If you’re in real estate or mortgage lending, you’re always getting inundated with data and statistics.  Among the many statistics I’ve seen lately, one kind of jumped out at me.

I read recently that something like 70% of all buyers of foreclosed home are speculators.  Wow.

I had a few quick reactions.  My first one was one of surprise.  I don’t know what I might have expected, but probably something like 30-40% would have been closer.  My second reaction was that we should all be grateful for these speculators, since we need someone to be out there buying real estate.  My third reaction was to wonder what will happen when the speculators all go away.

Let’s look at these assumptions or reactions. 

First, having speculators represent such a large percentage of buyers probably shouldn’t be surprising.  As speculators, they’re prepared to take risk in return for reward, and given how questionable housing values are these days, they’re willing to take great risk for great reward.

It’s speculators who are so key in the price discovery process.  Speculators who get in too early and pay too much will lose money, and that’s precisely how end-users, people buying homes to live in, know whether and when it’s time to buy. The people looking to buy homes to live in are afforded the luxury of standing off to the side where they can watch speculators determine the true value of local homes.

In this sense speculators are as much a part of the recovery process as they are of the discovery process.

But what happens when they go away?  First, we need to remember that the 70% statistic is only for foreclosed homes.  Second, they will go away when the easy profits are no longer there. And why will this happen?  It will happen because supply and demand are getting closer to equilibrium, and this has to happen before housing prices can stop falling and return to normal. 

Speculators thrive when there is a wide disparity between what sellers want and what buyers will pay.  True end-users want a market in which such disparities don’t exist.

The speculator stops playing the game because the easy profits are gone, but that also means that prices have stabilized.  After all, profits are much harder to come by once prices have stabilized.

The speculators will leave precisely when true end-users enter.

The absence of speculators will, by definition, mean that things have returned to normal. 

And isn’t that what we all truly want?  

* This article was from Rick Soukoulis, Chairman and CEO of Intero Mortgage

The Federal Reserve Board may be the least understood institution in America and about which people know the least.  But in these trying times, their role has not only been big.  It’s been critical.  The Fed has probable done more to get the economy moving again than all the government spending and bailout programs combined.

About 85% of all mortgages made today are being put into mortgage backed securities. These securities are being created primary by Fannie Mae and Freddie Mac. Both of which are now 80% owned by the government.  In past years, these securities were bought by banks, mutual funds, insurance companies and pension funds.  These same investors are still buying, but in general, they are buying a whole lots loss than they did before the credit crunch of 2008-09.

In order to drive rates lower, the Fed has stepped in and been buying massive amounts of mortgage securities.  As a mater of simple supply and demand, massive buying will drives bond prices up, and as bonds prices rise, rates drop.  Thus, the Fed made a conscious decision to buy mortgage securities to drive mortgages rates downward, largely to keep pressure off the American homebuyers and to stimulate housing markets in general.

The Fed has stepped in as the buyer of last resort, and they are now authorized to buy up to $1.2 trillion in these MBS’s.  They’ve already bought $975 billion, with $225 billion more to be bought.

They have been buying at a rate of $25 billion a week, just enough to keep rates relatively low, allowing people to refinance at lower rates and for homebuyers to afford new homes.

At current levels of purchases, the Fed will have bought the full $1.2 trillion by late December.

This raises two key questions:  (1) What will happen to the market and to mortgage rates once the Fed stops buying, and (2) what will the Fed doing with all these mortgage securities?

I don't think we need to worry about what happens when the Fed stops buying.  They’re smart enough to not stop until they’re convinced that private institutions are back and buying.  It will be a gradual phase out as the private sector phases itself back in. 

As for what the Fed will do with all these mortgages?  Fortunately, they have the world’s best balance sheet because of their ability to, essentially, print money for the purpose of acquiring assets. Think of that… Money is created out of nothing (but printing it) to buy real assets.   As a result, they won’t be in any hurry to dispose of them.  Over time, of course, they’ll probably sell 100% of the mortgage securities, but it will be very gradual and done in away that is not disruptive to the economy and to housing markets.

For all of the mystery behind the Federal Reserve, I think it has served us well by defusing the financial crisis.   

This article was from Rick Soukoulis, CEO of Intero Mortgage

More troubling news from a recent study by First American CoreLogic shows 20% of the homeowners in the U.S. have no equity left in their home.

About 8.31 million properties were underwater at the end of 2008, up 9 percent from 7.63 million at the end of September.

Corelogic predicts about 2.16 million properties will be underwater if home prices fall another 5 percent.

The problem is the worst in Arizona, California, Florida, Georgia, Michigan, Nevada, and Ohio.

Nationwide, 68 percent of U.S. adults own their own homes, and about two-thirds have mortgages.

I recently attended a workshop on Loan Modifications so I could address the issues of homeowners faced with little or no equity left in the their homes.  The government, along with the banks, seem to be still navigating the waters of this major real estate problem.  There are specific guidelines enacted in order to qualify for a loan modification.  I will address those in my next blog. 

Source: Reuters News (03/04/2009)

It seems everyday we are bombarded by the media regarding the economy, the stock market and the real estate market.  There is so much uncertainty and fear going through most people's mind.  What is the government up to today?

On the rise are the number of jobless claims at 667,000 for February, the highest level since 1982.  While the total number of people collecting benefits reached a record high of 5.11 million people.  On a good note, on the rise is the conforming loan limit from $625,500 back up to $729,750, as a result of the American Recovery and Reinvestment Act of 2009.  This higher loan limit will be in effect through December 31, 2009.  This should help to stabilize homes that were priced near the new conforming loan limit, and increase the perspective buyer with their financing options.

On the slide is Consumer Confidence which has hit an all-time low of 25 in February, down from 37.4 in January according to a report released by the Conference Board.  Consumer Confidence has been sapped by increased concerns over business conditions, employment and earnings.  On a positive note,  mortgage interest rates remain near an all-time low with 30-year fixed rate loans at slightly above 5.0%, 15-year fixed rate loans near 4.7% and 1-year adjustable rate loans at about 4.8% (source: Freddie Mac).

I'm sure we will continue to read, hear and anguish about the state of our economy.  No one seems to have a crystal ball to predict what is in-store for our near future, but there is one thing for certain.  The numbers will continue to rise and fall.

Though our local real estate median home prices have gone down a bit, some more than others, the following are some areas that have experienced increases...

 11 Markets With Highest Home Appreciations
Not all U.S. housing markets went south last year. First American CoreLogic Inc., in its latest study, identified the best-performing markets in the U.S. for 2008.

In many cases, the markets that made the list are areas that never enjoyed significant increases in value over the last decade -- but neither did they lose value over the last three years.

Nationwide, American CoreLogic, which predicts loan performance for banks, reported housing prices were down 11.1 percent last year. It predicts that home values will continue to decline through 2010.

In the fourth quarter of 2008, the report found that home price declines accelerated in some states where home values previously had been fairly stable, including Maine, Pennsylvania, Arkansas, Oregon and Rhode Island.

“The geographic breadth of price declines rapidly expanded in the second half of 2008, which means that housing wealth losses are broadening across much of the country," says Mark Fleming, Chief Economist for First American CoreLogic.

The 11 cities with the highest home price appreciation in 2008 are:

1. Cedar Rapids, Iowa: 8.83 percent
2. Binghamton, N.Y.: 7.78 percent
3. Amsterdam, N.Y.: 7.89 percent
4. Malone, N.Y.: 7.60 percent
5. Bay City, Mich.: 6.87 percent
6. College Station-Bryan: 6.78 percent
7. Rocky Mount, N.C.: 6.69 percent
8. Auburn, N.Y.: 6.51 percent
9. Lebanon, Pa.: 6.41 percent
10. Elmira, N.Y.: 6.28 percent
11. Johnstown, Pa.: 6.20 percent

*  This article from Realtor Magazine

The following is a recently published article by Kenneth Harney...

This article is provided by the California Association of Realtors...59% compared to 33% just a year earlier.

This information is from the California Association of Realtors...

 Earlier today, President Obama unveiled the Homeowner Affordability and Stability Plan, which will offer assistance to as many as 9 million homeowners, while attempting to prevent the destructive impact of foreclosures on families and communities.

The plan contains three main components, and only applies to primary residences. The loans referenced in the plan cannot exceed Freddie Mac/Fannie Mae conforming loan limits.  I’ve outlined the plan in greater detail below.

The first component is directed toward homeowners suffering from falling housing prices who still have equity in their homes, but no longer have the 20 percent equity needed to refinance.  Under the plan, homeowners who have conforming loans owned or guaranteed by Freddie Mac and Fannie Mae will be allowed to refinance their homes, even if they do not have 20 percent equity left in the house. The U.S. Treasury Dept. estimates that about 5 million homeowners will be helped by this portion of the program.

The second component, known as the Homeowner Stability Initiative, is designed to assist homeowners who are “underwater” on their mortgages. The $75 billion initiative will bring together lenders, servicers, and the government so that all stakeholders share in the cost of the modification.  Primary mortgages would be reduced to monthly payments that do not exceed a 38 percent debt-to-income ratio, with the costs of doing so borne by the lender. The government and lender then would split the costs of further reducing the monthly payments until they were at a 31 percent debt-to income ratio. An important aspect of the initiative is that homeowners do not have to be delinquent to participate.

The Homeowner Stability Initiative also will create incentives for servicers, mortgage holders, and homeowners. Servicers would receive an up-front fee of $1,000 for every eligible modification meeting the initiative’s guidelines. Guidelines are scheduled to be released by March 4. Mortgage holders will receive an incentive payment of $1,500, and servicers $500, for modifications made on loans that are current but at risk of imminent default.

The final aspect of the Homeowner Stability Initiative is creating clear and consistent guidelines for loan modifications. The Obama Administration plans to work with federal agencies, banking and credit union regulators, and the private sector in order to develop loan modification guidelines that can be implemented across the entire mortgage market. While adoption of the guidelines will be voluntary for the private sector, all financial institutions receiving Financial Stability Plan assistance going forward will be required to implement the loan modification guidelines.

The government estimates that between 3 and 4 million homeowners will benefit from the Homeowner Stability Initiative component of the plan.

The third component of The Homeowner Affordability and Stability Plan is supporting low mortgage rates by strengthening Fannie Mae and Freddie Mac.  The Treasury Dept. plans to increase their Preferred Stock Purchase Agreements with both Fannie Mae and Freddie Mac from its current $100 billion in both entities to $200 billion in each. The Treasury Dept. also will continue to purchase Fannie Mae and Freddie Mac mortgage-back securities in order to help promote stability and liquidity in the marketplace.  Additionally, the Treasury Dept. will increase Fannie Mae and Freddie Mac’s portfolios by $50 billion, for a total of $900 billion. The Obama Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving home buyers, such as CalHFA. Funding for this will not come from TARP money but from the Housing and Economic Recovery Act.

While some of the details still are being developed, such as the modification guidelines, the Obama Administration plans on using programs and funding already allocated for The Homeowner Affordability and Stability Plan and will need little legislative approval for programs under the plan.

The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

1.     Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.

2.     What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

3.     How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

4.     Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

5.     What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

6.     If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

7.     Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

8.     How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.

9.     How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.

10.   What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

11.   I read that the tax credit is "refundable." What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

12.   I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.

13.   Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

14.   Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.

15.   I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.

16.   I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.

17.   Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.

18.   I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit.

19.   Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.

Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.

20.   If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.

21.   For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

The weather over the weekend and through today has been wet around here.  I heard the Tahoe area received over seven feet of snow from this storm.  We did get a respite on Saturday for Valentine's Day, but the storms continued to roll through.  Up until this point we have had an extremely dry year, with eminent water rationing in the near future.  If we get a few more storms in the next month and a half, perhaps mandatory water rationing will be aborted.  Even if we do get a normal rainy season, and snow-pack in the Sierras,  water conservation is eminent. 

To help save a bit of water I bought a new shower head over the weekend that is suppose to save water and energy at the same time.  The shower head is made by Evolve Shower Heads (www.EvolveShowerHeads.com) and has a maximun flow of 1.5 gallons per hour (most shower heads have a maximum of 2.5 gallons or greater).  What makes this shower head unique is the "ShowerStart" technology that turns the spray of water to a trickle when the water temperature reaches 95 degrees F.  If your shower is like mine, I am waiting usually a minute or more for hot water to reach the shower head.  This feature allows me to turn the shower on and go put a fresh batch of coffee into the coffee maker, and when I return the shower is up to temperture and not wasting hot water.  There is a valve on the shower head that comes with a pull cord and all you do is pull on it to start the hot water flowing.  So, this saves both water and the natural gas it takes to heat the wasted hot water.  The shower head is $39.95 at Orchard Supply Hardware (not all the stores carry them), but I had a $10 off coupon.  It only took me about 5 minutes to remove the old shower head and install this one.  The Evolve Shower head package completes with teflon tape for the threads between the gooseneck and the shower head.  At my house the water is extremely hard, so I will report back on the performance and longevity of this shower head.  So far, it works great and I feel better knowing I am doing something to save some of our natural resources for feature generations.

I see this as a very positive move for real estate in California.  I have some buyers that have been looking for the last year and a half at buying their first home here in Silicon Valley.  They started looking in June of 2007, just as the local real estate market starting to be effected by the "mortgage meltdown".  Their price range was up to $750,000, even though they could qualify for slightly more.  As time went on, and they became very familiar with neighborhoods fitting their requirements and saw prices for larger homes matching their requirements recede.  At the end of 2008 they found several homes that would fit their needs, that were priced in the $900K's now priced around $750K.  Upon getting them re-approved for financing, their loan approval had gone down to $725K versus the $750K previously, due to the fact the conforming loan limit has decreased in 2008 from $729,500 to $625,500.  With their down payment (10%), they had lost some buying power.  So, this is great news for them that again they will be able to buy a home at around $750K, or slightly more.

Between the receding home prices, increased confirming loan limits and the availability excellent interest rates, this may prove to be a winning combination for many first time homebuyers that are currently sitting on the sidelines.

This information was brought to you by the California Association of Realtors...

The real estate financing today is all over the map.  A couple of days ago the rates were coming down due to the large drop in the stock market.  Today rates have started to rise and look to be heading that direction.

Inventory levels in Santa Clara County have stabilized.  The real estate market place in the sub $500k range continues to be hot.  The bank-owned properties leading the way in sales, as banks unload their inventory.  Short sales continue to sell as loss-mitigation departments of banks are dilligently trying to work their way through offers.

The local markets of Saratoga and Los Gatos continue to be sluggish as buyers for those marketplaces either are shopping for "great deals", or for some sign that the economic forecast is improving.

Portions of San Jose, Sunnyvale, Santa Clara, and Milpitas continue to be selling at a brisk pace.

Welcome to my blog site where I will be discussing a myriad of topics relating to real estate, ranging from financing (mortgage loans), to school information, restaurant reviews,, to neighborhood values in Silicon Valley.  Hopefully, you will find my information to be insightful.

All the best,

Perry