Lucien's Blog

Homebuyer Tax Credit vs Child Support

Lucien Vaillancourt (Realty Executives) — Sat, 14 Mar 2009 13:32:36 -0500

The $8,000 tax credit is a great incentive if it actually goes to the first time homebuyer. Here is a situation where I was caught of guard. I had a buyer who closed on their new home in 08 and was eligible for the $7,500.00 tax credit. When he filed his tax return he was getting the full credit plus an added amount due to excess withholdings from his earnings during the year. He had already made several improvements to the home on credit and was planning to pay off the debt with the tax credit. Sounds like a good plan until he learned that his entire tax refund including the $7,500.00 tax credit went to his x-wife for back due child support. The real kicker is that he was awarded custody of the children who have been living with him since he bought the home. Apparently there was a period of time where he was unemployed and unable to make payments to the x wife while she had custody. Even though the court awarded him custody of the children the x-wife is still entitled to the back due payments. I did not consider this otherwise I would have counseled him to avoid spending the money before he got it.

It might be a good idea for all REALTOR's to make buyers aware that there may be situations where the tax credit goes to someone other than the home buyer. If he had adjusted his tax withholdings during the year based on the expectation of receiving the credit he may have been stuck with a bill from the IRS.

HOPE for Homeowners or just postponing the inevitable?

Lucien Vaillancourt (Realty Executives) — Tue, 27 Jan 2009 16:36:03 -0600

Passage of the Housing and Economic Recovery Act of 2008 (HERA) H.R. 3221 may offer some hope for homeowners facing situations that may lead to foreclosure. Since the vast number of foreclosures is having a negative effect on home values preventing even more homes from going into foreclosure may help to stabilize prices and restore confidence among potential homebuyers. At least this is the intent. To see the effect of foreclosure sales on the Jacksonville home values check out my "Jacksonville Florida Real Estate Market Trends" page.

One component of H.R. 3221 designed to reduce the number of foreclosures is the HOPE for Homeowners Act of 2008 (FHA Foreclosure Prevention Refinancing Program). One key provisions of the act is to authorize the FHA to insure refinance loans for distressed borrowers. This sounds OK at first but lenders who hold the current mortgage would have to agree to accept only 90% of the appraised value as payment in full. Not such a good deal for them. Basically the distressed borrower will be able to reduce the amount of the original loan to 10% below the current appraised value. These loans will also have fixed rates. This is a great deal for the borrower. For more details click HOPE for Homeowners Act of 2008

What about the responsible borrowers who have made sacrifices and lifestyle changes in order to continue to make payments as promised to the lender? What's in it for them? Well they get a pat on the back and the satisfaction of knowing they did the right thing. They will also benefit from the stabilization of home values that should result from the removal of foreclosures from the market. Many responsible homeowners who would like to refinance to take advantage of record low interest rates find that they do not have enough equity to qualify due to falling home values. Also, should responsible homeowners need to sell their home they won't be competing with foreclosure sales.

What's in it for the taxpayer? The FHA will get to keep a portion of the equity if the home is sold within certain time frames. From 100% of the equity if the home is sold within one year up to 50% of the equity if the home is sold after 5 years. There will also be a 3% up front mortgage insurance premium due at closing and an annual mortgage insurance premium of 1.5%

I believe that irresponsible behavior and decision making is what leads to most foreclosures. In effect this program rewards that irresponsible behavior. Psychologists will confirm that behavior that is rewarded gets repeated. If that is true then the HOPE act of 2008 will probably evolve into the Renewed HOPE act of 2010. Is this program destined to only serve to prolong the inevitable? We shall see.

Foreclosures VS Home Values

Lucien Vaillancourt (Realty Executives) — Mon, 26 Jan 2009 18:42:25 -0600

What’s it going to take to stabilize home values? Here's my take on the situation. The Jacksonville real estate market continues to favor buyers with over 16 months of residential real estate currently for sale. Property values in Jacksonville and the immediate area have adjusted downward in response to a decrease in demand and a surge in short sale and foreclosure inventory. For example, there are currently 12,852 single family homes for sale in Jacksonville. 28% of those are listed with a title status of “pre-foreclosure” or “foreclosure”. In the last 30 days 757 single family homes were sold with 42% of those sales being pre-foreclosures, short sales, or foreclosures. The disproportionate number of foreclosure sales points to a trend among homebuyers to aggressively seek out bargains. In fact foreclosure sales have become a lucrative niche market for REALTOR’s specializing in in foreclosures. Sellers not in financial distress who need to sell are adjusting their prices downward in order to compete with the lower priced foreclosures. This activity is exerting downward pressure on home values which has resulted in an 11% decline in Jacksonville’s average sale price since Dec 07. A continued decline in home values will result in more short sales and foreclosures which will drive values down even further. It is a self perpetuating scenario. This is why selling off or reducing the existing foreclosure inventory by any other means is what is needed to stabilize and restore home values.

What motivates a bank to sell homes at fire sale prices? It’s strictly business. Banks are in the business of loaning money. When a bank exercises their right to foreclose on a home due to non-payment they now have money tied up in a non-performing asset. Each month the bank owns the home they loose money in lost interest and other costs associated with owning the property. It is in the best interest of the bank and their investors to convert that asset back into cash that can be loaned out as quickly as possible. Banks know that homes priced slightly below value will sell more quickly than homes priced at or slightly above market value.

How much lower will values fall? One guess is as good as another and I would take anyone’s opinion with a grain of salt. Everyone knows that real estate values rise and fall in cycles. A look back in history will prove that. Restoring confidence in the eyes of the consumer is critical in shortening the down cycle.

What happened to the Jacksonville Real Estate Maket?

Lucien Vaillancourt (Realty Executives) — Thu, 11 Sep 2008 16:50:47 -0500

So what's causing the drop in home prices in Jacksonville? That's an easy one. With over 16 months of inventory as of August 2008 there are still too many homes on the market. As with anything else it is an issue of supply vs demand. An increase in supply drives prices down while and increase in demand drives prices up. Simple economics.

So what caused the increase in supply? This may be up for debate but here's my take on it. Adjustable rate subprime mortgages. During the boom years practically anyone could get a mortgage. If the borrower did not have the income to qualify they were offered the SISA (Stated Income Stated Asset) loan. Then they could state whatever income was needed to qualify without any documentation. Many of those borrowers opted for adjustable rate mortgages because they came with a lower rate. Tack on a pre-payment penalty period and they got another 1/8 point reduction. In some cases the pre-payment penalty period exceeded the fixed period of the loan. That's where the trouble started. When rates started to climb borrowers could not refinance without paying a hefty penalty which was usually equal to six months of mortgage interest. When they could no longer afford the higher payments the home would go into foreclosure or would be sold as a short sale. Adding those forced sales to the normal sale activity flooded the market with homes priced below market value. Higher mortgage rates reduced the pool of qualified buyers to buy them. There you have it.

So why did mortgage rates go up? When people hear that the Federal Reserve has cut short-term rates, they expect long-term mortgage rates to move in the same, downward direction. But it's a stubborn fact that when Fed rate cuts are deemed inflationary, long-term mortgage rates go up. Bond yields rise to attract investors and mortgage rates follow. And that's what has been happening in the past few months. Heres why. When the Fed cuts rates, the economy typically is the beneficiary. This means businesses will do better as more sales are made. Manufacturers, service providers and retailers will then be more inclined to raise prices in response to an increased demand. Lets say the Consumer Price Index (CPI) indicated that overall prices rose 0.4 percent last month. That translates into an annual inflation rate of almost 5 percent. That rise in inflation reduces the actual return on a fixed interest rate investment like bonds, so with 5% inflation, that 6.74% mortgage note returns only 1.74% "real" interest. By that measure, a rate of 6.74 percent for a 30-year mortgage seems like a bargain.

For detailed information about the Jacksonville real Estate Market visit my web site and click Jacksonville Real Estate Market trends.

http://www.lucienvaillancourt.com

Jacksonville Real Estate Market Showing Signs Of Improvement!

Lucien Vaillancourt (Realty Executives) — Tue, 06 May 2008 17:01:31 -0500

I'm sure most of us are sick of hearing the drum beat of gloom and doom coming from the mainstream media and are anxious to point to some good news for a change. Well I am happy to report that, at least in Jacksonville, FL, the real estate market is showing signs of improvement. The graph below from the North East Florida MLS shows that the inventory of available homes has declined for three consecutive months with just over 16 months of inventory as of 31 March 2008. Although 16 months of inventory still represents a strong buyers market if this trend continues we should achieve a balanced market of 4 to 5 months of inventory by years end. For more detailed market stats visit my market update page on http://www.lucienvaillancourt.com.

I have also noticed an increase in showing activity on our company listings. I think the news of possible rate hikes on fixed rate mortgages and a belief that the market may have bottomed out is bringing buyers back into the market. Although it is still a great time to be a home buyer in Jacksonville the window of opportunity to get the best deal on a home is begining to close. I would advise anyone waiting for the best time to buy to act now. If anyone else has some good news I'm sure we would all love to hear it.