PMC Mortgage Lender's Blog

A year-long snapshot of the housing market indicates an improving market, according to statistics recently released by the National Association of Realtors (NAR).

For all of 2011, existing-home sales rose 1.7 percent to 4.26 million units, but the big gains came at the end of 2011. An upsurge in activity in the last three months of the year culminated in a December sales increase of 5.0 percent.

NAR's 2011 December sales data includes a 4.6 increase in single-family home sales. Existing condominiums and co-ops registered an 8.7 percent sales increase. All-cash sales, mainly from investors, increased 3.0 percent and accounted for 31 percent of purchases in December, up 2.0 percent from a year earlier.

Falling mortgage interest rates were a contributing factor to the year-end sales increases. The national average commitment rate for a conventional 30-year, fixed-rate mortgage fell to a record low of 3.96 percent in December, according to Freddie Mac.

Lawrence Yun, NAR's chief economist offered his analysis of consumer sentiment stating, “record low mortgage interest rates, job growth and bargain home prices are giving consumers the confidence they need to enter the market.”

Home sellers would like to channel more of that “consumer confidence” into home-buying action. Another important market factor may help them realize their goal: a falling housing inventory.

At the end of December 2011, NAR statistics revealed the available housing inventory for sale dropped 9.2 percent to 2.38 million existing homes. This represents a 6.2-month supply, the lowest level since March 2005 where 2.30 million homes were on the market.

Economists can easily predict the effect a falling housing inventory has on prices as “many markets will see prices stabilize or grow moderately in the near future,” states Yun.

Less available housing inventory will mean fewer selections and increased competition for choice properties. NAR president, Moe Veissi predicts “more buyers are expected to take advantage of market conditions this year. We have a large pent-up demand.”

The market still faces many challenges including the 33 percent of NAR members reporting contract failures. This figure has remained unchanged from November to December.

The main culprits are declined mortgage applications and failures in loan underwriting where appraised values fall short of the negotiated contract price. Only 9 percent of NAR members reported these incidences in December 2010.

NAR’s statistical data is derived from completed transactions provided from multiple listing services and includes single-family homes, townhomes, condominiums and co-ops.

“Negotiations are about more than price” offers 30-year veteran real estate broker, author and columnist, Dian Hymer. “Generally, the fewer the contingencies or the cleaner the contract, the more attractive it will be to the seller.”

Hymer says everything is up for grabs when a buyer and seller enter into negotiations. “Closing and possession dates can become issues at the bargaining table. What's included and excluded, time periods to satisfy contingencies, and virtually everything in the contract is negotiable.”

You should understand what motivates the other party. A seller moving to a retirement home might go for the highest-priced offer in a multiple-offer situation, even though it might not be ideal in other regards. If they are liquidating their asset, every penny will count. They might have plenty of time to negotiate their best price.

Your negotiation strategy will “differ depending on how well the home is priced and who's on the other side.”

Hymer wants buyers to enter negotiations with a clear understanding about the terms they feel are not negotiable, yet be flexible on points that would be valuable to a seller.

For instance, know your upper price limit, but if repairs to a house are required consider buying “as is” to avoid delays while repairs are made. A lower sales price may be your reward.

“Don't waste your time with sellers who are firm at a price that is considerably over market value,” says Hymer. “Some sellers eventually get tired of having their home listed and reduce the price to market value.”

Hymer says that from her experience, “many buyers don't want to negotiate. They want their first offer to be their best offer.” However, this strategy is rarely successful. Buyers should plan for some negotiation, but should not put all of their cards on the table at once.

Sellers should be aware that if buyers feel they're not getting anywhere or are being treated unfairly they will walk away from negotiations, especially in today’s market.

A smart strategy is to defend your position while being honest and fair with the other party. Many buyers feel that cash is king. But if the home is a good value and suits your long-term needs, you might increase your offer price and include a mortgage. This way, you conserve cash for other uses.

Hymer’s best strategy for negotiating to close a deal is to be “preapproved for the mortgage you'll need and provide verification of cash for the down payment and closing costs.”

The Internal Revenue Service (IRS) has “issued a massive new set of regulations, with complex rules, in 2012” that will affect the profitability of owning rental and investment properties says Stephen Fishman, a tax expert, attorney and author.

Some of these new rules change the definition of what constitutes a deductible repair versus an improvement.

“The regulations will likely make it more difficult to classify fix-ups and other building expenses as currently deductible repairs,” states Fishman. “When it comes to taxes, repairs are far more valuable than improvements, up to 271 percent more valuable.” There are two big reasons why:

1.)  Repairs are currently deductible in a single year, while improvements must be depreciated over many years (39 years for nonresidential buildings, 27.5 years for residential buildings);

2.)  If you sell a building at a gain, you must pay a recapture tax of up to 25 percent on the depreciation you claimed in prior years.

So what's the difference between a repair and an improvement? An improvement is a major change or alteration to property. The IRS says there are three types of improvements:

betterments – improving property or repairing defects;
restorations – making older property like new and;
adaptations – adapting property to a new use.

In contrast, a repair doesn't make a property better, restore it, or adapt it to a new use. A repair is a minor change that just keeps property in good running order.

The IRS now says that fixing your roof, replacing heating and air conditioning systems, installing plumbing or electrical systems, even if relatively minor in scope, will be classified as improvements rather than repairs.

Add to this list fire-protection and alarm systems, security systems, gas distribution systems, elevators and escalators. Now, under new IRS rules, a property owner cannot “repair” these systems, he or she can only “improve” them.

Fishman says, “The new regulations require that buildings be divided up into as many as nine separate properties for tax purposes: the entire structure and up to eight separate building systems.

A significant change to any of these systems must be treated as an improvement and depreciated over several years. As a result, more costs will have to be classified as improvements rather than repairs.

If you own rental or business property, or if you should become an “accidental landlord” in 2012 by electing to rent your home rather than sell it at a loss, you should talk with your tax adviser about how these new regulations will affect you.

Until recently, home ownership was no bargain compared to renting, according to Paul Diggle, a housing economist at Capital Economics.

Recent data from the U.S. Census Bureau and published statistics from Thomson Datastream indicate that rising rents and falling mortgages are tipping the scales towards home ownership.

Diggle says the median monthly mortgage payment has fallen to about $700 which is close to a median monthly rent check.

Several economic factors have converged at the beginning of 2012 presenting a strong financial incentive for renters to buy a home. This has historically never happened before.

“There has been a 33 percent drop in home prices,” says Diggle, “a plunge in mortgage rates and a 15 percent rise in rents since the housing crash.”

Much of the decision to buy a house still depends on your personal finances and preferences, your career or family life, or level of financial security.

But if you’re comparing just the cost of owning vs. renting, buying a house is the better choice.

For someone who plans on staying put for seven years, they would come out ahead by about $9,000 if they bought a median-priced home rather than being a tenant in a median-priced rental.

Dingle has taken into account the total cost of owning versus renting by including closing costs, maintenance, insurance and property taxes, tax savings from mortgage deductions and gains or losses from home equity.

His calculations assume that rents keep rising by about 3 percent a year and that house prices stay flat in 2012 and 2013 and begin rising in 2014 at about 3 percent a year.

Renters need to consider broker fees and future rent hikes and make assumptions about future trends in housing prices and rents in order to make an informed decision to buy a home.

However, falling home prices combined with record low interest rates and rising rents may soon prompt renters to take a second look at buying.

Renters with a good rental payment history could now be rewarded with better credit scores.

Last year Experian, one of the three leading credit-reporting companies, added a section to millions of credit reports showing on-time rent payments.

Now two other companies, CoreLogic and FICO, have announced new credit reports and scores for 2012 that will incorporate renters' payment histories from landlords.

In addition to rental payment history, data on payday loan payments, other nontraditional loans and child support payments will also be reported. Utility payments and mobile phone bill information could be added later in 2012.

“Our research shows that one in three consumers in the highest risk score band will improve to at least the next higher score band with the addition of positive rental data,” states Brannan Johnston, vice president and managing director of Experian’s RentBureau.

For some borrowers, that could be a 100 point boost or more in their credit score, explains Johnston. But for renters exhibiting less than perfect credit behavior, their scores could take a hit.

Experian said that in 2012 it would add negative marks to renters’ files including notes about bounced checks and if they “bailed out” of their lease agreement by moving out before the end date of the lease.

Incorporating rental payments into credit scores could affect millions of people who have previously not been “scoreable.” That includes recent college graduates, students and divorced people.

CoreLogic’s Core Score report includes about 100 million people. The three other major credit reporting companies, which include Equifax and TransUnion, have reports on 200 million.

TransUnion collects rental payment information and shares it with landlords, but Experian is the only one of the three so far to add rental history to credit reports.

Experian obtains rent history reports primarily from major property managers and apartment companies. Most small landlords are not reporting, but Experian is working on a system for them to send reports in the future.

If your landlord is not reporting to Experian or CoreLogic, says Maxine Sweet, Experian’s vice president for public education, you can build your rental history by documenting your own on-time rental payments.

Many consumers are "often confused as to where their credit score comes from," reports John Ulzheimer, president of consumer education at SmartCredit.com and Bottom Line newsletter contributor.

When these consumers hear the term "FICO credit score" they often think that the company Fair Isaac, the company behind FICO, creates their credit score.

Ulzheimer says this is a "common misconception."

Fair Isaac "does not calculate anyone's credit score," states Ulzheimer, "It simply developed the software that is used to calculate credit scores and licenses its software to the three credit reporting agencies: Equifax, Experian and TransUnion."

Although all three credit reporting agencies use FICO scoring software, each tends to produce slightly different FICO credit scores.

Ulzheimer says each of these agencies compiles its own credit history for each individual and inevitably misses certain credit accounts and events.

This can leave the consumer even more confused and wonder which of the three scores they should care more about.

It's important to consumers because the score can determine whether you get a mortgage, auto loan or credit card with attractive terms.

As a former employee of Fair Isaac and Equifax, Ulzheimer knows the inside workings of the credit reporting industry.

He says for a consumer applying for credit, "it depends on which of the three credit reports a lender happens to check. Only mortgage lenders check all three."

While many consumers have the ability to obtain a non-FICO version of their credit score through various Internet websites, those "scores are rarely checked by lenders."

In fact, a home mortgage borrower who needs to know quickly his or her credit scores and to receive an accurate interest rate and monthly payment calculation for a new home purchase, should contact a Paramount Mortgage banker.

The Federal Housing Administration's (FHA) acting commissioner, Carol Galante, announced on Wed., Dec. 28, it is extending the waiver for the agency’s anti-flipping regulation.

The waiver was set to expire Jan. 31, but will now be in effect through Dec. 31, 2012.

The law was originally created to maintain stability in the housing market by prohibiting the agency from insuring homes sold within 90 days of their acquisition.

FHA temporarily waived the rule back in 2010, saying a reprieve would allow buyers to acquire HUD-owned properties, bank-owned properties and private homes for the purpose of improving and selling them to revitalize neighborhoods.

Galante wants to help neighborhoods “struggling to overcome the possible effects of abandonment and blight," by accelerating the resale of foreclosed properties.

The waiver is subject to certain restrictions.

When the sale price of the property is 20 percent or more above the seller’s acquisition cost, the lender must provide documents that justify the increase in value and must meet other specific conditions.

All qualified transactions must be at arms-length, meaning parties to the deal cannot be striving to achieve some type of kick-back or special interest separate from buying and selling of the real estate.

The waiver applies only to forward mortgages and is not eligible for home equity conversion mortgages.

The FHA said it extended the waiver after finding it takes less than 90 days to acquire, rehabilitate and sell a distressed property.

Since the original waiver went into effect on February 1, 2010, FHA has insured nearly 42,000 mortgages worth more than $7 billion specifically on properties resold within 90 days of acquisition.

Link: Waiver

The National Association of Realtors’ research staff recently released its comprehensive annual report: Profile of Home Buyers and Sellers for 2011.

Market researcher, Paul C. Bishop, Ph. D., Vice President and Jessica Lautz, Manager of Consumer Survey Research state that they’ve identified “trends that have not been seen in the last 10 years,” which will affect the housing market as we enter 2012.

“Buyers now are facing tighter credit standards” and the successful home buyer will typically have “the very best credit” or buyers quite often will purchase “without financing,” states the authors. “This change is one that is so substantial, it is changing who purchases homes, who sells homes, and how the home is financed.”

Getting your potential buyers preapproved with a mortgage banker early in the home buying process may be the critical first step to ensure a successful sale in 2012.

Thirty nine percent of buyers “reported the mortgage application and approval process” was “more difficult than expected,” which underscores the need to obtain competent financial expertise to help buyers navigate through the entire mortgage process.

Younger buyers and first-time buyers are leaving the market. The report states “37% of home buyers were first-time buyers, a drop from 50% in 2010.” Your typical buyer is now “45 years old, a jump from 39 years old in 2010.”

To attract buyers, “41% of sellers offered incentives” such as home warranty policies or financial assistance with closing costs. The typical home sold at “95% of the listing price, and 61% reported they reduced the asking price at least once.”

Single women are also leaving the home buying market dropping to “the lowest market share since 2004” at 18%, while married couples purchasing homes have increased to 64%, “the highest share since 2001.”

The real estate agent’s and broker’s job is secure however, as 89% of all buyers purchased their homes with these professionals, a steady increase from 69% in 2001.

Agents and brokers shouldn’t stop advertising and promoting themselves. Referrals from families or friends account for just 41% of an agent’s customer base. Once a buyer selects you as their agent, you’ll have a loyal client because “nearly nine in ten buyers would use their agent again or recommend to others.”

The report says the “financial aspects of homeownership are important, but they do not stand alone as the primary motivators for the purchase of a home.”

Agents who specialize in stable, quality neighborhoods will do better in 2012. Buyers consider the “top three factors” that influence their home purchase are “quality of the neighborhood, convenience to job, and overall affordability.”

“The House voted 234-193 Tuesday evening of last week to extend payroll tax cuts and jobless benefits,” reports Andrew Scoggin of Housing Wire. But this is bad news for the housing industry.

The House Bill HR 3630 would increase guarantee fees (G-fees) charged by Fannie Mae and Freddie Mac. The fees, however, would go directly to the Treasury Department, not to the GSEs.

The president of the Mortgage Bankers Association, David Stevens, reacted negatively writing, “In their effort to raise revenue in order to extend the current payroll tax holiday, policymakers have proposed imposing a new tax on homebuyers that will cost each homebuyer thousands of dollars over the life of his or her loan.”

“This new tax comes in the form of a proposed 10-basis-point increase in the guarantee fees charged by Fannie Mae and Freddie Mac,” continued Stevens. “For the average borrower, that could mean an additional $4,000 in fees over the life of a $200,000 mortgage.”

The Mortgage Bankers Association, the National Association of Realtors, and the National Association of Homebuilders told lawmakers that redirecting revenue from Fannie and Freddie for purposes unrelated to the health of the housing finance system is counterproductive.

Originally, the Senate had only proposed increasing the guarantee fees charged by Fannie Mae and Freddie Mac on sales of mortgage backed securities. In response to lobbying efforts from private mortgage insurers, the Senate agreed on Saturday to increase the mortgage insurance premiums on FHA mortgages to avoid giving FHA financing a competitive advantage.

Housing experts say it is easy to understand why Congress would decide to offset the cost of the payroll tax reduction with increased mortgage fees. The mortgage fees will not directly tax anyone that already has a mortgage. So, there is no existing group of tax payers that will be immediately affected by the hike in mortgage fees.

Time is running out on the Dec. 31 deadline. The take-home pay for 160 million Americans will decrease in January unless the House and Senate can come to a compromise and approve an extension of this year’s cut in the payroll tax.

A worker earning $50,000 a year would see take-home pay drop by $1,000 over the year. For those paid biweekly, each paycheck would be $38.46 smaller.

“The Federal Reserve said on Tuesday this week that it was closing the books on 2011,” reports Binyamin Applebaum, New York Times financial reporter.

The Federal Open Market Committee met and voted for the 16th consecutive time to leave the Fed Funds Rate unchanged.

Wall Street wanted QE3. It failed to arrive. So, mortgage rates are dropping.

The vote was nearly unanimous with just one dissent: a vote in favor of additional policy stimulus beyond what the Federal Reserve currently provides.

The Federal Reserve said that the U.S. economy is improving. It noted that since its November 2011 meeting, the economy has been "expanding moderately" despite some "apparent slowing in global growth," alluding to the Eurozone's financial issues. Read the Fed's Statement.

No Change in Fed Policy; No New Stimulus.

The Fed's economic analysis appears mixed. It acknowledged moderate growth expectations over the next year, but there are challenges.

As such, the Bernanke-led Fed added no new policies at its December meeting, and made no changes to existing ones.

It did reiterate its plan to leave the Fed Funds Rate within its current range of 0.000-0.250 percent "at least until mid-2013" and also re-affirmed "Operation Twist". There was no mention of a "QE3" program or other market stimulus. The Fed left everything as-is until its next meeting on January 24-25, 2012.

Play the Fed's Decision for Low Mortgage Rates

Wall Street expected the Fed to "do more." Because the Fed stood pat, though, a window to lock low mortgage rates just opened up. It did not exist before the Fed’s press release on Tuesday.

Market conditions look great. There's steady growth, low inflation, and no clear resolution within the Eurozone.

These three forces have combined to push mortgage rates down to levels we never imagined possible just six months ago, let alone six years ago.

This isn’t the time to sit on the fence. For a borrower wanting to buy a home, or an owner ready to refinance there is a short window of opportunity to take advantage of historic low interest rates.