Changes to MID seen as increasingly likely – Consequences of eliminating or limiting tax break for mortgage borrowers debated

SAN FRANCISCO — The burgeoning federal debt makes it unlikely that the mortgage interest tax deduction will survive in its present form, but any proposed changes to the tax break for homeowners will likely spark a fierce debate over the fundamentals of the U.S. housing market, the value of homeonwership, and consumer behavior.

That’s  according to panelists at a housing forum hosted Friday by real estate search and valuation company Zillow Inc. and the University of Southern California’s Lusk Center for Real Estate.

“I  think its entirely likely that something big is going to happen (with the MID) starting next  year with either administration,” said Jason Gold, director and senior fellow at the Washington,  D.C.-based Progressive Policy Institute, an independent think tank.

Some members of Congress have proposed eliminating or changing the mortgage interest deduction as one way to help address the nation’s $15 trillion debt and a $1.1 trillion federal budget deficit.

At the end of this year, a series of tax increases and spending cuts to address that deficit are scheduled to go into effect  automatically, unless Congress acts to prevent or alter them. Revamping the mortgage interest deduction is one of the solutions proposed to head off that “fiscal cliff” scenario.

Two years ago, a  bipartisan deficit reduction commission recommended scaling back the mortgage interest deduction, which is currently capped at mortgages worth up to $1 million for both principal and second homes and home equity debt up to $100,000. The deduction is available only to taxpayers who itemize.

The commission, often referred to as Simpson-Bowles, proposed turning the deduction into a 12 percent nonrefundable tax credit available to all taxpayers, capping eligibility to mortgages worth up to $500,000, and eliminating the deduction on interest from second homes and home equity debt.

The National Association of Realtors, which has consistently defended the mortgage interest deduction in its current form, was highly critical of the recommendation, claiming any changes to the MID could depreciate home prices by up to 15 percent, and promising to “remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest.”

At the end of July, the trade group launched an email campaign designed to educate roughly 82 million consumers about the value of homeownership and the federal housing subsidies, including the MID, in place that support it.

The MID and home prices

The MID is a “tax expenditure,” meaning its cost must either be made up through higher taxes elsewhere or by adding to the debt, and it costs the government about $90 billion a year.

Richard Green, the director of the USC Lusk Center for Real Estate, told forum attendees that reforming the MID is necessary for fiscal sustainability.

“We need to get revenue,” Green said. “You need to make a judgment about what’s  better or worse for the economy. In my opinion, it’s better to do it with tax  expenditures, rather than rates, though you may have to do both to get to where we  need to be.”

Because mortgage interest rates are currently so low, he added, “this may be an opportunity to do less damage by reforming  the mortgage interest deduction than at other times.”

Christopher Thornberg, founding partner at Beacon Economics, agreed. The current low interest rates mean that changing the MID “will have  a more moderate impact on home prices,” he said. “With that in mind, it’s exactly the time  to get rid of it.”

He estimated home prices would drop perhaps 6-7 percent overall if the MID were eliminated.

Green declined to estimate how much prices would decrease.

“I have no idea. We’re in a world in which to try to  make predictions is much harder than it would have been 10 or 15 years ago,” he said.

Dowell Myers, a professor and director of the Population Dynamics Research  Group at the USC Sol Price School of Public Policy, said declining prices are “the last thing we want.”

“Lower prices are good as long they rise 2 percent  per year. I don’t want them to fall 2 percent per year,” Myers said. “We must rebuild slowly.”

Thornberg disagreed. “I weigh 190 pounds. I guarantee you that first day on  the StairMaster is going to be miserable. But that doesn’t change the fact that  I need to lose weight,” he said.

Just as food and gas prices should be as low as possible, a household’s biggest expenditure — housing — should be as inexpensive as possible, he said. “Over the past five years, falling home prices were a symptom  of the underlying problem. They didn’t cause the recession,” he said. “In the long-run basis, cheap housing is good for the economy.”

He advocated more homebuilding to drive prices down.

Unintended consequences

Green noted that in some other countries, such as the United Kingdom, there is no mortgage interest deduction. “They get big mortgages just like  us, but they pay them off quicker because there’s no incentive to carry a lot of  debt.” Over time, we could see the same pattern in the U.S., he said.

Panelists observed that eliminating or limiting the scope of the MID could have unintended consequences. Lower home values could mean fewer property taxes paid. More incentive to pay down a mortgage could mean fewer goods consumed and fewer stocks and bonds invested in in the short run. Each would mean less revenue generated than proponents of cutting the MID anticipate, Green said.

“In the short term, it would have an anti-stimulative impact,” Green said.

“In the long run, it means our household balance sheets  are better,” which means people can retire and have money to spend in the future and also be protected from financial shocks, he added.

A mortgage is “a long-term forced saving that builds a storehouse of  wealth,” Gold said. “We need to make housing something that people can rely on and not this  playpen of speculation.”

The panelists noted that most economists are against the MID. “(Economists say) it makes  housing more expensive, distorts the market, and the revenue that we could get out  of it is more important than what it could do to the market,” Gold said.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, has said that the MID acts as an incentive for  homebuyers to take on bigger mortgages than they might need, making it  harder to safeguard the financial system against systemic risk.

Lowering the fraction of mortgage  interest households are allowed to deduct from their taxable income  would help protect the financial system in the event of another housing  boom and bust, Kocherlakota said last year. To encourage homeownership, policymakers could  replace the MID with a tax credit  that offsets part of a buyer’s down payment on a home.

A Georgia State University study published in May suggested that  lenders capture between 9 and 17 percent of the subsidy created by the  MID through higher mortgage interest rates.

Because the MID is  capped at a $1 million mortgage, the study looked at more than 900,000  “jumbo loans” loans made in 2004 (those for more than $333,700) and  found that rates dropped as loan sizes crossed the $1 million mark, and  that the larger the portion of the loan that was above this mark, the  lower the rates went, SmartMoney reported.

The  deduction is projected to cost taxpayers an estimated $609 billion  through 2016, and the study results suggested lenders, not homeowners,  will receive $55 billion to $104 billion of that subsidy, the  publication said,

A recent survey of economists, real estate experts and investment strategists conducted by research and consulting firm Pulsenomics LLC on behalf of Zillow found 60 percent favored getting rid of the mortgage interest tax deduction, with 10 percent saying it should be eliminated immediately and 50 percent saying it should be phased out gradually.

Thirty percent of respondents said the deduction should remain, but that there should be more restrictions on eligibility. Only 11 percent said the deduction should remain as is.

No ‘shock treatment’

Panelists noted that the mortgage interest deduction is politically polarizing because there is a disconnect between how people use it and how it is perceived.

For example, Green said most people in Texas do not itemize their taxes (indeed, only about a third of all U.S. taxpayers do), and therefore they cannot take advantage of the MID.

But studies show “they love the mortgage interest deduction,” he said. “There’s a detachment  between how taxes actually affect people and how they feel about it.”

Green also pointed out that even if the MID were limited to primary residences with a mortgage of no more than $500,000, the middle class would remain largely unaffected.

“Away from California, $500,000 is not a middle-class (home) —  that’s an upper-income house. That’s why disproportionately (the MID in its current form) is more  beneficial for California, coastal markets, New York, San Diego.”

Thornberg agreed. “Clearly this benefits richer people more than it does  the middle class.”

According to the Tax Policy Center, those in the middle income quintile received $139 from the deduction in 2011, while those in the top income quintile received an average of $2,344. The average benefit overall was $460.

John Burns, CEO of John Burns Real Estate Consulting LLC, said scaling the MID back to $500,000 “really won’t kill the housing market.” He added that, because most taxpayers don’t itemize, making the MID a 12 percent tax credit available to all taxpayers would probably boost the amount of money in people’s pockets. He said, however, that such changes “would hurt the move-up market dramatically.”

The panelists seemed to support either a gradual phase-out of the MID or alternatives to the MID.

“I would never prescribe shock treatment,  particularly” right now with the current state of the economy, Green said.

Thornberg agreed. “Most policies should be phased in, not done  overnight.”

Green and Gold said they would support something like a credit to first-time homebuyers as an alternative to the MID, though Gold doubted such an alternative would be politically viable.

Myers suggested a MID targeted only to people under age 35.

“Baby boomers are going to  be retiring and selling off their houses. I would worry that if (their  children) are spooked away from homeownership because we get rid of the MID, it’s a  social signal that homeownership” is not for them, he said.

Green said homeownership is “a good thing” for families with children in particular.

“In the U.S., there are two ways you can live in a  house — you can own, or have a one-year lease. If you have kids you care about  and want to keep them in the same school district,” security of tenure  “really leads to good outcomes,” Green said.

Housing Secretary Shaun Donovan has said the Obama administration, which has been pushing for changes to the MID that would reduce its value to wealthy families, doesn’t advocate getting rid of it altogether.

“This is not the time to be questioning the fundamental pieces [of U.S. housing policy] … while we’re still very much focused on recovering from the crisis,” Donovan said. “Anything that would change the system substantially now [would] have a real risk of stopping the momentum that we have in the housing market.”

Last week, David Stevens, president and CEO of the Mortgage Bankers Association, told HousingWire his trade group stands ready to advocate for the survival of the mortgage interest deduction, but that it’s too early to react to political slogans about ending the popular tax deduction.

“We need the housing market to recover — particularly the home purchase market — to recover for the broader U.S. economy to get back on track,” Stevens said. “Any uncertainty around the impact of consumers on the most significant tax benefit that the U.S. tax system has for the U.S. consumer could be very disruptive.”

Presidential candidate Mitt Romney has not clearly stated his stance on the MID, though has twice has raised the possibility of imposing caps on tax benefits to help lower tax rates, the Wall Street Journal reported.

“Instead of simply cutting the home mortgage interest deduction or the write-off for charitable donations, lawmakers could allow each taxpayer one overall allowance to use as desired. Mr. Romney suggested options ranging from $17,000 to $50,000,” the Journal said.

A recent survey conducted by public opinion research firm Belden Russonello Strategists LLC  on behalf of The National Low Income Housing Coalition, an affordable housing advocacy group, found that 56 percent of 1,006 respondents favored replacing the MID with a tax credit that would provide the same percentage benefit for all households regardless of income.

Nearly two-thirds, 63 percent, supported a $500,000 cap on the size of mortgage for which one can get a tax break. Support for these changes was bipartisan, with nearly equal numbers of Democrats, Republicans and independents favoring both proposals, the NLIHC said. The group estimated the changes would save $20 billion to $40 billion a year.

When asked how the savings should be used, 71 percent said reducing the federal deficit should be a top or high priority, 63 percent said ending homelessness should be a top or high priority, and 62 percent cutting taxes for middle-income people should be a top or high priority.

The NLIHC recommended directing the savings to the National Housing Trust Fund, which provides communities with funds to build, preserve, rehabilitate and operate rental homes that are affordable for extremely and very low-income households.

“The mortgage interest deduction is very popular, but the American people understand that it can be improved to help more middle- and low-income homeowners. At the same time, the savings from reform can be used to end homelessness and create jobs by building more rental homes that low-income families can afford,” said Sheila Crowley, president and CEO of the NLIHC, in a statement.

“The American public is ahead of policymakers on this issue. It is time to enact reforms that will stop the subsidy of million-dollar houses and use the savings to help middle- and low-income families who need it most.”

By Andrea V. Brambila, Monday, October 15, 2012.

Inman News®

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Analysis Blames Slow Recovery on Tight Credit Market

Daily Real Estate News |      Monday, September 17, 2012

High lending standards are preventing a full economic recovery, according to new survey findings and an analysis of historic credit scores and loan performance by the National Association of REALTORS®. The group estimates that the U.S. economy would reap significant benefits if mortgage lending conditions were to return to normal.

“Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year,” said NAR Chief Economist Lawrence Yun.  “The economic activity created through these additional home sales would add 250,000 to 350,000 jobs in related trades and services almost immediately, and without a cost impact.”

This view appears to be shared by real estate professionals as well. According to the REALTORS® Confidence Index, based on more than 3,000 responses by NAR members, there is widespread concern over the tight credit conditions for residential mortgages.  Respondents report that lenders are slow to approve applications, and that banks request information from borrowers that is considered to be excessive.

Some expressed the belief that lenders are focusing only on loans to individuals with the highest credit scores. The survey found that 53 percent of loans in August went to borrowers with credit scores above 740.  From 2001 to 2004, only 41 percent of loans backed by Fannie Mae went to borrowers with FICO scores above 740, while 43 percent of Freddie Mac-backed loans went to such borrowers. In 2011, about 75 percent of total loans purchased by Fannie Mae and Freddie Mac, which are now a smaller market share, had credit scores of 740 or above.

Yun said the financial industry has not recognized that the market has turned in the wake of an over-correction in home prices.

“There is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash which could go a long way toward speeding our economic recovery. A loosening of the overly restrictive lending standards is very much in order,” he said.

Yun added that lenders’ high aversion to risk was unnecessary because default rates have been abnormally low since 2009.  Fannie Mae default rates have averaged 0.2 percent while Freddie Mac’s averaged 0.1 percent. The association deemed such rates especially notable due to higher-than-usual unemployment levels.

“These findings show we need to return to the sound underwriting standards that existed before the aberrations of the housing boom and bust cycle, and thoroughly re-examine current and impending regulatory rules that may cause excessively tight standards,” Yun said.

Source: “Home Sales and Job Creation would Rise with Sensible Lending Standards,” National Association of REALTORS® (Sept. 17, 2012)

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August Existing-Home Sales and Prices Rise

WASHINGTON (September 19, 2012) – Existing-home sales continued to improve in August and the national median price rose on a year-over-year basis for the sixth straight month, according to the National Association of Realtors®.

Total existing-home sales 1 , which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 7.8 percent to a seasonally adjusted annual rate of 4.82 million in August from 4.47 million in July, and are 9.3 percent higher than the 4.41 million-unit level in August 2011.

Lawrence Yun , NAR chief economist, said favorable buying conditions get the credit. “The housing market is steadily recovering with consistent increases in both home sales and median prices. More buyers are taking advantage of excellent housing affordability conditions,” he said. “Inventories in many parts of the country are broadly balanced, favoring neither sellers nor buyers. However, the West and Florida markets are experiencing inventory shortages, which are placing pressure on prices.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 3.60 percent in August from a record low 3.55 percent in July; the rate was 4.27 percent in August 2011.

“The strengthening housing market is occurring even with difficult mortgage qualifying conditions, which is testament to the sizable stored-up housing demand that accumulated in the past five years,” Yun added.

The national median existing-home price2 for all housing types was $187,400 in August, up 9.5 percent from a year ago. The last time there were six back-to-back monthly price increases from a year earlier was from December 2005 to May 2006. The August increase was the strongest since January 2006 when the median price rose 10.2 percent from a year earlier.

Distressed homes3 – foreclosures and short sales sold at deep discounts – accounted for 22 percent of August sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in July and 31 percent in August 2011. Foreclosures sold for an average discount of 19 percent below market value in August, while short sales were discounted 13 percent.

Total housing inventory at the end August rose 2.9 percent to 2.47 million existing homes available for sale, which represents a 6.1-month supply 4 at the current sales pace, down from a 6.4-month supply in July. Listed inventory is 18.2 percent below a year ago when there was an 8.2-month supply.

The median time on market was 70 days in August, consistent with 69 days in July but down 23.9 percent from 92 days in August 2011. Thirty-two percent of homes sold in August were on the market for less than a month, while 19 percent were on the market for six months or longer.

NAR President Moe Veissi , broker-owner of Veissi & Associates Inc., in Miami, said some buyers are involuntarily sidelined. “Total sales this year will be 8 to 10 percent above 2011, but some buyers are frustrated with mortgage availability. If most of the financially qualified buyers could obtain financing, home sales would be about 10 to 15 percent stronger, and the related economic activity would create several hundred thousand jobs over the period of a year.”

First-time buyers accounted for 31 percent of purchasers in August, down from 34 percent in July; they were 32 percent in August 2011.

All-cash sales were unchanged at 27 percent of transactions in August; they were 29 percent in August 2011. Investors, who account for most cash sales, purchased 18 percent of homes in August, up from 16 percent in July; they were 22 percent in August 2011.

Single-family home sales rose 8.0 percent to a seasonally adjusted annual rate of 4.30 million in August from 3.98 million in July, and are 10.0 percent above the 3.91 million-unit pace in August 2011. The median existing single-family home price was $188,700 in August, up 10.2 percent from a year ago.

Existing condominium and co-op sales increased 6.1 percent to a seasonally adjusted annual rate of 520,000 in August from 490,000 in July, and are 4.0 percent above the 500,000-unit level a year ago. The median existing condo price was $176,700 in August, which is 3.3 percent higher than August 2011.

Regionally, existing-home sales in the Northeast rose 8.6 percent to an annual pace of 630,000 in August and are also 8.6 percent above August 2011. The median price in the Northeast was $245,200, up 0.6 percent from a year ago.

Existing-home sales in the Midwest increased 7.7 percent in August to a level of 1.12 million and are 17.9 percent higher than a year ago. The median price in the Midwest was $152,400, up 7.8 percent from August 2011.

In the South, existing-home sales rose 7.3 percent to an annual pace of 1.90 million in August and are 11.1 percent above August 2011. The median price in the region was $160,100, up 6.5 percent from a year ago.

Existing-home sales in the West increased 8.3 percent to an annual level of 1.17 million in August but are unchanged from a year ago. With ongoing inventory shortages, the median price in the West was $242,000, which is 16.3 percent higher than August 2011.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.

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Last Week in the News

Retail sales fell 1.5% for the week ending August 18, according to the ICSC-Goldman Sachs index. On a year-over-year basis, retailers saw sales increase 3.1%.

Existing home sales rose 2.3% in July to a seasonally adjusted annual rate of 4.47 million units from 4.37 million units in June. Compared to a year ago, existing home sales were up 10.4% in July. The inventory of unsold homes on the market increased 1.3% to 2.4 million in July, a 6.4-month supply at the current sales pace, down from a 6.5-month supply in June.

The Mortgage Bankers Association said its seasonally adjusted composite index of mortgage applications for the week ending August 17 fell 7.4%. Refinancing applications decreased 9%. Purchase volume rose 0.9%.

New home sales rose 3.6% in July to a seasonally adjusted annual rate of 372,000 units from an upwardly revised rate of 359,000 units in June. The initial June reading was 350,000. On a year-over-year basis, new home sales are up 25.3% compared with July 2011. At the current sales pace, there’s a 4.6-month supply of new homes on the market.

Orders for durable goods — items expected to last three or more years — rose $9.4 billion or 4.2% to $230.7 billion in July. This increase follows a 1.6% increase in June. Excluding volatile transportation-related goods, July orders posted a monthly decrease of 0.4%.

Initial claims for unemployment benefits for the week ending August 18 rose by 4,000 to 372,000 from an upwardly revised 368,000 the prior week. Continuing claims for the week ending August 11 also rose by 4,000 to 3.317 million.

from Prospect Mortgage Economic Update

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Last Week in the News

The index of leading economic indicators — designed to forecast economic activity in the next three to six months — rose 0.7% in February, following a revised 0.2% increase in January. The February reading was the highest level since June 2008.

Initial claims for unemployment benefits for the week ending March 17 fell by 5,000 to 348,000, the lowest reading since February 2008. Continuing claims for the week ending March 10 fell by 9,000 to 3.35 million.

The combined construction of new single-family homes and apartments in February fell 1.1% to a seasonally adjusted annual rate of 698,000 units, after an upwardly revised gain of 3.7% in January. The January figure was revised from 699,000 units to 706,000 units. Compared to a year ago, housing starts are up 34.7%. Applications for new building permits, seen as an indicator of future activity, rose 5.1% to an annual rate of 717,000 units.

Existing home sales fell 0.9% in February to a seasonally adjusted annual rate of 4.59 million units from an upwardly revised 4.63 million units in January. The inventory of unsold homes on the market increased 4.3% to 2.43 million, a 6.4-month supply at the current sales pace, up from a 6-month supply in January.

New home sales fell 1.6% in February to a seasonally adjusted annual rate of 313,000 units from a downwardly revised rate of 318,000 units in January. The initial January reading was 321,000. The December rate was revised higher to 336,000 units, the highest level since the economic recovery began. On a year-over-year basis, new home sales are up 11.4%. At the current sales pace, there’s a 5.8-month supply of new homes on the market.

The Mortgage Bankers Association said its seasonally adjusted composite index of mortgage applications for the week ending March 16 fell 7.4%. Refinancing applications decreased 9.3%. Purchase volume fell 1%.

from Prospect Mortgage Economic Update

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Bring back FHA 203(k) loan for investors

Two years ago, the National Association of Realtors, the largest trade group in the nation with 1 million members, floated its idea of a housing solution to attendees at its annual convention.

NAR later presented Congress with a Four-Point Housing Stimulus Plan to help stabilize the housing and mortgage markets. The crux of the package suggested using $130 billion of the $700 federal billion bailout funds on housing, specifically earmarked for an interest-rate buydown and more tax credits.

That buydown idea did not happen. It would have been a one-percentage-point, interest-rate buydown on fixed-rate loans for all buyers. The reduction reportedly would have resulted in approximately 840,000 additional home sales and reduced the inventory of homes by as much as 20 percent.

What was adopted was an $8,000 first-time homebuyer tax credit and a new existing homeowner tax credit of $6,500. The first-time bonus was especially popular, even extended for an additional period.

This year, NAR crafted a five-point proposal, New Solutions for America’s Housing Crisis, that really does not contain any new ideas at all, rather a restoration of old guidelines and programs.

While each “point” contains about five subtitles that could easily stand alone, the proposal focuses on higher lending limits, no reductions in the mortgage interest deduction, reinstatement of the FHA 203(k) program for investors, and relaxed mortgage guidelines for second homes.

The investor message came through loud and clear, particularly because Florida credits its rebound to investors and international second-home buyers. According to Moe Veissi, NAR president-elect, a 10-year supply of condominiums has been reduced to seven months due to cash transactions by investors looking to hold the properties for long-term rentals.

“Investors are not healthy to the market during bubble years, but they can help speed up the recovery in a down market,” said Lawrence Yun, NAR’s chief economist.

Owner-occupants continue to use popular 203(k) loans, which allow the borrower to finance both the purchase of the property and upgrades into one mortgage guaranteed by the government.

However, for the past 15 years, FHA has maintained a moratorium on allowing investors to use the 203(k) program because of past abuses in how the refurbished properties were appraised.

Most mortgage loans provide only permanent financing. Typically, the lender will not close the loan and release the money unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, the lender usually requires improvements to be finished before a long-term mortgage is granted.

When a buyer wants to purchase a house that needs repair or updating, the buyer usually has to obtain interim financing to purchase the dwelling, then additional financing to do the work. When the rehab is completed, a permanent mortgage — which pays off the interim loans — is made.

(Interim financing often involves relatively high interest rates and relatively short payback periods.)

The FHA 203(k) program was designed to roll all financing into one package. The borrower can take out one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. The mortgage amount is based on the “as will be” (projected) value of the property and takes into account the cost of the work.

FHA 203(k) loans are available for purchase or refinance. The refinance component can combine all existing loans plus provide the funds for needed repairs.

To minimize risk to the mortgage lender, the loan is eligible for endorsement by FHA as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At that point, the lender has a fully insured mortgage.

The FHA 203(k) loan can come in handy in a foreclosure sale — and especially to investors around the country. In many cases, the previous owner has taken fixtures or the structure is in dire need of repair. Loan proceeds would provide for the updates and the permanent financing.

It’s time to let investors back under the FHA 203(k) umbrella. It’s past time to get vacant homes cleaned up and alive again with occupants.

By Tom Kelly, Wednesday, December 14, 2011.

Inman News®

Tom Kelly’s new e-book, “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement,” is available online at Apple’s iBookstore,, Sony’s Reader Store, Barnes & Noble, Kobo, Diesel eBook Store, and Google Editions. 

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Last Week in the News

The combined construction of new single-family homes and apartments in November rose 9.3% to a seasonally adjusted annual rate of 685,000 units. Single-family starts increased 2.3%. Multifamily starts rose 25.3%. Applications for new building permits, seen as an indicator of future activity, rose 5.7% to an annual rate of 681,000 units.

Existing home sales rose 4% in November to a seasonally adjusted annual rate of 4.42 million units from 4.25 million units in October. The inventory of unsold homes on the market decreased to 2.58 million, a 7-month supply at the current sales pace, down from a 7.7-month supply in October.

The Commerce Department announced that gross domestic product — the total output of goods and services produced in the U.S. — increased at a revised annual rate of 1.8% in the third quarter of 2011.

New home sales rose 1.6% in November to a seasonally adjusted annual rate of 315,000 units from a revised rate of 310,000 units in October. Compared to a year ago, new home sales were up 9.8%.

The index of leading economic indicators — designed to forecast economic activity in the next three to six months — rose a strong 0.5% in November, following a 0.9% increase in October.

Orders for durable goods — items expected to last three or more years — rose $7.5 billion or 3.8% to $207 billion in November. Excluding volatile transportation-related goods, orders posted a monthly increase of 0.3%.

Initial claims for unemployment benefits fell by 4,000 to 364,000 for the week ending December 17. Continuing claims for the week ending December 10 fell by 79,000 to 3.546 million.

PS – The Federal Housing Administration (FHA) has extended the temporary waiver of anti-flipping regulations through December 31, 2012.

from Prospect Mortgage Economic Update

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3 reasons the real estate crisis will worsen

Foreclosures are old news. Down real estate values? Been there, done that, right? Well, we might all have gotten tired of hearing bad news about the real estate market, but the facts show that in many areas, foreclosure rates will rise before they decline, and a number of other indicators point to things getting worse before they get better.

Reality check: A down market is not all bad news. Weak home values translate into opportunity for buyers — especially when the government keeps rates as low as they presently are to encourage homebuying. Many of the mortgages being foreclosed were toxic and could stand to be purged.

Today’s low prices and record-low interest rates also portend well for the future stability of the housing market in that new homeowners are much less likely to face the problems this last generation of homeowners did (i.e., spiking mortgage payments and plummeting home values).

In any event, the real estate market is likely to stay down or continue to decline, in terms of home values and sales activity, and increased foreclosures, before it improves, for the following reasons:

1. The massive foreclosure backlog. The New York Times recently reported that it would take lenders 62 years — years! — to repossess the 213,000 New York state homes currently in some stage of foreclosures. New Jersey homes? Forty-nine years. Illinois and Massachusetts? A decade.

While the foreclosure pipeline moves more quickly in states where homes can be foreclosed without a court’s involvement, like California (three years), Nevada and Colorado (two years each), the fact remains that there is a massive backlog of homes in mortgage default that will take years to work through.

And the trend is for these foreclosures to take more, not less, time than before — after the robo-signing scandal and related self-imposed freezes, courts and law enforcement have imposed more verification requirements, settlement conferences and more detailed audits of foreclosure files before they will allow repossession to take place.

Despite the fact that the rate of new foreclosure filings has slowed (some say this has more to do with banks being slower to file than any real change in the default rate of homeowners), the rate of foreclosures will increase and/or stay elevated for years to come.

2. Too-tight lending guidelines. How tight is too tight? Lending guidelines are too tight when they screen out creditworthy borrowers, which many industry insiders say today’s loan standards do.

Sixteen percent of Realtors reported a contract failure in July, which usually indicates that a borrower who was probably preapproved (i.e., had a good job and credit history) had her loan declined because she failed to pass tough underwriting standards, the property didn’t pass the lenders’ muster, or there was an appraisal problem.

Ron Phipps, president of the National Association of Realtors, described this number as “unacceptably high,” explaining that with “both mortgage credit and home appraisals, there’s been a parallel pendulum swing from very loose standards, which led to the housing boom, to unnecessarily restrictive practices as an overreaction to the housing correction.”

Loans originated in 2009 have a default rate right around 1 percent, compared with the 22-27 percent default rate on 2007 loans and the 3 percent default rate on 2003 vintage loans.

These numbers, taken along with the contract-failure numbers, suggest that today’s lending guidelines are a knee-jerk overcorrection that is prohibiting many worthy would-be buyers from becoming owners and limiting the much-needed absorption of the excess inventory of homes on the market.

3. Job market woes and transitions. The national unemployment rate of 9.1 percent is just barely better than the average 2010 rate of 9.6 percent — and job growth totally flat-lined from July to August of this year, the latest available figures.

And those numbers are, many feel, misleadingly optimistic, as many long-term unemployed have stopped being counted, and are underemployed in part-time jobs or working freelance gigs because they have no other option.

Clearly, none of these people will be buying homes anytime soon (most thriving freelancers will need to file two years of tax returns as self-employed before they can qualify to buy); and even some employed would-be buyers are hesitant to enter the market as long as jobs are scarce because they view their own positions as insecure. Job market health is a prerequisite to housing market health.

By Tara-Nicholle Nelson, Monday, September 19, 2011.   Inman News™

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Ask her a real estate question online or visit her website,

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8 Tips to Protect Your Home While Away on Vacation

Many lucky families are planning holiday trips to cure their winter blues. Here are some important things to remember if you leave your home for several days.

  1. Make sure to hold the mail and newspaper. If you can’t have someone pick it up every day, it’s a sure giveaway that nobody’s home and can be a green light for burglars.
  2. If possible, leave a key with someone you trust, preferably a neighbor and have them keep an eye on your home while you’re gone. Make sure to offer returning the favor and thank them with a gift when you return.
  3. Unplug all electronics that don’t need to used like the television, coffee maker, and home computers.
  4. Lower the temperature on your water heater.
  5. If you can, leave a car in the driveway and use timers to turn on outdoor and indoor lights to give the impression that someone is home. Leaving the porch light on the entire time you’re gone is a bad idea. If you don’t have a timed light, you can leave an interior light on for the duration of your trip as long as you can’t easily notice it during the day.
  6. As excited as you may be to go on vacation, avoid advertising it over Facebook and Twitter. Also, keep this in mind while posting updates from your cell phone on vacation.
  7. If you have access to one, place all your valuables in a safe or safe deposit box.
  8. Remember, if your house is on the market, you can ask your REALTOR® to stop by and check in. While you’re on vacation, it’s a great time for showings because you won’t have schedule conflicts.

If you follow these tips the next time you are out of town, you will most likely protect your house and your peace of mind.

By Kelly O’Ryan – from Old Republic Home Protection newsletter – Reprinted with permission of RisMedia, publisher of Real Estate Magazine

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American Dream Still Alive

In spite of the gyrations of the housing market in recent years, an overwhelming number of Americans still view owning a home as a key to their happiness and security.

According to a 2011 poll of likely voters, commissioned by the National Association of Realtors, 75% of respondents said they believed owning a home is worth the risk of potential market fluctuations.  Of those respondents who already owned a home, an even higher number, 95%, stated they were happy with their decision to purchase their home.

The good feelings towards home-ownership extend to potential buyers as well.  73% of those who do not currently own a home view the purchase of a home as a goal for the future.  Most respondents also agree that their home is their best  investment, adding that they would advise a friend or family memeber to buy a home.  One of the reasons cited for the lack of first-time buyers entering  the housing market:  difficult saving up for a down payment and closing.  Combined, these costs are seen as the biggest barrier to home ownership today.

A 2008 book by authors Gary Smith, Pomona’s Fletcher Jones Professor of Economics, and wife Paula, a business economist from Harvard, reflects similiar sentiments.  According to their research, as reported in “Homeconomics:  Why Owning a Home Is Still a Great Investment,” buying a home offers as many benefits today as it always has.  These benefits include providing shelter and a place to live, as well as providing the “fun” and enjoyment of home ownership.  The economists are quick to note the financial benefits as well, labeling them as the home dividend.  The dividend is described by the authors in the following manner.

A “home dividend” is the owners’ rent savings for a comparable house in the same neighborhood, plus mortgage interest and property tax deductions, minus the mortgage payment, property tax and attendant insurance and maintenance costs.

Rents are often higher than mortgage payments, since rents increase over time, while mortgages with fixed rates stay flat.  When  the  two amounts are subtracted, the difference between them is the amount of the monthly dividend.  This extra money can be  saved an invested in the stock market, bonds,  business opportunities or educational opportunities for family members.  If the dividend earns even a modest rate of return, it can generate an additional source of wealth for the homeowner.

This inherent dividend explains why the average homeowner has a net worth of $200,000, while the average renters worth is closer to $5,000, according to the two economists. 

In addition to the financial benefits of homeownership, however, people also report a strong emotional connection to their home.  It is viewed as a place for rest, relaxation and enjoying the company of family and friends.  Seen from this perspective, owning a home is reported as an important core value for many families.

Far from giving up on the American Dream, many people still embrace it,  and view the purchase of a home as a way to save for retirement, as well as a place to hang their hat well into the future.

from Teck Inspections August 2011 newsletter

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