Sharron’s Real Estate Rundown

 The Top
As if the foreclosure investment market weren’t super-heated enough, Congress is about to stoke the fire even higher.
     The “Foreclosure Prevention Act of 2008″ contains a $7,000 tax credit (payable over two years) to anyone who purchases a foreclosed home within a year of the proposal’s enactment. Supposedly, this would help clear the nation’s swollen inventory of repossessed properties, thus propping up home prices in general.
     But there’s the catch. For lenders as well as borrowers, foreclosure is an expensive hassle. If at all possible, most banks would rather avoid repossessing a house, which they must then try to resell. But, by making it cheaper to buy a foreclosed house than a comparable unforeclosed property, the tax credit makes it more feasible to sell one. The cost and hassle—for the lender—of foreclosure go down, and the benefits go up. Other things being equal, lenders would be that much more likely to foreclose—rather than to help homeowners stay in their houses on modified terms.
     At ForeclosuresDaily, we think our approach is more sound: the foreclosures boom still represents a tremendous investment opportunity in the real estate industry and we predict that the foreclosure investing segment will continue to remain a strong source for wealth building in America. By helping lenders to divest their portfolios of non-performing assets, property owners to escape financial hardship, and investors to create secure futures, ForeclosuresDaily will stay at the forefront of this issue.

Senate Passes Foreclosure Bill
Plan includes tax breaks for builders, credit for the purchase of foreclosed property and grants to buy and repair abandoned homes
CNNMoney.com

Objections
     The $25 billion tax break the plan offers to homebuilders and other businesses absorbing heavy losses and the energy tax package were both dropped from an economic rescue plan enacted in February. Critics of those proposals said they were overly expensive and would not stimulate the economy.
     But deepening public worries about the housing crisis appear to have emboldened lawmakers to swell the $9 trillion deficit to pay for the measures.
     The $7,000 tax credit for the purchase of foreclosed homes, opponents argue, would unfairly reward purchases that would have happened anyway while possibly devaluing other homes. It also could give banks an incentive to foreclose on homes by subsidizing purchases of such properties.
     The measure calls for a long-awaited modernization of the Federal Housing Administration that would enable more homeowners to refinance into loans backed by the Depression-era agency.
     It includes $10 billion in tax-free mortgage revenue bonds to help homeowners refinance subprime loans, a move endorsed by President Bush.
     A House bill takes a far different tack, steering tax breaks toward first-time homebuyers and investors in low-income rental housing. The measure is likely to be paired with a broader housing rescue package being drafted by Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, that would have the FHA step in to back $300 billion in refinanced loans for 1 million or more homeowners who otherwise might face foreclosure.
     Under a similar plan by Sen. Chris Dodd, D-Conn., the Banking Committee chairman, the FHA would insure up to $400 billion in loans.
     The Bush administration countered those plans Wednesday with its own, far narrower, proposal. It would expand an existing FHA program to allow more homeowners who are facing large rate hikes to refinance into more affordable government-insured loans.

Wells Fargo Home Mortgage offers advice on foreclosures
by Bill Bruce, The Valdosta Daily Times

Blume: Areas where home values are depreciating at a fast rate are the most challenged in terms of foreclosures. This includes areas where investor-owned properties and related exotic loans are high, such as Florida. Nearly 60 percent of subprime ARM foreclosures are occurring in eight states: Arizona, California, Florida and Nevada have experienced rapid price appreciation followed by today’s market correction, and in Illinois, Indiana, Ohio and Michigan have been affected by job loss.
Frequent root causes for delinquency remain job loss, illness, marital status change and death. As of late, consumers are also citing increased energy costs and other utilities, as well as insurance and taxes in unique markets where weather has been an issue, as key factors of being financially overstretched.

Posted on Monday, March 31, 2008, 12:00AM

 Charles Wheelan, Ph.D. The Naked Economist

 Housing prices dropped by over 11 percent at the beginning of this year, the largest drop in the 20 years that such data have been collected. Thank goodness.

Restoring Financial Sanity

Why are plummeting real estate prices good news? Because it’s the first sign that sanity is returning to the market. And a sane real estate market — one in which sellers recognize that they won’t get as much for their house as Al down the street got two years ago — is a precondition for a broader economic recovery.

Recessions, or any economic downturn, are always caused by the same thing: Something goes wrong. That may sound overly vague, but it’s rarely the same thing that causes a shock to the system. In an agrarian society, it might be a bad harvest or a failed monsoon season. In a developing country, it might be a slump in the global price of a major export, such as coffee or copper.

In the United States in 1929, it was the stock market collapse. In the early ’80s, it was the recession deliberately engineered by Fed Chairman Paul Volcker to break the back of inflation. (The Fed held interest rates high enough for long enough that the economic pain persuaded workers to stop asking for higher wages, and firms to stop raising their prices.)

Bad to Be Good

In all these cases, the recovery begins when either: 1) Conditions get better — the rains come, the price of coffee rebounds, or consumers stop worrying about another terrorist attack. Or, 2) Things don’t get better, but we adapt to the new reality. Coffee prices don’t rebound, so farmers start growing something else.

The only route out of our current real-estate-bubble-inspired economic malaise is the latter — a new real estate reality. Property owners must recognize that some of the prices we saw over the past couple of years were an anomaly, just like Internet stocks in the ’90s.

The problem with the housing bubble wasn’t just that prices got out of whack for a while. The bigger problem was that those crazy prices sent erroneous signals to the rest of the economy. Artificially high housing prices caused developers to build things that shouldn’t have been built; consumers to spend money that they didn’t really have; banks to loan money to those developers and consumers; and Wall Street to bundle those shoddy loans into products that most of us still don’t understand.

Feeling the Heat

Normally, the beauty of a market economy is that prices convey important information. When starting salaries for engineers go up, more college students major in engineering. When the price of gas gets to $4 a gallon, people drive less (or buy fuel-efficient cars).

But the housing bubble sent bad signals all over the economy. It’s as if we had a broken thermometer telling us it was 30 degrees, and now we’re all standing outside in 90-degree weather wearing sweaters and ski parkas. The important thing is what we do next: We can either stand there hoping the weather gets much colder, or we can recognize that it’s 90 degrees and start taking off the layers.

Falling real estate prices tell me that sellers are finally starting to do the latter. I recognize the pain. A lot of people are going to lose a lot of money; some will lose their homes. But realistically that’s already happened. If buyers are only willing to pay you $300,000 for a house you bought for $400,000 two years ago, the $100,000 difference is already gone.

For What It’s Worth

Listing the house for $400,000 and leaving it on the market unsold isn’t going to get the money back, either. That’s essentially just living in the house and hoping it’ll appreciate in the future. The “For Sale” sign out front is decoration, something to keep the mailbox company.

Look, I bought 50 shares of Bear Stearns stock at $90 a share. There’s nothing stopping me from putting a sell order in with my broker at $90. I can keep that sell order open as long as I want, just like the permanent “For Sale” sign.

But the market reality is that JP Morgan Chase has an offer on the table for $10 a share. If I really want to sell my shares, it’ll have to be at a price someone is willing to pay — which, sadly, has nothing to do with the $90 I paid in the first place.

True Value

If this were just about the price of real estate, I wouldn’t care at what price people tried to sell their homes, or how long those properties stayed on the market. But it’s bigger than that. Falling prices will help put the “market” back in the real estate market; it’ll get us back to a point where sellers are asking prices that buyers are willing to pay.

We’ll know the real value of real estate in different markets around the country. That’ll give banks a sense of what their loans are worth. It’ll also be a signal to buyers that they don’t have to wait any longer for the deals that they know are coming.

Both will help stabilize the credit markets so that they can get back to the business of making sane loans based on realistic property valuations. And healthier credit markets will allow Wall Street to price the mortgage-backed securities that will remain illiquid as long as we have no idea which mortgages are likely to go into default and which mortgages aren’t.

The Bottom Is Near

What good news am I looking for in the future? Another significant drop in housing prices, albeit smaller, say 4 or 5 percent. That would signal to buyers, sellers, banks, and Wall Street that the bottom is near.

Things have to get worse before they can get better. We’re making progress.

Sometimes others say it best.  This was on Yahoo Finance and written by Suze Orman……. 

Even though every nook and cranny of the housing market is draped in doom and gloom, it may be a good time for potential buyers to take a contrarian look.

I’m not minimizing the risks in the housing market, because they’re very real in many locations. Nor am I predicting any sort of miraculous turnaround in the next six months, since I doubt that we’ll see that happen. But I’m still a believer in the long-term viability of housing as a solid investment if you buy at the right price. This has me thinking that the current shakeout is in fact creating an interesting sweet spot for first-time homebuyers to at least start checking out the market.

That said, potential first-timers need to be extra-strategic and cautious when considering a purchase; there’s no room for making any mistakes these days. But simply sitting on the sidelines to wait for signs that the worst is over, or that your local market has turned the corner, means you may miss out on the best deal-making opportunities.

Here are some tips:

• Take a new look

Right now, some of the markets that were hot a few years ago are full of overextended builders looking to unload their unsold inventory. First-timers tend to focus on existing homes rather than more expensive new construction, but I advise them to take a look at new homes as well.

All those stressed-out developers are motivated to make deals. That can mean sharp price discounts or great offers to help with your mortgage financing. But be careful, too — you don’t want to be the only owner on a block where half of the homes haven’t even been finished.

• Know what price is right

In today’s markets, it’s crucial to load up on as much data before you bid on a home. Get at least three to five recent comparable sales, what are known as “comps” from your real estate agent.

You want to know the differential between the initial list price and the sale price for those homes. The size of the gap, and whether it’s been trending lower or higher, is what will determine your aggressiveness in bidding. Keep updating your market analysis every few weeks to stay on top of your market’s twists and turns.

In today’s market, being patient and bidding correctly is crucial. I know someone who had a $2 million bid for a new home in Florida turned down a year ago. A year later, the house was still on the market and the developer was desperate to deal. This time, the same buyer offered $1 million and the bid was accepted.

So don’t be afraid to go for it. If you see a house you want and it’s been on the market for some time, you have nothing to lose by going in and bidding 50 percent lower than the asking price. Don’t be afraid to insult someone. Remember, 50 percent of something is better than 100 percent of nothing. If they counter at a higher price, be careful — you can’t afford to overbid to meet an unrealistic seller’s price. Besides, there are plenty of other homes to choose from.

• Buy only if you have a five-year time frame

If you anticipate relocating anytime soon, it’s probably smart to keep renting instead of buying.

Remember that once you’re an owner, it’s going to cost you a 5 to 6 percent sales commission when you decide to sell. To have a decent chance of selling with some equity left in your pocket — even after paying the commission — you probably need to stay put for at least five years.

• Shore up your score

Before you look at a single house, check your FICO credit scores. Home buying is the one time you want to pay up for all three scores, because many lenders base the interest rate you’re offered on a calculation that takes all three scores into account.

If you’re applying for a mortgage with someone else, make sure both of you have strong FICO credit scores. Some lenders will base the rate you’re offered on the lowest score between the two of you. If your scores aren’t in the top range of 760 to 850, chances are you’ll be given a higher interest rate on a loan — and that can make all the difference in whether you can afford to buy or not.

For example, if you need a $200,000 mortgage and have a score of 760, you might qualify for a 30-year fixed rate loan at 5.8 percent with a monthly payment of $1,775. With a 619 score, you’re looking at a 9.2 percent rate for the same loan, and a monthly payment of $2,458. That $683-per-month difference is enough to cover property tax, insurance, and probably annual maintenance costs.

If one or both of you has low FICO scores, focus on getting them into the 760-or-higher range. Not only will it save you a lot in mortgage costs, it’s also an important step in making sure you have the financial discipline to take on such a huge commitment.

• Get the lowdown on down payments

During the housing boom, lenders were all too happy to dole out mortgages that didn’t require a down payment. That’s coming back to sting many lenders — and crippling the entire credit system — as homeowners who never had to put equity into their home are now walking away from them when their outstanding mortgage is more than the current value of the home. The upshot is that to have any chance of getting a mortgage in today’s tight lending market, you need to come to the loan table with a down payment.

A 20 percent down payment will speed up your loan approval, but not many people have that right now. One possible remedy is the recent change in FHA limits; FHA-insured loans require just a 3 percent down payment, but up until a month ago these loans maxed out at $362,790 in high-cost metro areas. The economic stimulus package signed into law in February authorized the FHA to raise those limits for the remainder of 2008. The new top loan limit for high-cost metro areas is as much as $729,750. You can check the new FHA loan limits in your area here.

Ideally, you can scrape together your down payment from savings. But if that’s not going to cover everything, you might consider raiding your IRA. Yes, you read that right: The typical 10 percent penalty for early withdrawals made before age 59-1/2 is waived when the money is used for a down payment on a first-time home purchase.

If your money is in a traditional IRA you’ll still owe tax on the withdrawal. Roth IRAs are a better deal; you can pull out money you contributed with no penalty or tax. Any Roth earnings you withdraw for the down payment are also tax-free as long as you’ve had the account for at least five years.