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Bill Tightens Tax Rules For Second Homes

Legislation to ease the burden on struggling homeowners could hit an unexpected constituency: people with vacation houses. Owners facing foreclosure could get a break, however.
By: John Godfrey: The Wall Street Journal Online
Popular legislation to ease the tax burden on struggling homeowners could hit an unexpected constituency: people with second homes.

The Ways and Means Committee, the House's tax-writing panel, approved a bill yesterday under which homeowners facing foreclosure won't get stuck with a tax bill if part of their debt is forgiven by lenders. Currently, forgiven debt is treated as income to the borrower and is subject to tax.

The committee decided to pay for the tax break, as required by congressional budget rules, by restricting homeowners' ability to avoid or reduce the taxes on the sale of second homes. The gain in revenue would be equal to roughly $2 billion over 10 years.

Some Republicans complained that the move would hurt the second-home market. Rep. Kevin Brady (R., Texas) said the change would punish those who had saved to purchase a second home. Rep. Sam Johnson (R., Texas) called it a "luxury tax on retirement homes."

There is little evidence that such opposition could threaten the underlying bill. The bill, which came in response to the subprime-lending crisis, has broad bipartisan support in both the House and Senate. The Senate hasn't said how it would pay for the bill.

Treasury tax counsel Michael Desmond said that while the Bush administration differed with the bill on several fronts, it supported the committee's vote. A White House proposal would shield homeowners from the debt-forgiveness tax for three years. The House bill makes that change permanent.

Industry groups, such as the Mortgage Bankers Association and the National Association of Realtors, weren't thrilled at the tighter tax rules for second homes but still supported the overall bill. "No one likes to be the pay-for," said Linda Goold, tax counsel at the Realtors' group. But, she added, "a tax benefit has been curtailed, but nothing has been eliminated."

Under current law, a person can exclude from taxes up to $250,000 in capital gains on the sale of a principal residence. Up to $500,000 of gains can be excluded for married couples. A second home can become a principal residence as long as the taxpayer has lived there for two of the previous five years.The bill approved yesterday would change those rules. Under it, the size of the tax break for a second home would be tied to the portion of time, out of all the years a house is owned, that it serves as a principal residence. Living in a property longer would result in a larger tax break on any gains when it is sold.
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California home sales drop 28% in August

Median prices fall in most cities compared to last year
EXCEPT notice LA County, Westside of LA and West Hollywood!
Inman News
Resale single-family median home prices fell in 11 of 20 regions in California while sales dropped 27.8 percent in August compared to the same month last year, the California Association of Realtors trade group reported this week.

Median single-family existing-home prices increased 2 percent statewide in August compared to August 2006, despite falling in most regions. Meanwhile, the statewide median price in the entry-level price range of less than $500,000 dropped 5.1 percent in August to $349,360 compared to $368,210 in August 2006.

And the median price per square foot for a single-family home fell 4.3 percent this year to $336 compared with last year's record high of $351 per square foot, the association reported.

August median home prices for all types of homes in the state, including new and existing single-family homes and condos, dropped in about 74 percent of the 326 cities and city areas tracked compared to August 2006, according to statistics provided by DataQuick Information Systems, a real estate data company.

DataQuick also reported that median prices fell in 24 of 31 California counties that it tracked in August compared to August 2006 - the state has 58 counties.

Median home prices fell 18.9 percent in Merced County in August compared to August 2006 - the highest price drop among counties tracked by DataQuick - while dropping 15.8 percent in San Joaquin County, 14 percent in Sacramento County, 13.9 percent in Stanislaus County and 12 percent in Nevada County.

The highest year-over-year median price increase in August was in Marin County, at 12.4 percent, followed by San Francisco County, at 5.9 percent; San Mateo County, at 5.8 percent; Santa Clara County, at 5.2 percent; and Los Angeles County, at 4.8 percent.

Nipomo, in San Luis Obispo County, topped the list of cities and city areas with a 37.6 percent year-over-year median price decline in August, followed by Twentynine Palms with a 33.9 percent drop; North Highlands with a 33.7 percent drop; Patterson with a 32.9 percent drop; and Fallbrook with a 32.3 percent drop.

The Westside area of Los Angeles experienced a 42.5 percent rise in median price from August 2006 to August 2007 - the highest among all cities and city areas in the state - followed by West Hollywood, 35.8 percent; Los Gatos, 35.7 percent; Encinitas, 27.7 percent; and Los Altos, 26.2 percent.

Single-family existing-home sales fell in all 20 regions of the state year-over-year in August, the association reported, dropping most in the High Desert region. That region had a sales drop of 56.2 percent, and sales fell 47.3 percent in the Riverside/San Bernardino region, 37.1 percent in the Monterey County area, and 33.8 percent in the Central Valley region.

Statewide, the 10 cities and communities with the highest median home prices in California in August were: Los Altos, $1.82 million; Manhattan Beach, $1.7 million; Saratoga, $1.6 million; Newport Beach, $1.6 million; Burlingame and Palos Verdes Estates, $1.5 million; and Calabasas, La Canada/Flintridge, Coronado, and Los Gatos, at $1.3 million.
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Law Would Keep IRS from Taxing Foreclosures

The U.S. House Ways and Means Committee is considering a bill that would end the practice of taxing the mortgage debt forgiven in a foreclosure.
NAR: REALTOR® Magazine Online
The U.S. House Ways and Means Committee is considering legislation that would end IRS's practice of classifying mortgage debt forgiven in a foreclosure as taxable income.

Panel Chairman Charles Rangel scheduled a committee vote on the legislation for this Wednesday and spokesman Matthew Beck says the New York Democrat hopes to win broad bipartisan support for the bill.

Since the 1990s, the NATIONAL ASSOCIATION OF REALTORS® has supported efforts to change the so-called "phantom tax" law. "It will relieve a tax burden at a time when an individual has experienced a true economic loss," NAR President Pat V. Combs has said.

The bill also would extend a current tax deduction for mortgage insurance.

Sens. Debbie Stabenow, a Michigan Democrat, and George Voinovich, an Ohio Republican, have sponsored similar legislation in the Senate, but no date has been set for its consideration.
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5 Ways to Cash In on the Fed Rate Cut

Now that the Fed has cut interest rates by one-half point, here's advice on how to take advantage.
By: Emily Brandon: Yahoo!Finance
Mortgages, home equity lines of credit, auto loans, credit card rates, certificates of deposit, and money market accounts can all be influenced by changes in short-term interest rates set by the Federal Reserve. But don't count on getting a lower interest rate; first, read the fine print in whatever contract you're signing. The only interest rate that will automatically drop is the federal funds rate, which is what banks charge each other on overnight loans. Here are some ways to make the most of the rate cut announced by the Fed Tuesday:

Watch the market for lower rates. The Fed's rate cut should provide a measure of relief to borrowers anticipating rising payments on their adjustable-rate mortgages. "Borrowers facing resets will still see a sizable payment increase compared to the initial payment when the loan was initiated several years ago, but that increase will be substantially lower than it would have been had the Fed not changed interest rates," says Greg McBride, a senior financial analyst with Bankrate.com. The savings won't be huge, though. "If your adjustable-rate mortgage is due for a reset in October, you're going to see some benefit right off the top, so instead of jumping to 7 percent, it's going to jump to 6¾ percent." But many adjustable-rate mortgages are not tied directly to the prime rate, which is affected by the Fed's federal funds rate. "A reduction in the prime rate may not affect their payment at all or may not affect it for some time," warns David Jones, president of the nonprofit Association of Independent Consumer Credit Counseling Agencies.

Switch to a fixed rate. It might be a good time to consider converting to a fixed-rate mortgage. "Switching to a fixed rate would be a great idea, particularly if you can refinance and your adjustable-rate mortgage is still adjusting higher," says Mark Zandi, chief economist at Moody's Economy.com. Thirty-year fixed-rate mortgages dropped to 6.25 percent this week, down from 6.42 percent last week in anticipation of the Fed rate cut, according to the Mortgage Bankers Association. "You may want to wait a little longer because you'll probably get an even better deal sometime between now and the end of the year," says Zandi. But be sure to carefully weigh the effect of closing costs and fees before refinancing. And try to avoid late payments before you make changes, as even a single late payment can make it much more difficult to refinance and lock in a lower rate.

Tap home equity. "You will see lower home equity lines of credit because they're tied to the prime rate, so they'll come down one for one," says Zandi. If you can tap into your home equity to pay off higher-interest credit card debt, there are savings to be had. But watch rates closely before you sign up for a HELOC. "If you have a home equity line of credit, your rate will adjust lower following a Fed rate cut, but it often comes with a lag of one to three months," cautions McBride.

Switch credit cards. "Consumers should shop around and look for credit cards where the rate is tied to short-term interest rates and see if they can take advantage of that," says Gus Faucher, director of macroeconomics for Moody's Economy.com. Although credit card rates are heavily influenced by your own credit history, now is a great time to shop around for the lowest-rate card and aggressively pay down debt. "If it's a variable-rate credit card, chances are pretty good your rate will come down. With a fixed-rate credit card, it probably won't," says McBride. "If you consolidate onto a variable-rate card, you can do that now because as variable rates decline you will get that value."

Keep saving. Although borrowers may be getting a slightly better deal in the coming months, savers who sock money away in money market accounts and bank-issued certificates of deposit may see their interest rates decline. "Banks are going to be quick to lower their deposit rates, in part because they don't need the deposits because they are not making as many loans," says Zandi. With interest rates now topping 5 percent at many financial institutions, stashing your cash in a CD is one way to lock in high interest rates before they drop. "If you've been looking for an opportunity to put money into a long-term CD, now is the time to do it before rates decline," says McBride. But even if rates drop, risk-averse investors may still want to stick with these safe savings vehicles. "If interest rates fell 1 full percentage point, you're still looking at money market accounts or CDs at 4 percent and 4¼ percent," says McBride. If you have $10,000 to invest, the latter rate will yield you $425 interest earned per year.
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Inflation news gives Fed room to maneuver

But cutting interest rates too fast could stoke future price pressures
By: John W. Schoen: MSNBC
Tuesday’s report that inflation appears to be under control will give the Federal Reserve’s interest rate-setting committee a little breathing room to make a widely-expected cut in its target federal funds rate for the first time in more than four years.

Forecasters are divided on whether the Fed will cut the benchmark rate by a quarter-percentage point or a more aggressive half-point at its policy meeting Tuesday, as central bankers respond to the first economic crisis since Chairman Ben Bernanke took office 19 months ago.

No matter which course they choose, central bankers still face significant risks. A course of gradual rate cuts could come too slowly to keep the slowing U.S. economy from being dragged into a downturn by the housing recession. On the other hand, rapid, aggressive cuts could spark another round of the kind of easy credit that created the housing bubble — and risk eroding gains in the Fed’s hard-fought battle to keep inflation under control.

The Fed’s rate-setting Open Market Committee got two more pieces of economic data to chew on ahead of Tuesday’s widely-watched rate announcement, which is expected at 2:15 p.m. ET. Wholesale prices fell by 1.4 percent in August, led by a big pullback in energy prices; even without that drop, so-called "core" inflation rose just 0.2 percent, according the Labor Department.

Meanwhile, the ongoing mortgage mess continued to widen in August. As the financial markets remained skittish about the risk of rising defaults, the number of foreclosure filings more than doubled from a year ago and jumped 36 percent from July, according to a RealtyTrac, a Web site that specializes in foreclosures.

As a result, Fed watchers say, the central bank is fighting a battle on two fronts. On one side, it is trying to push money into the banking system, recently cutting the rate on direct loans to banks through its so-called discount window, to calm the storm that hit the financial markets a month ago.

Those moves to pump money into the banking system have already pushed the cost of money well below the Fed’s official target rate. According to the Fed’s own data, the “effective” federal funds rate fell as low as 4.54 percent Aug. 14 as the central bank added liquidity to put out the fires sweeping through money markets.

The Fed tries to maintain its target rate through daily sales or purchases of Treasury securities from primary dealers, adding or draining cash to try to balance the supply of money with demand.

Though the target rate has since moved back above 5 percent, some analysts suggest that the widely expected quarter-point cut Tuesday would merely ratify what is already happening in the financial system. That has led to some speculation that the FOMC could move more aggressively with a half-point cut in the federal funds rate target.

Still, the Fed remains wary of letting up on its other perennial battle front — the fight against inflation. Despite Tuesday's good news on wholesale prices, oil prices are moving higher again — breaking $80 a barrel earlier this month. If the Fed cuts rates too far, it risks creating another credit bubble, or stoking inflation.

Former Fed Gov. Wayne Angell, now a private economist, believes the central bankers can’t have it both ways.

“It's just nonsense to say that the Fed can supply reserves to the discount window and to open market operations and without affecting the target (federal) funds rate,” he said. “There is only one monetary policy. And this monetary policy is apparently confusion.”

Regardless of what the FOMC announces as its target rate, Fed watchers will also be scrutinizing the statement that accompanies the new rate — looking for clues about the outcome of the next regularly scheduled meeting six weeks from now.

“I would like to see the Fed (cut a half point),” said former Fed Gov. Lyle Grimly, now a senior adviser at Stanford Washington Research Group. “But I think the key issue if they go (a quarter-point) is whether the (press) release indicates more help is on the way if needed.”

Despite the recent addition of cash to the U.S. banking system, the global credit markets remain skittish following the implosion of subprime mortgage-backed bonds and the collateral damage to hedge funds, banks and other investors that are holding them. A widening fear about the prospect of further defaults rocked the stock and bond markets last month and raised market-based rates for some other types of lending.

Even as short-term rates have fallen in the U.S., a widely used lending benchmark called the London Interbank Overnight Rate, or Libor, has risen. That’s a sign that banks and investors are afraid of further credit fallout, so they’re demanding higher rates from borrowers to compensate for that risk.

A cut by the U.S. central bank could help calm those lenders and investors and restore flows of cash to some forms of borrowing that have dried up since the credit squeeze began in early August.

“Financial conditions are tighter today than they were a month or two ago,” said Jay Bryson, global economist at Wachovia. “In order to offset that the Fed needs to be easing to try to bring some of those rates down.”

But a move to cut rates is not without risks. The recent turmoil in the credit markets is due in part to a period of easy money policy after the dot-com bubble burst — when the Fed, under the leadership of former Chairman Alan Greenspan, cut the benchmark overnight rate to as low as 1 percent. That policy helped fuel the lending spree that pumped U.S. housing prices to unsustainable levels. Now that the excesses of the housing boom have been reined in, the Fed is loath to begin another round of cheap credit.

The Fed has also long maintained that its primary goal is to fight inflation. On that front, it’s shown good progress: A key inflation indicator the Fed watches closely has recently fallen below the central bank’s perceived target of 2 percent annual price growth.

But loosening credit now could set the stage for higher inflation down the road. Strong demand for crops used for both food and biofuels have driven up food prices. Crude oil recently topped $80 a barrel. A strong global economy has tightened supplies of others commodities like steel and other building materials.

“Longer term, if the Fed is sowing the seeds of an inflation problem and the economy turns out not to be this weak, there could be a price to pay for this long-term,” said Michael Darda, chief economist at MKM Partners.

Assessing the health of the economy is probably the Fed’s toughest task at the moment. Its own survey of economic conditions at the 12 regional member banks last month found that while the pace of economic growth is slowing, business conditions are still relatively healthy. Recent data on industrial production seem to confirm that view.

But last month’s weak employment report — showing a net loss of 4,000 jobs in August — came as a surprise to economists and analysts who had been looking for gains of over 100,000 new jobs. The report also said job growth was weaker than initially reported in June and July.

The rising pace of home foreclosures and the slowdown in mortgage lending also poses a threat to future growth — and raises the possibility that the recession now gripping the housing market spills over to the broader economy. Though such a full-blown recession isn’t inevitable, say many economists, the odds of one occurring have risen as the housing and mortgage markets have fallen.

Former Fed governor Lyle Gramley notes that since World War II, every downturn in housing has been followed by a recession – with the exception of housing slumps in 1950 and 1966 “when we had big increases in defense spending that kept the wolf at bay,” he said.

While some FOMC members may want to cut rates more quickly — by a half percentage point — Fed watchers note that it will be easier to reach a consensus for a quarter point cut. But Bryon is in the camp who thinks that recent signs of economic weakness indicate that a more aggressive cut is needed.

“If over the next few months we find out that (economic) growth is really stronger than we think, and the economy didn’t really need the (half point) cut, they can reverse it and they can reverse it pretty quickly,” he said. “But I think that downside risks to growth are starting to build at this point.”
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Fed Expected to Cut Interest Rates Tuesday

Many economists believe the Federal Reserve will cut the federal funds rate for the first time in more than four years.
By: Ron Scherer: REALTOR® Magazine Online
Many economists believe the Federal Reserve will institute the first cut to the federal funds rate in more than four years when it meets on Tuesday, with some anticipating a 0.25-percentage point cut and others a drop of 0.50 of a percentage point.

A decline in the short-term interest rate, according to experts, will indicate that rising inflation is not as big a concern as an economic slowdown and likely will be made in response to a household survey revealing that 300,000 jobs were lost in August and that an average of 17,000 were lost per month since the start of the year.

However, National City Corp. chief economist Richard DeKaser is worried the central bank could further weaken the dollar and impact inflation by cutting short-term interest rates. Experts do not believe such action would have much affect on mortgage costs, as they are tied to long-term interest rates.
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Fed rate cut likely next week

Commentary: Credit crunch's effect on housing could intensify
By: Lou Barnes: Inman News
The credit panic appeared to stabilize on Wednesday, interest rates rising a bit, but the crunch found new legs today on news of sinking retail sales. At week's end conforming mortgages are a hair under 6.5 percent, the gap to vanilla jumbos closing to roughly a 0.5 percent premium, half of the worst in August. Everything else - even high-quality off-brand loans - is as-was: pricey or gone.

The Fed meets Tuesday, will cut its overnight rate a bit, will have something murky and inane to say about following developments as they develop and taking appropriate action when appropriate - all completely as expected by the markets and built into the current rate structure.

The next big move in long-term rates will depend on economic data weeks away: We won't get trend confirmation of last Friday's weak employment data until the next report on Oct. 5. Thursday's report of no change in early September unemployment claims says that hiring may have slowed, but we're not yet facing a spike in layoffs.

We won't get comprehensive housing data until well into October, and even then, news of deepening trouble will not push rates lower unless companion reports show weakness spreading into the larger economy. The preliminary data says that the credit crunch didn't push housing off a table, but the July slope of deterioration steepened in August and is doing so again in September. Just not quite vertical.

The astonishment here continues at the absence of grip and clarity among the authorities about the extent and character of the credit crisis. Simon Johnson, director of International Monetary Fund research, told the Herald Tribune that the subprime crisis has not been resolved, and the IMF doesn't understand why.

The European Central Bank poured $100 billion in 90-day money into its banks -- an extraordinary throwing-in-of-towel, as central banks typically inject liquidity only overnight or for a few days. On that same day, Bank of England governor Mervyn King derided all of these liquidity injections as "... ex-post insurance for risky behavior" that would only encourage more. Two days later, last night, the BOE had to bail out the UK's largest mortgage lender - the first bank bailout there in 30 years.

Federal Reserve Chair Ben Bernanke traveled all the way to Europe to deliver a re-print of a 2-year-old speech on the "savings glut," and offered not a syllable of insight into current matters. He cannot tip his policy intentions; however, in a moment crying for leadership he might have had descriptive things to say, defining the edges of the crunch. He employs the largest group of economists anywhere, and they must have some clues. I hope.

The Secretary of the Treasury, Hank Paulson, late Grand Poobah of Goldman Sachs, said he is focused on the commercial paper evaporation (I will sleep so much better tonight), and on Wednesday gathered a group of mortgage wholesalers, asking them to offer more products to help prevent foreclosures. He knows perfectly well that the Structured Finance department at Goldman and its cousins are the source of such products and are paralyzed in the credit panic, able to wiggle only a single finger to the crowd, pointing blame for this fiasco at somebody else.

Paulson of all officials has the capacity to find out what and where the trouble is, and to understand it, and to offer measures to repair it and to prevent its recurrence. "Playing dumb" hardly describes his contributions in public in six weeks of crunch.

The very worst of the blame-shifting profiteers, led by commercial bankers, claim that the whole problem here is the practice of selling loans, the maker immune to the pain of the ultimate holder (this theory joined, incredibly, by Bernanke). Loans have been sold since the beginning of banks, and securitized and sold in vast quantity for 50 years - successfully, an essential component of economic growth, so long as properly underwritten at transfer, not merely at origination. Who, Mr. Paulson, failed at that?

The call here continues for blanket-yanking and sunshine: Re-underwrite to discover who sold what to whom, where it is now, and who has loaned how much against it.
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Mortgage rates drop swiftly this week

Borrowers facing resetting rates hope lull will offer refi opportunity
Inman News
Long-term mortgage rates dropped considerably this week following the release of August's dismal employment report, according to surveys conducted by Freddie Mac and Bankrate.com.

In Freddie Mac's survey, the rate on 30-year fixed-rate mortgages fell to an average 6.31 percent from 6.46 percent last week, and the 15-year fixed rate declined to 5.97 percent from 6.15 percent. Points, which are fees lenders charge for loan processing expressed as a percent of the loan, averaged 0.5 and 0.4, respectively, on the 30- and 15-year loans.

Adjustable-rate mortgages (ARMs) also saw a drop in rates, as the five-year Treasury-indexed hybrid ARM was down at an average 6.17 percent from 6.32 percent a week ago and the rate on one-year Treasury-indexed ARMs sank to 5.66 percent from 5.74 percent. Points on the five-year and one-year loans averaged 0.6 and 0.8, respectively.

"Interest rates on prime conforming loans fell across the board in the past week, with rates on 30-year fixed mortgages averaging 0.15 percentage points below the previous week's level," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement. "The drop in mortgage rates may give some relief to borrowers who are looking to refinance or purchase a home."

In Bankrate.com's survey, fixed mortgage rates plunged this week to four-month lows, with the average conforming 30-year fixed mortgage rate falling to 6.28 percent. Discount and origination points on these loans averaged 0.43.

The average 15-year fixed-rate mortgage popular for refinancing dropped by the same amount to 5.96 percent, according to Bankrate.com. Adjustable mortgage rates were lower as well, with the average one-year ARM inching lower to 6.2 percent and the average 5/1 ARM retreating to 6.3 percent.

Mortgage rates plunged following last Friday's lackluster employment report, Bankrate.com reported. Poor job growth figures raised concerns about economic health and helped push mortgage rates to the lowest point since May 2. Nervousness about the economy often drives investors toward the safe haven of Treasury securities, pushing both bond yields and mortgage rates lower. Rates for jumbo mortgages -- those above $417,000 -- declined by a similar amount, settling at 7.2 percent. While the spread between jumbo and conforming mortgage rates remains uncharacteristically wide, this spread has stabilized in the past two weeks.

Amid the turbulence in mortgage markets, fixed mortgage rates are still an attractive option for borrowers. Just two months ago, the average 30-year fixed mortgage rate was 6.82 percent, meaning that a $200,000 loan would have carried a monthly payment of $1,307. Now that the average conforming 30-year fixed rate is 6.28 percent, the same $200,000 loan carries a monthly payment of $1,235.

The following is a sampling of Bankrate.com's average 30-year-mortgage interest rates this week in some U.S. metropolitan areas:

New York - 6.31 percent with 0.28 point

Los Angeles - 6.41 percent with 0.66 point

Chicago - 6.31 percent with 0.13 point

San Francisco - 6.25 percent with 0.7 point

Philadelphia - 6.31 percent with 0.36 point

Detroit - 6.28 percent with 0.09 point

Boston - 6.38 percent with 0.22 point

Houston - 6.17 percent with 0.7 point

Dallas - 6.18 percent with 0.54 point

Washington, D.C. - 6.25 percent with 0.62 point
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UCLA forecast: Economy may steer clear of recession

Housing-market recovery still several years away
By: Glenn Roberts Jr.: Inman News
While several economists maintained in the early descent from the real estate boom that a "soft landing" was in store, the latest Anderson Forecast predicts a very bumpy ride for the housing market and a near-miss with a recession.

David Shulman, senior economist for the quarterly University of California, Los Angeles, forecast, stated in his outlook that the nation's economic performance is expected to be "almost as close as you can get to avoid the technical definition of a recession." That means low growth in the nation's gross domestic product - about 1 percent in fourth-quarter 2007 and in first-quarter 2008, according to Shulman's "A Near Recession Experience" report.

There are dangers, too, that things could get worse. "When the economy slows to a 1 percent pace, it runs the risk of falling into an actual recession just as when an airplane's velocity dips down to its 'stall speed' and falls out of the sky," Shulman states in the report. "In that sense our forecast can be viewed as somewhat optimistic."

Shulman told Inman News that the latest forecast was prepared prior to a federal report last week that showed lackluster employment numbers, and the dollar has also struggled in recent weeks - both of these factors would likely have further diminished expectations in the forecast.

While an earlier Anderson Forecast called for housing starts to bottom-out at an annual rate of 1.2 million to 1.3 million, the forecast report released today expects a range of 1 million to 1.1 million for housing starts "and perhaps more importantly we now believe that the recovery will be far more tepid with starts barely recovering to a 1.4-million-unit annual rate by the end of 2009."

Housing starts are projected to experience a 55 to 60 percent peak-to-trough decline, Shulman said, with home prices falling 10 percent to 15 percent. The decline in housing starts would resemble a similar drop-off in 1986-91, he said. "I hope we're done lowering our numbers," he said.

Home-price declines are expected to drop through the end of 2009 and perhaps further out, Shulman said. Florida, California, Arizona, Nevada and parts of the Northeast are probably most susceptible to larger price drops, he said.

Credit tightening in the mortgage market has complicated property purchases in high-priced states such as California, he said, and the mortgage industry is moving toward "more full documentation, real cash down payments and more serious income standards - and that's going to take a lot of people out of the market at the current price structure." The problems in the mortgage market could lead to some painful adjustments in home prices, he said.

"I don't think lending standards were ever as lax ... and that's the cause of the problems," Shulman said.

The national scope of the real estate foreclosure problem in some ways resembles the Great Depression, he said.

Consumer spending is projected to drop, and auto sales, for example, are expected to hit the lowest level next year since 1998.

"Although it has taken longer than what we had previously forecast, the effect of housing weakness has finally spilled over into consumer spending on durable goods," the report states. "Nevertheless, we are still sticking to our story that we will not have a classic recession."

Shulman's report notes that the nation's trade sector is improving and a strong global economy should increase exports.

But he also states that "'Star Wars' buffs would characterize the August seizing up of financial markets as 'a disturbance in the force,' " and mortgage defaults have spread to Alt-A and prime home loans.

The Federal Reserve has taken steps to patch up the market, Shulman states in his report. "It seems to us that what the Fed is trying to accomplish is simultaneously restore liquidity to the financial markets without reinforcing the notion of what was called the 'Greenspan put' where aggressive market participants can lay off their pain on to the Federal Reserve. Simply put, the Fed wants to avoid the problem of what economists call 'moral hazard' by putting risk back into the system where risk takers are both rewarded and punished for their actions."

The Anderson Forecast expects the Fed to cut the federal funds rate from 5.25 percent to 4.5 percent by the end of this year. "The cuts will be undertaken to support the economy, not specifically to bail out the financial markets," the report states.

While some people are comparing the mess in the financial markets in August to the 1987 stock market crash or the 1998 Long Term Capital Management crisis, Shulman states in his report that "both analogies are wrong ... the economy in both 1987 and 1998 was much stronger than it is today." And because the crisis this time around has its origins in the domestic mortgage market, "we believe the impact on the real economy will be far greater this time than the prior two events."

Given the approaching presidential election year, Shulman said the mortgage crisis will provide some high theater, including "clear heroes, clear villains and ... ritual sacrifices." He said, "A lot of people are going to be very embarrassed before this is over."

And with all of the legislation in process now to address the mortgage problems, it's possible that the country will get "a whole new mortgage finance system when it's all over," he said.

Shulman's report concludes, "We forecast that it will take years for the housing market to recover to 'normal,' and the situation will be exacerbated in the short-run by changes in legislation affecting the mortgage industry."

A separate Anderson Forecast report focusing on California's economy predicts that the state is also expected to escape a recession, though the report's author states that the difference between a sluggish economy and a recessionary economy "is getting smaller all the time."

That report also notes that mortgage defaults and foreclosures "continue to occupy center stage in any discussion of local housing markets," and that most mortgage defaults have occurred in owner-occupied homes. The California counties with the highest foreclosure rates are those with "middle-of-the-pack home prices, but extremely high usage of adjustable-rate mortgages - exactly the combination we'd expect when working families stretch beyond their means to buy a home," the report states.
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Mortgage Problems Dampen Home Sales

"There's been an unusual hit to home sales, starting in March when subprime problems emerged and more recently when problems spread to jumbo loans," says NAR's senior economist.
REALTOR® Magazine Online
Tighter credit for home mortgages will measurably soften home sales in the short term and postpone an expected recovery for existing-home sales until 2008, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.

Lawrence Yun, NAR senior economist, says unusual disruptions in the mortgage market are dampening the outlook for home sales, notably for August and September.

“There’s been an unusual hit to home sales, starting in March when subprime problems emerged and more recently when problems spread to jumbo loans, with many potential buyers on the sidelines,” Yun says. “However, the jumbo loan market is now beginning to settle, and FHA-insured loans are helping to fill the subprime vacuum. The volume of existing-home sales this year will be better than 2002, which was the second year of the housing boom.”

Housing Outlook

Existing-home sales are projected at 5.92 million this year and then expected to rise to 6.27 million in 2008, compared with 6.48 million in 2006. New-home sales should total 801,000 in 2007 and 741,000 next year, below the 1.05 million in 2006.

“A sharp production pullback by homebuilders deep into 2008 is a healthy trend that will help trim down housing inventory,” Yun says. Housing starts, including multifamily units, are expected to total 1.37 million this year and 1.26 million in 2008, compared with 1.8 million in 2006.

“The mortgage markets will calm further in the months ahead, but it’s important to underscore the fact that conventional loans — the vast majority of available financing — are available to creditworthy borrowers,” Yun says. “Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment.”

Existing-home prices are likely to slip 1.7 percent to a median of $218,200 this year before rising 2.2 percent in 2008 to $223,000. The median new-home price is estimated to drop 2.2 percent to $241,100 in 2007, and then increase 1.7 percent next year to $245,100.

Here are some other economic factors that will likely influence the housing market:

    • The 30-year fixed-rate mortgage is projected to average 6.4 percent for the
      balance of the year and then edge up to the 6.5 percent range in 2008. “We
      expect the Fed to cut rates two times before the end of the year, which will
      lower interest rates for prime borrowers and FHA-insured loans,” Yun
      says. “FHA modernization could buffer the fallout of subprime loans, which
      would raise our sales forecast in the future.”

    • Growth in the U.S. gross domestic product is forecast at 2 percent in 2007,
      below the 2.9 percent growth rate last year; GDP will probably grow 2.7
      percent in 2008.

    • The unemployment rate should average 4.6 percent for 2007, unchanged from last
      year. Inflation, as measured by the Consumer Price Index, is estimated to be
      2.8 percent in 2007, compared with 3.2 percent last year. Inflation-adjusted
      disposable personal income is likely to increase 3.6 percent this year, up
      from 3.1 percent in 2006.

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August Home Sales Take a Major Plunge

Despite dropoff, median prices are holding steady.
By: HOWARD FINE: Los Angeles Business Journal Online
The expanding mortgage crisis and credit crunch slammed the Los Angeles housing market in August, with home sales plunging 50 percent from the same month last year and 25 percent from July.

Sales of new and existing homes in Los Angeles County slid to 4,107 units in August, just under half the 8,246 units that sold in August 2006 and well below July’s 5,458 units, according to figures compiled for the Business Journal by Melville, N.Y.-based HomeData Corp.

The pain was widespread, as only a handful of the county’s nearly 300 ZIP codes managed to eke out any sales gains. August’s plunge was even more dramatic considering that the month is traditionally one of the more robust for home sales.

The number of houses that changed owners represents the second-lowest monthly total since HomeData began compiling Los Angeles County data in January 2004. Only the 3,661 homes sold in February – one of the slowest months for sales – was lower.

Similar carnage took place in the condo market with year-over-year sales plummeting 40 percent to 1,168 units. Sales were off 27 percent from July’s 1,601 units.

“These numbers are the first to show the beginning of the impact of the credit crunch that materialized in the last couple months,” said Robert Kleinhenz, deputy chief economist with the California Association of Realtors.

Yet, as has been the case throughout the housing downturn so far, median home prices managed to hold their own. August’s median dropped slightly from its record July level to $579,000, though it was still 5 percent higher than year-earlier levels. Condo prices actually hit a new peak of $460,000, up from July’s $450,000 and from $415,000 a year ago.

Whether the drop in sales is the start of a bleak trend or is merely a statistical aberration tied to the abrupt onset of the credit crunch remains to be seen.

“The size of the drop is unusual and bears close watching in the months ahead,” said Delores Conway, director of the Casden Forecast at the USC Lusk Center for Real Estate.

High-end slowdown

The differing trajectories – home sales down but median prices up – has been due to a strong market for high-end homes with sale prices exceeding $2 million.

But last month, even this market took a hit as borrowers had a much more difficult time obtaining so-called jumbo loans, or those exceeding $417,000.

“Everything was great until about a month ago. Then, on one day – Thursday, Aug. 9 – everything changed as lenders shot up rates on jumbo loans to 9 percent and further tightened guidelines,” said Syd Leibovitch, owner of Beverly Hills-based Rodeo Realty, which mostly deals in homes worth more than $2 million.

“It became almost impossible to find a jumbo loan.”
For 10 days, Leibovitch said, sales of high-end homes came to a screeching halt. “We lost about a half-dozen deals,” he said.

Finally, towards the end of the month, sales picked up a bit as alternative sources of financing – chiefly savings and loans and credit unions – began to step in.

The mid-range market went through similar turmoil last month.

“We had a dramatic slowdown in activity in August. When the credit crunch hit, people didn’t know what to do and they just froze. It was like the Sept. 11 aftermath all over again,” said Gregory Holmes, associate manager with Coldwell Banker residential brokerage in Studio City.

Holmes said that “shock to the system” washed out almost all the buyers with less than prime credit or those who were unable to come up with 20 percent down payments.

However, he said there are still some buyers who do qualify for prime loans and can come with a $150,000 down payment on a $750,000 home. “They are just a little harder to find now than a year or two ago when we had all those bidding frenzies.”

Home seller blues

This relative scarcity of buyers has put the squeeze on sellers. Leibovitch said about two-thirds of his firm’s clients with listings have pulled them and chosen to wait out the market instead of accepting a lower price. That has put a further damper on home sales and it may also help explain why the average length of time homes have stayed on the market has declined from a high of 68 days in the first quarter to 50 days in the second quarter. Normally, a lengthening of the figure would be more consistent with a collapse in sales.

“Those people who can afford to wait are definitely taking their homes off the market,” Kleinhenz said.

He also pointed to the unsold homes inventory, which measures how long it would normally take to sell all homes on the market. Last month, the inventory stood at about 12 months, nearly 50 percent higher than the historical average of 8.3 months. However, the all-time high was 28 months back in early 1991.

“Back then, people were moving out of the region in droves, mainly because they had lost their jobs. We had net out-migration. These people had to sell their homes, no matter how long it took. Today, it’s a different story,” Kleinhenz said.

Some homeowners who have decided to move and are not getting sufficient offers on their homes have chosen to rent out their homes on a temporary basis until the market begins to recover, according to Harvey Mark, a Long Beach area Realtor with Coldwell Banker.

Mark said the impact of August’s credit crunch on his clientele was less severe than in other areas of the county. “There are fewer buyers and the ones who are out there are a little gun-shy because of all the bad press in recent weeks. But they are all eventually buying. They are jumping on competitively priced properties,” he said.
Mark’s territory in the Belmont Shore area of Long Beach has fared comparatively better than the rest of that city or the rest of the county, with home sales only off 7 percent from August 2006 and the median home price up about 5 percent.

It’s quite a different story in lower-priced exurbs like the Antelope Valley or lower-income inner cities communities like Compton and Lennox. Besides the national credit crunch, these regions have been hit particularly hard by foreclosures stemming from the subprime lending crisis.

For example, the HomeData figures show that the four Palmdale ZIP codes experienced a whopping 70 percent decline in home sales last month from August 2006 levels. Prices were off 6 percent to almost 15 percent.

In three Compton ZIP codes, volume was off 62 percent to 75 percent, with price declines reaching almost 14 percent.
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Economist: Fed has the Power to End Housing Slump

The Fed could prevent a lot of damage to the housing market and overall economy by acting swiftly to aggressively cut interest rates, says a Fed Board of Governors' member.
By: Peter Coy: REALTOR® Magazine Online
At least one influential economist is urging the Federal Reserve to cut interest rates quickly and preemptively.

Fed Board of Governors’ member Frederic S. Mishkin said in a white paper that the Fed could prevent a lot of damage from a severe housing slump by acting swiftly to cut interest rates aggressively before the slump gets any worse.

Mishkin says the harm that falling home prices do to the economy is predictable, so there's no value in waiting until the damage is done. By acting quickly, he says, the Fed can buoy consumer spending and minimize the loss in economic output while suffering only a small increase in the inflation rate. Such a policy, he writes, "can be extremely successful at counteracting the real effects of [a] very large housing slump."

The required cuts would actually be slightly less than the total under a typical monetary policy, he says, because they would forestall part of the economic decline. Rates would hit bottom about two years after a price decline begins. Under a traditional strategy, Mishkin says, rates wouldn't hit bottom until three or four years after a housing slump takes hold — and economic output would suffer a much bigger hit.
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Investors Default On Home Loans

Investors played a big role in pumping up home prices during the housing boom. Now, they account for an outsize proportion of loan defaults, mortgage bankers and builders say.
By: Michael Corkery and James R. Hagerty: The Wall Street Journal Online
A survey by the Mortgage Bankers Association found that mortgages on properties that aren't occupied by the owner - mostly investment homes - account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast.

Defaults were high on both prime and subprime loans, those made to borrowers with shaky credit histories.

The four states were among the favorites of speculators during the housing boom. When the market was hot, many speculators bought homes hoping to flip them for a quick profit. But now that home prices have turned lower, that strategy is backfiring.

As a result, some investors have "simply walked away from their mortgages," said Doug Duncan, chief economist of the MBA, echoing recent comments from executives of Countrywide Financial Corp., the nation's largest mortgage lender.

Investor defaults are likely to add to the spate of foreclosed homes hitting the market over the next year or two, even as much tighter lending standards cut many potential buyers out of the market.

The darkening outlook for the housing sector has prompted economists at Goldman Sachs Group to predict that home prices nationwide will fall an average of about 7% both this year and next. Alarmed by such prospects, a group of top executives from home-building and supply companies are scheduled to meet next Wednesday with Federal Reserve Chairman Ben Bernanke to argue for Fed actions to support the housing industry.

In Nevada, Arizona and Florida, loans for properties that weren't owner-occupied accounted for nearly a third of all home mortgages issued in 2005. The figure was 14% for California and 17% for the nation as a whole. The nationwide share for these primarily investor loans was in a range of about 5% to 7% in the 1990s, then jumped to 11% in 2002, 12% in 2003 and 15% in 2004.

In Nevada, homes that weren't occupied by the owner accounted for 32% of the prime-mortgage defaults recorded as of June 30, the MBA said. Such homes accounted for about a quarter of prime-loan defaults in Florida and Arizona and a fifth in California. For the nation as a whole, the figure was 16%.

The MBA defines defaults as loans that are 90 days or more past due or in the foreclosure process, but not those already taken over by lenders.

Sazzad Khandakar, 43 years old, an information-technology manager and father of three in Monroe Township, N.J., is among the nation's distressed home investors. In early 2005, he bought a $410,000 condominium and a $390,000 newly built single-family home, both in Orlando, Fla. "Everybody around me bought an investment home in Florida," Mr. Khandakar said. "Florida was all over the news; my friends were doing it....I didn't want to miss out."

He planned to keep the condo as a second home and sell the detached house for a quick profit. For the condo, Mr. Khandakar made a 10% down payment, but he borrowed 100% of the cost of the house, assuming that its rapid price appreciation would soon provide him with equity. Instead, prices began falling, and he has been unable to sell the home or find a tenant. Now, Mr. Khandakar said, he is behind on both loans.

"My credit is shot for the next six or seven years," he said, and he has run through $100,000 of retirement savings. "It will take me another five to 10 years to recover that," he added.

Many home builders say they tried to rein in sales to investors. Dom Cecere, chief financial officer of KB Home, a major national home builder based in Los Angeles, said his company used contractual clauses barring home owners from renting out their properties, but many investors bought anyway. "People do infiltrate whether you like it or not,'' he said.

Thanks to easy lending standards, many investors were able to get mortgages even though they put down deposits of as little as 2% to 3% on homes that weren't yet built. Some watched gleefully as a rising market boosted the value by 5% or 10% before the home was ready for occupancy. "For a while it went their way, they bought two or three homes and continued to roll the dice,'' said Mr. Cecere. "But that goes the other way when the prices go down.''

In the end, some investors may have made money by flipping a series of houses, and lost out only on their last investment, which they couldn't sell before the market collapsed, Mr. Cecere said.

Jerry Howard, chief executive of the National Association of Home Builders, said, "It's probably a pretty good bet" that the trade group will press the case for cutting interest rates when it and housing-industry executives meet with Mr. Bernanke on Wednesday.

On Aug. 17, in response to a credit crunch that grew out of problems in the markets for mortgage-linked securities, the Fed reduced its discount rate, the fee charged on direct Fed loans to banks, to 5.75% from 6.25%, in an effort to boost confidence amid near panic among investors over the surge in mortgage defaults and risks on other types of loans.

Markets are betting the Fed eventually will have to cut the more economically important federal-funds rate, charged on loans between banks, the benchmark for short-term borrowing costs. Lower rates tend to stimulate the economy by making it cheaper to borrow money.

Home prices are weak in most of the country largely because of a glut of houses and condos on the market. In July, the number of homes listed for sale nationwide was enough to last 9.6 months at the current sales rate, according to the National Association of Realtors. That's well above the five- to six-month supply that's considered balanced.

Meanwhile, lenders keep setting tougher terms, particularly for investors, who are viewed as higher-risk borrowers. Guidelines sent out to mortgage brokers last week by Countrywide specified that investors must make down payments of at least 20% on some types of loans and must document their income and assets. During the boom, many lenders provided 100% financing and often didn't insist on seeing the borrower's tax forms and pay stubs.

Underscoring the growing pessimism about housing, economists at Goldman Sachs in New York raised their forecast for the drop in U.S. home prices this year to 7% from a previous 5%. The forecast is based on the S&P/Case-Shiller national home-price index, considered the best such gauge by some housing economists. The Goldman economists expect a further 7% decline in house prices next year. In this year's second quarter, the index was down 3.2% from a year earlier.

Another house-price index, produced by the Office of Federal Housing Enterprise Oversight, or Ofheo, showed that prices in the second quarter were up 3.2% from a year earlier, the federal regulator announced yesterday. The Ofheo index, based on loans guaranteed by Fannie Mae and Freddie Mac, excludes homes financed with mortgages above the current $417,000 limit of the two federally sponsored mortgage giants. As a result, it misses much of the market in California and other high-price areas. The Ofheo index has lagged other gauges in tracing the housing slump of the past two years

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Private financing, rate buy-downs can rescue sale

Part 2 of 2: How to close deal when lender says 'no'
By: Bernice Ross: Inman News
(Read Part 1, "Low appraisals kill sales in today's market.")
A slowing real estate market, a credit crunch and an increase in foreclosures means that mortgages may be harder to obtain. What can you do when the lender turns down your qualified borrower?

Last week's article looked at how to handle a situation where the appraisal comes in low on a property. This week we look at additional strategies to assist you in closing a transaction when the lender says "no."

Second and Third Mortgages Bridge the Gap

If the appraisal comes in low and the buyer still wants the property, one option is for the buyer to seek secondary financing. This could involve having the sellers and/or the agents carrying a second or third mortgage. Another alternative is to seek a home equity line from a credit union or business bank. For example, if the buyers planned to make any renovations or to replace major items such as the air conditioning, carpets or appliances after the closing of the transaction, they may be able to obtain a home equity loan for the amount, thus freeing up additional funds to put towards the down payment. A different approach would be to seek financing from a private lender who does "hard money" loans. These loans are typically much more expensive. In a severe crunch, private financing may be your only alternative.

The Buyer Doesn't Qualify

Your buyers may be preapproved for a loan at 6.5 percent and the rates go to 7 percent. If the buyers' original ratios were tight, they may no longer qualify for their loan. This creates an exceedingly difficult situation for all parties. One solution, provided that the seller is desperate enough to do so and has sufficient equity, is for the seller to buy down the buyer's interest rate to the original 6.5 percent.

Many lenders also offer buy-down programs to help borrowers qualify as well. The most common buy-down is known as "2-1." Assume that the rates are at 8 percent. A typical buy-down would be for 6 percent for year 1 and then 7 percent for year 2. At the beginning of the third year through year 30, the rate would go back to 8 percent. At closing, the borrower or the seller prepays the difference in interest for the first two years.

For example, if the borrower is taking a loan of $300,000, the buy-down amount would be two percentage points, or $6,000 the first year and $3,000 the second year, for a total of $9,000. The $9,000 may be added to the purchase price, provided the comparable sales are high enough to support the higher valuation. In the example above where the buy-down is only 0.5 percent, the buy-down amount on a $300,000 mortgage for the first year would be approximately $1,500.

A slightly different approach is to keep the loan fees the same, but to raise the overall interest rate once the buy-down period has passed. For example, if the borrower above was unable to prepay the buy-down amount, the lender could help out with the equivalent of an adjustable-rate mortgage. Assume the interest rate is 7.5 percent with one point. To keep the points at 1, the borrower could qualify at a rate of 6.25 percent. The second year the interest rate would be at 7.25 percent and years 3 through 30 would be at 8.25 percent. There are multiple variations on this theme. The simplest solution may be for the borrower to take a traditional adjustable-rate mortgage rather than working with the buy-down.

No W-2, No Loan

In a credit crunch, lenders tighten the standards for self-employed individuals or people who may be between jobs. Since most self-employed individuals are aggressive in taking business deductions, they may find it particularly difficult to obtain a loan, even if they have 20 percent down and excellent credit. Lenders are nervous that the borrower's business may decline and that the property may come back to them as a foreclosure.

If you're representing someone who is self-employed, expect to have your client's tax returns reviewed as carefully as an IRS audit. Also, many underwriters don't understand the subtleties of corporate or partnership tax returns. The underwriter on our loan disallowed a distribution from our company as income even though we paid taxes on it.

Job history will once again become an important issue as well. One agent was representing a surgeon who was starting a new job at a local hospital. The surgeon wanted to purchase a home prior to beginning his new job. He had several million dollars in liquid assets. Even with "A" credit, the lender turned him down because he couldn't demonstrate two years of income with his new employer.

"The good old days" of 20 percent down, fully documented loans with careful scrutiny of all borrowers are upon us again. Given that there are many more listings than buyers in most places in the country, the tightening of credit may hasten a deeper slowdown. Foreclosures, bankruptcies and overextended borrowers are bad for everyone in our business. In the long term, however, tougher standards will be better for just about everyone.
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