are still down compared to last year, the continued upward trend is a nice change from last winter, when all cities saw their prices decline for several months on end. Many believe that the housing market is now turning around. However, the prices are down significantly. The average price today is equivalent to 2003 levels. In Detroit, they are at the same levels they were at in 1995. Compared to last August, prices are down 11.3 percent. As a result, many of the problems we have seen recently in regards to underwater homeowners and foreclosures seem likely to continue in the near future. As the New York Times said, in many places, it’s as if the housing boom never happened.

Rethinking the New Homebuyers Tax Credit

The government’s $8,000 tax credit to new homebuyers has been under a lot of scrutiny in recent months. The tax credit was designed to help stimulate the housing market and lead to increased home ownership. To that end, it has been extremely successful. However, abuses within the system appear to have also been quite high. While the reverse mortgage industry found itself under scrutiny for what appear to be under about a dozen complaints, the federal government has started 167 criminal investigations and 107,000 civil investigations into possible fraud. Of the 1.4 million people who claimed the over 10 billion dollars in tax credits in 2008-2009, 60% had incomes under $50,000– leading to questions as to whether they could even afford a home.

The new homebuyer tax credit has certainly had many positive effects. Of the 1.4 million home sales, 350,000 to 400,000 were estimated to be a direct result of the credit’s availability. That accounts for 25-30% of the eligible home sales. In some areas, real estate agents have reported that up to 70% of their clients were considering buying a home as a direct result of the tax credit. With sales of existing homes at their highest level in two years, many are attributing the strong numbers to the tax credit, which expires November 30. Sales increased 9.4% in September according to the National Association of Realtors.

So which is it? It seems that the tax credit likely has had a positive effect on the market. However, the rock-bottom prices and increased inventory have also likely contributed to many first-time buyers choosing to enter the market. The increase in first-time homebuyers is a good sign for the real estate industry, but it is still a disconcerting one. If 60% of the 1.4 million people who claimed the tax credit from 2008-2009 had incomes of under $50,000, could they really afford to own a home? Will we see another foreclosure crisis within the mortgage industry down the line as these homebuyers are faced with rising rates or declining incomes? The answer to these questions remains to be seen.

While the pros of the tax credit may outweigh the cons, with the damage to the real estate industry wiping out the savings of many throughout the country, if the credit is extended, it should be done so with caution. While the image of every American owning a home is a promising one, the government has an obligation to ensure that those owning homes can actually afford to do so. Otherwise, history is at risk of repeating itself.

Sources: The New York Times: Home Tax Credit Audit Shows Abuses
The New York Times: Tax Credit Lifts Home Sales to Two-Year High
The Associated Press: Northeast Home Resales Post 11 Pct Annual Increase

Housing Market Bounces

As the news today that housing resales dropped in August sent stocks spiraling downwards, those within the real estate industry were faced with a really interesting reality. The housing market rebound may not be as linear as once hoped.

Existing home sales fell 2.7% in August after a record increase of 7.2% electrified the industry in July. However, there are many factors that likely played into the change. The federal tax credit of $8,000 for new home buyers is due to expire soon, likely contributing to the glut of deals in July. Jobless rates continue to be high, as do foreclosures. With many foreclosures yet to hit the market (likely knocking home prices down), it seems reasonable to think that the market may not climb steadily, but rather peak and valley as it restarts.

This may just mean that government programs and incentives (such as the tax credit) are important to getting consumers back in the market, and that sellers may just need to watch timing to match the ups and downs of the market. Even when home sales increase, the inventory of houses on the market is still high and unlikely to dissipate rapidly. But sellers can likely work within the curves of the market to best optimize when to sell their home (and at what price).

Finally, the coming winter means that it’s unsurprising that home sales will dwindle. Home sales generally increase during the spring and summer, with the warmer temperatures. Sales will probably decrease as fall changes to winter.

Taking in a Renter to Help Pay the Mortgage or Increase Income

An article in the Wall Street Journal today focused on a noteworthy new phenomenon: more homeowners are taking in renters. In some cases, homeowners are taking in renters in homes they still live in as a way to help make ends meet. In others, homeowners are becoming landlords, renting out homes they are unable to sell. This seems to be a popular option when the homeowners are forced to make a quick move- especially in the distressed real estate market. While to qualify for a reverse mortgage, a single family residence cannot be a rental property, nor can any portion of it be a rental property, renting out a home may be a good option for those who do not qualify for a reverse mortgage, but need the income from their home. In addition, multi-family homes with separate apartments may be rented and still qualify for a reverse mortgage as long as the homeowner continues to occupy the home.

There are some additional costs that come with being a landlord. Landlord insurance is about 25% higher than homeowners insurance, and landlords who use property manages may wind up paying them 3-12% of the rent. However, a tenant can be a good source of income, helping homeowners be able to continue to afford mortgage payments or break even on a property. When homeowners need to relocate in a short time frame, taking on a tenant helps alleviate the financial burden of paying for two mortgages at once (or a mortgage and rent).

Location is Everything in a Reverse Mortgage

This 2BR featured in the New York Times is on the market for $425,000.

Every week I read the New York Times “Property Values” column. The column features three properties throughout the country each week that are on the market for the price listed. “What You Get For… $250,000,” for example, vs. “What You Get For… $450,000.” But having watched homes of different prices and sizes be listed each week, I have come to one clear conclusion: location is everything.

During one recent week, I watched some 3-5 BR homes discussed for under $300,000, but this week, the homes listed were 4BR, 2BR, and 1BR… all for $450,000. Clearly location is at play. A 1BR in a high rise in Midtown Manhattan will almost certainly cost more than a 1BR in Lancaster, PA. A 3BR in Orange County, CA will likely go for more than one in Seattle, WA or Des Moines, IA.

When considering a reverse mortgage, location also comes into play because property values in some areas are higher than in others, as the above indicates. Some places have been hit dramatically by the burst of the housing bubble, while others have not seen their housing prices drop as steeply. Foreclosures and underwater mortgages are more common in California, Florida, Arizona, and Nevada than in most places in the Northeast.

It is a good idea to have a sense of how much your property is worth when using the reverse mortgage calculator and when evaluating your options. You may find that sales in your market are going strong and your home has not lost much of its value recently. However, you could also find that the reverse is true, is many are throughout the country.

Housing Market Rebound Freezes Out The Previously Well-Off

A front page story in the Wall Street Journal this morning highlighted an interesting trend; high-end homeowners are being left behind in the housing market rebound. Stimulus programs, such as the $8,000 new homebuyer tax credit and low mortgage rates, are dependent upon income and home values. The jumbo mortgages necessary to take out a high-cost home have come with higher rates and lenders requiring an increasingly large portion as the down payment (20-30% of the property value). All this comes at a time when prospective buyers have had an even harder time selling their homes, making coming up with money up front difficult. As a result, while the market has begun to turn upwards for many first-time buyers and lower value homes, the market is still stagnant for those in the upper and upper-middle classes.

While it is perhaps unsurprising that stimulus programs might choose to target those with lower incomes, the recession has hit those with higher incomes as well. Many of the people affected by the stock market crash and financial fraud scandals are those who were making upwards of $150,000/year. After losing their jobs and/or the majority of their 401Ks, some members of this group are taking pay cuts in order to land new jobs. As home values decline however, this group also is beginning to have a hard time making mortgage payments and qualifying for relief. Jumbo mortgages are currently the type of mortgages with the highest default rate.

The government should do something to make sure that the upper middle class and upper classes are not completely cut out of the stimulus programs–at least so far as real estate is concerned. Their homes are taking some of the largest hits in a distressed market, to the point where selling is not possible without losing hundreds of thousands of dollars. And in markets such as California, some are extremely upside down on their mortgages. While they may be well off in comparative terms, they could still lose their homes (and many are), could still lose their jobs and source of income (and many have), and they still should be granted some form of relief.

Case-Shiller Index Shows First Positive Monthly Return in Three Years

The Case-Shiller Index from January 2000 - January 2009 shows the housing bubble well. Many believe the worst is now over.

The Case-Shiller index for May indicates that the housing market may have hit bottom in April. Home prices continued their upturn in May, with prices down only 17.1% from last year, versus 18.1% in April. Prices also increased in May versus April by a half a percentage point, the first positive monthly return on the index in three years! However, when adjusted for seasonality, the prices show a slight drop.

Nonetheless, the positive message from the data is clear. While in February we reported that all 20 metropolitan areas on the Case-Shiller index had experienced a price decline from the previous month, this month, only 5 of them did: Las Vegas, Phoenix, Miami, Seattle, and Los Angeles.

Despite the decreasing rate of decline, analysts still don’t expect the market to stabilize much less prices to rise until late next year at the earliest. However, the market has exceeded expectations recently- maybe it will rebound sooner as well.

Housing Prices Stabilize, Home Sales Increase- Is the Market Better?

The National Association of Realtors revealed today that home sales continued their increase in June, with the sale of previously occupied homes rising 3.6% from May. It was the highest number of sales since October of 2008 and beat analysts expectations by 50,000 homes. In perhaps more telling numbers, the median sales price was $181,800. While this is up from $174,700 in May, it is down from the $215,000 median sales price in June of last year.

Meanwhile, other reports are asking whether housing prices may have stabilized. The Federal Housing Finance Agency’s housing price index, based on repeat sales of the same houses, rose 0.9% in May from April. It is nearly unchanged since November (source: Wall Street Journal, front page, 7/23/09). However, the index seems to be deceiving. It does not include subprime or other unconventional mortgages, which are the source of many of the problems in the housing market and which appear to have driven down the prices throughout the country.

These signs seem to be positive for the housing industry. But jobless claims are still high, and foreclosures, new homes, and unsold properties do not seem to play a large role in these reports. While it is nice to see two indicators moving in such a positive direction, other downward indicators seem to mean that it might not be wise to get too optimistic just yet.

New Housing Starts See Unexpected Jump in June

More people are starting to build new homes again, or at least, that’s what the numbers from the unexpected rise in housing starts in June appear to show. The number of housing starts rose 3.6% (or about 20,000 seasonally adjusted starts) to 582,000 units. Even larger leaps were seen in the number of housing starts of single family homes (14.4%) and the number of permits to break ground (8.7%). Analysts had expected these values to remain unchanged from previous months.

While the number of housing starts and permits to break ground are still down around 50% from a year ago, the increase is still a sign of progress. It seems that few aspects of the real estate industry have defied analyst’s expectations recently, and the large unexpected jumps are a definite exception. Although one wonders slightly whether developers will be able to fill all their new properties, it is good to see people building homes again. Perhaps once the new properties are completed, the worst of the recession will be over.