Knowledge Center for Real Estate Professionals

Knowledge Center for Real Estate Professionals


Breaking down the new $7,500 tax credit for 1st time buyers. 9/19/08
Understanding New FHA Rules & Fees. 08/29/08
What do Fed Rate Cuts Mean for Mortgage Rates. 10/08/08
Investing in a Home: The Power of Leverage 10/27/08
Do Mortgage Rates Really Rise After Presidential Elections? 11/05/08

Breaking down the new $7,500 tax credit for 1st time buyers
by Nelson Barss 08/29/08

The media reports accurately that there is a $7,500 tax credit available, but offers very few details . Here are the major points to help you understand the new law.

We’ve received a lot of questions about the home buyer’s tax credit that was created with the new housing bill. As we get into these details, please remember that we are not tax professionals. If you plan to use this credit, please consult a licensed tax advisor before moving forward with your plans.

The new law allows a 1st time home-buyer to receive a tax credit up to $7,500 or 10% of your home price, whichever is lower. Since most homes are priced well above $75,000, nearly every first-time home buyer will be eligible for the full $7,500 credit.

A tax credit is not the same as a tax deduction—it’s much better! That’s because, it is a dollar-for-dollar credit against your taxes. For Example, If you owe $2,000 in taxes at the end of the year, the credit will cover the taxes owed, and still give you $5,500 in cash to use as you see fit.

This tax credit is for 1st time home buyers only. Keep in mind, however, that the law defines a first time buyer as anyone who hasn’t owned a home in the last 3 years. The credit is also only available to families whose income is less than $170,000 per year. (For single filers, the income limit is $95,000 per year).

Another important fact to know is that this tax credit DOES need to be paid back to the IRS. Buyers who take the credit will need to begin paying back in the 2nd year. The amount is spread out over 15 years, with payments worked into their annual tax returns.

It’s also important to recognize that this is a temporary measure. It only applies to homes purchased between April 9, 2008 and July 1, 2009.

With all of the restrictions, many people have commented that this amounts to smoke and mirrors. However, in a market that has been flooded with negative news, we’re grateful for the efforts by congress to make it easier and more attractive for 1st time home buyers to take action now, while prices and rates are low!

Understanding New FHA Rules & Fees
by Nelson Barss 09/19/08

Recently passed laws have changed some key features of FHA loans.  Slightly higher down-payment requirements, as well as increased fees do not make it impossible for 1st time buyers, especially if they’re well educated by their agents and lenders.   In my opinion these changes were necessary in order keep the FHA loan program strong for the future.  Utah Housing loans still offer excellent zero down options, but we should understand and explain the risks to buyers who finance their home to the maximum in today’s slow market.

The most significant changes to the FHA loan program involve down payment requirements.  Beginning January 1, 2009 the FHA down payment goes up from 3% to 3.5%.  In addition, the popular seller-assisted down payment options such as Nehemiah and Genesis have been eliminated.  (The last of those transactions must fund by the end this month.)

Remember, however, that sellers are still able to make sales concessions of up to 6%.  These concessions can be anything from closing costs, gift cards to the buyer, and even discount points to buy-down the borrower’s interest rate.  The latter option may be a very helpful listing tool to help entice first-time buyers to a particular home.

Also, Effective October 1, 2008, the up-front mortgage insurance fee will increase from 1.5% to 1.75%.  This is in response to The Housing and Economic Recovery Act of 2008, passed last month, which requires a moratorium on the newly announced risk-based mortgage insurance.  For one year, all purchase and refinance transactions (except streamlines) will have to pay the higher fee.

With these changes, Utah housing loans become the last options for true zero-down financing.  We are proud to be able to offer Utah housing loans from numerous lenders to our clients, but in doing so we encourage our clients to remember that if they use all of the available money from Utah Housing, they’ll be financing 103% of their purchase price.  In my opinion, borrowers choosing this option in this market should be aware that, unless they’re buying a home at a bargain price, they may be upside down on the home for some time.   Disciplined buyers will make extra payments in order to accumulate equity after the purchase.   Others will be surprised if they try to sell in 3-4 years.  They may very well find that they owe too much to sell without bringing some of their own cash to pay off the loan.  This scenario would also make it virtually impossible to pay a commission to a realtor to help them sell.

Many in our industry have fought these changes, specifically the elimination of the seller-funded down payment assistance.   After reading HUD’s statistics on the issue, it is my opinion that without this change FHA would find itself in more trouble in the future and would require its own government bail-out in order to survive.   I’m personally glad to see these changes implemented.  I know how important the FHA program is to the stability of our housing market, and I also believe that most buyers have the ability to save up the cash they need for down payment.

Our task now becomes one of educating potential home buyers so they know how to save up for a down payment and prepare themselves to make a good decision when it comes time to finance their home.

What Do Fed Rate Cuts Mean For Mortgage Rates?
 By Nelson Barss 10/09/08

Whenever the Federal Reserve (“the FED”) reduces key interest rates, clients naturally want to know what that will mean for their mortgage rate.  Yesterday the FED announced an emergency rate cut of ½ percent.  Interestingly enough, we have seen mortgage rates tick slightly upward since yesterday.  As you’ll see in this article, Fed cuts don’t directly affect mortgage rates; instead it’s all about how the markets react to these announcements. 

Fed rate cuts that come as a big surprise to the market can generate quick swings in stock and bond prices, therefore dramatic swings in mortgage rates.   Yesterday’s rate cut was no surprise – in fact nearly all economists expected the Fed to make the move on or before their upcoming quarterly meeting, and earlier this week  Ben Bernanke, the Fed chairman hinted toward this move. 

The fact that this rate cut was already expected means that it was already “priced into the market” and so nothing dramatic has happened with interest rates.

What makes mortgage rates rise and fall?
Mortgage rates are determined by bond prices, so answering the question “what makes mortgage rates rise and fall?” is almost the same as answering the question  “What makes bond yields rise and fall?”

This is because nearly all mortgages in today’s market are grouped together into pools or “securitized” and sold as investments on the bond market.  These investments are known as “mortgage backed securities” or “Mortgage Bonds”
I don’t know all of the workings of the bond market, but here are some basics that I’ve learned.  Rates fluctuate, in general, as investors move money back and forth from stocks to bonds.

Investors pay close attention to economic indicators like unemployment reports, inflation indicators and consumer sentiment.  They also scrutinize any move or any comment by the Fed for hints as to what is ahead for the economy.  Money tends to flow out of bonds (which raises interest rates) when economic news is good, and it looks like the corporations will do well and be more profitable.

On the flip side, when bad news comes, such as poor corporate earnings reports, an increase in oil prices or terrorist threats we see a “flight-to-quality.”  Money flows back into the more stable bond market.  (This makes rates go down.)
So where does the Fed play into all this?  One of the Fed’s main goals is to control inflation (although right now he seems more concerned about influencing the Dow Jones Industrial Average than inflation).  When they feel that our economy is growing too fast for our own good, they will adjust the “Fed Funds Rate.”  This is the interest rate that banks charge each other, and when banks begin to pay more for their own borrowing, they pass this cost along to their customers.  This then causes our whole economy to “drag its feet” as businesses and families have to pay more for their borrowing.  Our auto loan rates, credit card rates and even our home equity lines of credit rates will go up...but not necessarily our mortgage rates.  To make a long story short – mortgage rates are tied to the bond market, not the Fed’s short term interest rates.

Investing In a Home: The Power of Leverage
By Nelson Barss 10/24/08

No-one will argue that Real Estate is a sound investment, especially if buyers adhere to prudent principles, but I doubt that most home buyers understand exactly how impressive the rate of return can be on a home!  Explaining the principle of “leverage” as it pertains to Real Estate may help motivate some of those buyers who are sitting on the sidelines and may be missing an excellent opportunity to buy while prices are low!  Here is how I explain this to clients:

Have you ever gotten excited about making 5%, 10%, 15% returns on your investments?  What if I told you that you could make 200%, 300% or 500% - now I’m starting to sound like a TV infomercial! But before you change the channel please consider the following scenario:

What if you bought a home for $200,000.  (You got a good deal facilitated by a good realtor on a home that needs just a little TLC.)  You purchased it with 3% down and put $5,000 worth of money into repairs over 5 years’ time.  Your total out of pocket investment is $11,000.  

After 5 years you sell the home for $250,000 and you walk away with $43,500 (after paying real estate commissions). 

Now let’s do some math—you invested $11,000 and you got back $43,500 that is a 295% return on your investment!  In this scenario, the home’s value only increased by 5% per year, for a total of 25% appreciation over 5 years, but your investment return was 295% - this is leverage. You invested only a part of the money needed to buy the house, but you get to keep the entire return on investment.

What if you had purchased that property with nothing down? — Then you would only have $5,000 invested and your return would have been 770%!!!. (yes 770%!)

How is this possible?  Does this really happen?  The reason so many people can make such good money in real estate is because you there is easy (and relatively cheap) access to Other People’s Money through the mortgage market.
Leverage is common in many markets, including stocks and bonds.  If you buy stocks with enough leverage (through a margin account) you can easily augment a 5% return into 20% return. 

What’s better—there are tax rules that allow you to make this kind of return tax free on your primary residence in most cases, and if it’s an investment property you can re-invest this money into another property tax free!  (this is called a 1031 exchange* more to come on this topic in future issues.)

What about risk?  Isn’t there a chance that you could loose a lot of money investing in real estate?  Yes—but much of the risk comes from buying the wrong home.  If you’re patient, work with an experienced agent, and work hard to purchase a home a home for the right price, then it should follow that you can sell the same home below market later if you need to get out.  The best advice I can give you is this: don’t underestimate the value of a good Real Estate Agent.   As a buyer, you do not pay for your agent’s services—the seller does.

 Above all else, Remember this key: You make your profits in real estate by BUYING right.
 *consult your tax advisor

Do Mortgage Rates Really Rise After Presidential Elections?
By Nelson Barss 11/05/08

This year I have heard many people perpetuate the notion that “mortgage interest rates typically rise after every presidential election.”  Can this be true?  Is there something about the months leading up to a presidential election that somehow hold rates low?

The chart below tracks the average 30 yr. fixed rate for 3 months before and after each of the last 4 presidential elections.  As you can see form the graph, this simplistic phrase simply isn’t true. 

 

Although presidential elections themselves don’t seem to make rates rise or fall,  the policies of certain presidential candidates can have an effect. (Read more on our web-site).  As markets react to the economic outlook under a new president, rates will either increase or decrease.

Typically, when investors believe the economy will be better under the new leader, dollars flow out of “safe” bonds and into the stock market.  Under normal conditions this would make bond rates (and mortgage rates) increase.  On the other hand, if the election of a new president leads investors to believe that businesses will be less profitable, dollars will flow toward the bond market, which tends to reduce interest rates.

Without getting too deep into this (because I’m already in over my head), I think It’s sufficient to say that there is no historical evidence and no economic explanation to support the idea that rates rise after elections.

So where does this theory come from?  Why do people say it?   My honest opinion is that it’s no more than a marketing tool.  Lenders and other industry professionals have used this phrase for years as a tool to get potential buyers and refinance prospects off the fence of indecision or procrastination.