Harvard Study Reports on Recent Trends in Home Equity and Housing Stock

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Harvard Study Reports on Recent Trends in Home Equity and Housing Stock

Spending on home improvements and repairs totaled $275 billion in 2011, down 4 percent from 2009 levels and some 16 percent below the market peak in 2007. Loss of home equity with the onset of the housing crash contributed to the decline in home repairs, according to a new study by the Harvard Joint Center for Housing Studies.

With the decline in spending on discretionary projects, home improvement expenditures per owner in 2011 stood well below levels averaged over the previous decade. In fact, per-owner spending fell from about 25 percent above the decade average in 2007 to about 10 percent below that level in 2011.

Near the top of the list of causes for the decline in home improvement spending is the loss of home equity resulting from the unprecedented plunge in house prices during the housing crash. By 2011, however, aggregate home equity had dropped by half to $6.5 trillion, or $87,000 per owner.

In 2011, the Harvard study found that more than a million distressed properties came back onto the housing market, including 760,000 lender-owned units and 300,000 short sales. Lenders improved about a third of their foreclosed properties prior to sale, with an average expenditure of about $6,500 per unit. About 60 percent of owner-occupant purchasers undertook improvements, averaging $11,100, while investors spent even more per unit on average than either lenders or owner-occupants, $15,600.

The Harvard study also noted the role investors are playing turning foreclosures into affordable rentals. Some 4.4 million formerly owner-occupied units were shifted to the rental market between 2007 and 2011. Another 4.6 million were vacant in 2011 and may become part of the rental stock as demand continues to grow.

The unexpected investor expenditures to improve the quality of America’s single family housing stock came as the nation began to experience what the Harvard study calls an “uptick” in the deterioration of housing quality at the outset of the housing crash. In 1997, 4.4 percent of owner-occupied homes were considered inadequate, the study said. By 2007, these same units accounted for almost 8 percent of homes that were no longer owner-occupied (i.e., stood vacant or were converted to rental or nonresidential uses), indicating their increasing deterioration. Even more telling is that these inadequate units accounted for almost 17 percent of the homes that were demolished within the decade.

The study also tracked lender spending to restore REO properties for sale. During the housing downturn, the plunge in house prices precipitated a wave of foreclosures in many metropolitan areas. The foreclosure process often takes years to complete, wreaking havoc on mothballed and backlogged properties. But once foreclosure is completed, banks and other institutions typically invest in repairs to get the homes ready for sale and back into active use.

According to Joint Center estimates, lender expenditures on distressed properties amounted to $1.7 billion in 2011, with Atlanta, Las Vegas, Orlando, Phoenix, and Riverside posting the highest shares of spending. Local housing market conditions dictate the average amount that banks and institutions expend to prepare distressed properties for the market. In 2011, lenders invested considerably more per property in higher-priced markets such as Denver, Los Angeles, Portland, Raleigh, and Washington, DC.

In large measure, this disparity reflects the fact that properties in these markets often need to be in better condition to sell at a competitive price within a reasonable amount of time.

“Renovating foreclosed or abandoned homes benefits the entire neighborhood. Joint Center research has shown that home prices in neighborhoods with higher levels of improvement spending appreciate more rapidly, explaining why investing in blighted neighborhoods has been a national priority in dealing with the foreclosure crisis,” said the report.

For more information and full article visit www.realestateeconomywatch.com [1].

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New mortgage rules could crimp lending



<a href="http://www.shutterstock.com/pic.mhtml?id=97135283" target="_blank">Bank vault</a> image via Shutterstock.

New mortgage rules could crimp lending

Bank vault image via Shutterstock.

Though the new “ability to pay” (aka Qualified Mortgage or QM) rules  released last week by the Consumer Financial Protection Bureau drew extensive media coverage, there are still widespread misunderstandings about how they’ll work in practice. That probably shouldn’t be a surprise since the regulations weighed in at a chunky 804 pages.

So what are the rules going to mean for real estate professionals and their clients? Here’s a quick overview of a few issues of concern. Start with the potential impacts on underwriting during 2013, well before they officially take effect next January.

Will lenders finally begin loosening up a little? After all, since 2010 they’ve been telling us that one of the key reasons for their ultra-strict underwriting is the “regulatory uncertainty” flowing out of the Dodd-Frank financial reform legislation — the risk that federal agencies will impose new mortgage rules that open banks up to costly lawsuits by defaulting consumers.

Well, now they’ve got their once-feared regulation, and it creates a broad “safe harbor” that essentially shields them from such litigation nightmares if they simply follow the guidelines. Will they loosen up?

The day the QM rules were released, I asked David Stevens — chairman and president of the Mortgage Bankers Association, former FHA commissioner and former head of Long & Foster Real Estate, the largest independent realty brokerage in the U.S. — that very question.

Stevens could not have been more emphatic: ” I completely disagree” that the QM rules will ease any standards, he said. And in fact, “I think on the margins, things will be a tad tighter.”

What? Why tighter? Just about all lenders already follow the QM basics — full documentation of applicant’s income, assets, employment, credit history — so why would lenders even think about getting more restrictive?

Because, said Stevens, the rules also create new quality control requirements for lenders that add to costs, as well potentially severe financial risks if they make a mistake and approve a loan outside the QM parameters for safe harbor treatment.

Plus the Dodd-Frank law limits total points and fees for qualified mortgages at 3 percent of the loan amount, including fees paid both by the borrower and lenders to loan officers. That could negatively impact large lenders, home builders and realty brokerages who use affiliated companies for certain loan-related services — title, settlement, appraisal among others. Now, they’ll somehow have to cram originator/ broker compensation and the affiliates’ fees into deals to pass the 3 percent test — if they can.

Though the CFPB says it’s open to suggestions on how to handle computation of the 3 percent cap, the entire issue is troubling to wholesale lenders and big banks that own highly-profitable affiliates. It does nothing to encourage them to loosen up on anything. To the contrary, under current practices, they don’t have to worry about this stuff at all.

So expect no underwriting favors for your buyers this year. Lenders aren’t in the mood.

Also worrisome, according to Stevens, is the rule’s treatment of jumbo mortgages, which are crucial financing tools for buyers in higher-cost market such as California, Hawaii, metropolitan Washington D.C., New York and parts of New England.

Under the CFPB regulations, to achieve QM safe harbor protection, a loan generally must not have a “back end” total debt-to-income (DTI) ratio in excess of 43 percent. Stevens estimates that 22 percent to 25 percent of all jumbos — loans that exceed the Fannie Mae-Freddie Mac conventional loan limits — have DTIs beyond that cap, and many others come with interest-only payment terms to limit borrowers’ monthly outlays.

But the Dodd-Frank law, and the new rules, prohibit interest-only features in loans that get the QM stamp of approval. Since the jumbo market lacks the strong secondary market support of Fannie, Freddie and Ginnie Mae, lenders are expected to avoid all non-QM loans. As a result, buyers in upper-cost areas can expect worse treatment looking ahead: Even larger down payments and much more rigorous underwriting scrutiny.

Already, California’s U.S. senators, Barbara Boxer and Dianne Feinstein, have written to the CFPB warning that its rule, at least in current form, “would have a disproportionate impact on California and other high cost states, potentially limiting access to affordable credit even more.” They asked CFPB director Richard Cordray to review the jumbo situation and try to lighten up on the harsh treatment.

At least for the near future, there will be some flexibility possible for the large numbers of prospective home buyers who cannot meet the mandatory 43 percent DTI test. As long as their loans can get green lights from the automated underwriting systems of Fannie Mae (Desktop Underwriter), Freddie Mac (Loan Prospector), FHA’s “Total” overlay underwriting system or from the VA, they will be eligible for QM status even if their DTI’s exceed the 43 percent limit.

This will continue to be the case for as long as Fannie and Freddie remain in conservatorship — but no longer than seven years — or until FHA and VA adopt their own QM rules.

Since FHA and VA loans frequently have back-end DTIs above 43 percent, this will keep the door open to some, but not all, borrowers who need special considerations on credit defects and other issues in their applications. However, since automated underwriting approval will be required, manual underwriting may no longer get them in the door.

Some other provisions in the rules that could affect your business:

Seller-financed notes and mortgages, which can provide creative solutions to a wide variety of buyer incapacities, will not be affected by the federal QM regulations at all. There will be no restrictions on the terms, rates or payment features that home sellers can offer purchasers who might not be a candidate for a bank loan. However, sellers who make more than five such notes during the course of a year will not qualify for this exemption.

Subprime loans in the QM era? Not a chance from major financial institutions. Those folks will either have to find a way to qualify under FHA’s rules — which may be increasingly unlikely since FHA is toughening, not relaxing, credit standards and raising fees — or just not become home buyers at all.

Fiscal cliff bill extends real estate tax breaks




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Fiscal cliff bill extends real estate tax breaks


The tax law passed by Congress this week to avert the “fiscal cliff” turned out pretty well for the real estate industry.

First, the Mortgage Forgiveness Debt Relief Act of 2007, which was scheduled to expire on Dec. 31, 2012, has been extended through the end of 2013.

This means that homeowners who experience a debt reduction through mortgage principal forgiveness or a short sale of their principal residence during 2013 may exclude up to $2 million of forgiven debt from their taxable income.

Had this law not been extended, income tax would have had to be paid on such forgiven debt — making short sales and loan modifications less attractive to some distressed homeowners than foreclosure and bankruptcy.

Second, the fiscal cliff deal brings back from the dead the deduction for mortgage insurance premiums. This deduction expired at the end of 2011, but has now been retroactively extended for all of 2012 as well as 2013.

Taxpayers with adjusted gross incomes (AGI) of less than $100,000 per year can deduct as an itemized deduction all of their mortgage insurance premiums.

The deduction is phased out ratably by 10 percent for each $1,000 by which the taxpayer’s AGI exceeds $100,000. Thus, the deduction is unavailable for taxpayers with AGIs over $110,000.

The deduction applies to private mortgage insurance premiums as well as mortgage insurance provided by the FHA, the Department of Veterans Affairs, and the Rural Housing Service.

Third, the home mortgage interest deduction (the “MID”) was left largely untouched — for the moment, at least. Some had feared that the MID might be substantially reduced, an option that remains on the table as lawmakers prepare for a broader debate over the shape of the tax code that will take place in coming months.

Although the MID is intact for now, many high-income taxpayers will see some reduction in the value of their itemized deductions, including the MID. That’s because the fiscal cliff bill brings back the “Pease limitation,” which had expired in 2009. This provision reduces a taxpayer’s itemized deductions by 3 percent of the amount his or her AGI exceeds a threshold amount.

Under the new law, the Pease thresholds are $300,000 for married taxpayers filing jointly, and $250,000 for single taxpayers.

So a married couple with an AGI of $400,000 and $50,000 in itemized deductions (including home mortgage interest), would be $100,000 over the threshold. Because 3 percent of $100,000 equals $3,000, the couple’s itemized deductions would be reduced from $50,000 to $47,000. The couple end up with $3,000 more in taxable income, which at their income level is taxed at a 33 percent rate. They end up paying $999 in extra taxes.

No matter how high a taxpayer’s AGI, the Pease reduction cannot exceed 80 percent of the amount of itemized deductions otherwise allowable for the year.

But this still means that a very high-income homeowner could still lose up to 80 percent of his or her itemized deductions for home mortgage interest, state and local income and property taxes, and charitable contributions.

Finally, in a boon to all homeowners, the $500 credit for various energy-saving improvements to a principal residence has been reinstated — it had expired at the end of 2011. The fiscal cliff law brings it back for 2012 and 2013.                                                                                               Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor,” and “Working with Independent Contractors.” He welcomes your questions for this weekly column.

November Existing-Home Sales and Prices Maintain Uptrend

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November Existing-Home Sales and Prices Maintain Uptrend

Posted By Paige On January 2, 2013 @ 4:22 pm In Business Outlook,Finance and Economy,Real Estate News,Real Estate Trends,Today’s Marketplace |

Existing-home sales continued to improve in November with low inventory supply pressuring home prices, according to the National Association of REALTORS®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 5.9 percent to a seasonally adjusted annual rate of 5.04 million in November from a downwardly revised 4.76 million in October, and are 14.5 percent higher than the 4.40 million-unit pace in November 2011. Sales are at the highest level since November 2009 when the annual pace spiked at 5.44 million.

Lawrence Yun, NAR chief economist, says there is healthy market demand. “Momentum continues to build in the housing market from growing jobs and a bursting out of household formation,” he notes. “With lower rental vacancy rates and rising rents, combined with still historically favorable affordability conditions, more people are buying homes. Areas impacted by Hurricane Sandy show storm-related disruptions but overall activity in the Northeast is up, offset by gains in unaffected areas.”

The national median existing-home price for all housing types was $180,600 in November, up 10.1 percent from November 2011. This is the ninth consecutive monthly year-over-year price gain, which last occurred from September 2005 to May 2006.

Distressed homes– foreclosures and short sales sold at deep discounts – accounted for 22 percent of November sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in October and 29 percent in November 2011. Foreclosures sold for an average discount of 20 percent below market value in November, while short sales were discounted 16 percent.

“The market share of distressed property sales will fall into the teens next year based on a diminishing number of seriously delinquent mortgages,” Yun says.

Total housing inventory at the end of November fell 3.8 percent to 2.03 million existing homes available for sale, which represents a 4.8-month supply4 at the current sales pace; it was 5.3 months in October, and is the lowest housing supply since September of 2005 when it was 4.6 months.

Listed inventory is 22.5 percent below a year ago when there was a 7.1-month supply. Raw unsold inventory is now at the lowest level since December 2001 when there were 1.89 million homes on the market.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 3.35 percent in November from 3.38 percent in October; the rate was 3.99 percent in November 2011.

NAR President Gary Thomas says there’s been speculation of a rise in short sales before the end of the year with pending expiration of the Mortgage Forgiveness Debt Relief Act. “However, there’s been no movement in short sales, their market share is staying in a narrow range, and they’re still taking much longer to sell – typically three months,” he says.

“The fact remains it is extremely difficult to expedite a short sale, and banks’ response to client urgency is only starting to improve. However, we’re hopeful that the act will be extended before it expires on December 31 so sellers don’t have to pay taxes on forgiven mortgage debt, which would be unfairly treated as income for owners who are selling under duress,” Thomas notes.

The median time on market for all homes was 70 days in November, slightly below 71 days in October, but is 28.6 percent below 98 days in November 2011. Thirty-two percent of homes sold in November were on the market for less than a month, while 20 percent were on the market for six months or longer; these findings are unchanged from October.

First-time buyers accounted for 30 percent of purchases in November, down from 31 percent in October and 35 percent in November 2011.

All-cash sales were at 30 percent of transactions in November, up slightly from 29 percent in October and 28 percent in November 2011. Investors, who account for most cash sales, purchased 19 percent of homes in November, little changed from 20 percent in October; they were 19 percent in November 2011.

Single-family home sales rose 5.5 percent to a seasonally adjusted annual rate of 4.44 million in November from 4.21 million in October, and are 12.4 percent higher than the 3.95 million-unit level in November 2011. The median existing single-family home price was $180,600 in November, up 10.1 percent from a year ago.

Existing condominium and co-op sales jumped 9.1 percent to an annualized level of 600,000 in November from 550,000 in October, and are 33.3 percent above the 450,000-unit pace a year ago. The median existing condo price was $181,000 in November, which is 10.6 percent higher than November 2011.

Regionally, existing-home sales in the Northeast rose 6.9 percent to an annual rate of 620,000 in November and are 14.8 percent above November 2011. The median price in the Northeast was $232,900, down 2.0 percent from a year ago.

Existing-home sales in the Midwest increased 7.2 percent in November to a pace of 1.19 million and are 21.4 percent higher than a year ago. The median price in the Midwest was $141,600, which is 7.0 percent above November 2011.

In the South, existing-home sales rose 7.9 percent to an annual level of 2.04 million in November and are 17.2 percent above November 2011. The median price in the South was $157,400, up 10.5 percent from a year ago.

Existing-home sales in the West rose 0.8 percent a pace of 1.19 million in November and are 4.4 percent higher than a year ago. With ongoing inventory constraints, the median price in the West was $248,300, which is 23.9 percent above November 2011.

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Fiscal Cliff Bill

‘Fiscal cliff’ bill addresses some key housing issues

Battle over mortgage interest deduction still to come


Inman News®

<a href="http://www.shutterstock.com/pic.mhtml?id=113019124" target="_blank">The U.S. Capitol</a> image via Shutterstock.The U.S. Capitol image via Shutterstock.

When the monthlong congressional game of chicken known as the “fiscal cliff” ended late last night in the House of Representatives, housing and real estate emerged as winners on most key issues.

The Senate bill that finally passed the House by a 259-167 vote extended a number of federal tax code provisions that are important to homebuyers, sellers, builders and real estate professionals.

The bill also made permanent the Bush-era reduced tax brackets for all but the highest income earners in the country, along with a permanent “patch” to the increasingly troublesome alternative minimum tax (AMT) that threatened millions of middle-income homeowners with higher taxes.

Here’s a quick overview of what the legislation means for housing:

Mortgage Forgiveness Debt Relief extended through 2013

For huge numbers of financially distressed owners of homes with underwater mortgages, this was the biggest issue in the entire fiscal cliff debate. The mortgage debt relief provisions in the tax code, first enacted in 2007, expired at midnight Dec. 31.

Had Congress not acted, the tax code would have reverted to its pre-2007 treatment of mortgage principal reductions or cancellations by lenders, whether through loan modifications, short sales, deeds-in-lieu or foreclosures: All principal balances written off would be treated as ordinary income to the homeowners who received them.

For illustration, if a lender wrote off $100,000 of debt to facilitate a short sale, the seller would be taxed on that $100,000 at regular marginal rates, just as if he or she had earned it as salary.

A return to taxation of principal reductions would have disrupted short sales — a growing segment of the home real estate market — in 2013, and almost certainly would have encouraged more distressed owners to opt for foreclosure and bankruptcy.

Deduction of mortgage insurance premiums

The bill retroactively extended this benefit to cover all of 2012, plus continues it through 2013. Qualified borrowers who pay private mortgage insurance premiums or guarantee fees on conventional, low down payment home loans, FHA, VA and Rural Housing mortgages will be able to write off those premiums along with their mortgage interest on federal tax returns. The retroactive feature is crucial because Congress had allowed this deduction to lapse at the end of 2011. There are limitations, however: The write-off is available only to borrowers who have an adjusted gross income below $110,000.

Tax credits for energy-efficiency home improvements

This benefit provides modest tax credits of $200 to $500 for owners who install energy-efficient windows, insulation and other upgrades designed to cut energy consumption. The bill covers improvements made during 2012 and 2013.

Tax credits for new energy-efficient new houses

This allows builders and contractors to claim a $2,000 tax credit on new homes constructed in 2012 and 2013 that meet federally specified energy-conservation standards. The bill also extends credits for U.S.-based manufacturers of energy-efficient refrigerators, clothes washers and dishwashers. As with other energy-related tax provisions, this had expired last year and will now be continued through 2013.

So what’s negative in the fiscal cliff compromise bill for real estate?

Not a whole lot for homeowners who aren’t in the highest income brackets. But for those who are, there are provisions that likely will inflict some pain.

Start with marginal tax rates and capital gains. If you earn $400,000 or more as a single filer or $450,000 as a joint filer, your new marginal federal tax rate is 39.6 percent.

You also get hit with a 20 percent rate on long-term capital gains, such as those from investment real estate and home sales that rack up gains beyond the $250,000/$500,000 thresholds.

Also, the new “Obamacare” 3.8 percent surcharge on certain investment income, which went into effect Jan. 1, could raise effective rates on capital gains for upper bracket households to 23.8 percent. As a result, some investors in rental property and commercial real estate may begin looking again to Section 1031 tax-deferred exchanges to hang onto their profits.

For taxpayers in the 33 percent, 28 percent and lower marginal tax brackets, capital gains will continue to be taxed at 15 percent.

Perhaps the crucial question to ask about the new legislation is: What could have been in the fiscal cliff compromise package affecting real estate but wasn’t included? That’s easy: There are none of the “grand bargain” deduction limitations on mortgage interest and property taxes that had been proposed by tax system reform proponents.

But don’t assume those proposals are moribund. Quite to the contrary, they are likely to arise again this spring and summer, when broader scale debates over the shape of the tax code get under way. Once that process starts, watch out: Home real estate tax preferences like the “MID” will be front and center on the chopping block.