Home prices edging downward

Home prices will probably drop a bit this year for the first time in 38 years, according to a report from the National Association of Realtors. This is partially due to tighter lending standards being implemented by lenders and government agencies. Median prices of existing homes are now projected to fall 0.7 percent this year before a 1.6 percent gain next year, NAR predicts. Since NAR began tracking prices of single-family existing homes in 1968, the smallest annual price gain was 2.0 percent in 2006. The average gain has been 6.5 percent.

The median sales price of new homes is expected to rise 0.4 percent this year, and two percent next year, NAR projects. “We still forecast this year to be the fourth highest year on record for existing-home sales, and housing remains a great long-term investment,” Lereah said. He urged people who are uncomfortable with the terms of their mortgage to refinance new before rates rise again. “Simply stated, a loan with the lowest monthly payment probably isn't in your best interests. Borrowers need to understand worst-case scenarios. If you're in a mortgage you aren't comfortable with, now is the time to refinance, if you can, with historically low rates on safer conventional loans.”

Lereah predicts the number of existing home sales to drop this year by 2.2 percent, and the number of new-home sales to be down by 14.1 percent. New housing construction starts will be down by 18.4 percent, he noted.

Property tax bills may drop

Your property tax bill may be lower this year. With real estate values generally decreasing over the past year, the assessed value of properties also declines, translating to lower property tax for owners.

Here's a brief overview of the assessment process: The assessment value of homes and other property is usually linked to fair market values and determined by local government, at the county of municipal level. The assessment is made up of two components – the improvement or building value and the land (or site) value. The person with overall responsibility for accurately assessing the current value of properties in a local jurisdiction is the tax assessor. He's the public official who must set the value of properties for the purpose of apportioning the tax levy.

The assessor's office usually maintains inventory information about improvements to real estate, and creates and maintains up-to-date tax maps. The assessed value of a home is normally determined by one or more accepted methods of valuation. Assessments may be given at 100 percent of value or at some lesser percentage.

In most cases, the determination of value made by the assessor is subject to some sort of administrative or judicial review, if an appeal is instituted by the property owner. Taxes are based on fair market values of individual properties. The local assessor then applies an established assessment rate to that fair market value. By multiplying the tax rate by the assessed value of the property, a tax due is calculated.

If you feel the property tax bill you receive is too high, you can always appeal for reconsideration. Be prepared to document why you believe your property is over-valued by the assessor. Contact your local assessor's office for information about their appeal procedure. The property tax funds are used to financially support school systems, sewers, parks, libraries, fire stations, hospitals and other public facilities and services.

Financial boost for second home owners

We'll soon be in the vacation season, and many families will become motivated to purchase their own vacation (or second) home. Considering today's prices of those second homes, a great deal of thought needs to focus on the financial aspects of making such a purchase. Making those added monthly payments may mean cutting back on other expenses – less money spent on such things as dining out.

There are some unique financial advantages of acquiring a second home, like tax advantages not available to any other form of investment. If it's in a favorite vacation area, perhaps on a lake or ocean coast, the property can provide the owner family with a get-away home that's much more cost-effective than shelling out large chunks of money for expensive hotels or resorts.

The owner also has the option to rent the property to other vacationers. This can sometimes cover all the ownership costs, or more. That added income, coupled with the property's appreciation in value, can generate a substantial portion of the owner's retirement savings fund. The Internal Revenue Service has some rather complex rules on renting properties on a short-term basis. Deductions depend on a variety of factors so that should be checked out and considered.

Some families have creative ways to maximize their second home's income-producing capability. For example, they might sell their primary home and move into their second home for at least two years before selling it. That will qualify it as the family's primary residence, so when it is sold the owner could qualify to take up to $500,000 in tax-free profits (if it's jointly owned by a married couple), even though they took that same benefit when they sold their previous home.

Of course, a prospective buyer of a second home should consider downside factors like continuing maintenance and possible tenant problems. But an increasing number of families are deciding the personal and financial advantages of owning a second home outweigh the disadvantages.

High title insurance premiums questioned

Consumers are paying too much for title insurance premiums, according to a report issued in April by the Government Accountability Office (GAO). The report points out that consumers find it difficult to shop for title insurance and put little pressure on insurers to compete on price, due in part to the practice of burying the fees with many others in closing transaction paperwork.

The report also noted that investigations by federal housing officials and state regulators have alleged “illegal activities within the title industry that appear to reduce price competition and could indicate excessive prices.” The GAO has recommended that state and federal legislators and regulators improve the consumer's ability to shop for title insurance based on price, and to encourage price competition.

Why mortgages become delinquent

Surprisingly, unemployment and income losses are not a rising cause for mortgage delinquencies – at least for the millions of single-family home mortgages acquired by Freddie Mac. Job-income loss accounted for 36 percent of delinquencies last year, compared with to 43 percent in year 2005.

An increasing number of delinquencies are caused by excessive borrower financial obligations and late payments linked to family or borrower illnesses has been rising dramatically, according to Freddie Mac's recently released analysis report.

Help for mortgage-troubled homeowners

There has been a substantial increase in the number of people calling The Home ownership Preservation Foundation hotline in recent weeks, seeking assistance in avoiding foreclosure of their homes. The hotline helps individuals and families who are behind on their mortgage payments. The foundation received more than 14,000 calls during the first quarter of this year – a 30 percent increase over the fourth quarter of last years. About 25,000 homeowners called the hotline in all of 2006, it was reported.

The Home ownership Preservation Foundation, working with mortgage lenders, nonprofit organizations and city government agencies, provides homeowners with counseling and resources to help them resolve their mortgage-related troubles. Homeowners who call the hotline number – 888-995-HOPE – can receive free advice and counseling from HUD-certified organizations.

Proposed help from FHA

A variety of steps are being proposed to help homeowners who can't handle their rising payments on a subprime adjustable-rate mortgage. One proposal is for the Department of Housing and Urban Development to refinance distressed subprime borrowers into more affordable FHA loans.

This could be accomplished in a prudent way that would not be a “bailout” for lenders, according to the National Association of Realtors. HUD could waive an underwriting requirement so the FHA can refinance borrowers who are behind on the adjustable-rate mortgage payments. The proposal calls for the original lender to forgive a significant amount of the loan so FHA can refinance at a 97 percent loan-to-value ratio, reflecting the current appraised value of the property.

“This would not be a bailout for lenders since they would incur significant losses,” NAR president Pat Combs said. Lenders generally lose from $20,000 to $40,000 in a foreclosure, it was noted. There would probably be considerable lender interest in this program if it were implemented, NAR said. HUD officials have made no comment on the proposal at this point. “We (NAR) believe FHA can design a mechanism where creditworthy borrowers could refinance subject to prudent guidelines and therefore avoid losing their homes,” Combs said.

More help for low income homeowners

National organizations and businesses are becoming more progressive in helping low income families become homeowners, or maintaining their current homes. For example, Rebuilding Together, one of the nation's largest volunteer home rehabilitation organizations, is now providing modifications and repairs on homes for low-income owners – particularly the elderly, disabled, and low-income families with children.

“Low-income elderly and disabled homeowners and families with children often have no place to turn when the roof begins to leak or the front steps crumble,” said a Rebuilding Together spokesperson. “Our goal is to preserve these homes and neighborhoods and assure a warm, safe and dry home for people in need. Home ownership stabilizes and strengthens communities.”

Each year, through 250 affiliates working in more than 800 communities in all 50 states, over 250,000 RT volunteers make repairs and improvements for needy families. The current 24 million low-income homeowner families is expected to grow to 28.5 million by year 2010, according to a RT report. More and more families are in the position of choosing between vital necessities such as food or medicine and a roof that doesn't leak. Many disabled homeowners can't afford the modifications that allow them to “age in place” and remain in their own homes. For more information, visit the RT Web site: www.rebuildingtogether.org .

NeighborWorks America is another national nonprofit organization created to help low-income homeowners. Supported by Congress, this group provides financial support, technical assistance and training for community-based home revitalization efforts.

NW often links homeowners in danger of foreclosures to a free counseling hotline (888-995-HOPE), provided by the Home ownership Preservation Foundation. It also establishes foreclosure intervention programs in cities with high rates of foreclosure, and conducts research to better understand the complexities surrounding current Home ownership problems and their viable solutions. For more information, check out their Web site: www.nw.org/.

Real estate: the top investment vehicle

Real estate, despite its ups and downs, is still the preferred form of investment over stocks and bonds for many astute investors. Here are a few advantages: Property values are generally less volatile than stock values. Home prices fluctuate, but have a long history of rising in the long term. Since year 2000, the stock market rose by 15.5 percent, while the real estate market is up by nearly 62 percent. Stocks may go up dramatically at time as they have recently, but they can also drop just as fast.

A key advantage of real estate is that it provides a leveraged investment. One person might acquire a property with an equity investment (down payment) of only 20 percent or less of its current value. Stock investments usually require a cash outlay of the full value of the stock.

There are substantial tax advantages in real property investments. Any interest incurred in financing a property acquisition, along with property taxes in many cases, is deductible from the investor's ordinary income for tax purposes. The stock investor pays capital gains tax and can't deduct the interest on any debt incurred for acquiring financial assets. In many cases, the investment property is a second home – perhaps a vacation home where the investor can reside while enjoying a get-away stay at his investment property. Stock purchases offer no such advantage.

Proposed foreclosure moratorium

A proposal to place a six-month moratorium on home foreclosures resulting from subprime home mortgage loans has been made by several consumer and housing related groups. “Nobody wins when a home goes into foreclosure,” said John Robbins, chairman of the Mortgage Bankers Association. “Consumers lose their homes and suffer a ding on their credit rating, and lenders and investors lose significant amounts of money.

“The industry wants to take every possible step to avoid foreclosure. That's why we at MBA have developed a number of tools to help those who are at risk of losing their homes. Lenders are already using a number of those tools to help financially-stretched borrowers stay in their home, including forbearance, payment plans and other options. The problem will be lessened if Congress enacts legislation to expand the roles of Fannie Mae, Freddie Mac and the Federal Housing Administration to provide more housing opportunities for low-income homeowners and those living in high cost metro areas,” Robbins said.

Tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than three percent a year over the next two years, it was predicted by David Lereah, NAR's chief economist. Many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so by saving for a down payment or growing their income, he said.

“Tougher lending standards imposed by the marketplace and the regulators are necessary, but we need to be mindful of over correction. Responsible lending practices are what the doctor ordered, not practices that cause a credit crunch,” Lereah said. Individual lending professionals are also expressing their views on problems in the subprime market. Matt Crane, president of Stockbridge Financial offered this perspective:

“There are always examples of predatory lenders that should be prosecuted. But this is less about predatory lenders and more about predatory lawyers. They are faulting all lenders, most of whom took on huge amounts of risk to give people a shot at the American dream, looking to line their own pockets. At the end of the day, the only results from all this will be wealthy lawyers and a huge segment of the population that will be effectively redlined, creating a huge class of renters that are unable to become owner-occupants.”

ARM applications falling

Considering all the problems related to existing subprime adjustable-rate mortgages – e.g., home foreclosures, lender bankruptcies – it's no wonder that the proportion of applications for new ARM loans is dropping. It's now down to 20.2 percent of all mortgage applications, according to a report from John Burns Real Estate Consulting.

Burns noted that in March the yield curve reversed its inverted status for the first time since July 2006. Interest rates responded by decreasing across the board. Subprime worries and a lackluster start to the spring home selling season are reflected in a drop in homebuilding activity. However, many analysts are predicting a substantial rise in home sales in coming months, due in large part to continuing low mortgage interest rates, improving weather, and the seasonal build-up in consumer demand.

“The housing market was largely responsible for pulling the economy through the recession in 2001 and back to a vigorous pace of growth,” it was stated in Freddie Mac's April Economic Outlook report. “It remains to be seen whether the economy will return the favor, with overall GDP growth helping housing out of its downturn. The next month or so will be a critical period, as home sales provide a key test of housing demand.”

Spring and early summer is a popular time to shop for home, the report noted. Better weather makes house hunting more pleasant, and a purchase at that point allows families to settle in before school starts in the fall. “With mortgage rates on 30-year fixed-rate loans steady at just above 6 percent and job growth more solidly on track, conditions are ripe for a firming in housing demand. Of course, this is only part of the equation, and housing supply presents several challenges to the recovery,” the report said.

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers – along with freelance features.  Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com.