SubscribeChange, Logic and Money
January 23, 2009
January is a month typically filled with many things inspirational, and I must say that January 2009 appears exceptional. In listening to Obama’s inaugural speech on Tuesday, my own interpretation was, “The power of change begins with me. With you. The sooner we all believe that we can change things for the better, the sooner we ACT to make things better.”
Would you like a tax credit of $7,500 for buying a home? And I mean a REAL credit, not the 0.00% loan that the 2008 stimulus package was enactingfor firs time home buyers? Well, that’s the latest possible modification going forward as part of the 2009 Stimulus Package, and it’s NOT limited to first time home buyers. There’s discussion that ANYONE wanting to buy residential real estate will be entitled to this $7,500credit. As you know, a tax credit directly offsets the amount of federal tax that you may owe the federal government—it’s not a reduction in taxable income—which makes this a very compelling reason for would be home seekers and investors to make a purchase this year.
Want another compelling reason why the smart, savvy buyers are acting sooner than later? Because they know that average appreciation rates in California are 8.8% over the last 40 years (yes we all know that the Peninsula is much greater), and today provide an opportunity for both tremendous value and cheap financing. Let’s think about real value for a moment. The last year we had average appreciation in California, it was the year 2001 (8.7%). If we strip out the overbuilt areas of California.., and concentrate specifically on areas where housing expansion is extremely limited, like the Peninsula, one can simply take the median price of comparable homes in 2001, add 8.8% appreciation per year, depreciate appropriate improvements to the property and a value may be derived. Thus, if a would-be buyer can obtain a home at that value or better, and combine the cheap cost financing, that’s an ideal move on a fundamental basis, whether the purchase is for shelter or for investment.
Want more? OK. How about the fact that, since 1968, there have only been four real periods of decline: 1984 (0.1%, so not really), 1990 (only 1.2%, despite the Loma Prieta earthquake in October 1989), 1992-1996 (Average of 2.44% despite a major recession following a major earthquake) and today (yes, believe it or not, there was NO decline for CA as a whole in 2001 when the stock market crashed; in fact, it was up 8.7% in 2001 and up over 20% in 2002. All the more reason why 2001 is a good basis to use.
Want even more? “Thank you, Sir, may I have another?” Sure. How about the fact that I have personally bought at a low point (1994), sold and bought at a high point (2000), sold and bought at a mid point (2004) and came out ahead EVERY time. In fact, that stepping-stone approach toward buying a home in Palo Alto without a trust fund was a goal realized solely because of real-estate appreciation. On that note, let’s review again the fundamentals of buying real estate for both the person seeking shelter and the person seeking an investment.
For those seeking shelter, it does not matter which price point one is buying at today, as there is good value on property and cheap money available now. It also matters very little at this point whether we’re at the bottom of the current cycle. The reality is that interest rates across the board, combined with attractive pricing, have made it far more financially advantageous to buy versus rent. And with a 5-year holding period, equity is protected and an increase to net worth is likely. For those looking to buy their primary residence, and who are also trying to time the market, they will likely be settling for less desirable property at a higher cost…
For those seeking investment, there are properties everywhere that are positively cash flowing, thanks again to a strong combination of value and very cheap financing. A recent example I looked at was a 4-plex here on the Peninsula going for about $900k, and it POSITIVELY cash flowed with only 10% down! To boot, if the client had 30% to place, it would yield a capitalization rate of almost 3%– that’s HUGE for residential property investment on the Peninsula!
What about financing? Mortgage banks offer the greatest breadth and depth of available programs, but large institutions with reputable loan professionals are a good alternative . As you may have heard this week, Chase is the latest major player to cease brokerage operations (yet they are still buying paper from mortgage banks) making it tougher for brokers to source money. Rates on conforming programs have risen in recent weeks, but rates are still very attractive around 5%. Further, rates on non-conforming/jumbo programs have also been very attractive at rates BELOW 5%.
Please keep in mind that seller financing is an ideal way for buyers to buy more valuable property while protecting their liquidity and sellers to obtain a great investment while selling their property at a reasonable price. Many are waking up to this option, which will undoubtedly move greater inventory.
Will a short sale hurt my credit score?
January 15, 2009
When I meet with homeowners who are struggling with their mortgage are maybe behind on payments and have no equity in their home, we always discuss their options when it comes to avoiding foreclosure. We usually get through my report and if it appears that their only option is to sell their house in a short sale, I always get this question – “Will a short sale hurt my credit score? And if so, by how much?”
I have been doing a lot of research on this topic recently, and what I have found is there is a lot of mis-information out there. It’s tough to find any definitive information about the impact of a short sale or foreclosure on one’s credit report.
I recently came across some great information provided by a mortgage broker and former underwriter in Southern California, Catherine Coy, on the www.BiggerPockets.com forums, where she explains that in terms of the Fair Issac scoring model, there is no difference between a foreclosure, a short sale, and a 120 day late (Notice of Default). Here is an excerpt from her post:
It’s a total myth that somehow a short sale is less damaging to one’s credit. Why? Because the following events are all the same; that is, the definition of a ” foreclosure” by Fannie Mae and Freddie Mac is:
Foreclosure
None in past 5 years with minimum 3 active trade lines more than 24 months old, with no late payments or derogatory credit after the foreclosure.
Definition of Foreclosure: Any 120 day mortgage late within the last 24 months, any notice of default or settlement on a real estate secured trade line (short sale), any deed-in-lieu or forbearance agreements.
The above is straight out of the Fannie Mae Selling Guide, so it’s not speculation or conjecture. All underwriters know the facts: foreclosure/short sale = same/same.
The hit to one’s FICO score is EXACTLY the same because each of the above events results in Score Factor Code #22–” serious delinquency, derogatory public record or collection.”
Now if you’re thinking, well, why would I do a short sale then? There are still other very compelling reasons to complete a short sale as opposed to letting your home go to foreclosure. The biggest reason is that you will be able to get another mortgage and buy a home again in two years after a short sale, whereas you will have to wait 5 years after a foreclosure. There is also the social stigma of having gone through foreclosure as opposed to being in control of the process and selling your home. There’s something to be said for saving your dignity.
If you want to read more of Catherine’s analysis, you can follow the discussion thread here:
http://www.biggerpockets.com/topics/17598-do-short-sales-hurt-your-credit-score-?page=1
