Todd & Lisa Sheppard
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Lisa
Sheppard
Mobile:
707-483-9990
Email:
Lisa@TEAMSHEP.com
BRE # 01154225
Todd
Sheppard

Mobile:
707-235-6870
Email:
Todd@TEAMSHEP.com
BRE # 01314350

Archive for November 2011

The Wealthy Are Also Defaulting on Their Mortgages

November 30th, 2011   by lisasheppard

There are many who believe that mortgage delinquencies in their region are concentrated in the middle-to-lower income neighborhoods. Actually, the research shows the number of delinquencies in the higher priced sections currently exceeding the percentages in less affluent areas.

The most recent Mortgage Monitor issued by LPS reports that the largest increase in both delinquencies and foreclosures, as compared to 2008 levels, are in ‘jumbo’ mortgages. A jumbo mortgage, according to Wikipedia, is:

“a mortgage loan in an amount above conventional conforming loan limits…the limit is $417,000 for most of the US.”

In some parts of the country, that limit can be over $625,000. This type of loan finances the higher priced properties in a marketplace.

According to LPS, the percentage increase in jumbo mortgages is as follows:

  • § Delinquencies:  increased 281%
  • § Foreclosures: increased 589%

Again, these numbers are greater than any other type of loan including Option ARMs and Sub-prime loans.

Strategic Defaults

That doesn’t necessarily mean that the more affluent don’t have the money to meet their mortgage obligations. In some cases, they see their home as a depreciating asset and determine that continuing to put money into it makes little sense. The Washington Post recently reported on this. In the article, they explained:

“The ratings agency Moody’s said that based on its analysis of mortgage-backed bond portfolios, homeowners with jumbos now constitute “greater strategic default risk” than any other type of borrowers, including subprime. That’s because an exceptionally high number of jumbo owners — many in high-cost markets hit by real estate deflation over the past several years — are stuck with persistent negative equity.”

Bottom Line

We often explain that the number of distressed properties in a neighborhood adversely impacts values of other homes in that area. It now appears that even the most affluent areas will be dealing with a supply of discounted properties entering the market as foreclosures.

Understanding the Impact of Shadow Inventory

November 23rd, 2011   by lisasheppard

Standard & Poors released their Third Quarter 2011 Shadow Inventory Update yesterday. We want to cover the basic points of the report today.

What is shadow inventory?

It is an inventory of houses that will come to market as a distressed properties at a discounted price. Each of the data companies define shadow inventory in slightly different ways. Standard & Poors defines it this way:

“We include in the shadow inventory all outstanding properties for which borrowers are 90 days or more delinquent on their mortgage payments, properties in foreclosure, and properties that are real estate owned (REO).

We also include 70% of the loans that “cured” from being 90 days delinquent (loans that once again became current) within the past 12 months because cured loans are more likely to re-default. Our calculation of the months to clear the shadow inventory is the ratio of the total volume of distressed loans to the six-month moving average of liquidations.

Is this inventory increasing?

The report shows that shadow inventory is decreasing in many parts of the country as banks are starting to release distressed properties to the market. From the report:

“We estimate that it will take 45 months to clear the national shadow inventory. This is seven months below our peak estimate but three months longer than our estimate a year ago. Twelve of the top 20 MSAs recorded declines in months-to-clear during the quarter, while eight reported increases.

What impact will shadow inventory have on real estate?

One of two things will happen:

  1. The inventory will continue to mount and be a hindrance to a housing recovery
  2. The inventory will be placed on the market and impact prices

As the report states:

“Despite the recent stability of our months-to-clear estimates and liquidation rates, these distressed loans continue to loom over the housing market and threaten to further depress home prices. Though fewer additional loans are currently defaulting, the overall volume of distressed loans remains huge. Low liquidation rates over the past two years allowed the shadow inventory to grow as distressed homes have remained tied up in foreclosure proceedings.

The shadow inventory will continue to jeopardize the housing market’s recovery until servicers are able to improve liquidation times. However, if and when that happens, an influx of homes will likely enter the market, increasing supply and driving prices down further.”

Bottom Line

We believe the inventory will come to market impacting prices now but bringing about a housing recovery in a much shorter period of time.

Why You Need an Expert – Part II

November 22nd, 2011   by lisasheppard

Yesterday, we explained that having someone who truly knows the market was crucial if you were planning to buy or sell a home today. This expert should know what is happening in real estate, understand why it is happening and be able to simply and effectively explain each point to you and your family.  Today, we want to discuss the consequences if you don’t have a true industry professional on your side.

When families enter into a contract to buy or sell a house, two things are true:

  1. The buyer wants to own the home.
  2. The seller wants to sell the home.

In order for both these things to take place, the transaction must be completed. That is not an easy task in the current market.  The National Association of Realtors (NAR) released their Existing Homes Sales Report yesterday. In the report, NAR announced that one out of every three contracts to purchase a home in October never made it to a closing table.  

Cancellations have more than quadrupled in the last 14 months!  According to NAR, cancellations are caused by:

“… declined mortgage applications, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems including home inspections and employment losses.”

Bottom Line

No one can guarantee you won’t face challenges. However, the best agents and mortgage professionals know how to manage the expectations of all the parties involved thus dramatically increasing the chances your deal will close and you and your family will be able to move on with your lives. Hire that true professional!!

You Need an Industry Expert in This Market

November 21st, 2011   by lisasheppard

In today’s real estate market, it is easy to get confused. There seems to be an overabundance of information and much of it seems to be conflicting. As an example, we offer you two headlines that appeared within 24 hours of each other last week.

National Delinquency Rate Falls to Lowest Level in Three Years

– Mortgage Bankers Assoc. 11/17/2011

Second Consecutive Increase in First Mortgage Default Rates

– Standard & Poors 11/18/2011

(Remember, foreclosures impact home values and the cost of mortgage money. This makes current delinquency rates an extremely important data point.)

Though these headlines seem to be saying opposite things, both are actually correct. Each report was looking at different data points over different periods of time.

In their article regarding the MBA report, DSNews explains:

“Industry data released Thursday indicates the number of borrowers in the United States behind on their mortgage payments is showing signs of improving. The Mortgage Bankers Association (MBA) reported that the national delinquency rate for residential home loans fell to 7.99 percent in the third quarter.”

In their post, S&P claims:

First mortgage default rates rose from 1.99% in September to 2.08% in October.”

Bottom Line

Make sure you are dealing with local real estate and mortgage professionals. They will help you and your family decipher the hordes of information available so you can truly understand your best options.

How Much Should You Put Down?

November 17th, 2011   by lisasheppard

Like most questions, the answer is “it depends”. Today, I thought I’d give you some things to consider.

Let’s begin the discussion with loans that don’t require Mortgage Insurance. The suggestion is to borrow as much as you can afford. As an example, borrowing $310,000, as opposed to $300,000, will increase your mortgage payment by about $51 at 4.5%. Recognize that by doing so, you will have $10,000 in the bank. It is my experience that it is easier to find $50 more every month than it is to save $10,000. Even if you had the discipline to set aside the $50 monthly, it would take you 200 months to re-accumulate the $10,000 in principal (longer with lost interest).

Understand too, that the interest paid on the extra money borrowed is tax-deductible. In a 25% tax bracket the $51 additional has a real cost of about $38!

Having the $10,000 liquid has other potential advantages as well:

  1. If rates go up in the future, you could potentially make more interest than you are spending.
  2. If you can avoid using credit cards for furniture, home improvements, etc., you can save a bundle on those non-tax deductible interest rate costs.
  3. In a world where home values have declined, the more you borrow, the less you have at risk. You transfer the risk of the future value of the home to the lender.

Now, many borrowers today will need some sort of Mortgage Insurance, whether it’s a Conventional Loan with less than 20% down or an FHA Mortgage. These borrowers should sit with their loan officer and run the numbers because the cost of the Mortgage Insurance can vary based on loan-to-value and other factors. Examine the costs and the relative benefits.

The PRICE Is the Same, But the COST Is Less

November 16th, 2011   by lisasheppard

There is more and more research coming out showing that it makes great financial sense to purchase a home today . Whether it be rent vs. buy ratios, income-to-price ratios or income-to-mortgage payment ratios, purchasing a home right now is a bargain compared to historic norms. Now we want to look at the COST of a home today compared to pre-peak prices.

According to the most recent S&P Case Shiller price index, residential real estate values have returned to 2003 1Q PRICEs. That, in itself, says something. However, when you factor in mortgage rates, the case for buying a home today becomes even more compelling.

In 2003, 30 year mortgage rates stood at 5.88%. Today, they are 4%. How does that impact the actual COST of a home? On a home purchased for $250,000, here is the difference in monthly cost:

That means you save $285.30 a month, $3,423.60 a year and $102,708 over the life of a 30 year mortgage! You buy the home for the same PRICE but the COST is over $100,000 less.

Bottom Line

This is why so many financial advisors are saying that this may be one of the greatest times in history to purchase a home.

Is There a 3.8% Tax on Homes in the Health Bill?

November 14th, 2011   by lisasheppard

We have received many questions about a possible 3.8% tax which will be put on home sales beginning in 2013. We want to do our best to clarify this situation for everyone. We are not accountants and give you this information just as a simple answer to the misconception. Understand that, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.

A little history on the confusion

Fact Check.org explains it this way:

The truth is that only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on profits from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home.

We can understand how this misconception got started. The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. (This provision begins on page 33 of the reconciliation bill that was passed and signed into law.) And it does say the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code. And the fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn’t apply to vacation homes or rental properties.)

The Joint Committee on Taxation, the group of nonpartisan tax experts that Congress relies on to analyze tax proposals, underscores this in a footnote on page 135 of its report on the bill. The note states: “Gross income does not include … excluded gain from the sale of a principal residence.”

And just to be sure, we checked with William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation. “Some home sales would see a tax increase under this bill,” Ahern told us, “but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple).”

Simple Explanation: 

The following simple explanation comes from midiShaw:

The tax will affect those sellers of real property who will be otherwise taxed on capital gains under current tax laws. Under current laws, if you sell your primary residence and meet the ‘time ‘ criteria, you are exempt up to $250,000 or $500,000 (filing individually or jointly).  Any amount realized OVER that amount is taxable under current tax schedules based on income.  As such, this new tax will apparently be added to the current capital gains tax burden IF your income is over $200,000/$250,000 (filing individually or jointly). For those selling second homes and investment properties, the tax, once again, will be applied to the amount of gain realized.

Detailed Explanation:

The following also comes from midiShaw in a comment to the above answer.

Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income.

We offer this just as an explanation. Remember, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.