Real Estate News and Commentary

November 3, 2009October 5, 2019

Hearings on residential and commercial real estate crises

On November 2, 2009, The Committee on Oversight and Government Reform Subcommittee on Domestic Policy began witness testimony on the hearing entitled “Examining the Continuing Crisis in Residential Foreclosures and the Emerging Commercial Real Estate Crisis: Perspectives from Atlanta.”

You can read the interesting opening testimony on the subcommittee’s website:

The witnesses seem to be a cross section of those involved in the real estate industry. Interestingly, each perspective on the cause of the real estate bubble burst and its effects on the current recession (and vice verse) are different. Among the witness testimony, one blames all lenders for predatory lending practices, one blames large lenders for not lending in the current climate with government TARP funds, one blames excessive government regulation for not allowing small local banks provide loans because they are deemed “high priced…”

November 2, 2009October 5, 2019

Will home buyer tax credit replace mortgage interest deduction?

Tax credit or deduction?

The mortgage interest tax deduction (MID) has been around for a long time. In fact, the MID (along with other interest tax deductions) was allowed since 1913. Throughout its history there have been many considerations to increase tax revenue by reducing, eliminating or phasing out the MID. In recent years, the Bush administration considered alternatives to the MID, and now the Obama administration is considering the options on the disposition of the MID.

In its August 2009 report to the House and Senate Committees on the Budget (Budget Options, Volume 2), the Congressional Budget Office (CBO) presented suggested options to assist policy makers in the budget process. Included in the report was their proposal for the MID. Much like the previous’ administration’s considered changes to the MID, the CBO’s report discussed either reducing the MID beginning in 2013 (as the CBO report states, “when the housing markets are expected to have recovered from their current turmoil”), or converting the MID to a home buyer tax credit (CBO.gov).

Proposed changes to the MID have typically been met with strong opposition by housing proponents, such as the National Association of Realtors and the National Association of Home Builders. During the Bush Administration’s contemplation of reducing the MID, then NAR President, Al Mansell, sent a letter to the President’s Advisory Panel on Tax Reform stating reasons for not changing the MID. Mansell’s letter makes many points in favor of the MID, among them include that the tax system supports homeownership and makes homeownership affordable. Additionally, the removal of the MID may cause a deflationary spiral of home prices (keep in mind this letter was dated October 14, 2005).

MID opposition include many economists who challenge the need for continuing the MID with arguments that the MID does not promote home ownership (and may in fact contribute to the inflation of “affordable” housing), and (contrary to claims that it helps lower to middle income home owners) a disproportionately larger number of home owners who claim the MID are in the upper income brackets.

Studies that present housing data indicate that the MID has little to no effect on home ownership. One such study, a 2007 report by the California Legislative Analyst Office (www.lao.ca.gov), indicated that home ownership rates were higher than the national average in the eight states that do not allow for a state MID. Additionally, the report cited other studies that showed there was no clear relationship between the MID and national homeownership rates as their variances over a forty year period were not congruent.

The California Legislative Analyst Office study also reported income data that corroborated a 2006 study by the Tax Foundation (taxfoundation.org) that a higher proportion of home owners who use the MID are in the upper income brackets. The Tax Foundation study analyzed 2003 IRS data that indicated that a significantly higher percentage of home owners (nationwide) who claimed the MID had an adjusted gross income of $75,000 or more.

Proposed changes to the MID are always controversial, but the timing may right for such a change. The ultimate demise of the MID may come from an unlikely source gaining additional support to boost the housing market- the first time home buyer tax credit.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of October 19, 2009. Copyright © 2009 Dan Krell

October 30, 2009October 5, 2019

Looming rental crisis

Renting is not just for those who are unprepared to own a home. These days, many individuals and families are finding that they are seeking rentals because they are being evicted by their foreclosing lenders.

Some have called the influx of renters a crisis in the making, but the extent of the crisis is not yet clear. Many seeking a rental are finding that it is not as easy as they thought; they are finding that applying for a rental is much like applying for a mortgage.

If you plan to apply for a rental (home or apartment) be prepared to provide your personal information to the landlord/management company. Much like mortgage underwriters, landlords and management companies want to make sure you have the ability to pay the monthly rent and through the term of the lease. In addition to collecting your income and employment information, they may also require references from employers and/or previous rentals. Additionally, they will check your credit report to see if you have a history of paying your bills on time.

Before applying for your rental, be prepared by having a month’s worth of pay stubs as proof of your income (self employed individuals may need to provide other forms of income verification) as well as communicating with your employer that they may be called upon to verify your income and employment history. If you’re unaware of your credit standing, be prepared by ordering a free copy of your credit report in case you may need to explain any reported derogatory information.

Additionally, along with your application you should have your first month’s rent and security deposit available. The security deposit is provided as a safeguard against damages to the home and can be equivalent to the first month’s rent or more depending on the terms of the lease and/or additional circumstances (such as pets).

Although the recent decline in home sales has made the rental market competitive, there are rentals available – but you may have to act quickly. If you waiver in your decision or just not prepared, you may lose your rental. For a wealth of information on renting, you can turn to the Montgomery County Department of Housing and Community Affairs (www.montgomerycountymd.gov/dhctmpl.asp). The DHCA offers online resources for landlords and tenants, including a rental guide and rental listings.

Many who have had recent foreclosure are finding that not all landlords/management companies are open to allowing them to rent due to their credit issues. However, some former home owners are finding that some landlords/management companies are flexible in accepting renters with past credit issues; these “understanding” landlords/management companies may require additional deposits as security.

Although there are many recently evicted home owners who are finding rentals, some are having trouble and are at risk of becoming homeless; after all, they may be financially challenged and may not have enough money for rent and security deposits. If you are or know someone who is at risk of becoming homeless, consider contacting the Montgomery County Coalition for the Homeless (301-217-0314). The Montgomery County Coalition for the Homeless is described as a non-profit and community-based organization, and a leading provider of permanent and transitional housing, emergency shelter and supportive services for people experiencing homelessness.

October 15, 2009October 5, 2019

Pending optimism for housing market

Last week, the National Association of Realtors (NAR) announced that pending home sales are up for the seventh straight month. The October 1st press release indicated that the number of signed contracts increased to the highest level since March of 2007; the August pending home sales index is up 6.4% from July and up 12.4% from August 2008 (Realtor.org).

Not to be confused with the existing home sale index, (which calculates the actual number of closed transactions as well as median home prices), the pending home sales index reports activity that is based on the number of signed contracts in any given month; the index is used to compare monthly home buyer activity.

Alone, the pending home sales index doesn’t say much other than that home buyers are interested in getting into the market. However, when combined with the recent existing home sales index, which recently reported that August home sales slightly decreased compared to July of this year (but still remained above the August 2008 sales figures); the story that emerges is one we are not used to hearing.

Although it may be true that some home buyers are being turned down for loans due to a rapidly changing mortgage industry, however, the disparity between the indices may also indicate that the state of the present market is based on delayed home sales. Until about a year ago, it was unusual for anyone to write an offer that had a closing date of forty five days or more. During the real estate boom earlier this decade, a home seller would almost certainly pass over your offer if you could not settle in thirty days or less. However, since a large number of distressed properties have penetrated the market, multi month closing delays and even unsuccessful closings (sometimes banks foreclose before a successful close of a short sale) have become common and sometimes expected. Lawrence Yun, NAR Chief Economist, stated in the October 1st press release that, “The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales…”

Pending sales are also outpacing home sales here in Montgomery County (as reported by the Greater Capitol Association of Realtors, Homes Sales Statistics for Single Family Homes; August 2009); however sales indicators show an overall increase from 2008. Home sales increased 24.8% in August 2009 as compared to August of 2008, however decreased approximately 16% from July 2009.

The missed story, however, may actually be the shrinking local home sale inventory. Although, national home inventory is slowly decreasing, local inventory of homes for sale has decreased significantly from last year (as reported by the Greater Capitol Association of Realtors, Homes Sales Statistics for Single Family Homes; August 2009). Single family homes available for sale in Montgomery County decreased about 47% comparing the inventories of August 2009 to August 2008!

Although a shrinking inventory often means increased home buyer competition, don’t expect another historic seller’s market anytime soon. An expiring home buyer tax credit combined with an expected new wave of foreclosures and a changing mortgage industry may have a significant effect on the market. But for now, pending optimism remains for a stable real estate market.

October 9, 2009October 5, 2019

Commercial real estate bubble bust

by Dan Krell &copy 2009
www.DanKrell.com

If Wall Street is considered by some to be the “life blood” of the United States economy, then commercial real estate can be described as the economy’s lungs. If you can take a pulse of the economy by looking at Wall Street’s progress, then you can measure how well the economy “breathes” and thrives by looking at the state of commercial real estate. Even though Wall Street’s markets have somewhat rebounded from last fall’s correction, a bust in commercial real estate can correct Wall Street’s correction with another dip into the recession bin.

Owners of commercial real estate depend on cash flow to service their debt; this means that they depend on their business to pay their mortgages. For owners of retail and office centers, this means that the key to paying their mortgages is to collect the rents from businesses leasing space. When the economy is strong, vacancies are low and lessees pay their rents. As the economy slipped into a recession, vacancies increased and owners of retail and office centers found it more difficult to service their debt.

Commercial real estate financing is much different than residential real estate financing. Unlike residential mortgages, where typical terms are 30 years and underwriting guidelines are standardized for many programs; the terms and conditions of commercial real estate mortgages are often tailored to the risk level of the individual project or property.

Because commercial real estate mortgages are due in shorter periods (usually a balloon note), owners of commercial property are always looking for better rates and terms to improve their cash flow. As liquidity dried up in the last year due to bank fall outs and shake ups, some commercial real estate owners are finding it more difficult to refinance their notes that are coming due.

This double whammy is the reason for many real estate analysts’ predictions of a bursting commercial real estate market. As Lingling Wei and Peter Grant pointed out in their August 31st Wall Street Journal commentary (Commercial Real Estate Lurks as Next Potential Mortgage Crisis), delinquencies in commercial mortgage backed securities (bundled loans sold to investors such as hedge funds and pension plans) rose 600% to a delinquency rate of 3.14% in July 2009 as compared to the same time the previous year.

Wei and Grant also point out that an additional $1.7 trillion worth of commercial mortgage notes are being held by banks. As notes become due, bank losses are also expected to increase because of the inability to re-finance mortgages. Many commercial real estate owners and their lenders are finding that commercial properties are increasingly burdened by vacancies, making it more difficult to service the debt, while commercial real estate values are being driven down due to increasing defaults and foreclosures.

The good news is that like residential real estate, commercial real estate data is regional (depending on local market activity). Local commercial Realtor, Cory Hoffman (of Thur and Associates located in Mclean, VA) was optimistic when he said that “the commercial real estate market will get worse before it gets better…but the Washington D.C. commercial market will not be as hard hit as the rest of the country…” because of the strong government job market and stronger local economy.