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Americans ready to spend money…especially on housing

As a positive sign for the U.S. economy and housing conditions, Americans are reportedly more optimistic about buying a home, according to the PulteGroup Home Index survey. Overall attitudes toward buying a home is trending positive, and Margaret Gramann, senior vice president of sales for PulteGroup, Inc., commented, “For the first time in years, Americans have a growing sense of optimism that the housing market is improving, and that these positive changes may be sustainable.”

Making sense of the story

  • The survey found that 67 percent of people say they plan on purchasing a home, and of that amount, 32 percent are looking to buy within the next two years.
  • Twenty-one percent would move up their buying timeline if they were able to sell their current home at a higher price point/break their lease without penalty.
  • The results indicate that 57 percent of adults think now is a good or excellent time to purchase items they want or need, especially when it comes to entering the housing market.
  • Millennials and move-up buyers represent the most engaged consumer segments, 85 percent and 71 percent, respectively, intending to purchase a home in the future.
  • As for baby boomer trends, 50 percent of those aged 55 and older are looking to purchase a home in the future.
  • Seventy percent of home shoppers plan to spend more or as much money on their next home, and 64 percent prefer to spend more on a home that’s move-in ready rather than spend less and renovate.

Source: HousingWire

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Talking Points …

  • Homeowners largely have not extracted any recovered equity in their homes, according to a survey by Freddie Mac. Borrowers with conventional loans pulled just $6.5 billion out of their homes during the first quarter through cash-out refinancing, down from $6.7 billion during the prior quarter.
  • Cash-out refinancing has been lower only in three quarters since mid-2000, and when adjusted for inflation, cash-out refinancing since 2010 has been near its lowest levels since 1997.
  • Cash-out refinancing surged during the housing bubble, reaching a high of $84 billion during the second quarter of 2006. But many borrowers ended up in a position where they owed more than their homes were worth, resulting in a painful pay-back that continues today.

Forty-percent of Home Sellers Plan to Price Higher Than Market Value

Home sellers are kicking off the spring real estate season with what might be considered a risky pricing strategy: 40.3 percent say they plan to price their homes above market value, despite warnings from their agents, according to the latest Real-Time Seller Survey from Redfin.

More than half (51.3 percent) of home sellers surveyed said they plan to price their home in the middle of the range based on local comparable sales. An analysis by Redfin found that a home listing gets nearly four times more visits on real estate websites during the first week on the market than it does a month later.

In the second quarter, 52.4 percent of sellers were confident that now is a good time to sell their home, compared with 37.5 percent in the first quarter. Nevertheless, home sellers are not free from worry. In the second quarter, 40.9 percent of sellers said they are worried about being able to afford their next home.
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Short sales in California are generally not subject to state or federal income tax for cancellation of debt. The Franchise Tax Board (FTB) issued a letter yesterday stating that, as nonrecourse obligations, short sales in California are not subject to state income tax for cancellation of debt. The FTB’s position conforms with the federal treatment of short sales stated in an IRS letter as we previously reported on November 15. These letters will provide welcome relief for short sale sellers given that the tax break for a qualified principal residence under the federal Mortgage Forgiveness Debt Relief Act of 2007 will expire at the end of this year, and similar protection under California law already expired in 2012. The FTB letter includes transactions that closed in 2012 but, as always, sellers should consult with their own tax professionals.

According to the recent FTB letter, “a California taxpayer would not have cancellation of indebtedness where the taxpayer was involved in a short sale pursuant to CCP section 580e.” Section 580e of the California Code of Civil Procedure (CCP) generally protects borrowers from owing a deficiency after a short sale of a residential property with one-to-four units, including both first and junior trust deeds. Exceptions include fraud, waste, cross-collateralized loans, and borrowers that are corporations, LLCs, or limited partnerships. For more information, C.A.R. members may refer to our legal article on Short Sale Deficiencies.

As with the IRS letter, the FTB letter states that even if no cancellation of debt income is owed, a taxpayer may nevertheless have capital gains to the extent that the outstanding debt exceeds the tax basis for the property. A principal residence, however, is generally excluded from capital gains tax up to $250,000 for single taxpayers and $500,000 for married couples filing joint returns (under 26 U.S.C. § 121).

Mortgage Lenders Ease Rules for Home Buyers in Hunt for Business

As a sign of mortgage lenders’ rising confidence in the housing market, restrictive lending standards are beginning to ease, and the credit freeze is starting to thaw. Lenders have started to accept lower credit scores and to reduce down-payment requirements.

Making sense of the story

  • Lenders recognize that refinancing old mortgages will no longer be a huge profit center for banks, so competing for borrowers will be needed for business and future profits. As a result, lenders will have to open up to borrowers who may not have perfect credit or large down payments.
  • For example, the lender TD Bank began accepting down payments as low as 3 percent through an initiative called “Right Step” for first-time buyers. A year ago, the program required at least a 5 percent down payment.
  • Mortgage originations are expected to reach $1.1 trillion this year, which is down from $1.8 trillion last year and $2 trillion in 2012 due to less refinancing.
  • While private lenders have shied away from low-down-payment mortgages in the past few years, in the past year, more than one in six loans made outside of the FHA included down payments of less than 10 percent.
  • Credit scores for borrowers seeking conventional mortgages also are easing, as scores on purchase mortgages stood at 755 in March, down from 761 a year earlier.
  • Smaller lenders are trying to appeal to first-time buyers while many larger lenders are gradually reducing down payments for jumbo loans in order to attract wealthy customers.

Source: Wall Street Journal

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Talking Points …

  • As a sign that the housing recovery is in for a promising spring, homebuilders picked up the pace of new construction in March. Single-family housing starts increased construction by 2.8 percent, to a seasonally adjusted annual rate of 946,000 units, according to the Census Bureau and the Department of Housing and Urban Development.
  • Regionally, production rose strongly in the Northeast and Midwest, with gains of 30.7 percent and 65.5 percent, respectively. However, construction dropped 9.1 percent in the South and 4.5 percent in the West.
  • Multifamily construction fell 6.1 percent, to 292,000 units during the month of March.

Why Home Price Gains Aren’t Lifting the Economy

Analysis of whether housing has lived up to its true potential as a catalyst for a stronger recovery has led experts to argue that while housing stopped being a drag on the economy a few years ago, it has failed to propel strong economic growth. Professors Atif Mian of Princeton University and Amir Sufi of the University of Chicago argue that rising home prices haven’t done much to stimulate the economy.

Making sense of the story

  • The professors conclude that the home price gains of the past two years have had fewer knock-on benefits for the economy than in the past because those gains have done little to stimulate either new-home construction or increased spending paid for by home-equity borrowing.
  • They argue current rising home prices won’t greatly stimulate the economy because gains that simply restore lost wealth aren’t as valuable as gains that create new wealth.
  • Consequently, prices may need to rise even higher for the economy to enjoy any “wealth effect” because it is at that point when people will spend more because they feel richer as their home or stock portfolio rises in value.
  • Growth is also deterred by tight lending standards, which have made it tougher for homeowners to take cash out of their homes with either a second mortgage or by refinancing into a larger first mortgage.
  • Also, prices haven’t risen enough to encourage homeowners to sell, which is creating inventory shortages that are being blamed for sluggish sales volumes and higher prices.
  • And while home prices are up, they’re still not up enough to encourage builders to build more homes because they face higher land, labor, and supply costs.

Source: Wall Street Journal

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Talking Points …

  • Housing’s share of gross domestic product (GDP) was 15.5 percent in the first quarter of 2014, with home building yielding 3 percentage points of that total, according to the National Association of Home Builders.
  • As an important source of economic growth, housing-related activities contribute to GDP in two basic ways. One, residential fixed investment (RFI), which measures the home building and remodeling contribution to GDP. Secondly, the measure of housing services, which includes gross rents and utility payments. For the fourth quarter, RFI was 3 percent of the economy.
  • For the fourth quarter, housing services was 12.5 percent of the economy. Historically, RFI has averaged roughly 5 percent of GDP while housing services have averaged between 12 percent and 13 percent, for a combined 17 percent to 18 percent of GDP.

Homeownership rate slips to 19-year low while rental market tightens

According to the Census Bureau, 64.8 percent of homes in the U.S. are owner-occupied, the lowest share since the second quarter of 1995, as more households rented and home sales remained low in the first quarter. Homeownership rates topped 69 percent at various times in 2004 and 2005 before the foreclosure crisis and housing crash.

Source: LA Times

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Report Profiles Housing Future for Older Americans

A new report by the Mortgage Bankers Association’s Research Institute for Housing America found that older Americans who own their homes are more financially secure and generally experience fewer impediments to good health compared with their peers who rent.

The new report provides a profile of the housing, functional status, and health status of the near-old (individuals aged 55 through 64) and older Americans (aged 65 and older) using the most recent data available from the Health and Retirement Study, a joint product spearheaded by the National Institute on Aging and the University of Michigan.

The principal findings of the report are as follows:

  • There were more than 47 million near-old and older American households in 2010, of which 80 percent were homeowners.
  • Housing is still the dominant asset in the portfolios of older Americans.  Median housing equity for older American homeowners was $125,000; the median housing-equity-to-income ratio was 2.4:1; and 50 percent of the typical older homeowner’s portfolio was composed of housing wealth.
  • Forty-four percent of older renters spend more than 30 percent of annual gross income on rent, which suggests that the availability of affordable rental housing is a concern for older Americans.
  • Older renters have almost double the number of limitations in their ability to conduct daily activities relative to homeowners.
  • Thirty-six percent of older individuals have fallen in the last two years, and one-third of these have been seriously injured in a fall.  The likelihood of falls occurring rises steeply as housing quality declines.
  • Thirty-one percent of older Americans have residences that have special safety features.  Thirteen percent have modified their home to be either more accessible or safer between 2008 and 2010.

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Fannie, Freddie may cut loan limits, pushing borrowers to jumbos

Borrowers are already expected to face a challenging lending environment in 2014, and potentially adding to the challenges is a reduction in loan maximums next spring. Simply put, Fannie Mae and Freddie Mac are considering reducing the maximum size of home loans that they can acquire. Critics argue that if borrowers aren’t already concerned about the maximum loan amount being cut next year, they should be because under the revised limits, they may have to pursue a jumbo mortgage. By pushing eligible loan amounts downward, many buyers could find themselves unexpectedly in the jumbo arena.

Making sense of the story

  • In the jumbo area, the bar is far higher for minimum credit scores and financial reserve requirements. In addition, down payments typically must be much larger.
  • Critics also suggest such borrowers may also have to settle for an adjustable-rate mortgage rather than a fixed-rate mortgage, or they may need a higher-rate “piggyback” second mortgage.
  • A potential reduction in loan maximums stems from desires to lessen federal involvement in the mortgage market. Edward J. DeMarco, acting director of the Federal Housing Finance Agency, announced that he was seriously considering the strategy.
  • Industry analysts suggest the maximum Fannie-Freddie loan size could decrease from the current $417,000 to $400,000 in most parts of the country. For high-cost areas, such as coastal California, there could be a reduction from $625,500 to $600,000.
  • These decreased limits could take effect as early as May, which could particularly affect buyers who want to purchase newly built houses, or homes with prices above the average for their areas.
  • If the loan ceilings are lowered, jumbo mortgages could become a bigger piece of the market. Since they are larger than conventional mortgages, they range from just above $417,000 to seven figures. Jumbos also typically have extra costs and underwriting restrictions.

Source: The LA Times

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Talking Points …

  • Double-digit home price appreciation will continue to occur but will drop off by the end of 2014, according to the latest CoreLogic Case-Shiller Home Price Indexes. Increased housing construction and increases in existing inventories are expected to restrain price appreciation even if demand remains strong.
  • National home prices were up 10.1 percent year over year in the second quarter, and the index predicts prices will rise 3.4 percent over the next five years. Currently, prices are rising in almost 90 percent of the nation’s metro areas.
  • For metros with populations exceeding 950,000, CoreLogic Case-Shiller found that metros with the greatest annual price appreciation in the second quarter were in California. In fact, Sacramento experienced the greatest price growth at 25.9 percent.

7.3 Million Boomerang Buyers Poised to Recover Homeownership in Next Eight Years

In 2015, the first wave of 7.3 million homeowners who lost their home to foreclosure or short sale during the foreclosure crisis will pass the seven-year window they conservatively need to repair their credit and qualify to buy a home. More waves of these potential boomerang buyers will be moving past that seven-year window over the next eight years corresponding to the eight years of above historically normal foreclosure activity from 2007 to 2014, according to an analysis by RealtyTrac.

While millennials have gotten a lot of attention lately as the generation whose below-normal homeownership rates are changing the landscape of the U.S. real estate market, the boomerang buyers — who are primarily Generation Xers or Baby Boomers — represent a massive wave of potential pent-up demand that could shape the housing market in the short term even more dramatically.

U.S. Census data shows homeownership rates for those ages 35 to 44 — roughly Generation X — were 11 percent below historical averages in the third quarter of 2014, while home ownership rates for the below age 35 cohort — roughly the Millennial generation — were 10 percent below historical averages.

RealtyTrac analyzed foreclosure, affordability, and demographic data to provide predictions of when and where these boomerang buyers are most likely to materialize. Nearly 7.3 million potential boomerang buyers nationwide will be in a position to buy again from a credit repair perspective over the next eight years.
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