The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers. To qualify for the credit, a home must be purchased between April 9, 2008 and before July 1, 2009, and buyers must meet income restrictions. This tax credit combined with still relatively-low interest rates and house prices at a 5-year low make now a great time to enter the real estate market for the first time!
Sphere: Related ContentPortland, Oregon is regarded as one of the greenest cities in America. As a Portland real estate professional, new home buyers often ask, “What’s available for environmentally friendly homes?” To my surprise, green architecture doesn’t seem to be catching on very quickly with Oregon homes. Yes, there are a few projects popping up here and there, but the majority of newly built homes for sale are following many of the same old environmentally unfriendly guidelines.
My response to Portland, Oregon residents and new home buyers is this, “Get into the house you like and make environmentally friendly improvements on your own.” When your financial situation is right, pull some equity out of your home to make some green improvements. Why wait a decade for Portland real estate builders to go green, when you can get started with your current home? The following are some easy tips for making your home and lifestyle green:
According to this article, due to the combination of fewer new houses being built with an increase in the number of buyers who can afford to buy one (lower prices = greater affordability), within three years we should see a bounce back of the housing market. Lower prices create greater demand which creates higher prices. Good ol' supply & demand - never fails.
On the other hand interest rates are steadily increasing (up to about 6.25% for a 30 year fixed today) and if that continues, this forecast might be a bit optimistic. (So as to not lose perspective, rates were 6.125% a couple of years ago - we just had a nice dip this past winter.) As federal attention shifts to bringing down the price of oil, the bond market could continue to suffer and who knows how high rates will go. The increase in rates could offset the attractiveness of home ownership for buyers in certain areas so we'll see how things go.
In the meantime, here is an interesting analysis of what has been happening in Portland's market. We haven't suffered as badly as some, with any luck we'll snap out of it sooner too!
The New York Times published a user-friendly graph that measures if/when it's better to buy rather than rent.
Sphere: Related ContentEffective June 1st PMI, a major mortgage insurance company, has added to its list of distressed housing market areas. They have also divided them into "Level 1" and "Level 2" segments. Given that the options for obtaining combination first/second mortgages to avoid large down payments have all but disappeared, how much mortgage insurance companies are willing to insure is becoming increasingly important for those seeking to purchase or refinance with minimal down payment/equity.
Areas listed under Level 1 are eligible for mortgage insurance up to a 95% loan-to-value ratio.
"Level 1 is for those... areas where we anticipate the downturn to be less severe based on underlying fundamentals, including unemployment trends, home price volatility, etc."
Areas listed under Level 2 are eligible for mortgage insurance once the loan-to-value has been REDUCED by 5% of the maximum allowable for the particular loan program being used. And in any event, the loan-to-value cannot exceed 90%.
"Level 2 is for those... areas that are projected to continue to experience more significant economic and/or housing downturns and are expected to take longer to improve."
Oregon and Washington state are not largely affected by this yet, with one exception. Bend, Oregon is on the Level 2 list. So however bleak it looks to the average person driving around Portland seeing "For Sale" signs on seemingly every third house, PMI doesn't think we have it so bad -- we'll see how it goes over the next several months.
Richard Florida's newest book offers an analysis of housing markets and suggests that (perhaps not today, but in the near future) Portland's real estate forecast is sound.
A local Real Estate Agent wrote an interesting review of it. I especially enjoyed his take on the book because he included one of my favorite sayings -- "the only two things that people don't like to buy on sale are real estate and stocks." Particularly relevant in this market given that the population of Portland is expected to increase by about a million people over the next decade.
With the majority of economists now speculating that rates will either go up or perhaps stay the same for the foreseeable future, anyone who has been thinking about refinancing will probably want to look into it now. We're not expert economists here, but rates have increased a little bit every day since Bernanke lowered the discount rate last week. Below is a calculator to help you determine if a refinance is a good idea for you.
Also, for potential homebuyers, this will give you an idea of what you can afford. Be sure to use the "mortgage" function rather than "loan" function so you'll have the most accurate total payment including property taxes and homeowners' insurance.
The Lake Oswego Review reported some interesting data on Lake Oswego's real estate market last week. According to this analysis property values are increasing even if potential home buyers and sellers are exercising caution due to the national news.
One source of confusion in this article is a local realtor states that lenders are more restrictive (which is true) and that "down payments are more in the 25 to 30 percent range."
I'm trying to think if I've ever seen a buyer who had 25 to 30 percent to put down on a house. Maybe once or twice over the past 15 years. Anyway, that statement just is not true.
Three to five percent down (depending on how expensive the house is) is becoming the norm now -- so would-be homebuyers don't need to panic. The vast majority of "tightening up" has been the elimination of Zero-down loans and Stated-Income loans.
This week David Leonhardt wrote a really excellent explanation of how the relatively miniscule segment of the mortgage industry known as sub-prime lending has managed to turn our entire economy on its ear.
“It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.”
Of course we all know what happened next. Too many people received too many loans that they couldn’t repay. Which leaves us in our current dilemma:
“So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are.”
“The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears.”
But fear not, there is at least one optimistic voice in the roaring den.
“The best way to overcome fear is to look at the long run. The typical homebuyer keeps a home for 10 years or more, so there is time for those who bought in 2005 and 2006 to weather the current decline in prices. Those who bought at the top are unlikely to see any windfalls from house appreciation, but they will not necessarily suffer from buyers’ remorse. Owning a home has its advantages: the deduction on mortgage interest is substantial and too much of a sacred cow to ever be repealed, and there is a certain security and satisfaction to owning your own home.”
And that’s exactly what we’ve been saying all along. When the stock market hits a blip no one comes out saying that as a rule, it’s smarter to bury your money in the back yard than to invest it. They recognize that these things rise and fall and suggest the best ways to make money or at least not lose your shirt while waiting out the downturn. The same is true for real estate. Right now is not a good time to sell if you don’t have to, but it’s a good time to buy if you can.
Last week the Standard & Poors/Case-Schiller Home Price Index figures indicated that three of the twenty metropolitan areas tracked experienced positive (if moderate) growth. Namely: Portland, Seattle and Charlotte.
Portland is only one of three MSAs still experiencing positive annual growth rates. Portland has been holding strong with median home prices increasing month after month. Fourth quarter 2007 saw a 1.8% increase to $290,500 from $285,400 a year prior. “We have a positive economic atmosphere in our area. The current median sold price is up, due to a greater ratio of sales on the higher end,” says Jim Homolka, President of RE/MAX Equity Group, Inc.
I don't know that this is GREAT news, but we'll take it and hope for the best.
Right after I explained all of the zero-down financing options available to would-be homebuyers last week, I was greeted Monday morning by several memos from mortgage insurance companies effectively stating that conventional 100% loans are probably going the way of the dinosaur soon.
To back up, all conventional loan applicants who do not have a 20% down payment are required to have mortgage insurance. When you apply for the loan, the lender approves the loan subject to the mortgage insurance company approving your loan as well, thereby mitigating the lender’s risk.
For a while now, several markets have been listed by mortgage insurance companies as “declining.” Currently all of California, Nevada and Arizona are on that list. For a while Bend and Medford, Oregon have been on these lists too. But the latest list also includes the Portland metropolitan area (meaning Clark County, Washington as well). Seattle is still hanging tough (though Tacoma is on some lists).
But just to keep things confusing, every mortgage insurance company puts out its own list, and Portland isn’t on all of them. Neither is Bend or Medford. (Sorry to those it affects, but NV, CA and AZ are on all of them.)
The purpose for these lists is that mortgage insurance companies will no longer insure properties in declining markets to 100%. So as of today, we may be able to find a no-down conventional loan for someone (most lenders are still doing them, but as I said, subject to being able to insure them), but for how long depends on when the remaining mortgage insurance companies decide we’re in a declining market. Soon it might be that people will need at least a 3% down payment for conventional financing.
The good news is, HUD has thus far been unable to ban down-payment-assistance programs on FHA loans. Even better, FHA loan limits are expected to increase by as much as 30%. So I have a feeling we’re going to be doing a lot of government loans in the coming months.
According to this article it’s a very bad time for young people to buy a home. I’m not sure under what investment strategy it’s considered best to buy when prices are high rather than low, but I’ll just let that absurd tidbit in this article go for now.
What I do want to address is the ridiculous notion that first time home buyers have to put 10% down. Entirely untrue. Here’s a short list of options for first time home buyers with NO down payment. As in ZERO down payment.
1. FHA – FHA loans require a 3% down payment. However, HUD’s attempt to outlaw the gifting of the down payment from “down payment assistance” programs has thus far been unsuccessful. On an FHA loan, a first time buyer can use this gift program for the down payment, and ask the seller to pay all of the closing costs (especially in this market full of desperate sellers). Resulting in zero investment by the buyer. Alternatively, if you’re lucky enough to be related to someone who wants to give you money, you can receive a gift from family for the entire 3% down and closing costs.
2. FannieMae Flex 100 – This is a 0 down loan with mortgage insurance. The seller can pay all of the closing costs or the buyer can receive a gift from family to cover the closing costs.
3. FannieMae My Community – This is a zero down loan also with mortgage insurance. The closing costs can be paid by the seller or by a gift from family; however, on this program the buyer does need to have $500 of his/her own money. (Income Limits apply for this program.)
4. VA – Veterans, including reservists, are eligible for VA loans which require zero down payment. The closing costs can be paid by the seller or by a gift from a family member.
5. Oregon State Bond – For this program the buyer cannot have owned a home for the past three years and income limits apply. Under this program the state of Oregon offers first time buyers a below market rate and also pays 3% of the loan amount toward the buyer’s down payment. It’s done in conjunction with either a Fannie Mae or an FHA loan and follows the credit and qualifying guidelines of whichever program is being used.
I don’t know where some of these people get their information, but it’s really not anymore difficult to get a loan today than it was ten years ago generally speaking. It is tough out there for those who want to become billionaires overnight by investing in real estate, without working, having any money to invest or paying their bills. But for first time home buyers - there's no time like the present to start investing in your future.
Naturally everyone is concerned about the current housing and mortgage lending trends, but some people really take their concern to the extreme, as in this article Monday from the New York Times. Of course lenders and realtor associations need to be held accountable and advise responsibly, but to suggest that they shouldn’t be advertising because we’re in a down market? That’s crazy. Here are a few reasons why:
1.The real estate market is cyclical. Just because home prices might fall a little bit over the next six months doesn’t mean that thirty years from now you won’t be glad you bought a home today.
2.A lot of people already have mortgages and if you think refinancing your loan to a 5% fixed rate (like a few lucky people did a couple of weeks ago) isn’t a good idea just because Countrywide Financial is having some difficulty right now – well, you can go ahead and pay too much if you want to.
3.The sky is not falling. There’s a lot of opportunity out there and the people who work in the industry are taking advantage of it if they have the means to do so. It’s unfortunate that some people are experiencing hard times, but that they have to get rid of their house is an opportunity for the people who have the money to buy them and for the companies who have the money to refinance them into something they can afford. If you want to hide under a rock because there’s a blip in the financial market, go ahead, but that doesn’t mean you’re the smart one.
Just like stock investors switch strategies to make money in a down market, so do real estate investors. As for what regular ma and pa homeowners and would-be homeowners should do? If history is an indicator, the odds are good that the sun will continue to rise every day for the foreseeable future and that Americans will continue to want to live in houses. Home ownership is not suddenly a “bad” investment, generally speaking.
One thing that people often request in order to avoid foreclosure is to add another family member who has good credit to the title, and refinance in that person’s name to pay off the existing mortgage. But lenders don’t like this idea. So much so that a recent memo is circulating specifically forbidding it. No one will be allowed to refinance a property unless they’re obligated on the current loan. These cases are going to have to be treated as a purchase. The issue with that is that generally if a person is going to help someone out of the danger of losing their home, they’re most likely a friend or family member, creating what’s known as a non-arms-length transaction, which causes problems on all purchase transactions in any market.
We have one client who will be affected by this. His brother is several months behind on his mortgage. The client wanted to add himself to title and then refinance the house as an investment property, deeding his brother off title at closing, and then charge his brother “rent.” But no lender will let him do that anymore. And he can’t “purchase” the property from his brother without a slew of issues, because – well, he’s his brother.
These kinds of rules are created to prevent fraudulent transactions (a lot of loan defaults occurred during the 80s as a result of these types of “sales”), but they end up having a negative effect on people whose hearts are in the right place too. Unfortunately, someone wanting to help out a friend in need often doesn’t translate into a good quality loan risk for the mortgage company.
The New York Times ran an interesting article on Baltimore foreclosures today asserting that too many single women were given sub-prime loans and are now facing foreclosure as a result. (This after just last week they blamed the high foreclosure rate on racism.) As I read through the article I was thinking that in many cases this is probably just coincidence, since more single women than single men buy houses for one thing, and for another, single women often have less income than their male counterparts (and less savings as well, especially if they're raising children alone). But this statistic from FHLMC and FNMA gave me pause:
Freddie Mac and Fannie Mae, which buy loans from mortgage lenders, have estimated that 15 percent to 50 percent of the subprime loans they bought in 2005 went to borrowers whose credit scores indicated they were qualified for prime loans.
This reminded me of a person who applied to be a Loan Officer here and was currently working at a sub-prime company. The fees he told us they charge as a matter of course caused our eyes to bulge out of their sockets (and regular, standard mortgage loans that we do here are not “cheap” by anyone’s definition). Now we only try to find a sub-prime lender if we can’t possibly do anything else for a borrower AND they really insist they can’t wait the six months to two years to do what we advise and get their finances in order. But it occurred to me that if any random person, unknowingly, called a sub-prime lender FIRST, they would probably get a sub-prime loan – whether they needed one or not.
In fact, we just received a “thank you” note from a woman we refinanced out of a negative-amortization, adjustable rate loan that she took out last year. Her credit scores weren’t the greatest and she doesn’t have a lot of income, but if we were able to get her conventional, fixed financing last month, there’s no reason someone shouldn’t have been able to do it for her a year ago. It’s just so important to know who you’re talking to or to verify what you’re being told, particularly if you’re not educated on what is common and normal for the mortgage lending industry.
Einstein called our income tax system "the most difficult thing to understand." That can't bode well for the rest of us, can it? But this year as we start to think about tax time many of those who took out a loan with mortgage insurance in 2007 are in luck.
Mortgage insurance will be tax-decuctible through 2010 assuming the following conditions:
1. A 100% deduction for households with an adjusted gross income of $100,000 or less. The deduction is reduced by 10% for each additional $1,000 of AGI, phased out entirely after $109,000.
2. Deduction applies to primary residences and second homes only -- so no help to investors.
3. The deduction only applies to loans closed in 2007. If you have a loan from 2006 with MI, there is no deduction available to you.
I'm a mortgage advisor, however, so don't take my word for it. Be sure to check with a tax accountant.
Happy New Year!
Thanks to the Federal Reserve, rates have dropped below 6% a few times over the past month (today included). That's the good news. The bad news is that people whose credit score is below 680 will pay higher rates on all conventional loans. Those with scores below 620 will be paying 2% higher than the going rate.
If you're planning to buy a house next year or think you might want or need to refinance to take advantage of the nice low rates, make sure you optimize your chances of having a high credit score. In addition to the famed "pay your bills on time" and "don't file for bankruptcy" there are additional steps you can take to protect or raise your score.
1. Don't have more (or less) than about 2 or 3 credit cards. I have personally seen this make a difference. My husband and I have had all joint credit accounts for ten years, except I have a Macy's card (I have no choice, of course, as Macy's often offers an addition 10-20% off if you use their card!), and my credit score is always 10-20 points higher than his.
2. Don't max out any of your credit cards. Or better yet, pay them in full each billing cycle.
3. Do use your credit cards regularly, so that you have current credit ratings. If you have a card you keep for emergencies that you never use, have Netflix (or some other recurring bill) charge your card and then pay it off every month.
4. Don't take out any new loans right before you apply for a home loan - brand new debt temporarily adversely affects your score. In other words if you plan to buy a car and a house, buy the house first. ANYONE will give you a car loan -- even if you filed bankruptcy yesterday. Home loans are a little trickier, so get that established first.
5. If you have collections to pay or want to pay off and close some accounts (make sure you keep AT LEAST 3 accounts open), do it well in advance of applying for your loan, as recently closed accounts adversely affects your score.
It's not all real estate gloom and doom for everyone -- or so some people say. According to Forbes, Salem real estate is still appreciating. As far as the price of housing in Oregon goes, it's also a very affordable market right now. So if you're renting in Salem, you might be missing a good opportunity.
According to the article Spokane, Washington has a good appreciation rate too -- beautiful place, though it's a little chilly up there for my taste.
An article in The Oregonian this week offers some perspective on Portland's real estate market. While the situation in many markets is tragic, the situation here is that we've slowed to a healthy and sustainable pace.
"But Loen and others are quick to note that, far from the homebuilding disasters occurring in some parts of the nation -- parts of Florida, Colorado, Arizona and Nevada are going up in figurative flames -- the cooling here is merely putting the industry back on par with what used to be called a "normal" year."
In addition to our outstanding land-use laws, here are some other factors that are helping us during this national crisis:
"Other factors working to minimize instability in the area's housing market, analysts said, are a continued influx of potential buyers from out of state, continuing low interest rates on 30-year mortgages, and relatively strong job growth."
With any luck we'll be able to ride out the "credit crunch" and the "mortgage meltdown" and the "real estate bust," -- as the media likes to hype it. In the meantime, it's a buyers' market here for sure -- one person's crisis is another person's opportunity, as they say.
