Real Estate News & Commentary by Chris McLaughlin, October 2, 2009

http://www.shortsalesriches.com

* Follow me on Twitter: http://www.twitter.com/mclaughlinchris
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Keep the $8000 tax credit, say realtors

A large majority of the nearly 1,000 real estate agents surveyed in a recent Weichert poll say the first-time homebuyer tax credit of up to $8,000 has had a significant impact on spurring consumer interest in getting into the housing market. Some even called for an expansion of the program past its current expiration date and to homeowners that do not yet qualify. 71% indicated the credit was the single largest factor motivating the buyers they’ve worked with so far in 2009, 20% of respondents said affordable home prices were the motivating factor, and 8% indicated low interest rates played a major motivating role. 92% said the market will decline if the tax credit expires at the end of November while 97% of respondents favored extending the credit through Dec. 31, 2010. “The tax credit is working to restore confidence and stimulating the overall economy but we still have a long way to go before we return to a normal market,” said James Weichert, president and founder of Weichert. “As this survey shows, many in our industry are concerned that we will lose much of the ground that has been made toward a recovery if the tax credit is not extended.”

30-Year Mortgage Rate Falls to 4.94%

According to Freddie Mac’s latest survey of data through October 1, the average 30-year fixed-rate mortgage (FRM) had a 4.94% interest rate with an average 0.7 points, down 10 basis points (bps) from 5.04% last week. The 15-year FRM averaged 4.36% with an average 0.6 points, down 10 from 4.46% last week. The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.42% with an average 0.6 points this week, down from 4.51% last week. The one-year FRM averaged 4.49% with an average 0.5 points this week, also down from 4.52% last week. A separate rate survey conducted by Bankrate.com of major US banks and thrifts indicated rates fell for a fifth week, dipping to their lowest levels since spring. The 30-year FRM slipped 11bps to 5.25%, while the benchmark 15-year FRM fell 10bps to 4.65% this week. “This is as good a time as any to refinance because Uncle Sam will make it more difficult and more expensive to refi in a few months,” said Bankrate’s Holden Lewis in weekly commentary.

Unemployment hits 9.8%

The national unemployment rate inched up to 9.8%, another 26-year high. The Labor Department said there was a net loss of 263,000 jobs in the month, up from a revised loss of 201,000 jobs in August. Economists surveyed by Briefing.com had forecast losses would fall to 175,000 jobs. The labor market had shown slow but relatively steady improvement since a record loss of 741,000 jobs in January, and this is only the second time this year that job losses rose from the previous month. However, September marked the 21st consecutive month that the number of workers on payrolls has shrunk, a period during which 7.2 million jobs have been lost. Even though many economists, including those at the Federal Reserve, say there are signs that the economy is growing once again, today’s jobs report shows that job losses could continue well into the recovery, limiting the strength of any economic turnaround.

GSE REO Portfolio Near 100,000

According to 10-Q filings with the Securities and Exchange Commission (SEC), Freddie Mac’s portfolio is nearly 35,000 properties, while Fannie Mae’s is closing in on double that figure at nearly 64,000. Fannie’s REO portfolio nearly doubled from the first half of 2008 compared to H109. Fannie held 33,729 properties during H108. The number of properties increased in all regions of the US except the Midwest, which experienced a decrease from 15,265 to 14,626 properties, but the rate of growth in the two portfolios has declined. Freddie acknowledges it expects to experience further losses from REO properties: “While temporary suspensions of foreclosure transfers and recent loan modification efforts reduced the rate of growth in our charge-offs and REO acquisitions during the second quarter of 2009, our provision for credit losses includes expected losses on those foreclosures currently suspended,” the Freddie filing said. Freddie said its pool of Alt-A interest-only loans, as well as 2006 and 2007 vintage loans comprise the biggest share of its portfolio and “continue to be larger contributors to our worsening credit statistics than other, more traditional loan groups,” because of factors like declining home prices. Freddie’s REO properties are concentrated in the West region of the country, and homes there comprised 27% of the unpaid principal balances of Freddie’s single-family mortgage portfolio as of June 30, 2009, but accounted for 46% of its REO acquisitions in the first half of 2009.

Regulation Z statutes in effect

The Federal Reserve’s long awaited Regulation Z statutes went into effect yesterday after more than a year of preparations by the mortgage industry. Regulation Z is a truth-in-lending regulation to protect consumers who buy higher-priced mortgages with annual percentage rates (APR) above the average prime offer rate for a comparable transaction by at least 1.5 percentage points for first mortgages, or 3.5 percentage points for second mortgages. Lenders now have to provide additional disclosures when their customers purchase these loans. In addition, lenders will now evaluate the borrower’s ability to repay, verify income and assets, establish escrow accounts for taxes and insurance, and won’t have prepayment penalties for two years on most loans.

Taxes looming?

Remember the taxes the President promised no one but “the rich” (making over $250,000/yr) would have to pay? Well, no matter how much you make, reach for your wallet. An increasing number of influential Democrats and fiscal-policy experts have signaled that lawmakers will have to get a handle on the deficit, and they recommend seriously considering the creation of a value-added tax (VAT) on top of the federal income tax. That would mean more money out of everyone’s pockets when buying virtually anything — sweaters, school books, furniture, pottery classes, and dinners out. A VAT is tax on consumption similar to a national sales tax, but it’s not just paid at the cash register. It’s levied at every stage of production, so all businesses involved in making a product or performing a service would pay a VAT. And then the retail customer gets hit as well. Paul Volcker, the former chairman of the Federal Reserve who heads President Obama’s tax reform panel, (among others, including liberal think tanks, of course) said that when it comes to getting control of the country’s debt burden, “I think if we can’t do it on the cost side, we’ve got to go on the revenue side. And it’s too early to do it, but it’s not too early to begin wondering.” Well, we all knew deep down that the “no new taxes” shtick was too good to be true, didn’t we?

Now on to our real estate educational section…

What’s Better…Short Sales or Savings?
No, this isn’t a trick question nor are we opposed to savings – in fact, liquidity is an essential survival strategy that helps investors at all levels ride out tough economic times; however, it is possible to take anything to the extreme including savings.
As Americans across the nation embrace savings for the first time in years, there is a growing need for rational financial reasoning especially when it comes to investments. For years consumers were content to spend money they had not earned then simply make credit card payments or take out a second mortgage. Today all that changed as the rate of savings has gone from literally less than zero to nearly ten percent within the past two years.
While paying down debt and getting one’s financial house in order is always a good thing – it is not the same as investing. Setting aside money for a rainy day and keeping a little extra on hand for emergencies is also a solid strategy but should never be confused with growing your money.

Let’s take an up-close and personal look at short sales versus savings to see how it will impact the average investor. We will use a hypothetical case study of Mr. Saver versus Mr. Short Sale to see how each strategy plays out over time.

Mr. Saver

Mr. Saver is like most average American’s; he is fortunate enough to still be employed and has an “average” household income that just happens to reflect the nationwide median – $50,000. Mr. Saver is 30 years of age with 1.3 children (the third child is a very spoiled dog), married and wishes he had more time to spend with friends and family. Mr. Saver has another 35 years to work before qualifying for Social Security (actually 37 more years but who is counting) and puts away a whopping 10% of his income each and every year….which is far above the national average but we are going to use extremes to show the very real difference in expectations.
At the end of the year, Mr. Saver has put $5,000 into savings and plans to continue with this same habit for the next 30 years. Current interest rates are roughly 2 percent (if you are lucky). At the end of 30 years Mr. Saver will have a balance of $215,750 after managing to save $156,200. Sounds pretty good right? Well, not really. First of all you need to take inflation into account. Using a historical 30 year adjustment, that same $215,750 will only be worth approximately $73,000 in today’s dollars. Yes, we know that is less than what you paid in but that is how inflation works…it robs your money of value over time. To add insult to injury, Mr. Saver must pay taxes on the earned interest. Using a conservative estimate from today, that would eliminate at least another $10,000 to $12,000 leaving roughly $205,000 or less than $70,000 in inflation adjusted purchasing power. Wow…Mr. Saver worked hard and did without for 30 years just to set aside about 18 months of income. He better hope Social Security is in good shape by then because he is going to need it!
“Wait a Minute” you might argue, “Interest rates are likely to go up after the economy recovers”. That is certainly true but by definition, interest rates typically lag behind inflation rates or the banks could not afford to lend money. Additionally, most people tend to save less when prices rise – remember, just a few years ago the national average for savings was literally below zero. However, for the sake of debate, we will use a historic interest average of 5 percent. At the end of 30 years the total balance would be just under $370,000 with the same $156,200 contribution and $212,000 interest earned. Taxes on interest would conservatively run $25,000 leaving a total of $345,000 or $116,000 equivalent adjusted for inflation. It’s Better… but not by much.

Mr. Short Sale

Mr. Short Sale also is employed with a household income of $50,000, 1.3 children and no other debt. Instead of putting his money into a low interest savings account, Mr. Short Sale decides to invest the same $5,000 toward purchasing his first modest short sale home. He decides to rent it out and allow someone else to pay for the mortgage so is able to take hefty tax write-off’s after combining the PITI plus depreciation and closing costs. For the sake of simplicity we will assume he rents the home for just enough money to allow the home to pay for itself without making any profit…in reality, it would be much more likely to create a positive cash flow.
Mr. Short Sale continues to purchase a home every 2 years rather than putting the money into a savings account. At the end of 30 years Mr. Short Sale own 15 homes each generating a steady income that pays for itself. One home is paid in full and every 2 years another mortgage is paid off adding to the total number of paid in full homes. Mr. Short Sale can either continue to collect rent every month or sell one or more properties to fund his retirement.
Because real estate is a tangible asset, it has continued to appreciate in value each and every year so those purchased early in his investment career are now worth substantially more in value. In fact, let’s assume Mr. Short Sale purchased very modest starter homes for only $50,000 in 2009. In 30 years when he goes to retire, that same property should be worth at least $150,000 due to inflation….that represents only one year’s savings compared to 10-15 years worth by Mr. Savings above. Remember, every two years Mr. Short Sales will have another mortgage paid in full.
Ask yourself, how “safe” are your savings compared to short sales?

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com

P.S. : YOU MUST SEE THIS! The move celebrated real estate
investing movie of the year:

http://www.housewarsmovie.com

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All Rights Reserved.

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Finally, a blog for Real Estate professionals
that want up-to-the-minute news, & how it impacts
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting nearly
400 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
* Follow me on Twitter: http://twitter.com/mclaughlinchris
* Add me on Facebook: http://www.facebook.com/mclaughlinchris
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