Home Values Still Rising

For the second month in a row, 18 of the 20 Case-Shiller real estate markets posted higher home values.  It’s the 6th consecutive strong showing for the benchmark private-sector housing index.

Combined with falling home supplies and rising sales figures, this month’s Case-Shiller Index suggests that housing may have bottomed sometime earlier this year.

It’s cause for optimism.

Even Case-Shiller respresentatives seem excited. In its press release, the publishers singled out the index’s winning streak, commenting on the recent “stabilization in national real estate values”.

But, in that statement, we see the Case-Shiller Index’s biggest flaw.  The index ipurports itself to be a national real estate metric but, in reality, there is no such thing as a national real estate market.

All real estate is local.

The Case-Shiller Index reports home values for 20 U.S. cities.  Each of those cities, however, is comprised of smaller neighborhoods, each with its own character, desirability, and price points.  Case-Shiller attempts to lump it all together — an impossibility.

As an example, New York City posted a nearly 1 percent increase in July but that figure is just a city summary.  The actual market in three distinct neighborhoods — Upper East Side, Chelsea, and Flatbush — vary tremendously.  Not to mention Long Island, too.

Flaws aside, though, Case-Shiller is still important.  It helps to identify broader trends in housing and housing may hold the key to our economic future.

With July’s Case-Shiller Index, we see that the housing market’s recovery is being sustained.

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First-Time Homebuyer Tax Credit – Frequently Asked Questions

What is a tax credit?

A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed.

Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.

What is the tax credit for first-time homebuyers (FTHBs)?

An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.

Who is eligible for the FTHB tax credit?

Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible. This applies both to single taxpayers and married couples.

In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.

How do I claim the credit?

You may choose to either apply for the credit with your 2009 tax return or you may apply for the credit sooner by filing an amended 2008 tax return with Form 5405 (http://www.irs.gov/pub/irs-pdf/f5405.pdf).

Is there a deadline for purchasing the home?

Yes. You must close on or before November 30, 2009.

Are there income limitations for the credit?

Yes. The credit is reduced or eliminated for higher income tax filers. The credit is phased out based on modified adjusted gross income. For a married couple filing a joint return, the range for a reduced credit is $150,000 to $170,000. For single taxpayers, the range is $75,000 to $95,000. So, the full credit is available for single taxpayers earning $75,000 or less and married taxpayers earning $150,000 or less.

Can you claim the tax credit in advance of purchasing a property?

No. The IRS has recently begun prosecuting people that have claimed credits where a purchase had not taken place.

Can a taxpayer claim a credit if the property is purchased from a seller with seller financing and the seller retains title to the property?

Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Examples of this would include a land contract, contract for deed, etc.

According to the IRS, factors that would demonstrate the ownership of the property would include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. the right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility to insure the property and 7. the duty to maintain the property.

Are there other restrictions to taking the credit?

Yes. According to the IRS, if any of the following describe your situation, a credit would not be due.

  • You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
  • You do not use the home as your principal residence.
  • You sell your home before the end of the year.
  • You are a nonresident alien.
  • You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
  • Your home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
  • You owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.

Can you buy a home from a step-relative and be eligible for the credit?

Yes. Provided the person you are buying a home from is not a direct blood relative, the purchase would be allowed.

Can parent(s) who will not live in the property cosign for a mortgage for their child and the child that is a qualifying FTHB still be eligible for the credit?

Yes.

Can a separated spouse who has not owned a home for four years qualify if the spouse has owned a property anytime in the last three years?

No.

The best path to take in any situation regarding income taxes is to speak with a professional tax preparer or CPA. If you have any questions that fall outside the situations here, give me a call and if you do not have an accountant to speak with, I can refer you to one.

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First Time Homebuyer and Seller Alert!

General Points to Consider – Buyer and Seller
The expiration date of the tax credit is November 30, 2009. Close December 1, as of now, and any qualifying buyer will not receive the tax credit. With the 30th falling on the Monday following Thanksgiving, where possible work towards a closing date of November 24th. This will provide some cushion if anything pops up in the closing process that could delay a closing.

Recent legislation mandates that if the Annual Percentage Rate or APR changes outside acceptable tolerances from the initial application, some documentation needs to be re-disclosed and time needs to pass before the closing can occur. Items that can impact APR can include a change in interest rate or fees required to close. If a buyer delays locking the application and interest rates increase during the loan process, this could delay the closing. This is just one reason to plan accordingly and schedule an earlier closing date than the last possible day.

Protect your clients on both sides with extended closing dates of 45-60 days. Expectations are high that more FTHBs will be going under contract in the next month. Interest rates have fallen to levels not seen since May. The result is that many lenders’ pipelines will be swelling with people seeking to take advantage of lower rates and the tax credit. Where feasible, work to get people under contract soon and plan accordingly to allow for any processing delays that could result.

Seller Points to Consider
Many FTHBs are motivated to purchase but may lack the necessary funds to close or may fall short in qualifying income. One way to assist with either or both situations and make the property more attractive is to promote that the seller will pay to reduce the borrower’s interest rate and/or closing costs. In many cases, this will not only cost the seller less than a price reduction but also bring additional prospects to consider the house.

Most FTHBs today are choosing to obtain loans that are guaranteed by the FHA, VA, or USDA. In the case of both FHA and USDA loans, the seller can pay up to 6% of the sales price or appraised value. For VA loans, the maximum seller concession is capped at 4%.

Consider approaching all sellers today with homes that would appeal to FTHBs and get them to commit to paying closing costs and/or reducing the buyer’s interest rate. This has often worked for builders in generating sales and it can work for your sellers, too.

Sellers who do not move homes before the end of November may find themselves waiting until the spring buying season kicks in to find their buyer. Make sure sellers know they need to promote their property now or risk waiting months while potentially seeing their property’s value decline in the process.

Buyer Points to Consider
In the same light as just mentioned, many buyers may feel they lack the funds required to close. When buyers are interested in a property, encourage them to submit an offer with the concessions needed to get the mortgage approved. They may just find that the seller is willing to negotiate.

Get all potential buyers pre-approved. As the time to close will be at a premium during the months of October and November, any work that can be done to expedite the application process will be golden. Prepare your buyers by advising them not to wait until they have a home under contract. Any documentation submitted today for pre-approval should be good through the end of November. Also, with a pre-approval in hand, both you and they will know exactly what they can qualify and shop for.

If you want to help with the application process and prevent the need to possibly re-disclose loan documents, encourage your buyers to lock their interest rate early in the loan process. This will be helpful for all parties and help the buyer focus on closing and providing any additional documentation that may be needed.

Some Questions on Who May Qualify
I have received many questions regarding who may and who may not qualify for the FTHB tax credit. I am attaching to this letter some FAQs on examples I have either dealt with or read about. As always, I encourage anyone with specific questions to consult with an accountant for final clarification.

Let’s Move Some Property!
If you have any questions from either a seller or buyer side as to what someone can or can not offer where financing is concerned, pick up the phone and call me. I’m here to help you and look forward to making this year’s November holiday a very Happy Thanksgiving for everyone.

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Where Are The Top Foreclosure States (Graph)

Once again, the country’s foreclosures are concentrated in just a few states.

As reported by foreclosure-tracking company RealtyTrac.com, more than 50 percent of the country’s foreclosures-au_1252554872foreclosure-related actions in August occurred in just four states:

* California : 25.76 percent
* Florida : 17.4 percent
* Michigan : 5.4 percent
* Nevada : 5.0 percent

The rest of the “Top 10″ foreclosure states included Arizona, Illinois, Georgia, Ohio, Texas and New Jersey.

Versus July’s numbers, the U.S. foreclosure rate improved last month. However, the August data is awful in comparison to last year — foreclosures are up nearly 18 percent.

The silver lining? High foreclosure rates are yielding tremendous opportunities for today’s home buyers. Buyers of distressed properties now account for about one-third of all home sales and low mortgage rates and a federal tax credit are spurring sales.

Search the complete August 2009 foreclosure report for yourself, including foreclosure heatmaps and other trends on the RealtyTrac website.

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Mortgage Rate Review September 4, 2009 (Chart)

Mortgage Rates continued their nine (9) day accent posting 375bp for the week. Friday was the only negative day with the FNMA 30 YR 4.5% giving up only 9bp on a quiet day before the Holiday weekend.  The positive gains can be attributed to the negative pull back in the equities market. The DOW gave up 1% for the week, and unemployment rate for August increased to 9.7%, that’s the highest since June of 1983.

This is a very interesting time in our economy, if the financial markets continue to sell off, expect rates to stay low. If we see a bounce back in the equities market watch for mortgage rates to rise fast. This so called recovery feels and look eerily similar to the 2002 head fake.  Believe me I am not a bear although this run since last September’s catastrophic collapse of the markets.

mortgage-rates-sep-04-09

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Why Home Prices Will Rise This Fall

In what’s becoming a regular occurrence, housing data blew away economists expectations Tuesday.

As reported by the National Association of Realtors®, the Pending Home Sales Index posted its 6th consecutive monthly gain in July.

After a meteoric rise that started in January, the index is now at its highest levels in more than 2 years.

A “pending home sale” is a home that is under contract to sell, but not yet closed.  It’s not the same as an actual home sold, but data shows that nearly 80% of homes under contract close within 2 months and many more close in months 3 and 4.

Home buyers — take note.  When the Pending Home Sales Index is rising, it means that market activity has picked up.  This can lead to any one, or a combination, of the following:

  1. Multiple-offer situations
  2. Reduced negotiation leverage over sellers
  3. Higher home sale prices with fewer concessions

So, consider yourself alerted.  If you’re buying a home in the next several months, expect the recent run in Pending Sales to lead to a run in closed sales, too.  That should lead home prices higher in most markets.

Indeed, we’re already seeing it.  Case-Shiller says prices are on the upswing.

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