Thursday, April 19, 2007

It's All About the Timing

The Express article is finally out. Read my thoughts on the spring market, and also the great experience of my client, Ellen Krouss, here.

Sub Prime Meltdown: The Beginning of the End?

Freddie Mac announced it will buy $20B in fixed-rate and hybrid adjustable rate mortgage products to provide alternatives for sub-prime borrowers. Both Freddie and Fannie Mae are also working on developing new loan types to help distressed borrowers keep their home.

I think these announcements will limit the fall out of the subprime "meltdown"...much to the dismay of the buyers circling and waiting for the big spike in foreclosures in the DC metro area. The fact is that banks don't WANT homes...they want viable loans. They're not in the home foreclosure business, and they take big losses too, so the incentive is there for them to do everything they can to keep a buyer in their house, even if it's a less profitable loan than it was several years ago.

Congress is too wary of being saddled with a "bailout" label to make any broad-scale changes, but Fannie and Freddie are already stepping in to manage the situation. I think buyers who are waiting for short sales and foreclosures in DC or close-in suburbs may be waiting much longer than they anticipated.

Sunday, April 15, 2007

The Best "Rent vs. Buy" Calculator

Thanks, Mary Ellen, for sharing this cool link with me: One of the best Rent vs. Buy calculators I've seen, especially for the visually-oriented and "what if" type of people:

Rent vs. Buy Calculator

Check out the "Advanced Settings," especially on Buying, where you can enter such things as condo fees (count on at least $250-300) and costs of buying home (about 3% for closing costs is a good rule-of-thumb) and selling (count on 7-10%), maintenance costs, It even lets you enter the return on alternate investments and inflation rate, and the capital gains exclusion (see "Tax Benefits of Home Ownership" post). This is simply the most thorough calculator I've seen.

The only downside to this particular calculator is that it doesn't allow for different financing scenarios--say an ARM loan or interest only loan. (No, interest-only loans are not instruments of the devil; in fact for some borrowers it is a fantastic option. They've been abused quite a bit in the past few years in this area, and now there's an unreasonable backlash against the product.) Nonetheless, it's an excellent tool overall and includes many "hidden" costs of homeownership.

Of course, the breakeven point always depends on your assumptions, so what are some "reasonable" ones? Reasonableness is in the eye of the beholder, but a conservative estimate of property taxes in this area is 1%. Long-term appreciation rate is of course a huge driver; the long term average, according to the GMU study I've reference in previous posts, is 7%, though of course 2006 was much less than that. GMU estimated 2.2% appreciation in 2006, currently is predicting somewhere between 0-5% in 2007, and expects a return to the long term average of 7% by 2008-09.

Here is the NY Times article that accompanies the calculator. Interestingly, the article is an argument to rent over buying, which is the best option for lots of people. These types of articles paint the market with a broad brush, by necessity--they have a national audience. But if there's one thing everyone knows about real estate, it's location, location, location. All real estate, like politics, is local. Don't take someone's word for it that buying is the right answer for you--use your own assumptions and tools, like this one. But in my experience in this area, with rents and income levels being what they are in DC, combined with the long-term market view (if one were to believe the historical data and housing shortage projections, anyway), the numbers almost always add up to buying.

Co-ops: The Surprising Numbers

I've posted here before that I am not a big fan of co-ops, and that's still true. HOWEVER, I do want to share some data that surprised me, and after I have a chance to do a little more digging, I may reverse my position after all.

I have a client who is very interested in co-ops, so I wanted to try to get some facts to support the potential resale issues; broadly speaking, my impression of co-ops was that they were cheap to get into, but very tough to get out of when it's time to sell.

I was surprised to find that for the most recent six month period, MLS data showed that in zip code 20009..
Statistic: Condos / Co-ops
Units sold: 156 / 33
Days on Market: 60 / 53
Avg Sold Price: $366,574 / $304,321
Source: Metropolitan Regional Information System

Now, I already knew that the average price of co-ops was much less, and the number of units sold would be much lower, after all, there are many more condos than co-ops in Washington, DC. But, I was certainly surprised by the Days on Market total--turns out co-ops sell just as quickly, if not more quickly, than condos. My guess is that this is because of the low price point--an entry level buyer, and $52K is quite a difference for someone trying to get into their first place. Not to mention that co-ops, often in older buildings, are frequently much larger units than today's condos.

My point? Perhaps just that I may have been too hasty to condemn co-ops--though I am still adamant about the land lease co-ops. And there are still major pitfalls for a buyer to be aware of: Board Approval, possibly higher required downpayments, limited options for financing, the potential inability to rent the unit. But for the right purchaser, co-ops could be a great opportunity, and the topic deserves more study and I'll post again soon.

And now for my legal disclaimer: Information deemed reliable but not guaranteed. Do not rely on this information without verification.

FAQ: What is PMI?

Private Morgage Insurance (PMI) is required by a lender when a buyer has less than 20% or the purchase price as a downpayment (this is where the "I need 20% down" myth originated.) The buyer pays the premium but the lender is actually the one insured. Once the equity in the property reaches 80% (either via paying down the balance or an increase in market value of the property), the buyer can cancel the insurance. (Note: This insurance is NOT the insurance that must be carried on FHA mortgages, often touted as advantageous for first time buyers. FHA loans carry a different type of required insurance that lasts for the life of the loan.)

Prior to 2007, PMI was not tax deductible--just a fee that a homeowner had to pay. This resulted in "piggyback" loans--second mortgages that are tacked on to first mortgages. These second mortgages often carry slightly higher interest rates, but the benefit to the borrower was that the two loans in combination added up to more than 80%, and thus the buyer could replace non-tax-deductibe PMI with tax-deductible interest on the second mortgage. You often see these loans referred to as 80/15/5, or 80/20; the first number is the percent of the purchase price borrowed on the first trust (loan), the second number is the percent borrowed on the second trust, and the third number, if there is one, is the amount of the downpayment.

Starting in 2007, PMI is now fully tax deductible IF you're income is under $100,000. So far, this applies only to loans closed in 2007, so we'll have to see if this benefit stays in place. If you qualify for this deduction though, it may be advantageous to take one 95% loan, all at the same, lower interest rate, and pay the PMI, since it's now tax deductible just like mortgage interest. Everyone's situation is different, so consult a mortgage lender you trust and ask him to run the scenarios to see which option is more beneficial for you.

Sunday, April 8, 2007

Tax Benefits of Home Ownership

With tax day quickly approaching, I want to give a quick overview of the tax benfits of homeownership--perhaps when you see that big check you're writing to the IRS you'll start exploring that home ownership idea again!

Most people know there are financial benefits to owning over renting, including the deduction of mortgage interest. But few people really understand how to calculate that savings, and fewer are aware of some of the other financial benefits and tax incentives. I'll cover rules of thumbs on how to calculate the tax-deductibility of interest in a future post, but I'll lay out here a few of the less commonly discussed tax benefits.

Buying a home provides lots of deductions. Mortgage interest (up to $1 million on a first and second home, subject to certain limitations), as well as real estate taxes. Points paid in connection with a mortgage to purchase, construct, or improve your main home are also tax deductibe. Seller-paid points are deductible, too, but the amount deducted reduces your home's basis.

Basis is the amount you've spent on your home. It includes the purchase price, plus improvement costs (though not repairs) you incur while you own it. Minor repairs don't need to be tracked, but improvements which are more permanent in nature (likely to last beyond one year), should be carefully tracked and receipts kept. If you make the same improvement more than once, only the most recent ones adds to your basis. Receipts and records of improvements such as: Room additions, fences, exterior lighting, storm windows/doors, wiring upgrades, built-in applicances, new carpets, bathroom and kitchen upgrades, landscaping, security systems, roofs, HVAC systems, lighting fixtures, water heaters, insulation, and flooring should be catalogued and added to the basis of your home.

When you do sell, if you've lived in the property 24 of the last 60 months (note: you do not need to own the property for 60 months), then $250,000 of profit ($500,000 if you're married) are tax-free. Yes, tax-free! How many other investments do you know that the federal government doesn't tax?! And you don't even have to "roll over" the profits into another home (though many people do.) To calculate your gain, subtract your basis (purchase price + improvements) from the net sales price (sales price net of selling costs like commissions). So tracking receipts can save you big bucks on taxes if you're close to the threshold.

As an aside, unfortunately, a loss on the sale of your home is not tax dedcutible, so you're on your own for that one. So if the value of your home (less selling expenses) is not enough to pay off your mortgage, the government is not going to help subsidize that loss.

Sunday, April 1, 2007

What Realty Agents Won't Tell You...

...not because we don't want to, but because we're not allowed by law!

Here's a great article every buyer should read, with links to research on schools, crime stats, environmental effects, and demographics.

What Realty Agents Won't Tell You