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Amy Tyson
Sr. Loan Consultant
Phone: (770)974-3178
Cell:(404)886-4098
Fax: (770)200-1953
atyson@envoymtg.com

November 2009
What Remains for Those Seeking a Home or Loan

The Importance of Acting Now - Waiting Really Could Cost You

The last weekend in October you were likely treated to a host of Halloween characters, all in search of treats, not tricks. People searching for a new home or a mortgage, whether they donned a costume or not, may have gotten a little of both.

Home loan seekers have been treated to great rates all year long since the Federal Reserve announced it would be purchasing mortgage backed securities, with rates diving below 6.00% since last December. However, if you are looking to buy a home, according to the Case-Shiller index, home prices increased for the fourth straight month, possibly signaling the end to home price declines.

So, the question now is what lies ahead?

How About a Little Perspective?
Applications for home loans fell the last few weeks of October as average reported rates for a 30 year fixed rate climbed above 5.00% according to both the Mortgage Bankers Association of America and Freddie Mac. The reason most cited for the decline in applications was increasing rates. Which means that for many people a rate above 5.00% was the cause for a decline in applications.

Perhaps this could be for one of two reasons. The first could be that anyone who could refinance into a sub-5.00% rate had already done so. The second is that people could be thinking that either rates will fall below 5.00% again or that rates in the low 5.00% range are simply not that attractive.

If we were to take a look at home loan rates dating back to 1980, a span of nearly 30 years, the average monthly reported rate for a 30 Year Fixed Rate loan according to Freddie Mac was 9.07%. While the thought of a rate in the 9.0% range seems exorbitant today, today's rates were inconceivable prior to 2001…and especially in October 1981 when rates were a whopping 18.45%!

The chart below shows the average reported monthly interest rates since January 1980. This graph does not take into account the amounts paid to obtain these rates, which were as high as 2.6% in 1984, compared to 0.7% in 2009. The red line represents 7.00%, showing that rates below 7.00% were an abnormality prior to 2002.

The low rates we have seen this decade are largely attributable to the impact of the 9/11 bombing which launched global economies into a tailspin. The result was an aggressive lowering of rates from the Federal Reserve to stabilize the economy. The impact of low interest rates resulted in a rapidly and unsustainable appreciation in property values.

As property values started their return to "normal" we witnessed the plunge into our current recession. We also saw the Federal Reserve get into the mortgage backed securities (MBS) market, becoming the major buyer of MBS this year, driving rates to current and lower levels.

While rates may appear a little less attractive based on where they have been this year, do not let that cloud your judgment. Any home loan rate with a five as the first number followed by a decimal point is a fantastic rate, when all things are considered.

Just as Halloween Has Passed, So Will These Rates
In short, as the Federal Reserve begins to pull back their purchase of MBS, as was started in October, mortgage rates will rise. It is not inconceivable to believe we will see interest rates well above 6.00% at some point in 2010, in particular after March as the Fed is scheduled to wrap up its MBS purchase program on March 31, 2010. Regardless of where we have been, for those wanting a phenomenally low interest rate, acting sooner rather than later is the best decision.

Try These Numbers on for Size
For comparison sake, just to offer a little more perspective, if one were to look at borrowing $150,000 for 30 years, here are some principal and interest payments to consider. A rate of 5.25% would yield a monthly principal and interest payment of $828. The average interest rate of 9.07% since January of 1980 would yield a payment of $1,214 or nearly $400 higher. The highest interest rate of 18.45%, in effect in October 1981, would require a payment of $2,316, a whopping $1,488 a month more. Viewed from a different perspective, one could borrow $417,000 at 5.25% for $13 less a month.

Yes, admit it. We have become spoiled with the best home loan rates we have ever seen. Sure, everyone would love a 30 year fixed rate that starts with the number four. However, do not let rates off their lows deter you from making a decision that could save you thousands of dollars over the time you may have your next loan in effect.

What about Home Prices?
There is no shortage of data one can choose from to base an argument for whether or not home prices have bottomed. One thing is clear though; national data is only relevant for determining overall trends, not local realities. That said, the S&P Case-Shiller index is widely touted as an accurate assessment on both national and local levels for the areas they report on.

Indexed to 100 in January 2000, it is easy to see when home prices began their rise and how they became out of sorts with where they should have been. It's also easy to determine when home prices started their decline in mid-2006.

The chart below, showing a 20 city composite of home prices, also demonstrates what many like to point to in order to demonstrate that home prices have bottomed and are on their way to stabilization and appreciation. The last four months have each marked an increase in month over previous month comparisons; although still lower than the 12 month previous number that is often used for comparison.

The red line indicates the point that many are referencing as the bottom of home prices. Whether you are a buyer looking to take advantage of prices not seen since 2003 or a homeowner looking to refinance, this point of reference could be the trigger you need to make a decision to move forward. No one wants to pay more for a home than they could have and increasing values hopefully will make it possible for more people to rid themselves of higher priced loans.

Whether housing has made a bottom or not, first time home buyers (FTHB) have voted with their wallet, showing that home prices overall are now affordable and they have been buying en masse. Washington and the IRS, FTHBs have accounted for monthly sales volume as high as 50% or more of total sales this year.

What Now?
Whether you are looking to refinance or purchase a home, the best way to determine what you may be eligible for is to speak with a professional. They can assess your situation and help you make a decision that is in your best interest.

However, in order to make the best decision and take advantage of rates that historically will be viewed as the lowest we may see in our lifetime, sooner is better than later to pick up the phone. Regardless of what happens to home prices, we do know that interest rates are on the rise. The Federal Reserve will end their program for purchasing MBS next March putting pressure on home loan rates to rise.

Go on, pick up the phone, call your mortgage professional and say "Trick or Treat!" Sure, you might be a little late according to the holiday calendar but you just might find something to be thankful for.

First Time Homebuyer Tax Credit Extended!

Plus...A New Tax Credit for Certain Existing Home Owners!

It's official! President Obama has signed a bill thatt extends the tax credit for first-time homebuyers (FTHBs) into the first half of 2010. This program had been scheduled to expire on November 30, 2009.

In addition to extending the tax credit of up to $8,000 through June 30, 2010, the extension measure also opens up opportunities for others who are not buying a home for the first time.

So Who Gets What?
The program that has existed for FTHBs remains intact with the one exception that more people are now eligible based on an increase in the amount of income someone may now earn.

Additionally, the program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Deadlines
In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

Higher Income Caps in Effect
The amount of income someone can earn and qualify for the full amount of the credit has been increased.

Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible.

Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.

Maximum Purchase Price
Qualifying buyers may purchase a property with a maximum sales price of $800,000.

First-Time Homebuyer Tax Credit – Frequently Asked Questions
Here are answers to some commonly asked questions about the tax credit.

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.

As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.

How do I claim the credit?
For those taking advantage of the tax credit in 2009, 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).

Can you claim the tax credit in advance of purchasing a property?
No. The IRS has recently begun prosecuting people who 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, 2009, 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, 2006, through July 1, 2009.

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 for the FTHB tax credit if the spouse has owned a property anytime in the last three years?
No. However, the spouse may be eligible for the repeat buyer credit. 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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Sunday, 15 November 2009

BANK OWNED HOMES & SHORT SALES
PRESENT CHALLENGE TO ATLANTA REAL ESTATE RECOVERY

This year will likely be remembered in Atlanta real estate circles as a year of change and challenge.

Change for the better in that values have apparently bottomed out in our market area and are starting to rise, according to both major reporting sources. And change for the worse as the flood of bank-owned homes continues to poison otherwise healthy neighborhoods with ultra-low price sales and lowball purchases.

Selling these homes for whatever they can fetch may be the cure for the lenders who end up with them, but they result in dramatically lowered values for the surrounding neighborhood. And still there is no source of mortgage money for the many investors who would otherwise buy these homes at higher prices, but necessarily offer less for a cash transaction.

The new challenge is the gradual increase in lender's acceptance of short sales as a way of stemming the foreclosure tide.

In a typical short sale, an owner facing foreclosure agrees to sell his house in exchange for being released from the loan obligation. Receiving no other compensation, he simply walks away and avoids a foreclosure action. Simultaneously, an investor offers to buy the house from the lender, but at a much lower price than the mortgage balance.

The lender eats the loss, but avoids the unappetizing prospect of owning and marketing the vacant house for months on end. By limiting their loss, they actually save money in the long run. And lenders are finally beginning to warm up to this practice.

However, because these same lenders will not offer new financing to even well-qualified investors for these purchases, they often drive down the prices a cash investor can afford to pay. Once again, this challenges any thought of re-establishing property values in many Atlanta neighborhoods.

Adding salt to the real estate wound is the current appraisal practice of considering these distressed sales to be comparable transactions in establishing market value. Sellers everywhere are complaining that when they finally do get a buyer, their house often fails to be appraised for contract price, effectively killing the transaction.

Yes, there are promising signs in our current economic picture, and I believe Atlanta will once again be recognized as one of the most desirable places to live in the country. Our economic output seems to be growing, and interest rates are still at bargain levels. Much wealth that was lost has been restored on Wall Street.

But on Main Street, the twin enemies of homeowners are short sales and bank-owned home giveaways. These are the toxic assets our leaders in Washington need to be concerned about. These, and the lack of available mortgage funds, must be addressed before we can look for a full recovery of the housing market in many parts of the country, including metro Atlanta.