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Economy's crystal ball: real estateCommentary: Middle East, inflation are '2 things not to worry about' February 25, 2011 Mortgage rates are back in the 4 percent range, taken there by the 10-year Treasury note's drop to 3.42 percent, which has wiped out the whole early-February spike. We have Libya, oil, stocks, housing and the economy to thank, but how those pieces interact is not obvious. Arriving economic data is obscured by incessant "recovery" cheerleading among business media. Some news is pretty good: both consumer-confidence surveys found three-year highs, which may indicate some hiring. New claims for unemployment insurance are holding down near 400,000. Every measure of manufacturing is doing well, although scratching in at 15 percent of our economy. The "wait-a-minutes" are led by today's downward revision in supposedly corner-turning fourth-quarter 2010 U.S. gross domestic product (from 3.2 percent to 2.8 percent). Growth? Sure. Self-sustaining, accelerating ... not so much. Wal-Mart's sales in the last 90-days fell 1.8 percent. Orders for durable goods in January (excluding super-volatile transportation and defense) tanked 6.9 percent. The Chicago Federal Reserve's January national index rolled to a minus sign. If you're in doubt, consider housing. New-home sales dumped 12.6 percent in January. But, the National Association of REALTORS® says sales of existing homes rose 2.7 percent. Hmmm. A story cooking for months: NAR may have overreported those sales for 10 years or more, high by perhaps a half-million each year vs. CoreLogic (its parent is a title company using real data), and since 2008 resulting in as many as 1.5 million imaginary sales each year. Nothing intentional, of course -- I first joined the National Association of REALTORS® in 1978 and quickly learned not to trust the association to count to 10 on its toes and get the same answer twice in a row. If existing-home sales are running below 4 million annually instead of above 5 million, then we have rather more trouble with distressed-inventory absorption than we thought. And market buyers and sellers have left the field or been elbowed from it. On that subject, NAR said only 37 percent of January sales were distressed ("only" ... sheesh). CampbellSurveys.com, meanwhile, says the distressed fraction was 44 percent in November, and shot up to 49.6 percent in January (California at 66 percent, Florida at 63 percent, Arizona and Nevada at a whopping 72 percent). Now two things not to worry about: inflation and the Middle East. Inflation comes in a few well-defined forms. The deadly one is the wage-price spiral, which plagued us in the 1970s and can be stopped only by recession. The U.S. today is impervious to such a spiral because we have near-zero wage growth. In fact, rising oil prices will slow this economy by crowding out other spending. Note that commodity prices have fallen -- not following oil, instead anticipating slowdown. Same for stocks. Other inflation forms include the classic money-printing of Zimbabwe and Weimar. The Fed's "quantitative easing" (QE) program does print monetary electrons, but the money cannot make it into wallets because the credit system is still broken. No credit, no money. The last form, cost-pushed inflation, is temporary -- it is not a structural ramp-up in general prices. That's what this is. Oil is driven by speculators, just as it was in 2008, and all should be reassured that this spike has stopped far short of that run to $150 per barrel. Middle East ... it takes some serious chutzpah to be relaxed about the place. But, concept No. 1: the Middle East nations need to sell oil worse than we need to buy it, no matter who is in charge over there. Non-oil economies in the Middle East have never developed, and 10-fold growth in population has made '70s-style embargoes impossible today. No. 2: Despite U.S. bejabbers about radical Islam, these brave Tunisians, Egyptians, and Libyans are in their streets waving their national flags, not pictures of Osama. No. 3: Post-revolutionary peoples' governments, no matter how they may roil and rock, are steadier by far than rotten autocracies, especially in dealings with neighbors. Some go sour (Iran), some are in doubt (Iraq), but dictatorships breed anger and extremism, and dictators need to pick external fights with pretend enemies. Refounded nations, even while struggling to establish representative government, have stabilizing advantages. The greatest of these: pride at self-liberation won hard. We live in one of those places. Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com. |
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Republicans take aim at HAMP4 bills targeting foreclosure programs could see House vote February 28, 2011 The House Financial Services Committee will vote this week on four related bills that would terminate the Home Affordable Modification Program and three other government programs aimed at preventing foreclosures or mitigating their impacts. Committee Chairman Rep. Spencer Bachus, R-Ala., has characterized the targeted programs -- which also include the FHA short refinance program for underwater homeowners and the Department of Housing and Urban Development's Neighborhood Stabilization Program -- as "failed and ineffective." A subcommittee hearing on the bills is scheduled for Wednesday, followed by a markup session and vote by the full committee on Thursday. Republicans hold the majority of seats on the committee and the House itself, but if approved by the House the four bills would face tougher going in the Senate and be subject to a presidential veto. Altough the HAMP program has been criticized on many fronts, the Obama administration and other defenders of the program say borrowers in HAMP loan mods have been less prone to redefault than those who received loan modifications outside of the program. HAMP bought time for many borrowers who didn't end up qualifying for permanent modifications, the program's defenders say. The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has questioned whether HAMP will ever meet its original goal of helping 3 million to 4 million homeowners, and reports by the Congressional Oversight Panel for the Troubled Asset Relief Program and the U.S. Government Accountability Office have also been critical. In an October report, SIGTARP dismissed the Treasury Department's claim that borrowers granted temporary loan modifications received a "significant benefit" whether they qualified for a permanent loan mod or not as either "hopelessly out of touch with the real harm that has been inflicted on many families, or a cynical attempt to define failure as success." Republicans are also targeting a program launched Sept. 7 by the Federal Housing Administration that allows underwater homeowners who are current on a non-FHA loan to refinance into an FHA-backed loan when their lender agrees to write off at least 10 percent of their principal. The so-called "short refinance" program has also gotten off to a slow start, in part because of eligibility requirements. Only 35 applications had been submitted as of Dec. 13, Bachus said in the press release. Borrowers must meet FHA's income, appraisal and debt-to-income standards, and the maximum loan-to-value ratio is 97.75 percent. But the combined loan-to-value ratio can be up to 115 percent, allowing for subordination of second loans or new subordination of some of the unpaid first loan, FHA Commissioner David Stevens said in a letter defending the program in December. Also targeted for termination is the Neighborhood Stabilization Program, which provides funding for state and local government agencies to acquire, redevelop or demolish foreclosed properties. Congress appropriated $7 billion for the program, which HUD has estimated will be used to buy about 100,000 properties. Critics of the program say it doesn't help at-risk homeowners facing foreclosure and may create incentives for banks to foreclose on troubled borrowers, according to Bachus. The NSP Termination Act would end the program and rescind the unobligated portion of a $1 billion third round of funding, authorized in July with passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. HUD announced in September that it would allocate at least $5 million to every state in the third round of funding, with larger amounts earmarked for: - Alabama ($7.6 million),
- Colorado ($17.3 million),
- Connecticut ($9.3 million),
- Georgia ($50.4 million),
- Kansas ($6.1 million),
- Massachusetts ($7.4 million),
- Maryland ($6.8 million),
- Minnesota ($12.4 million),
- Missouri ($13.1 million),
- Nebraska ($6.2 million),
- New Jersey ($11.6 million),
- New York ($19.8 million),
- Rhode Island ($6.3 million),
- South Carolina ($5.6 million),
- Tennessee ($10.2 million),
- Texas ($18 million),
- Virginia ($6.2 million) and
- Wisconsin ($7.7 million).
A fourth bill under consideration by the House Financial Services Committee would terminate HUD's Emergency Homeowners' Loan Program (EHLP). The Dodd-Frank bill provided $1 billion in funding for the program, to provide bridge loans of up to $50,000 to help eligible borrowers pay their mortgage insurance, taxes and hazard insurance for up to 24 months. The program is aimed at assisting borrowers in 32 states not receiving aid under the Treasury Department's "Hardest Hit" program. "These loans will serve to increase the amount of the borrower's indebtedness, so a borrower who is unable to pay back either the original amount of principal or the additional loans made under the program will be worse off in the long run," Bachus' office said. |
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The 30-year fixed-rate mortgage inched above 5 percent this week, rising to its highest level since the last week in April 2010, and continuing its steady climb upward the last few weeks.
The 30-year rate averaged 5.05 percent this week, up from 4.81 percent the week prior, according to Freddie Mac’s weekly mortgage market survey. Last year at this time, 30-year rates averaged 4.97 percent.
Here’s how other rates fared for the week:
▪ 15-year fixed rates: averaging 4.29 percent this week, up from 4.08 percent last week.
▪ 5-year, adjustable-rate mortgage: averaging 3.92 percent this week, up slightly from 3.69 last week.
▪ 1-year, adjustable-rate mortgage: averaging 3.35 percent, up from 3.26 percent last week.
"Long-term bond yields jumped on positive economic data reports, which placed upward pressure on mortgage rates this week,” says Frank Nothaft, Freddie Mac’s chief economist.
Meanwhile, earlier this week, the Mortgage Bankers Association announced a drop in the number of people applying for a mortgage as rates continued to rise.
MBA’s overall mortgage application index dropped 5.5 percent from last week. The refinance index fell 7.7 purchase from last week, and refis made up two-thirds of the mortgage activity last week--the lowest share since May 2010.
Source: “30-Year Fixed-Rate Mortgage Rates Rise to 5.05 Percent, Highest Level Since April 2010,” Freddie Mac (Feb. 10, 2011)and “Fewer People Applied for a Mortgage Last Week as Rates Increased on Better Economic Data,” Associated Press (Feb. 9, 2011) |
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Real Estate Tax Talk February 11, 2011 Life isn't exactly easy for most real estate professionals these days. But real estate pros who own rental property have one thing going for them that others don't: special tax advantages. Let's say that you are a rental property owner and you spend more on the property than you earn during the year -- a depressingly common occurrence these days. Naturally, you'd like to be able to deduct your loss from any nonrental income you have, thereby reducing your taxable income and lowering your taxes for the year. Unfortunately, losses from real property rentals are classified as "passive activity losses." Special passive activity loss rules greatly limit the amount of losses that a rental property owner can deduct from other nonpassive income, such as salary or other business income. A maximum of $25,000 can be deducted from nonpassive income each year, and even this is phased out if the owner's adjusted gross income exceeds $100,000. Unused losses must be saved for future years. But real estate professionals can qualify for a special exemption from the passive loss rules -- an exemption nobody else can get. If you qualify, you may deduct any amount of rental activity losses you have for the year from your other income -- such as real estate commission income -- regardless of how high your income for the year may be (see Internal Revenue Code Section 469(7)). For example, a real estate broker who loses $100,000 from his rentals could deduct the entire amount from his commission income. Unfortunately, the rules for determining who qualifies for the real estate professional exemption from the passive loss rules are complex. Basically, you (or your spouse, if you file a joint return) must spend more than half of your working hours during the year working in one or more real property businesses. In addition, you (or your spouse, if you file a joint return) must spend more than 751 hours a year in one or more real property businesses. A real property business includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage business (per the code section cited above). It includes working as a real estate broker or self-employed salesperson. In addition, you must "materially participate" in your rental activity to qualify for the exemption. This requires that you work a certain number of hours at your rental activity during the year. For example, you would materially participate if you work at least 500 hours during the year at the activity. You can qualify in other ways as well. If you own more than one rental property, here's a key point to understand: You are required to materially participate for each rental property you own unless you file an election with the Internal Revenue Service to treat all of your properties as one, single activity. In this way, you can combine the time you spend working on each rental property to satisfy the material participation test. If you fail to file the election, you'll have to materially participate for each rental property you own. For most landlords, this is impossible to do, which makes filing a timely election very important. Example: Dennis owns five rental homes. He works 500 hours a year managing all five, and no one else does any work on the properties. If he files an election with his tax return to treat all his properties as one rental activity, he'll pass the 500-hour material participation test. However, if he fails to file the election, he'll have to materially participate for each house he owns -- that is, he'd have to work 500 hours on each house, instead of all five together. To make an election to treat all your rental activities as one activity, you'll need to draft a statement like the following and attach it to your tax return: "Tax Year:__________ Taxpayer Name:___________ "Taxpayer Identification Number: _______________ "In accordance with Regulation 1.469-9(g)(3), taxpayer states that he/she is a qualifying real estate professional, and elects under IRC Section 469(7)(A) to treat all interests in real estate as a single rental real estate activity. "Signed: ____________" The election can be filed any year you qualify for the real estate professional exemption, and needs to be filed only once. It applies to all future years that you qualify for the exemption. It may only be revoked if you have a "material change" in circumstances. The fact that the election is less advantageous to you in a particular year is not a material change in circumstances (see: IRS Reg. 1.469-9(g)). If you are audited by the IRS, the key to preserving your real estate professional exemption is good records of your annual work hours. IRS regulations provide that you may use any "reasonable means" to keep track of your work time, including daily time reports, logs, appointment books, calendars, or narrative summaries (see: IRS Reg. 1.469-5T(f)(4).) You are not absolutely required to keep contemporaneous records -- that is, records made at or near the time you did the work involved -- but it is a good practice to do so. Got a real estate tax question? Ask below ... |
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