Tax Credits Extended and Expanded

Great news for home buyers, and for sellers, in a struggling residential real estate market in Warren County and elsewhere.

After several weeks of discussion, Congress has today passed bill HR3548, which extends the existing $8,000 First Time Buyer Tax Credit through to next April, and adds a $6,500 Tax Credit for some existing owners buying another home. The White House has confirmed that the President will sign it into law tomorrow (Friday, November 6).

In both cases, the credit is only available for purchase of a primary residence. Qualifying income levels have also been increased.

Here are the details:

First Time Buyer Tax Credit
- tax credit is 10% of purchase price, maximum $8,000
- applies to buyers who have not owned a home in the previous 3 years

Current Home Owners
- tax credit is 10% of purchase price, maximum $6,500
- applies to buyers who currently own a home, and have lived in it for at least 5 of the previous 8 years as a principal residence
- existing home does not have to be sold, but the new purchase must be for the primary residence

For Both Credits
- maximum qualifying income levels are $125,000 for single tax filers, and $225,000 for joint filers
- for purchase of primary residence only (not a second home or investment property)
- maximum purchase price $800,000
- must have a ratified contract for purchase by April 30, 2010
- must settle on the purchase by June 30, 2010
- for members of the military serving outside the US for at least 90 days, the tax credits will extend a further 12 months to June 30, 2011
- improved powers to the IRS for investigating possible fraudulent claims

While I see a big incentive here for first time buyers (and relief for those who were under pressure to close their purchases by November 30 under the existing deadline), I'm not convinced of the need for the limited credit for some existing homeowners, who don't need an incentive to buy, but rather need to get their current home sold in order to be able to move on and buy again.

Still, we need every bit of help we can get to bring buyers off the fence and stimulate the current market, and this new legislation is excellent news.

First Time Buyer Tax Credit Deadline

Time is running out if you wish to take advantage of the $8,000 First Time Buyer Tax Credit. The purchase must be completed by November 30,
which leaves only 74 days - that's barely 10 weeks - to get your mortgage finance in order, find the right home, get an accepted contract, and settle on the purchase.

While there are moves among members of Congress and lobbyists to extend the Credit into next year, and even to increase its scope, there is also plenty of opposition to the idea - so nothing can be relied upon, and the only sure way is to make sure you buy by November 30.

Further details can be seen on my website at http://taxcredit.chrisonline.net/.

If you need assistance in finding a home in or around the Front Royal area, or just want to talk through the First Time Buyer Tax Credit, please give me a call on (540) 671-1367.

Best Opportunities for Buyers are Now!

Heads up folks, the great "window of opportunity" may be about to close.

The past few months have presented buyers with a great chance to snap up bargain homes. All at once, we have seen:-

• falling home prices, back at least to 2003 levels
• record low mortgage rates encouraged by Government intervention
• the introduction of an $8,000 First Time Buyer Tax Credit

The result has been a significant increase in activity in the past couple of months, though this has been largely focused on the sub-$200,000 price range, and in particular on foreclosures which have accounted for over 2/3 of the sales so far this year in Warren County. This activity has brought the sub-$200,000 inventory to less than 7 months' supply, which is now a balanced market and no longer a seller's market in this price range.

But here's where things stand as we move firmly into the heat of the summer:-

Home prices appear to have bottomed, though many over priced homes on the market still have to come down to more realistic levels. However, buyers waiting to see a further fundamental drop in sale pricing levels are likely to wait in vain.

Mortgage interest rates may be rising. Over the last week of May, the government's sale of 10 year Treasury Bills (to help finance the stimulus) resulted in yields increasing by 1/2%, and mortgage rates, which are closely linked to 10 Year Treasuries, also increased by almost 1/2%. The market experts believe this is just the start of an inevitable steady rise in rates as a natural response to the huge supply of money into the market and the resultant threat of inflation down the line.

The Tax Credit will end! If you are a first time buyer (defined as someone who has not owned a home during the previous 3 years), you also need to be aware that you have to complete your purchase by November 30, 2009 to qualify for the First Time Buyer Tax Credit. A recent government announcement allows the credit to be "anticipated" and used towards the downpayment, but this still all has to be completed by November 30. That's less than 5 months, and that time soon disappears when you are going through the process of looking for and buying a home.

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So now is the time to act, before you are looking over your shoulder wishing you had done so earlier. I can help you find a home, and talk you through the process if you are not familiar with it. Here's how to start . . .

• browse for listings on the market at my home search
• read more about the First Time Buyer Tax Credit
• read more about foreclosures
• ask me for an up to date foreclosure list for Warren County.
• or just send me an email or call me on (540) 671-1367

There are Alternatives to Foreclosure

Many homeowners are struggling to pay the mortgage, or see a problem looming with a substantial increase in their mortgage payment as it re-sets. They may have borrowed unwisely, or just been unlucky with reduced income through losing a job or other reasons.

These homeowners may be quite prepared to sell their home to solve the problem, but can't do so because the value of their home is less than the amount they owe. They are "upside down" on their mortgage.

But most of them think that foreclosure is inevitable, and the only possible outcome.
Not so . . .

There are several reasons why you should try to avoid foreclosure if at all possible . . . not only does a foreclosure do long term and substantial damage to your credit, but a foreclosure on your credit history can affect present and future employment, and security clearances even at lower levels.

If you are in this position and facing foreclosure, don't assume that there is no alternative. The sooner you act, the greater the chance of working out a way forward. There are two main options to pursue, but note that they both require that you are genuinely suffering hardship and do not have the means to rectify the situation from your own resources.

Mortgage Modification. Approach your mortgage lender to see if they are able to modify your mortgage terms, by refinancing at lower interest rates or providing other temporary or longer-term relief. Don't assume they won't listen - lenders are increasingly aware of the benefits of helping to prevent foreclosure if they see the opportunity. Of course, the proposal must be viable. The government also announced a scheme a few weeks ago which, in certain cases, will compel lenders to modify mortgages, and in doing so provided a framework which others may wish to work with.

Short Sale. A short sale is the sale of a home where the net sale proceeds are insufficient to clear the mortgage(s), and the owner is unable to make up the shortfall from his own resources. The mortgage lender therefore cooperates with the sale and writes off the shortfall. Mortgage lenders are becoming very cooperative towards short sales, because if the only alternative is foreclosure, there are several reasons why they will lose less and benefit more from an agreed short sale. While a short sale will affect your credit, the impact is significantly less and for a shorter period than a foreclosure, and should not affect employment or security clearance issues.

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I have recently undertaken specialized training in the issues surrounding distressed property ownership, and have achieved the CDPE designation (Certified Distressed Property Expert). This leaves me very well placed to advise you and help you through these difficult times, and I encourage you to contact me to let me help you.

If you live in or around Warren County, VA, and would like to talk it through, please give me a call on (540) 671-1367 or send me an email with some contact points.

4% mortgage rates?

Great news for our ailing real estate market in Front Royal and Warren County. The Federal Reserve today announced that it is buying an additional $750 billion of mortgage-backed securities and agency debt, and $300 billion of longer term Treasury bonds - a total cash injection of $1.15 trillion, doubling its previous efforts in boosting the money supply.

The aim - and the pundits believe it will work - is to ease credit, and reduce interest rates for most borrowers, in particular mortgage borrowers. All being well we could see mortgage rates down to 4% or very close, a challenging target set by the government a couple of months ago.

The one question mark is whether the mortgage lenders will pass on the full benefit to the borrower. I hope so, and the belief is that they are likely to, due to political pressures especially on those banks that have received substantial (and cheap) TARP funds.

This is great news for home buyers - record low interest rates to take advantage of the very low house prices that are now available in the market. If you are a first time buyer, you may well also qualify for the 10% (max $8,000) tax credit. What a time to be in the market for a home!

If you've been thinking of buying, but sitting on the fence waiting, now may be just that window you have been waiting for. Give me a call or email me to see how I can help you to find the right home.

Market Update

We have been stuck in a range of around 25 to 30 sales per month for some time now in Front Royal/Warren County, but have seen the median sale price steadily fall due to the high level of foreclosures. Of the 27 sales in February, 22 (81%) were foreclosures. To put it another way, only 5 homes in regular private ownership sold in February, out of around 350 privately owned homes on the market. So far this year just 5 homes have sold for over $300k, and none over $400k.

The first chart shows active listings, sales, and months supply over the past 3 years. Click on the chart for a larger image.

The second chart illustrates the falling median sale price (green) and the Days on Market (purple) for homes that sold. Click on the chart for a larger image.

Confidence remains the principal obstacle to an improving market, and much of that depends on the general economy over the coming months. However there is no doubt that an improvement in activity will not bring about an increase in prices for a long time (my guess is 3 or 4 years). Why? Because there is still a significant over-supply of homes on the market (nearly 16 months supply), along with a large reserve of wannabe sellers waiting in the wings for a better opportunity to sell, who have either given up over the past 12 months, or who haven't yet put their home on the market.

Pricing of listings remains absolutely paramount. Most of the foreclosure companies get it right, which is why their homes sell. Most private sellers are still getting it wrong, as they cannot come to terms with the price necessary to achieve a sale.

Government Assistance for Homeowners

The government yesterday announced their long-anticipated initiative called the Homeowner Affordability and Stability Plan. If you are interested, click the link to read the White House Fact Sheet. The plan aims to:
a) stem the flow of foreclosures with a loan modification plan
b) help those who owe more than their home is worth, to refinance
c) ensure low mortgage rates for the foreseeable future

The two main problems with the initiative are that it only addresses “conforming” mortgages, and while it will no doubt help many deserving families, it will also reward many others who have in the past borrowed unwisely or beyond their means. It is already causing a lot of resentment from among the majority of homeowners who bought wisely and within their means, and pay their mortgage every month.

As always, the devil will be in the detail, and we will learn much more when formal Guidelines to Lenders are issued March 4. Meantime, here are the main features of the initiative:

Mortgage Modification Plan (expected to cover 3 to 4 million borrowers)
- owner-occupiers only
- conforming loans only, where repayments are more than 31% of gross income
- mortgage may be up to date, or in arrears
- overall, repayments will be reduced to 31% of gross income by reducing interest rate (partially subsidized by the government)
- interest rate reduction for 5 years, after which it will be phased back to “regular rate”
- incentive to the borrower of $1,000 reduction in principal for each year that repayments are made on time, for up to 5 years
- also incentives to loan servicers
- debt counseling a condition, if current total debt servicing is 55% or more of monthly income
- participation by lenders is voluntary, but compulsory for those who receive TARP money
- lenders may also achieve the repayment reductions by reducing the amount owed, but this seems less likely to be done

Refinance Assistance (expected to cover 4 to 5 million borrowers)
- owner-occupiers only, with conforming loans
- first mortgage cannot exceed 105% of current value of the home
- there can be an existing second mortgage, but that lender will need to agree to remain “second in line”
- must have satisfactory payment record, and payments must be current for the 3 months prior to entering the scheme
- new mortgage must be a fixed rate over 15 or 30 years, with no prepayment penalties or balloon repayment
- the portion of the new mortgage in excess of the home’s current value must remain unsecured

Additional Support for Freddie Mac and Fannie Mae
- government doubling its stake from $200bn to $400bn
- designed to increase confidence and promote stability and liquidity
- should ensure sustained low mortgage rates for the foreseeable future

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There are a lot of questions unanswered, and I am sure the pundits will be picking everything apart over the coming days. But here are my initial thoughts:

- the concept that this "rewards bad behavior" has to be balanced with the overall benefits to be gained by reducing foreclosures - if that is achieved. Foreclosures devalue all homes in a neighborhood, so this will hopefully provide some benefits to everyone.

- a "conforming loan" was by definiton no more than 80% of the value of the home when it was bought (or when refinanced). The limitation that the loan must now be no more than 105% of the current value would work if house prices had only dropped by some 25%. But in Warren County, Virginia, we have seen sharper declines than that. There will be a lot of people who bought at the peak, who will not meet these criteria.

- we have seen a lot of inconsistency between lenders in how they handle short sales or potential foreclosures. Some won't talk until the mortgage is 3 months in arrears (encouraging owners to not pay!), others won't talk until the home has been on the market for at least 3 months. My hope is that the "Guidelines to Lenders" will provide a standard set of procedures which may encourage all lenders to behave more consistently even with loans that fall outside those guidelines. We'll see . . .

Tax Credit - Final Details (Apparently!)

After some confusion and mis-reporting, the final details of the new tax credit have been released. Note that although this is now the "agreed compromise" by all sides of Congress, it has yet to be finally voted on, and then signed off by the President.

If you want to read the full text of the official press release for the Stimulus Package, it is here (the part relating to the home buyer credit is on page 2): American Recovery & Reinvestment Act of 2009.

But in a nutshell, here are the basics - very different from the original broad-ranging $15k credit added to the bill by the Senate:

- a refundable tax credit of 10% of purchase price or $8,000, whichever is less (which I believe means that if the tax payer's tax liability is insufficient, then a refund will be issued for the balance)
- for first time home buyers only (defined as those who have not owned a home during the previous 3 years)
- purchases between January 1, 2009, and November 30, 2009
- NOT repayable unless home is sold within 3 years
- credit reduced for couples earning over $150k and single filers earning over $75k

Effectively, the existing $7,500 first time buyer credit (due to expire June 30) has been increased to $8,000, extended to November 30, and converted from a 15 year interst-free loan, into a genuine non-repayable credit (unless you sell within 3 years).

Personally, I don't think this is enough to provide the stimulus we were looking for in the housing market. But at least if a first time buyer wishes to take advantage, they now need to get off the fence. We will see . . .

New homebuyer tax credit cut in half

There is good news and bad news from the "compromise agreement" for the stimulus package finalized yesterday in Congress.

The good news - a tax credit for home buyers at 10% of purchase price is part of the package. The bad news - the $15,000 maximum proposed by the Senate has been reduced to $7,500. Better than a kick in the pants, but maybe not the jump start that we were hoping for.

This is NOT the $7,500 credit already in place from last year, due to expire this coming July 1. That was only for first time buyers, and was effectively a 15 year interest-free loan. This new credit will be available to all buyers of a primary residence, and will not be repayable unless the property is sold within 2 years. Full details should be available soon.

$15,000 tax credit proposed

Could this be what we've been waiting for? Proposals added to the stimulus package currently going through Congress are for a tax credit for ALL buyers of a primary residence, equal to the lower of $15,000 or 10% of the purchase price.

This would be great news for both buyers and sellers, and may be just what we need, on top of the record low mortgage rates, to put a bit of zip back into the very slow real estate market in Warren County. Details could still undergo changes as part of the politics of the process, but here are the bare bones of the proposal as I understand it:

- direct tax credit of 10% of purchase price or $15,000, whichever is less
- for purchase of primary residence only
- must be purchased within 12 months of the legislation's enactment
- NOT restricted to income levels - all buyers qualify
- NOT repayable unless home is sold within 2 years
- can be claimed on 2008 tax return
- if tax liability is insufficient to absorb the full credit, the credit can be split in two and taken over two tax years

According to Bloomberg, the credit would effectively wipe out the annual tax bill for a "typical" family of four with household income of $122,000.

This legislation will replace last year's $7,500 credit (still good for purchases before July 1, 2009), which was only for first time buyers with income below $150,000, and was effectively a 15 year interest-free loan rather than an out and out credit.

We'll hopefully have this all confirmed and know fuller details over the next week or so. Meantime, I don't believe it will be the answer to all of our problems, but I do see it as a very positive step which has every prospect of helping to stimulate the housing market.