Saturday, November 29, 2008
Shevy Akason | www.findmylandmark.com launches Newport Beach Real Estate Page
Shevy Akason and Associates, www.findmylandmark.com, launched Newport Beach Real Estate page at the Newport Beach real estate link. The page includes links to some of the best things that newport beach has to offer including Newport Back Bay, Newport Harbor, The Newport Pier, The Orange County Museum of Art, Newport Sports Museum, The Balboa Bay Club, The Crab Cooker, Pelican Hill Golf Club, Corona Del Mar State Beach, Crystal Cove State Park, and the Catalina Flyer. In addition, the page offers a link to the exclusive search page that allows visitors to search thousands of property listings available throughout Orange County. Watch for coming pages including community pages for Corona Del Mar, East Bluff, Lower Newport Bay, Balboa Island, Newport Heights, The West Bay, and West Newport- Lido. These pages will include information on schools as well as fun things that the communities have to offer.
Friday, November 28, 2008
Shevy Akason and Associates Launches new web site
I hope that this web site can be a tool for past, present and future clients. I'm looking forward to feedback that can help me to improve the site. There are some features that I would like to point out that can be great tools. The site address is: http://www.findmylandmark.com/
1) The MLS search tool this feature allows clients to search for properties in specific cities and communities. In addition, it allows them to filter properties by size and allows them to set up a search that will automatically notify them when properties that meet their criteria come available.
I believe that this is one of the most important tools that I can provide my clients and I'm currently experimenting with a couple of different search tools. My goal is to provide the best search tools to past, present, and future clients.
2) The community link
This link is a work in progress. It will eventually feature detailed information on all of the communities that I work in. Including floor plan information, school information, comparative market analysis, and much more. It also connects to the National Center for Education Stats and Greatschools.net which provide valuable tools for researching schools.
3) Buyer/ investor services: I am often asked. "What do your services include or what is the benefit of having an agent" this section answers that question. In addition, it gives helpful advice on what to do and what not to do prior to purchasing a home.
4) Seller Services Agents must truly be marketing professionals. This section addresses why Shevy Akason and Associates are the best agents to handle the sale of your property if you want to get top dollar in the shortest period of time possible.
5) Calculator
This feature allows one to calculate what their monthly payment will be based upon current rates.
1) The MLS search tool this feature allows clients to search for properties in specific cities and communities. In addition, it allows them to filter properties by size and allows them to set up a search that will automatically notify them when properties that meet their criteria come available.
I believe that this is one of the most important tools that I can provide my clients and I'm currently experimenting with a couple of different search tools. My goal is to provide the best search tools to past, present, and future clients.
2) The community link
This link is a work in progress. It will eventually feature detailed information on all of the communities that I work in. Including floor plan information, school information, comparative market analysis, and much more. It also connects to the National Center for Education Stats and Greatschools.net which provide valuable tools for researching schools.
3) Buyer/ investor services: I am often asked. "What do your services include or what is the benefit of having an agent" this section answers that question. In addition, it gives helpful advice on what to do and what not to do prior to purchasing a home.
4) Seller Services Agents must truly be marketing professionals. This section addresses why Shevy Akason and Associates are the best agents to handle the sale of your property if you want to get top dollar in the shortest period of time possible.
5) Calculator
This feature allows one to calculate what their monthly payment will be based upon current rates.
Huge drop in interest rates!
In previous articles I wrote about the signifigant impact of having a loan at 5.5% versus 6.5%. I just received this email from Dan Hrey of Chase. If one is thinking about buying in the near future there is a great opportunity now with these fantastic rates.
From Dan Hrey of Chase
Wednesday morning CNN Money posted the following information in regards to
an $800 billion infusion of federal funds into credit markets having an
immediate impact on mortgage rates.
Mortgage rates fell sharply yesterday after the administration announced
that it will pump another $800 billion into credit markets to free up
frozen consumer and mortgage lending.
That number dwarfed previous government actions aimed at bolstering the
mortgage lending market.
"The feds agreed to spend a half a trillion dollars to buy up mortgage
backed securities and another $100 billion to fund lending for Fannie and
Freddie; we're not talking chump change anymore," said Keith Gumbinger of
HSH Associates, a publisher of mortgage information.
Rates averaged 5.77% for the day on a 30-year, fixed rate loan, down from
6.06% Monday, according to Gumbinger.
This rate drop amounts to huge savings for homebuyers. Hence, many experts
think that this drop in rates will surely help spark our real estate
market.
If you need any assistance please contact me at: 949.769.1599.
From Dan Hrey of Chase
Wednesday morning CNN Money posted the following information in regards to
an $800 billion infusion of federal funds into credit markets having an
immediate impact on mortgage rates.
Mortgage rates fell sharply yesterday after the administration announced
that it will pump another $800 billion into credit markets to free up
frozen consumer and mortgage lending.
That number dwarfed previous government actions aimed at bolstering the
mortgage lending market.
"The feds agreed to spend a half a trillion dollars to buy up mortgage
backed securities and another $100 billion to fund lending for Fannie and
Freddie; we're not talking chump change anymore," said Keith Gumbinger of
HSH Associates, a publisher of mortgage information.
Rates averaged 5.77% for the day on a 30-year, fixed rate loan, down from
6.06% Monday, according to Gumbinger.
This rate drop amounts to huge savings for homebuyers. Hence, many experts
think that this drop in rates will surely help spark our real estate
market.
If you need any assistance please contact me at: 949.769.1599.
Sunday, November 23, 2008
Friday, November 21, 2008
Deal of the week---- look at this
City: Orange County!!! wow---- Call 949-769-1599 for more information or to schedule a showing
Asking Price: $209,900
Downpayment needed: $6300-$42,000
Interest rate 6%
Number of years 30 year fixed fully amortized
Property tax and
special taxes/levies (estimated) 1.25%
HOA: $310
Maintenance and replacement
reserves 1%= 175$/month
Income Requirement: $60,000
Total Cost of ownership= $1643.63
Rent comps estimated= $2200/month
Address: Contact Shevy Akason at 949-769-1599
Beds: 3
Baths: 2
Sq. Ft.: 1600 square feet
$/Sq. Ft.: $128.93
Lot Size: 0
Year Built: 1967
Stories: 1 story second level
Listing agents description:
This is a private upper corner Condo that features 3 bedrooms, 1 3/4 baths. Master bedroom has its own bathroom with dual sinks and walk-in closet. Condo overlooks lush green landscaping in a courtyard. Big windows throughout, open floor plan, good size rooms, walk in closets, and fireplace in living room. Close to Metro, fwys, parks, schools, shopping and entertainment.
Shevy's analysis: I have had an opportunity to preview this home. It is in a solid B area witha mix of owners and renters. I spoke with a few people that lived there and they all really like it. It has huge green belts and is very quiet. The community was build in the 60's and it's a bit old, however, this is a fantastic investment opportunity for a buy and hold investor. This home could use between $10,000- $20,000 in upgrades to modernize it, however 0 upgrades are necessary. This property could make an excellent lease for an investor looking to purchase for the long term using a 30 year fixed fully ammortized loan or for a first time homebuyer.
Look at these numbers, this property could be a great hedge against the potential inflation that current policy could bring. In addition, because of the cashflow it's a relatively safe investment. Take advantage of todays really low interest rates before they're gone!
Friday, November 14, 2008
Learning from our mistakes- markets are indeed cyclical
The lessons that can be learned from the Great Depression, The Savings and Loan Crisis, as well as Japan's economic collapse of the 1980's, are essential if we wish to move forward to a stronger economy and better country. When the last up cycle was in full swing I remember trying to communicate that the market is cyclical and that we cannot have 20% appreciation forever, that interest rates are historically low and that the risk of financing a home using an ARM loan with a teaser rate is greater than most should take. Explaining that when appreciation dies down and rates eventually go up one has no insurance,no protection, and very few options. While with a 30 year fixed loan and an amortized payment that one can afford today there is a level of protection. Generally rents and incomes will rise, however, your payment will never change. Nevertheless, many were caught in the herd mentality and wild appreciation of the market. Of course we now see that the market is cyclical. Unfortunately, when in an up cycle people believe that the upswing is different. The link below was produced by National Public Radio offers a fantastic comprehensive overview of what created the credit crisis.
That being said, great fortunes are made in recessions, especially at the end of recessions. Many of the smartest investors have prepared themselves for the opportunities that will arise over the next two to three years. Orange County has a lot going for it including the relative affluence of the county, fantastic weather, and relatively strong economy. The question is how many people are living beyond their means? In general, I have seen a large number of foreign investors coming in and purchasing homes in Orange County, many call cash. Moreover, there was a home 3 weeks ago that was priced correctly and received 17 offers in 3 days. Will Orange County ever reach rental parody as some argue? That's a question that only time will be able to answer. Home prices will rebound, however it is important to take lessons from the current market and make sure we do not repeat the same or similar mistakes again.
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355
This program regarding the housing crisis explains the correlation between wall street and the credit crisis, why banks made half-million dollar loans to people without jobs or income, and why everyone is talking so much about the 1930s, and the giant pool of money that created this. Ironically the first interview was completed at an awards dinner for finance professionals who created the instrument that nearly brought down global economic system.
That being said, great fortunes are made in recessions, especially at the end of recessions. Many of the smartest investors have prepared themselves for the opportunities that will arise over the next two to three years. Orange County has a lot going for it including the relative affluence of the county, fantastic weather, and relatively strong economy. The question is how many people are living beyond their means? In general, I have seen a large number of foreign investors coming in and purchasing homes in Orange County, many call cash. Moreover, there was a home 3 weeks ago that was priced correctly and received 17 offers in 3 days. Will Orange County ever reach rental parody as some argue? That's a question that only time will be able to answer. Home prices will rebound, however it is important to take lessons from the current market and make sure we do not repeat the same or similar mistakes again.
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355
This program regarding the housing crisis explains the correlation between wall street and the credit crisis, why banks made half-million dollar loans to people without jobs or income, and why everyone is talking so much about the 1930s, and the giant pool of money that created this. Ironically the first interview was completed at an awards dinner for finance professionals who created the instrument that nearly brought down global economic system.
Thursday, November 13, 2008
The Great Depression and the Present Economic Crisis
America is quickly becoming desensitized to its moral obligation and duty to repay debts. In fact, many American’s now feel that they are owed something regardless of their behavior and actions. This moral path could lead to an economic crisis far worse than anything we have seen.
In the movie Cinderella Man Russell Crowe plays James Braddock, a.k.a Cinderella man. This movie is a story about a poor ex-prizefighter during the great depression. Unable to pay his bills struggling to feed and clothe his family he is forced to go on public relief. Driven by love and honor James Braddock returns to the ring to become a legend and a symbol to many American’s during the time, proving that hard work and sacrifice, pay off when he defeats the heavyweight champion. In a memorable scene, James Braddock returns to the public assistance office to return the money he was lent when he was down and out.
This brings me to today's economic crisis, a majority of Americans did not lose their homes trying to feed, clothe, and keep their children warm. In fact, of the entire country 6% of homeowners are behind on their mortgage, most of them are losing their homes as a result of irresponsible behavior that has caused many others that did not participate in the irresponsible behavior to lose their jobs, 401k's, and retirements. As Larry Roberts author of The Great Housing Bubble puts it, a majority of American’s are losing their homes because they “were lured by the free money accumulating as appreciation and took out an additional $400,000 in home equity lines of credit and refinancing and lived the good life. This neighbor was driving around in new cars, taking vacations, buying expensive toys and pretending to be rich,” while others sacrificed, even spent less time with family and friends in order to pay down their mortgage and in hopes of a better future. Now, current legislation endorsed by John McCain, Arnold Schwarzenegger, and others seeks to use the tax dollars of the prudent to pay for the imprudent and worst of all the imprudent are beginning to feel entitled and even proud of the plunders. Furthermore, this legislation leads to others saying why not me and the potential for the number of bad loans to increase exponentially as the banks tell people that they need to quit paying their mortgage to qualify for the modification.
“When the thirteen colonies were still a part of England, Professor Alexander Tyler wrote about the fall of the Athenian republic over two thousand years previous to that time:A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage.”1
1Alexander Tyler http://www.mcsm.org/democracy1.html In accordance with Title 17 U.S.C. Section 107, any copyrighted work in this message is distributed under fair use without profit or payment for non-profit research and educational purposes only. http://www.law.cornell.edu/uscode/17/107.shtml
In the movie Cinderella Man Russell Crowe plays James Braddock, a.k.a Cinderella man. This movie is a story about a poor ex-prizefighter during the great depression. Unable to pay his bills struggling to feed and clothe his family he is forced to go on public relief. Driven by love and honor James Braddock returns to the ring to become a legend and a symbol to many American’s during the time, proving that hard work and sacrifice, pay off when he defeats the heavyweight champion. In a memorable scene, James Braddock returns to the public assistance office to return the money he was lent when he was down and out.
This brings me to today's economic crisis, a majority of Americans did not lose their homes trying to feed, clothe, and keep their children warm. In fact, of the entire country 6% of homeowners are behind on their mortgage, most of them are losing their homes as a result of irresponsible behavior that has caused many others that did not participate in the irresponsible behavior to lose their jobs, 401k's, and retirements. As Larry Roberts author of The Great Housing Bubble puts it, a majority of American’s are losing their homes because they “were lured by the free money accumulating as appreciation and took out an additional $400,000 in home equity lines of credit and refinancing and lived the good life. This neighbor was driving around in new cars, taking vacations, buying expensive toys and pretending to be rich,” while others sacrificed, even spent less time with family and friends in order to pay down their mortgage and in hopes of a better future. Now, current legislation endorsed by John McCain, Arnold Schwarzenegger, and others seeks to use the tax dollars of the prudent to pay for the imprudent and worst of all the imprudent are beginning to feel entitled and even proud of the plunders. Furthermore, this legislation leads to others saying why not me and the potential for the number of bad loans to increase exponentially as the banks tell people that they need to quit paying their mortgage to qualify for the modification.
“When the thirteen colonies were still a part of England, Professor Alexander Tyler wrote about the fall of the Athenian republic over two thousand years previous to that time:A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage.”1
1Alexander Tyler http://www.mcsm.org/democracy1.html In accordance with Title 17 U.S.C. Section 107, any copyrighted work in this message is distributed under fair use without profit or payment for non-profit research and educational purposes only. http://www.law.cornell.edu/uscode/17/107.shtml
Education from IrvineRenter----
By Irvine Renter
Gross Rent Multiplier
Was developed by landlords seeking a method to quickly evaluate the purchase price of a property to see if it would be a profitable investment. When performing such an evaluation, a cashflow investor will typically look for a GRM near 100 to find a property with positive cashflow. This method can also be easily adapted to calculate the breakeven point where an owner/occupant would break even compared to renting. As you can see, when you consider the full cost of ownership -- including those costs often ignored -- the gross rent multiplier is lower than most think. The Gross rent multiplier is a convenient measure of value because it spares you the brain damage of performing, detailed calculation for every property you wish to evaluate.
Renting Versus Owning
Renting versus owning is both an intellectual, financial decision and an emotional one. The financial decision is first and foremost an analysis of the comparative cost of renting versus owning. The cost of a rental can be determined fairly easily as there are usually a number of comparable properties on the market to establish a realistic rental rate for any given property. Of course, it is easy to justify in one's mind a comparative rent that is higher than the market will bear. A house someone is in love with will almost certainly rent above market in their minds. Also when looking at similar products the rental rates may not be realistic in the marketplace. It is probably a good idea to take 5% to 10% off comparable rental rates on properties offered on the market. Once you have established what you believe to be a comparative rental rate, and you have gone through a realistic evaluation of the true costs of ownership as outlined above, a simple comparison of the two figures will tell you if a property is overvalued, undervalued or just right.
This point-in-time analysis of the relative worth of a house does leave out a couple of important financial factors: inflation and transaction costs. Inflation is the erosion of purchase power of money over time, or looked at another way, it is the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index. The effect of inflation on housing costs is that it tends to increase the cost of renting over time, and theoretically, it will increase the value of a house over time as well. If the cost of rent is increasing, but your cost of ownership is fixed (assuming a fixed-rate mortgage,) then owning a home becomes less expensive over time and serves as a hedge against the impact of inflation. If you are a homeowner, inflation is your friend. There is one big cost of home ownership that works against the positive impact of inflation: transaction costs. When people buy a house, they pay some closing costs, but many of these get rolled into your loan and forgotten. When people sell a house, they generally go to a realtor to help them market the property and complete the paperwork necessary for the transaction. Real estate commissions for many years have been held at an artificially high 6% in the United States, and the seller is the one who pays this commission. From the time of purchase to the time of sale, inflation (or irrational appreciation) must have increased the value of the house enough for the sales price to cover the real estate commission or the seller will lose money. This is why it is often recommended for people who are not going to live in a given area for more than 2 or 3 years to rent instead of own. Renting is freedom -- freedom to move when you wish (within the terms of your lease.) As I noted in America’s Debtor Prisons, homeowners who go underwater lose this freedom of movement. This advantage of renting is nullified during a price rally as owners have this same freedom during those times, but this forgotten benefit becomes readily apparent once prices start to fall.
Some people spend a great deal of effort evaluating the costs of ownership to determine if is a correct decision, but many people do not. Some people make the decision to purchase the most expensive asset they will ever own with no analysis at all. The decision to buy a house is primarily an emotional one. Even those who go through all the analysis generally only do so to provide rationalizations for their emotional decision. During price rallies, greed becomes a powerful emotion motivating people to fudge their financial analysis in order to justify their emotional purchase. Another factor often called the "nesting instinct" causes both men and women to want a place to call their own, particularly when there are children in the family. There is nothing wrong with deciding for emotional reasons. Most people pick a spouse this way. The real challenge is to have the emotions and the intellect working together to make a decision that is both fiscally sound and emotionally satisfying. This is easier said than done.
Gross Rent Multiplier
Was developed by landlords seeking a method to quickly evaluate the purchase price of a property to see if it would be a profitable investment. When performing such an evaluation, a cashflow investor will typically look for a GRM near 100 to find a property with positive cashflow. This method can also be easily adapted to calculate the breakeven point where an owner/occupant would break even compared to renting. As you can see, when you consider the full cost of ownership -- including those costs often ignored -- the gross rent multiplier is lower than most think. The Gross rent multiplier is a convenient measure of value because it spares you the brain damage of performing, detailed calculation for every property you wish to evaluate.
Renting Versus Owning
Renting versus owning is both an intellectual, financial decision and an emotional one. The financial decision is first and foremost an analysis of the comparative cost of renting versus owning. The cost of a rental can be determined fairly easily as there are usually a number of comparable properties on the market to establish a realistic rental rate for any given property. Of course, it is easy to justify in one's mind a comparative rent that is higher than the market will bear. A house someone is in love with will almost certainly rent above market in their minds. Also when looking at similar products the rental rates may not be realistic in the marketplace. It is probably a good idea to take 5% to 10% off comparable rental rates on properties offered on the market. Once you have established what you believe to be a comparative rental rate, and you have gone through a realistic evaluation of the true costs of ownership as outlined above, a simple comparison of the two figures will tell you if a property is overvalued, undervalued or just right.
This point-in-time analysis of the relative worth of a house does leave out a couple of important financial factors: inflation and transaction costs. Inflation is the erosion of purchase power of money over time, or looked at another way, it is the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index. The effect of inflation on housing costs is that it tends to increase the cost of renting over time, and theoretically, it will increase the value of a house over time as well. If the cost of rent is increasing, but your cost of ownership is fixed (assuming a fixed-rate mortgage,) then owning a home becomes less expensive over time and serves as a hedge against the impact of inflation. If you are a homeowner, inflation is your friend. There is one big cost of home ownership that works against the positive impact of inflation: transaction costs. When people buy a house, they pay some closing costs, but many of these get rolled into your loan and forgotten. When people sell a house, they generally go to a realtor to help them market the property and complete the paperwork necessary for the transaction. Real estate commissions for many years have been held at an artificially high 6% in the United States, and the seller is the one who pays this commission. From the time of purchase to the time of sale, inflation (or irrational appreciation) must have increased the value of the house enough for the sales price to cover the real estate commission or the seller will lose money. This is why it is often recommended for people who are not going to live in a given area for more than 2 or 3 years to rent instead of own. Renting is freedom -- freedom to move when you wish (within the terms of your lease.) As I noted in America’s Debtor Prisons, homeowners who go underwater lose this freedom of movement. This advantage of renting is nullified during a price rally as owners have this same freedom during those times, but this forgotten benefit becomes readily apparent once prices start to fall.
Some people spend a great deal of effort evaluating the costs of ownership to determine if is a correct decision, but many people do not. Some people make the decision to purchase the most expensive asset they will ever own with no analysis at all. The decision to buy a house is primarily an emotional one. Even those who go through all the analysis generally only do so to provide rationalizations for their emotional decision. During price rallies, greed becomes a powerful emotion motivating people to fudge their financial analysis in order to justify their emotional purchase. Another factor often called the "nesting instinct" causes both men and women to want a place to call their own, particularly when there are children in the family. There is nothing wrong with deciding for emotional reasons. Most people pick a spouse this way. The real challenge is to have the emotions and the intellect working together to make a decision that is both fiscally sound and emotionally satisfying. This is easier said than done.
Wednesday, November 12, 2008
North County Deal of the Week: Huntington Beach Condo
Analysis done using IrvineHousingblog.com
RentVsOwnulator™ read about calculator here: http://orangecountycaliforniarealestate.blogspot.com/2008/11/introducing-irvine-housing-blog-rent-vs.html
City: Huntington Beach
Asking Price: $255,000
Downpayment needed: $1650-$51,000 (used $51,000 for calculations)
Interest rate 6%
Number of years 30 year fixed fully amortized
Property tax and
special taxes/levies (estimated) 1.25%
HOA: $188
Maintenance and replacement
reserves 1%= $212.50/month
Income Requirement: $65,000
Total Cost of ownership= $1643.63
Rent comps estimated= $1800/month
Reverse calculation $1800/month rent
Estimated ownership costs 18%
Estimated purchase price $291,899
Estimated down payment $58,380
Estimated loan $233,519.17
Address: Contact Shevy Akason at 949-769-1599
Beds: 2
Baths: 2
Sq. Ft.: 860 square feet
$/Sq. Ft.: $296.51
Lot Size: 640
Year Built: 1963
Stories: 2
Listing agents description:
PRICE REDUCED TO SELL FAST! Great opportunity! Tile floors in living room and kitchen. Laminate floor in upstairs bedrooms and hallway. Appliances include stove, microwave, refrigerator, washer and dryer. Close to shopping, schools. Cool ocean breezes - less than 2 miles to the beach!
Shevy's analysis: I have not had an opprotunity to preview this home, however, it appears to be in a good location in the track walking distance to the community pool and hot tub. This home could use between $10,000- $20,000 in upgrades to modernize it. However, this property could make an excellent lease for an investor looking to purchase for the long term using a 30 year fixed fully ammortized loan or for a first time homebuyer that wants to live in the wonderful city of Huntington Beach.
RentVsOwnulator™ read about calculator here: http://orangecountycaliforniarealestate.blogspot.com/2008/11/introducing-irvine-housing-blog-rent-vs.html
City: Huntington Beach
Asking Price: $255,000
Downpayment needed: $1650-$51,000 (used $51,000 for calculations)
Interest rate 6%
Number of years 30 year fixed fully amortized
Property tax and
special taxes/levies (estimated) 1.25%
HOA: $188
Maintenance and replacement
reserves 1%= $212.50/month
Income Requirement: $65,000
Total Cost of ownership= $1643.63
Rent comps estimated= $1800/month
Reverse calculation $1800/month rent
Estimated ownership costs 18%
Estimated purchase price $291,899
Estimated down payment $58,380
Estimated loan $233,519.17
Address: Contact Shevy Akason at 949-769-1599
Beds: 2
Baths: 2
Sq. Ft.: 860 square feet
$/Sq. Ft.: $296.51
Lot Size: 640
Year Built: 1963
Stories: 2
Listing agents description:
PRICE REDUCED TO SELL FAST! Great opportunity! Tile floors in living room and kitchen. Laminate floor in upstairs bedrooms and hallway. Appliances include stove, microwave, refrigerator, washer and dryer. Close to shopping, schools. Cool ocean breezes - less than 2 miles to the beach!
Shevy's analysis: I have not had an opprotunity to preview this home, however, it appears to be in a good location in the track walking distance to the community pool and hot tub. This home could use between $10,000- $20,000 in upgrades to modernize it. However, this property could make an excellent lease for an investor looking to purchase for the long term using a 30 year fixed fully ammortized loan or for a first time homebuyer that wants to live in the wonderful city of Huntington Beach.
Introducing The Irvine Housing Blog rent vs own calculator
The Irvine housing blog is often referred to as a "bubble blog". I have been following the blog for a mere 10 days, however, I have met with the primary writer for the blog twice and the founder of the blog once. They are both extremely intelligent and knowledgeable professionals. Apparently most agents are not fans of their blog, I am. They offer a refreshing perspective on real estate in Irvine and knowledge that can be gained from their blog can apply to real estate all over the country. Although some would argue that they are overly bearish on real estate, I found that they take a well educated value approach to the market. They would probably be the first to tell you that they do not have a crystal ball, that no one can be 100% correct, and and that there are some aspects of demand such as the amount of buyers coming in from overseas in Orange County and particularly Irvine that makes the bottom really hard to predict. Irvine and Orange County still offers fantastic employment opportunity, unbeatable weather, some of the best real estate in the country, and they are still not making anymore land. Nevertheless, it is clear that they saw the affects that sub-prime and and ARM loans would have on prices long before Gary Watts who's widely seen the premier real estate forecaster in California.
For a long time, I too have wondered why ARM loans were offered to so many when rates were historically low. Once prices rose to a certain level one of the few benefits of purchasing was the ability to finance the property using a 30 year fixed loan at historically low interest rates. As the prices rose the loans became more outrageous, I remember asking friends, "where can you go beyond a negative amortization loan?" Our only idea was the bank pays you loan. Of course neither loan makes sense. That being said we are now returning to responsible financing and more and more good deals are beginning to spring up every day. How can purchasing a home for $650,000 be justified when renting the same house only costs $2100/month? If only people were educated and had the tools to understand. The calculator created by the Irvine Housing blog is one of the better calculators I've seen. Furthermore, it seems to me that if a deal can punch using the calculator developed by the Irvine Housing Blog, the blog that is widely seen as the premier bubble blog in Orange County, we might be on to something. Below you will find Larry Roberts (IrvineRenters) description of the calculator. To access it click on the link.
The wheels of progress keep turning here at the Irvine Housing Blog. Some of you may have noticed that we have introduced a new rent versus own decision calculator. It is still a work in progress, but it is good enough to put on the main site. We hope to add some formatting and create a stand-alone version for people to download and use.
Our goal was to create an accurate and detailed accounting for the true cost of ownership. This is a point-in-time calculator. You are not asked to make assumptions about inflation or appreciation. There are no projections for the future. People who invest in real estate (I am not talking about stupid amateur speculators) always look at the stabilized cash flow in the first year of ownership. If it doesn't make sense in year 1, then it isn't an investment, it is a speculative gamble. There are a variety of rent versus own calculators out there. Most are put up by realtors. They are totally biased and ignore costs and exaggerate benefits. Some are put up by bubble bloggers that are biased the other direction. We want to be accurate.
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Most of the underlying assumptions are documented in the post Rent versus Own. Most of the inputs are in the left-side column, and most of the outputs are on the right (the exception is the HOA fees which are plugged in directly on the cost side). Play with these assumptions at your own risk. As I documented in the Rent versus Own post many of the costs are underestimated, and many of the benefits are overestimated. The most common mistakes are to ignore maintenance and replacement reserves and to overestimate the tax savings. The true tax benefit is not the highest marginal tax rate you pay.
The primary function of the calculator is to determine the true cost of ownership to compare to a base rent. However, we have added a reverse calculation that allows renters to put in the rent they are currently paying and show them how much house they can afford. Since this is not a spreadsheet calculation and we could not iterate to run the calculations backward, we cheated: we use a percentage of rent that goes to the cost of ownership beyond the payment and subtract this from the rent to compute the purchase price, downpayment and loan amount. You will see the two methods produce very close results both forward and backward.
Any comments or suggestions for improvement will be appreciated.
For a long time, I too have wondered why ARM loans were offered to so many when rates were historically low. Once prices rose to a certain level one of the few benefits of purchasing was the ability to finance the property using a 30 year fixed loan at historically low interest rates. As the prices rose the loans became more outrageous, I remember asking friends, "where can you go beyond a negative amortization loan?" Our only idea was the bank pays you loan. Of course neither loan makes sense. That being said we are now returning to responsible financing and more and more good deals are beginning to spring up every day. How can purchasing a home for $650,000 be justified when renting the same house only costs $2100/month? If only people were educated and had the tools to understand. The calculator created by the Irvine Housing blog is one of the better calculators I've seen. Furthermore, it seems to me that if a deal can punch using the calculator developed by the Irvine Housing Blog, the blog that is widely seen as the premier bubble blog in Orange County, we might be on to something. Below you will find Larry Roberts (IrvineRenters) description of the calculator. To access it click on the link.
The wheels of progress keep turning here at the Irvine Housing Blog. Some of you may have noticed that we have introduced a new rent versus own decision calculator. It is still a work in progress, but it is good enough to put on the main site. We hope to add some formatting and create a stand-alone version for people to download and use.
Our goal was to create an accurate and detailed accounting for the true cost of ownership. This is a point-in-time calculator. You are not asked to make assumptions about inflation or appreciation. There are no projections for the future. People who invest in real estate (I am not talking about stupid amateur speculators) always look at the stabilized cash flow in the first year of ownership. If it doesn't make sense in year 1, then it isn't an investment, it is a speculative gamble. There are a variety of rent versus own calculators out there. Most are put up by realtors. They are totally biased and ignore costs and exaggerate benefits. Some are put up by bubble bloggers that are biased the other direction. We want to be accurate.
window.google_render_ad();
Most of the underlying assumptions are documented in the post Rent versus Own. Most of the inputs are in the left-side column, and most of the outputs are on the right (the exception is the HOA fees which are plugged in directly on the cost side). Play with these assumptions at your own risk. As I documented in the Rent versus Own post many of the costs are underestimated, and many of the benefits are overestimated. The most common mistakes are to ignore maintenance and replacement reserves and to overestimate the tax savings. The true tax benefit is not the highest marginal tax rate you pay.
The primary function of the calculator is to determine the true cost of ownership to compare to a base rent. However, we have added a reverse calculation that allows renters to put in the rent they are currently paying and show them how much house they can afford. Since this is not a spreadsheet calculation and we could not iterate to run the calculations backward, we cheated: we use a percentage of rent that goes to the cost of ownership beyond the payment and subtract this from the rent to compute the purchase price, downpayment and loan amount. You will see the two methods produce very close results both forward and backward.
Any comments or suggestions for improvement will be appreciated.
Tuesday, November 11, 2008
The moral hazard of modifications
It was brought to my attention that my post regarding CitiGroup does not correctly communicate my views. I would like to invite others to share their thoughts regarding loan modifications.
Banks are only thinking one step ahead
Although loan modification saves the bank money on one particular bad loan it creates 4 more. If banks don't start thinking past step one the worst is yet to come................ Game over.... read this article http://news.yahoo.com/s/ap/20081111/ap_on_bi_ge/citigroup_homeowner_assistance
Saturday, November 8, 2008
Interesting perspective on Democracy
“When the thirteen colonies were still a part of England, Professor Alexander Tyler wrote about the fall of the Athenian republic over two thousand years previous to that time:A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage.”1
1Alexander Tyler http://www.mcsm.org/democracy1.html In accordance with Title 17 U.S.C. Section 107, any copyrighted work in this message is distributed under fair use without profit or payment for non-profit research and educational purposes only. http://www.law.cornell.edu/uscode/17/107.shtml
1Alexander Tyler http://www.mcsm.org/democracy1.html In accordance with Title 17 U.S.C. Section 107, any copyrighted work in this message is distributed under fair use without profit or payment for non-profit research and educational purposes only. http://www.law.cornell.edu/uscode/17/107.shtml
Friday, November 7, 2008
Uncle Sam and prudent tax payers offering $150,000+ to anyone that quits making their payments
Uncle Sam and prudent tax payers offering $150,000+ to anyone that quits making their payments
If I told you that the government wanted to give you $150,000 and all you needed to do was quit making your mortgage payment, be willing to have bad credit for a period of 3-7 years would you accept the money? If you say no, you may be in the minority soon. As a result of current legislation and the prodding of the government loan modification is as out of control as exotic mortgages were 3 years ago.
While allowing modifications of loans at current market rate on 30 year fixed loans makes sense the modifications that are occurring in droves in no way resemble this type of prudent modification. Instead, many of the modifications are reducing principle by hundreds of thousands of dollars and offering exceptional terms that are only available to those that were imprudent when they purchased and stopped paying their mortgage. This is exacerbating the problem and could easily increase the amount of bad loans exponentially. Let me offer a real life example;
A friend of mine purchased a new home near the peak for around $450,000. At the same time many others in his neighborhood purchased as well. My friend and his neighbor were both paying their mortgage. However, his neighbor called his mortgage company requesting a loan modification. The mortgage company explained that he is not in default and therefore they will not complete a loan modification. My friend’s neighbor decided to quit paying his mortgage while he continued to make payments on his four-wheeler, quad, and other toys and make trips to the desert weekly. He called the mortgage company back a couple of months later and received a principle reduction of circa $100,000. My friend, makes excellent money, did not lose his job, and expresses to his neighbor that he is upset that his home is worth $100,000 less than he paid for it, however, his neighbor explains that he received a $100,000 principle write down by not paying his mortgage and negotiating a loan modification. Speaking to my friend a few weeks ago he explained this to me and said he that he is considering getting a modification as well. Who can blame him? This is only one example of what this type of legislation is creating.
I could tell you ½ dozen similar stories each more egregious and unbelievable than the last. Whether it be the real estate agent in San Diego that purchased her home for $200,000, pulled $400,000 equity out, hasn’t paid her mortgage in months as is being foreclosed on but not without a fight and the support of community groups fighting to keep her in the home. Some would consider her actions bank robbery; while her supporters have a different opinion. What about the millionaire living in Newport Beach that a friend of mine whose company completed 400 loan modifications last month told me about? The millionaire stopped paying his mortgage because he wanted a modification, saw others doing it, and could use the extra cash each month. What about the homeowner in Costa Mesa that realized they could not afford a $642,000 mortgage and opted for the short sale? Instead of a short sale Countrywide rejected a short sale offer of $450,000 and elected to reduce their principle to $382,000. There are hundreds of stories like this and their will be hundreds of thousands more if something is not done about this issue.
Loan modification of this kind is a moral hazard, exacerbates the problem, and has the potential to be a larger disaster than the original exotic loan problem it’s trying to solve. Something must be done to stop these types of modifications quickly or this country will likely feel the effects for generations. There is no easy solution to the current problem, however, legislation that encourages the type of loan modifications explained above and legislation that delays the foreclosure process are not the answer and only make the problem worse. Most would agree that the problem started with housing and that the problem needs to end with housing. The debate is how the problem should be solved. Current legislation seeks to reduce foreclosures and supply instead of addressing affordability and demand. Affordability needs to reach sustainable levels in order for a stabilization of the housing market. The quicker affordability is reached the quicker we can start to recover. Politicians are currently trying to swim up stream fighting hard against lowering prices while their legislation is only making the current stronger and the problem worse. If we really want to move forward legislation needs to pass that will allow everyone that currently owns a home or has good credit the opportunity to refinance into or take a new loan at 5% fixed and fully amortized for 30 years. Of course this will not help many people that purchased more home than they could afford and they will face foreclosure, an assistance program to help these people find a rental, learn about credit, repair their credit, and prepare them to purchase a home responsibly in the future should be provided.Current legislation is attempting to solve the problem by decreasing supply and slowing the rate of decline. Basic economics indicates that until affordability reaches a sustainable level, prices will continue to decline. Current legislation and bank strategy will temporarily slow the rate of decline, cause the problem to last longer, and cost our country more.
Of course the solution offered in this editorial will increase supply in the short term, drive prices down to affordable levels, and thus has not been considered viable. Supply will increase until demand catches up which will occur once homes reach the proper level of affordability. Using this method we will reach proper affordability levels quicker and begin to recover quicker. Nevertheless, if the pain becomes too great and the government insists on providing assistance to dull the pain it should come in the form of legislation that increases demand rather than by attempting to artificially decrease supply. Legislation that increases demand encourages people to stay in their homes, and helps to solve this problem quicker has been sent to numerous politicians and is looking for support. The bill will allow prospective homeowners to put money into a designated HEA (Home equity account) and if used within the 360 day period will allow them to write the money off for income tax purposes, similar to a SEP IRA, if used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 10%-30% equity to place money into an HEA account designated for homes they purchased after January 1, 2002 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later. Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2002 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions. The writer of this legislation believes that housing is already over subsidized and also proposed a future cap on mortgage interest write off, however, it has not been determined if this will be included in the bill.Although this is only a brief summary of the legislation you can learn more about the legislation and current housing issues and contribute to the discussion by visiting http://www.orangecountycaliforniarealestate.blogspot.com/.
If I told you that the government wanted to give you $150,000 and all you needed to do was quit making your mortgage payment, be willing to have bad credit for a period of 3-7 years would you accept the money? If you say no, you may be in the minority soon. As a result of current legislation and the prodding of the government loan modification is as out of control as exotic mortgages were 3 years ago.
While allowing modifications of loans at current market rate on 30 year fixed loans makes sense the modifications that are occurring in droves in no way resemble this type of prudent modification. Instead, many of the modifications are reducing principle by hundreds of thousands of dollars and offering exceptional terms that are only available to those that were imprudent when they purchased and stopped paying their mortgage. This is exacerbating the problem and could easily increase the amount of bad loans exponentially. Let me offer a real life example;
A friend of mine purchased a new home near the peak for around $450,000. At the same time many others in his neighborhood purchased as well. My friend and his neighbor were both paying their mortgage. However, his neighbor called his mortgage company requesting a loan modification. The mortgage company explained that he is not in default and therefore they will not complete a loan modification. My friend’s neighbor decided to quit paying his mortgage while he continued to make payments on his four-wheeler, quad, and other toys and make trips to the desert weekly. He called the mortgage company back a couple of months later and received a principle reduction of circa $100,000. My friend, makes excellent money, did not lose his job, and expresses to his neighbor that he is upset that his home is worth $100,000 less than he paid for it, however, his neighbor explains that he received a $100,000 principle write down by not paying his mortgage and negotiating a loan modification. Speaking to my friend a few weeks ago he explained this to me and said he that he is considering getting a modification as well. Who can blame him? This is only one example of what this type of legislation is creating.
I could tell you ½ dozen similar stories each more egregious and unbelievable than the last. Whether it be the real estate agent in San Diego that purchased her home for $200,000, pulled $400,000 equity out, hasn’t paid her mortgage in months as is being foreclosed on but not without a fight and the support of community groups fighting to keep her in the home. Some would consider her actions bank robbery; while her supporters have a different opinion. What about the millionaire living in Newport Beach that a friend of mine whose company completed 400 loan modifications last month told me about? The millionaire stopped paying his mortgage because he wanted a modification, saw others doing it, and could use the extra cash each month. What about the homeowner in Costa Mesa that realized they could not afford a $642,000 mortgage and opted for the short sale? Instead of a short sale Countrywide rejected a short sale offer of $450,000 and elected to reduce their principle to $382,000. There are hundreds of stories like this and their will be hundreds of thousands more if something is not done about this issue.
Loan modification of this kind is a moral hazard, exacerbates the problem, and has the potential to be a larger disaster than the original exotic loan problem it’s trying to solve. Something must be done to stop these types of modifications quickly or this country will likely feel the effects for generations. There is no easy solution to the current problem, however, legislation that encourages the type of loan modifications explained above and legislation that delays the foreclosure process are not the answer and only make the problem worse. Most would agree that the problem started with housing and that the problem needs to end with housing. The debate is how the problem should be solved. Current legislation seeks to reduce foreclosures and supply instead of addressing affordability and demand. Affordability needs to reach sustainable levels in order for a stabilization of the housing market. The quicker affordability is reached the quicker we can start to recover. Politicians are currently trying to swim up stream fighting hard against lowering prices while their legislation is only making the current stronger and the problem worse. If we really want to move forward legislation needs to pass that will allow everyone that currently owns a home or has good credit the opportunity to refinance into or take a new loan at 5% fixed and fully amortized for 30 years. Of course this will not help many people that purchased more home than they could afford and they will face foreclosure, an assistance program to help these people find a rental, learn about credit, repair their credit, and prepare them to purchase a home responsibly in the future should be provided.Current legislation is attempting to solve the problem by decreasing supply and slowing the rate of decline. Basic economics indicates that until affordability reaches a sustainable level, prices will continue to decline. Current legislation and bank strategy will temporarily slow the rate of decline, cause the problem to last longer, and cost our country more.
Of course the solution offered in this editorial will increase supply in the short term, drive prices down to affordable levels, and thus has not been considered viable. Supply will increase until demand catches up which will occur once homes reach the proper level of affordability. Using this method we will reach proper affordability levels quicker and begin to recover quicker. Nevertheless, if the pain becomes too great and the government insists on providing assistance to dull the pain it should come in the form of legislation that increases demand rather than by attempting to artificially decrease supply. Legislation that increases demand encourages people to stay in their homes, and helps to solve this problem quicker has been sent to numerous politicians and is looking for support. The bill will allow prospective homeowners to put money into a designated HEA (Home equity account) and if used within the 360 day period will allow them to write the money off for income tax purposes, similar to a SEP IRA, if used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 10%-30% equity to place money into an HEA account designated for homes they purchased after January 1, 2002 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later. Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2002 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions. The writer of this legislation believes that housing is already over subsidized and also proposed a future cap on mortgage interest write off, however, it has not been determined if this will be included in the bill.Although this is only a brief summary of the legislation you can learn more about the legislation and current housing issues and contribute to the discussion by visiting http://www.orangecountycaliforniarealestate.blogspot.com/.
Thursday, November 6, 2008
How much a house really costs by Irvine Renter
How Much a House Really Costs
A useful way to look at the total cost of housing is to evaluate the monthly cost of ownership. An ownership cost is any expenditure required for the possession of property. A working definition is important because there are many hidden or forgotten costs people overlook. These costs are borne by owners and not by renters. There are 7 costs to owning a house. Although some of these costs are not paid on a monthly basis, they can be evaluated on a monthly basis with simple math. These costs are:
The mortgage payment is the first and most obvious payment because it is the largest. It is also an area where people take risks to reduce the cost of housing. It was the manipulation of mortgage payments that was the focus of the lending industry “innovation” that inflated the housing bubble. The relationship between payment and loan amount is the most important determinant of housing prices. This relationship changes with loan terms such as the interest rate, but it is also strongly influenced by the type of amortization, if any. Amortizing loans, loans that require principal repayment in each monthly payment, finance the smallest amount. Interest-only loan terms finance a larger amount than amortizing loans because none of the payment is going toward principal. Negatively amortizing loans finance the largest amount because the monthly payment does not cover the actual interest expense.
Property Taxes
Property taxes have long been a source of local government tax revenues. Real property cannot be moved out of a government's jurisdiction, and values can be estimated by an appraisal, so it is a convenient item to tax. In most states, local governments add up the cost of running the government and divide by the total property value in the jurisdiction to establish a millage tax rate. California is forced to do things differently by Proposition 13 which effectively limits the appraised value and total tax revenue from real property. Local governments are forced to find revenue from other sources. Proposition 13 limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases. In California, the first half of regular secured property tax bills are due November 1st, and delinquent after December 10th; the second half are due February 1st, and delinquent after April 10th each year. If the delinquent date falls on a Saturday, Sunday, or government holiday, then the due date is the following business day. Often the lender will compel the borrower to include extra money in the monthly payment to cover property taxes, homeowners insurance, and private mortgage insurance, and these bills will be paid by the lender when they come due. If these payments are not escrowed by the lender, then the borrower will need to make these payments. The total yearly property tax bill can be divided by 12 to obtain the monthly cost.
Homeowners Insurance
Homeowners insurance is almost always required by a lender to insure the collateral for the loan. Even if there is no lender involved, it is always a good idea to carry homeowners insurance. The risk of loss from damage to the house can be a financial catastrophe without the proper insurance. A standard policy insures the home itself and the things you keep in it. Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets. Damage caused by most disasters is covered but there are exceptions. The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners' responsibility.
Private Mortgage Insurance
Mortgages against real property take priority on a first recorded, first paid basis. This is known as their lien position. This becomes very important in instances of foreclosure. The 1st mortgage holders gets paid in full before the second mortgage holder gets paid and so on through the chain of mortgages on a property. In a foreclosure situation, subordinate loans are often completely wiped out, and if the loss is great enough, the first mortgage may be imperiled. Because of this fact, if the purchase money mortgage (1st lien position) exceeds 80% of the value of the home, the lender will require the borrower to purchase an insurance policy to protect the lender in event of loss. This policy is of no use or benefit to the borrower as it insures the lender against loss. It is simply an added cost of ownership. Many of the purchase transactions during the bubble rally had an 80% purchase money mortgage and a “piggy back” loan of up to 20% to cover the remaining cost. These loan pairs are often referred to as 80/20 loans, and they were used primarily to avoid private mortgage insurance. There were very common during the bubble.
Special Taxes and Levies
Several areas have special taxing districts that increase the tax burden beyond the normal property tax bill. Many states have provisions which allow supplemental property tax situations. The State of California has Mello Roos fees. A Mello-Roos District is an area where a special tax is imposed on those real property owners within a Community Facilities District. This district is established to obtain public financing through the sale of bonds for the purpose of financing certain public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The taxes paid are used to make the payments of principal and interest on the bonds.
Homeowner Association Dues and Fees
Many modern planned communities have homeowners associations formed to maintain privately owned facilities held for the exclusive use of community residents. These HOAs bill the owners monthly to provide these services. They have foreclosure powers if the bills are not paid. It is given the authority to enforce the covenants, conditions, and restrictions (CC&Rs) and to manage the common amenities of the development. It allows the developer to legally exit responsibility of the community typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots. Most homeowners' associations are non-profit corporations, and are subject to state statutes that govern non-profit corporations and homeowners' associations.
Maintenance and Replacement Reserves
An often overlooked cost of ownership is the cost of routine maintenance and the funding of reserves for major repairs. For example, a composite shingle roof must be replaced every 20-25 years. It may take $100 a month set aside for 20 years to fund this replacement cost. Also, condominium associations often levy special assessments to undertake required work for which the reserves are insufficient. In the real world, most people do not set aside money for these items. Most will attempt to obtain a Home Equity Line of Credit (HELOC) to fund the repairs when they are necessary. Of course this assumes a property has appreciated and such financing will be made available.
Tax Savings
There are two other variables people often consider when evaluating the cost of ownership that is not included in the prior list: income tax savings and lost downpayment interest. When a borrower takes out a home loan, the interest is tax deductible up to a certain amount. For borrowers in the highest marginal tax bracket, the savings can be significant, and this can make a dramatic difference in the true cost of ownership. However, this benefit diminishes over time as the loan is paid off and the interest decreases. Plus, contrary to popular belief, it is never good financial planning to spend $100 to save $25 in taxes. Also, these benefits are almost universally overestimated by people considering a home purchase. A renter considering home ownership will need to remember they will be giving up the standard deduction when they itemize to obtain the Home Mortgage Interest Deduction (HMID). A "married filing jointly" taxpayer will forgo a $10,700 deduction in 2007. This reduces the net impact of the HMID. Anecdotally, even those in the highest tax brackets usually do not get more than a 25% tax savings.
Hidden Savings
This is the forgotten benefit of a conventionally amortizing loan: forced savings. Most people are not good at saving. The government recognized this years ago when they started taking money out of peoples salaries to pay income taxes because they knew people would not do it on their own. People who become homeowners during their lifetimes often have the equity in their home as their only source of retirement savings other than social security. To accurately calculate the cost of ownership, this hidden savings amount needs to be deducted from the total cost of ownership because this money will generally come back to the borrower at the time of sale. Since taxpayers in the United States get a capital gains exemption up to $250,000, this savings amount does not need to be adjusted for taxes.
Lost Downpayment Interest
Unless 100% financing is utilized, a cash downpayment will generally be withdrawn from an interest bearing account to purchase a house. The monthly interest that would have accrued if the downpayment money was still in the bank is a cost of ownership. This is perhaps the most overlooked ownership cost. For instance, if you are putting 20% down on a $500,000 property, you will be taking $100,000 from a bank account where it would have earned 5% in 2007. This $5,000 in interest comes to $417 in lost interest the moment this money gets tied up in real property. If someone chooses to rent rather than buy, they would earn this interest income. Of course, this earned income is also taxed, so 75% of this number is the net opportunity cost of a downpayment.
To establish the cost of ownership, each of these costs, if applicable, must be quantified. When the total monthly cost of ownership is equal to the rental rate, the market is considered to be at fair value for owner-occupants. In fact, this is the equilibrium in most real estate markets across the nation. In a strange way, the bubble did not upset this equilibrium. The use of negative amortization loans with artificially low teaser rates allowed borrowers to obtain double the loan amount with the same monthly payment: double the loan; double the purchase price. This is how prices were bid up so high so fast without a commensurate increase in wages. The elimination of these loans is also the reason prices collapse.
Ownership Cost Math
Below is a typical cost of ownership for a $500,000 Irvine property:
$500,000 Purchase Price
$100,000 Downpayment @20%$400,000 Mortgage @ 80%
$2,528.27 Mortgage Payment @ 6.5%$416.67 Property Taxes @ 1%$104.17 Homeowners Insurance @ 0.25%$104.17 Special Taxes and Levies @ 0.25%$100.00 Homeowners Associate Dues or Fees @ $100$625.00 Maintenance and Replacement Reserves @1.5%_________________________________________________________________________$3,878.27 Monthly Cash Cost
..................$2,166.67 Interest on First Payment$(567.71) Tax Savings @ 25% of mortgage interest and property taxes$(361.61) Equity hidden in payment$312.50 Lost Downpayment Income @ 5% of Downpayment_________________________________________________________________________$3,261 Total Cost of Ownership
Notes:
The mortgage payment assumes a 30-year fixed-rate conventionally amortized mortgage at 6.5% interest.
The property taxes are set at the 1% limit imposed by Proposition 13.
The homeowners insurance is estimated at one-quarter of one percent per year.
Private Mortgage Insurance is estimated at one-half of one percent per year. It is not included in the calculation above because this example utilized 80% financing. If the financing amount required PMI, the costs would have been over $200 a month higher.
Special Taxes or Levies (Mello Roos) is estimated at one-quarter of one percent per year. Some nieghborhoods do not have Mello Roos as the bonds have been paid off. Some Mello Roos fees are as high at 1%.
HOA dues are estimated at $100: some are lower, and some are much higher.
Maintenance and replacement reserves are estimated at 1.5%. This may be the most contentious estimate of the group because most people assume they will simply borrow their way around these costs when they are incurred. This certainly has been the pattern during the bubble years when credit was free flowing. This method of home improvement and maintenance may be significantly more difficult as the credit crunch and declining values make financing much more difficult to obtain. In any case, these costs are real, and failing to acknowledge them denies the realities of home ownership.
The sum of the above costs are the monthly cash costs of ownership. A homeowner may not write a check for each of these costs every month, but the costs are still incurred, and renters do not pay them.
The tax savings are based on the maximum interest payment at the beginning of a loan amortization schedule. This tax savings will decline each month as the mortgage is paid off. Contrary to popular belief, this is not a bad thing. Also, the property taxes are also deductable, but Mello Roos are not fully deductible (even though most people mistakenly deduct it.)
The opportunity cost of lost interest assumes a 5% interest rate on the downpayment reduced by 25% for taxes on this earned income.
So there you have it. The actual cost of ownership on a typical $500,000 property in Irvine would be approximately $3,250 per month. Some will be higher and some will be lower, but the calculation above, when adjusted for the specific property details being examined, will yield the cost of property ownership.
Gross Rent Multiplier
So what general relationships can be inferred from the ownership cost breakdown provided above? First, notice the relationship between monthly cost and price. This property is worth 154 times the monthly cost when you fully examine the cost of ownership. This is the basis for the Gross Rent Multiplier (GRM). The GRM is a convenient way to evaluate whether or not a rental rate will cover the monthly cost of a particular property. It was developed by landlords seeking a method to quickly evaluate the purchase price of a property to see if it would be a profitable investment. When performing such an evaluation, a cashflow investor will typically look for a GRM near 100 to find a property with positive cashflow. This method can also be easily adapted to calculate the breakeven point where an owner/occupant would break even compared to renting. As you can see, when you consider the full cost of ownership -- including those costs often ignored -- the gross rent multiplier is lower than most think. The GRM of 154 is very close to the 160 I have been using in my posts here. The Gross rent multiplier is a convenient measure of value because it spares you the brain damage of performing the above, detailed calculation for every property you wish to evaluate.
Renting Versus Owning
Renting versus owning is both an intellectual, financial decision and an emotional one. The financial decision is first and foremost an analysis of the comparative cost of renting versus owning. The cost of a rental can be determined fairly easily as there are usually a number of comparable properties on the market to establish a realistic rental rate for any given property. Of course, it is easy to justify in one's mind a comparative rent that is higher than the market will bear. A house someone is in love with will almost certainly rent above market in their minds. Also when looking at similar products the rental rates may not be realistic in the marketplace. It is probably a good idea to take 5% to 10% off comparable rental rates on properties offered on the market. Once you have established what you believe to be a comparative rental rate, and you have gone through a realistic evaluation of the true costs of ownership as outlined above, a simple comparison of the two figures will tell you if a property is overvalued, undervalued or just right.
This point-in-time analysis of the relative worth of a house does leave out a couple of important financial factors: inflation and transaction costs. Inflation is the erosion of purchase power of money over time, or looked at another way, it is the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index. The effect of inflation on housing costs is that it tends to increase the cost of renting over time, and theoretically, it will increase the value of a house over time as well. If the cost of rent is increasing, but your cost of ownership is fixed (assuming a fixed-rate mortgage,) then owning a home becomes less expensive over time and serves as a hedge against the impact of inflation. If you are a homeowner, inflation is your friend. There is one big cost of home ownership that works against the positive impact of inflation: transaction costs. When people buy a house, they pay some closing costs, but many of these get rolled into your loan and forgotten. When people sell a house, they generally go to a realtor to help them market the property and complete the paperwork necessary for the transaction. Real estate commissions for many years have been held at an artificially high 6% in the United States, and the seller is the one who pays this commission. From the time of purchase to the time of sale, inflation (or irrational appreciation) must have increased the value of the house enough for the sales price to cover the real estate commission or the seller will lose money. This is why it is often recommended for people who are not going to live in a given area for more than 2 or 3 years to rent instead of own. Renting is freedom -- freedom to move when you wish (within the terms of your lease.) As I noted in America’s Debtor Prisons, homeowners who go underwater lose this freedom of movement. This advantage of renting is nullified during a price rally as owners have this same freedom during those times, but this forgotten benefit becomes readily apparent once prices start to fall.
Some people spend a great deal of effort evaluating the costs of ownership to determine if is a correct decision, but many people do not. Some people make the decision to purchase the most expensive asset they will ever own with no analysis at all. The decision to buy a house is primarily an emotional one. Even those who go through all the analysis generally only do so to provide rationalizations for their emotional decision. During price rallies, greed becomes a powerful emotion motivating people to fudge their financial analysis in order to justify their emotional purchase. Another factor often called the "nesting instinct" causes both men and women to want a place to call their own, particularly when there are children in the family. There is nothing wrong with deciding for emotional reasons. Most people pick a spouse this way. The real challenge is to have the emotions and the intellect working together to make a decision that is both fiscally sound and emotionally satisfying. This is easier said than done.
A useful way to look at the total cost of housing is to evaluate the monthly cost of ownership. An ownership cost is any expenditure required for the possession of property. A working definition is important because there are many hidden or forgotten costs people overlook. These costs are borne by owners and not by renters. There are 7 costs to owning a house. Although some of these costs are not paid on a monthly basis, they can be evaluated on a monthly basis with simple math. These costs are:
- Mortgage Payment
- Property Taxes
- Homeowners Insurance
- Private Mortgage Insurance
- Special Taxes and Levies
- Homeowners Association Dues or Fees
- Maintenance and Replacement Reserves
- Mortgage Payment
The mortgage payment is the first and most obvious payment because it is the largest. It is also an area where people take risks to reduce the cost of housing. It was the manipulation of mortgage payments that was the focus of the lending industry “innovation” that inflated the housing bubble. The relationship between payment and loan amount is the most important determinant of housing prices. This relationship changes with loan terms such as the interest rate, but it is also strongly influenced by the type of amortization, if any. Amortizing loans, loans that require principal repayment in each monthly payment, finance the smallest amount. Interest-only loan terms finance a larger amount than amortizing loans because none of the payment is going toward principal. Negatively amortizing loans finance the largest amount because the monthly payment does not cover the actual interest expense.
Property Taxes
Property taxes have long been a source of local government tax revenues. Real property cannot be moved out of a government's jurisdiction, and values can be estimated by an appraisal, so it is a convenient item to tax. In most states, local governments add up the cost of running the government and divide by the total property value in the jurisdiction to establish a millage tax rate. California is forced to do things differently by Proposition 13 which effectively limits the appraised value and total tax revenue from real property. Local governments are forced to find revenue from other sources. Proposition 13 limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases. In California, the first half of regular secured property tax bills are due November 1st, and delinquent after December 10th; the second half are due February 1st, and delinquent after April 10th each year. If the delinquent date falls on a Saturday, Sunday, or government holiday, then the due date is the following business day. Often the lender will compel the borrower to include extra money in the monthly payment to cover property taxes, homeowners insurance, and private mortgage insurance, and these bills will be paid by the lender when they come due. If these payments are not escrowed by the lender, then the borrower will need to make these payments. The total yearly property tax bill can be divided by 12 to obtain the monthly cost.
Homeowners Insurance
Homeowners insurance is almost always required by a lender to insure the collateral for the loan. Even if there is no lender involved, it is always a good idea to carry homeowners insurance. The risk of loss from damage to the house can be a financial catastrophe without the proper insurance. A standard policy insures the home itself and the things you keep in it. Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets. Damage caused by most disasters is covered but there are exceptions. The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners' responsibility.
Private Mortgage Insurance
Mortgages against real property take priority on a first recorded, first paid basis. This is known as their lien position. This becomes very important in instances of foreclosure. The 1st mortgage holders gets paid in full before the second mortgage holder gets paid and so on through the chain of mortgages on a property. In a foreclosure situation, subordinate loans are often completely wiped out, and if the loss is great enough, the first mortgage may be imperiled. Because of this fact, if the purchase money mortgage (1st lien position) exceeds 80% of the value of the home, the lender will require the borrower to purchase an insurance policy to protect the lender in event of loss. This policy is of no use or benefit to the borrower as it insures the lender against loss. It is simply an added cost of ownership. Many of the purchase transactions during the bubble rally had an 80% purchase money mortgage and a “piggy back” loan of up to 20% to cover the remaining cost. These loan pairs are often referred to as 80/20 loans, and they were used primarily to avoid private mortgage insurance. There were very common during the bubble.
Special Taxes and Levies
Several areas have special taxing districts that increase the tax burden beyond the normal property tax bill. Many states have provisions which allow supplemental property tax situations. The State of California has Mello Roos fees. A Mello-Roos District is an area where a special tax is imposed on those real property owners within a Community Facilities District. This district is established to obtain public financing through the sale of bonds for the purpose of financing certain public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The taxes paid are used to make the payments of principal and interest on the bonds.
Homeowner Association Dues and Fees
Many modern planned communities have homeowners associations formed to maintain privately owned facilities held for the exclusive use of community residents. These HOAs bill the owners monthly to provide these services. They have foreclosure powers if the bills are not paid. It is given the authority to enforce the covenants, conditions, and restrictions (CC&Rs) and to manage the common amenities of the development. It allows the developer to legally exit responsibility of the community typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots. Most homeowners' associations are non-profit corporations, and are subject to state statutes that govern non-profit corporations and homeowners' associations.
Maintenance and Replacement Reserves
An often overlooked cost of ownership is the cost of routine maintenance and the funding of reserves for major repairs. For example, a composite shingle roof must be replaced every 20-25 years. It may take $100 a month set aside for 20 years to fund this replacement cost. Also, condominium associations often levy special assessments to undertake required work for which the reserves are insufficient. In the real world, most people do not set aside money for these items. Most will attempt to obtain a Home Equity Line of Credit (HELOC) to fund the repairs when they are necessary. Of course this assumes a property has appreciated and such financing will be made available.
Tax Savings
There are two other variables people often consider when evaluating the cost of ownership that is not included in the prior list: income tax savings and lost downpayment interest. When a borrower takes out a home loan, the interest is tax deductible up to a certain amount. For borrowers in the highest marginal tax bracket, the savings can be significant, and this can make a dramatic difference in the true cost of ownership. However, this benefit diminishes over time as the loan is paid off and the interest decreases. Plus, contrary to popular belief, it is never good financial planning to spend $100 to save $25 in taxes. Also, these benefits are almost universally overestimated by people considering a home purchase. A renter considering home ownership will need to remember they will be giving up the standard deduction when they itemize to obtain the Home Mortgage Interest Deduction (HMID). A "married filing jointly" taxpayer will forgo a $10,700 deduction in 2007. This reduces the net impact of the HMID. Anecdotally, even those in the highest tax brackets usually do not get more than a 25% tax savings.
Hidden Savings
This is the forgotten benefit of a conventionally amortizing loan: forced savings. Most people are not good at saving. The government recognized this years ago when they started taking money out of peoples salaries to pay income taxes because they knew people would not do it on their own. People who become homeowners during their lifetimes often have the equity in their home as their only source of retirement savings other than social security. To accurately calculate the cost of ownership, this hidden savings amount needs to be deducted from the total cost of ownership because this money will generally come back to the borrower at the time of sale. Since taxpayers in the United States get a capital gains exemption up to $250,000, this savings amount does not need to be adjusted for taxes.
Lost Downpayment Interest
Unless 100% financing is utilized, a cash downpayment will generally be withdrawn from an interest bearing account to purchase a house. The monthly interest that would have accrued if the downpayment money was still in the bank is a cost of ownership. This is perhaps the most overlooked ownership cost. For instance, if you are putting 20% down on a $500,000 property, you will be taking $100,000 from a bank account where it would have earned 5% in 2007. This $5,000 in interest comes to $417 in lost interest the moment this money gets tied up in real property. If someone chooses to rent rather than buy, they would earn this interest income. Of course, this earned income is also taxed, so 75% of this number is the net opportunity cost of a downpayment.
To establish the cost of ownership, each of these costs, if applicable, must be quantified. When the total monthly cost of ownership is equal to the rental rate, the market is considered to be at fair value for owner-occupants. In fact, this is the equilibrium in most real estate markets across the nation. In a strange way, the bubble did not upset this equilibrium. The use of negative amortization loans with artificially low teaser rates allowed borrowers to obtain double the loan amount with the same monthly payment: double the loan; double the purchase price. This is how prices were bid up so high so fast without a commensurate increase in wages. The elimination of these loans is also the reason prices collapse.
Ownership Cost Math
Below is a typical cost of ownership for a $500,000 Irvine property:
$500,000 Purchase Price
$100,000 Downpayment @20%$400,000 Mortgage @ 80%
$2,528.27 Mortgage Payment @ 6.5%$416.67 Property Taxes @ 1%$104.17 Homeowners Insurance @ 0.25%$104.17 Special Taxes and Levies @ 0.25%$100.00 Homeowners Associate Dues or Fees @ $100$625.00 Maintenance and Replacement Reserves @1.5%_________________________________________________________________________$3,878.27 Monthly Cash Cost
..................$2,166.67 Interest on First Payment$(567.71) Tax Savings @ 25% of mortgage interest and property taxes$(361.61) Equity hidden in payment$312.50 Lost Downpayment Income @ 5% of Downpayment_________________________________________________________________________$3,261 Total Cost of Ownership
Notes:
The mortgage payment assumes a 30-year fixed-rate conventionally amortized mortgage at 6.5% interest.
The property taxes are set at the 1% limit imposed by Proposition 13.
The homeowners insurance is estimated at one-quarter of one percent per year.
Private Mortgage Insurance is estimated at one-half of one percent per year. It is not included in the calculation above because this example utilized 80% financing. If the financing amount required PMI, the costs would have been over $200 a month higher.
Special Taxes or Levies (Mello Roos) is estimated at one-quarter of one percent per year. Some nieghborhoods do not have Mello Roos as the bonds have been paid off. Some Mello Roos fees are as high at 1%.
HOA dues are estimated at $100: some are lower, and some are much higher.
Maintenance and replacement reserves are estimated at 1.5%. This may be the most contentious estimate of the group because most people assume they will simply borrow their way around these costs when they are incurred. This certainly has been the pattern during the bubble years when credit was free flowing. This method of home improvement and maintenance may be significantly more difficult as the credit crunch and declining values make financing much more difficult to obtain. In any case, these costs are real, and failing to acknowledge them denies the realities of home ownership.
The sum of the above costs are the monthly cash costs of ownership. A homeowner may not write a check for each of these costs every month, but the costs are still incurred, and renters do not pay them.
The tax savings are based on the maximum interest payment at the beginning of a loan amortization schedule. This tax savings will decline each month as the mortgage is paid off. Contrary to popular belief, this is not a bad thing. Also, the property taxes are also deductable, but Mello Roos are not fully deductible (even though most people mistakenly deduct it.)
The opportunity cost of lost interest assumes a 5% interest rate on the downpayment reduced by 25% for taxes on this earned income.
So there you have it. The actual cost of ownership on a typical $500,000 property in Irvine would be approximately $3,250 per month. Some will be higher and some will be lower, but the calculation above, when adjusted for the specific property details being examined, will yield the cost of property ownership.
Gross Rent Multiplier
So what general relationships can be inferred from the ownership cost breakdown provided above? First, notice the relationship between monthly cost and price. This property is worth 154 times the monthly cost when you fully examine the cost of ownership. This is the basis for the Gross Rent Multiplier (GRM). The GRM is a convenient way to evaluate whether or not a rental rate will cover the monthly cost of a particular property. It was developed by landlords seeking a method to quickly evaluate the purchase price of a property to see if it would be a profitable investment. When performing such an evaluation, a cashflow investor will typically look for a GRM near 100 to find a property with positive cashflow. This method can also be easily adapted to calculate the breakeven point where an owner/occupant would break even compared to renting. As you can see, when you consider the full cost of ownership -- including those costs often ignored -- the gross rent multiplier is lower than most think. The GRM of 154 is very close to the 160 I have been using in my posts here. The Gross rent multiplier is a convenient measure of value because it spares you the brain damage of performing the above, detailed calculation for every property you wish to evaluate.
Renting Versus Owning
Renting versus owning is both an intellectual, financial decision and an emotional one. The financial decision is first and foremost an analysis of the comparative cost of renting versus owning. The cost of a rental can be determined fairly easily as there are usually a number of comparable properties on the market to establish a realistic rental rate for any given property. Of course, it is easy to justify in one's mind a comparative rent that is higher than the market will bear. A house someone is in love with will almost certainly rent above market in their minds. Also when looking at similar products the rental rates may not be realistic in the marketplace. It is probably a good idea to take 5% to 10% off comparable rental rates on properties offered on the market. Once you have established what you believe to be a comparative rental rate, and you have gone through a realistic evaluation of the true costs of ownership as outlined above, a simple comparison of the two figures will tell you if a property is overvalued, undervalued or just right.
This point-in-time analysis of the relative worth of a house does leave out a couple of important financial factors: inflation and transaction costs. Inflation is the erosion of purchase power of money over time, or looked at another way, it is the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index. The effect of inflation on housing costs is that it tends to increase the cost of renting over time, and theoretically, it will increase the value of a house over time as well. If the cost of rent is increasing, but your cost of ownership is fixed (assuming a fixed-rate mortgage,) then owning a home becomes less expensive over time and serves as a hedge against the impact of inflation. If you are a homeowner, inflation is your friend. There is one big cost of home ownership that works against the positive impact of inflation: transaction costs. When people buy a house, they pay some closing costs, but many of these get rolled into your loan and forgotten. When people sell a house, they generally go to a realtor to help them market the property and complete the paperwork necessary for the transaction. Real estate commissions for many years have been held at an artificially high 6% in the United States, and the seller is the one who pays this commission. From the time of purchase to the time of sale, inflation (or irrational appreciation) must have increased the value of the house enough for the sales price to cover the real estate commission or the seller will lose money. This is why it is often recommended for people who are not going to live in a given area for more than 2 or 3 years to rent instead of own. Renting is freedom -- freedom to move when you wish (within the terms of your lease.) As I noted in America’s Debtor Prisons, homeowners who go underwater lose this freedom of movement. This advantage of renting is nullified during a price rally as owners have this same freedom during those times, but this forgotten benefit becomes readily apparent once prices start to fall.
Some people spend a great deal of effort evaluating the costs of ownership to determine if is a correct decision, but many people do not. Some people make the decision to purchase the most expensive asset they will ever own with no analysis at all. The decision to buy a house is primarily an emotional one. Even those who go through all the analysis generally only do so to provide rationalizations for their emotional decision. During price rallies, greed becomes a powerful emotion motivating people to fudge their financial analysis in order to justify their emotional purchase. Another factor often called the "nesting instinct" causes both men and women to want a place to call their own, particularly when there are children in the family. There is nothing wrong with deciding for emotional reasons. Most people pick a spouse this way. The real challenge is to have the emotions and the intellect working together to make a decision that is both fiscally sound and emotionally satisfying. This is easier said than done.
North Tustin Opportunity
Square footage: 2600 square feetLot size: 11,200 square feet
Bedrooms: 4
Bathrooms: 4
Asking Price: $599,000
Address: 12552 Carmel Way, North Tustin
This is a short sale that has been approved numerous times at numerous prices, however, each time the bank took too long and the buyers walked a way. This is a nice ranch syle home. There is not much time left before the foreclosure is complete. The home has a large lot with lots of privacy. The mid-50s ranch has been updated with an expanded great room/kitchen featuring Corian Counters and breakfast bar that seats 4, beautiful wood floors and matching beamed cathedral ceilings. Downstairs features three original bedrooms including an oversized Master with double closets and attached bath. The two additional downstiars bedrooms are Jack-and-Jill and share an updatd bath. Upstairs, the Master Bedroom Addition features a Master Bath with walk-in closet, plus a separate, huge bonus room/loft with catherdral ceilings.Hardwood floors and New designer paint throughout. Cul-de-sac street is filled with kids & Award-winning Panorama Elementary is walking distance!
Saturday, November 1, 2008
Great comments regarding Legislation-- Does anyone know how to get these to decision makers?
I am new to blogging so I'm going to put a link to the Irvine housing blog and also copy and paste all of the comments below. I would like to thank everyone that has commented. Although I have not had any major sponsorship yet, some of the comments shared were the first I had heard with any level of opposition and are well taken.
If anyone knows how I can enable comments on here please let me know.
Thanks!
_______________________
comments from the Irvine housing blog below
link: http://www.irvinehousingblog.com/blog/comments/open-thread-11-1-2008/#comments
The proposal is not a fix for the foreclosure crisis. There is no fix. It does address the problem of saving for a house and the use of exotic financing, and I like that.
I also received an email from MalibuRenter:
As I was looking at your model of the cost of buying vs renting, I realized the potential of a simple policy change: make the standard deduction much larger. For example, instead of the current $10,200, go to $20,000 for a married couple. About 75% of all home mortgages are for $300k or less (see http://www.federalreserve.gov/pubs/bulletin/2008/pdf/hmda07draft.pdf , page 53). For someone with a new $300k loan at 6.5% and no other itemized deductions, they would no longer have to itemize. For people with a few other itemized deductions like income taxes and property taxes, they still might take the higher standard deduction with a $200-$250k loan. That would mean more than half of all mortgageholders would have no reason to itemize.
This has some nice implications. 1. For anyone whose itemized deductions including mortgage interest fits under the new limit, they are no worse off. Usually, they will be better off. Many more people with modest incomes will not have to keep records or have to understand the code in order to itemize. It is a way to both reduce and simplify taxes for people with modest incomes. 2. Paying off your loan earlier, or starting to pay faster, would not lower your income tax deductions for people under the $20,000 standard deduction. 3. There would be more incentive to refinance to lower interest loans, because the Federal Govt would subsidize less of the interest cost, frequently they would subsidize none of it. 4. There would be less marginal incentive toward larger homes, higher loan to value ratios, home equity loans, and cashout refis. 5. In general, homes would be financed with less leverage.
I like the idea. The following was my response:
This would also make interest-only loans less appetizing because you would get less bang for the buck. It would certainly be more politically feasible than trying to eliminate the HMID. I wonder, would this create a tipping point where you would have incentive to jack up your mortgage. Once you crossed the threshold, the larger your deduction the better. I suppose you could always lower the cap as well. You could make the window of opportunity to benefit from the HMID so small that only a small band of middle to upper income homeowners get any benefit. Also, for our new Democratic president and Congress, raising the personal exemption lowers the taxes on the most needy and trickles its way up to the middle class. They would like that.
The Home Mortgage Interest Deduction is a direct government subsidy of ownership that encourages excessive debt loads. It would be very difficult to get rid of politically, but since excessive debt was the primary cause of the house price collapse and huge lender losses, it is something that should be examined.
I have my own proposals for preventing the next housing bubble. The following is the last chapter of my book The Great Housing Bubble:
Preventing the Next Housing Bubble.pdf
When the new administration comes into office this January, the housing crisis will be one of the most important issues facing the new President. There will be many ideas floating around. Some of them good; most of them bad.
What do you think of these ideas? What do you think should be done?
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Astute Observations
Astute Observation by CapitalismWorks
2008-11-01 08:27 AM
How much impact could loan modification have on the pace of the decline and the ultimate destination in terms of pricing. It seems that banks, recognizing the huge downside to foreclosing in such massive numbers, as working in earnest to modify loans.
From my perspective these efforts are not beneficial to us renters.
Reply to this astute observation
Astute Observation by IrvineRenter
2008-11-01 08:45 AM
All these events are designed to slow the rate of price decline, and in that regard, they may have some impact. I still think it is trying to put out a forest fire with a garden hose. The number of distressed homeowners is much too large, and these programs do nothing to address affordability. The greatest declines for Irvine are in front of us rather than behind us. Irvine is not quite half way to the bottom, IMO. Some other areas are much farther along, and some of the most beaten down markets may actually be at the bottom.
Reply to this astute observation
Astute Observation by dafox
2008-11-01 01:49 PM
IR- What would you classify Irvine as? Alt-A or Prime (I highly doubt its subprime)? I’m looking primarily in south Huntington and its still WAY out of affordable according to median incomes on the redfin/onboardnavigator demographics.
Reply to this astute observation
Astute Observation by IrvineRenter
2008-11-01 02:20 PM
Ordinarily, I would say Irvine was Prime, but the prices were so high, and there was so much refinancing going on that much of it is now Alt-A.
Reply to this astute observation
Astute Observation by Hormiguero
2008-11-01 08:36 AM
I think you guys are being a bit naive - the whole idea is to keep the taxpayer in a state of serfdom, with maximum debt and maximum income. that’s how you keep them on the treadmill paying for those congressional pensions. their worst nightmare is a citizen with a free and clear home, a nice pool of stable, balanced savings and a good long-term care insurance policy. a person like that doesn’t need to make much income, nor need much of anything from the federal govt, and that is their worst nightmare.
Reply to this astute observation
Astute Observation by Surfing in Newport
2008-11-01 09:13 AM
Don’t forget that housing is the only asset you can sell at a profit and reinvest without paying taxes...and every 2 years you can even pocket a few hundred thousand tax free. The differences in capital gains treatment made investing in homes ripe for a bubble.
Reply to this astute observation
Astute Observation by JoeSez
2008-11-01 06:52 PM
I disagree with motivations. Capital gains is only 15% - right? Tax rates we’re NOT major driver for the bubble.
People bought homes as financial investments because they could get highly leveraged on an asset, a home, with little exposure and lending standards were lax.
If capital gains was 0.0%, there would have been the same housing bubble.
Reply to this astute observation
Astute Observation by brea
2008-11-01 10:35 AM
Why can’t we just keep things simple. When the prices fall, downpayments should be no problem for a disciplined saver. If someone is not disciplined, what are they going to do about the 30 years of payments. Downpayments are the test.
I am not a fan of savings accounts that lock the money into a specific purposes. What if you want or need to spend the money in a different way. What if your kid won’t go to college or you inherit the house of your dreams.
If they do this, there will be a guy that will go buy a house just so he can apply is tax free downpayment money, and then in the next breath pull it out in an equity withdrawal.
Reply to this astute observation
Astute Observation by Landmark
2008-11-01 03:15 PM
Brea- I agree with you, when prices fall downpayments should not be a problem for many and they are not, however many need an extra push in this type of market.
In addition, in a perfect world the government would not tinker. However, that’s not the case, they have committed to tinkering. Since that’s the reality we’re dealing with, at least they could encourage and reward positive behavior rather than negative. If mine/our/your tax dollars are going to be used for this bailout, would you rather it make the situation better or worse? Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited? (see entire PDF version to understand the dangers of the curren proposals)
The question is not whether the goverment is going to get involved and use our taxes to do it. It’s how wisely they are going to use this money and who’s going to benefit.
There are hundreds/ thousands of potential buyers out there waiting for prices to come down to reasonable levels. The foreclosures need to flush through the system the quicker the better. Do you think that it’s possible that this or similar legislation may get these buyers into the market and help prevent legislation that rewards irresponsible behavior?
Great point regarding the equity withdraw, provisions would need to be added to prevent that.
Reply to this astute observation
Astute Observation by brea
2008-11-01 04:15 PM
landmark,
Regarding your comment: “Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited?”
I would prefer that tax money not be used for anyone’s personal interest. So far, the modifications I have read about, don’t look like a windfall to the reckless borrower. I just don’t see were a banker/investor will give up anything unless it is in his own best interest to do so. The talk of the politicians just disgust me, but it may just be pandering to voters.
Your proposal is a separate matter. Why should income taxes not be paid on downpayments? It is income. We have deficits. In the case of retirement IRA’s, the withdrawals are taxed when the money is withdrawn. I assume the Home Equity Accounts would not be taxed when the money is pulled out at the house purchase, otherwise, you would just be postponing taxes for just a few years. Why bother. The while the housing market’s has been extreme, it will eventually return to a buyer’s market with prices tied to wages. That is when buyer’s should come back and they will.
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Astute Observation by Landmark
2008-11-01 06:42 PM
Brea--- Frist, again, I agree- tax money should not be used for personal interest. However, we have a problem that was started with housing. The general belief is that it will end with housing. If people believe that and goverment is set on doing anything they can to shore up the housing market there has to be better plan that modifying loans through principle reduction. “So far, the modifications I have read about, don’t look like a windfall to the reckless borrower.” -I do not do loan modifications, so I cannot speak to the average modification, however I have heard numerous stories of modification that I would consider reckless. For example, a good friend of mind lives in Victorville, he’s a vice principle, makes over 100k/year, bought a new home for circa 400k. His neighbor bought his home at a similar time for a similar price. His neighbor went to the bank for a modification, they said no because he was making his payments. So he quit making his payments and asked them again a few months later. They took $100,000 off of his principle. What makes this even worse is that his neihbor quit making his mortgage payment but kept paying his payment on his quads and “toys”. I would consider that a “windfall to a reckless borrower” do you agree? I have heard at least 1/2 dozen stories like that. Guess what my friend wants--- a modification.
Great point regarding the money when it is pulled out of the home. My thought is that it would be treated similar to a 1031 exchange. If the money is then put into another home it can be tranferred tax free. However, once the home is sold taxes will be paid.
In addition, I do not think that legislation should go on forevor, I believe the government is trying to create a softer landing and avoid a major catostrophe. If we are in as bad of a spot as they are saying and something needs to be done I think we need to explore every avenue.
Do you have any ideas besides do nothing. Which again, I tend to agree with you that the market will work itself out and the goverment should only step in if the situation is incredibly extreme.
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Astute Observation by IrvineRenter
2008-11-01 04:09 PM
Mortgage equity withdrawal is one of the big problems with this proposal. As I read it, someone could pay down their mortgage, get a tremendous retroactive tax break, then HELOC the money right back out again after they got their check from the government.
The best solution to that problem would be to tax HELOC money. In fact, I think HELOC money should be taxed as income since defaulting on it is not taxed now. The way our current tax system is set up, people are strongly encouraged to take on this debt. The money is essentially tax free, and the service on the debt is tax deductible.
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Astute Observation by brea
2008-11-01 04:50 PM
IR,
I am torn between reading your book and reading this site. What I have read is very interesting and useful. I am so glad you wrote it.
I hate when politicians make sweeping rules just to look like they care. IMO, this tax relief on debt forgiveness could have been handled on a case by case basis. When they can’t pay, harass them and then write it off.
Based on the IRS website:
http://www.irs.gov/irs/article/0,,id=179073,00.html
HELOC money used to improve the home, would qualify for the tax relief. When they bought cars and still claim they used it to improve the home, they are cheating. Maybe they will audit some of the returns. I still believe that we need to tax income and not loans. The real issue it that they get relief from the forgiveness of debt and isn’t that why we are in deep trouble now.
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Astute Observation by JoeSez
2008-11-01 06:47 PM
Case-by-case relief is ideal but apparently impractical. The financial system has repackaged these loans as investments and apparently it is hard to find paperwork and expensive to do case-by-case assessment.
The problem with NOT doing anything is debtors can’t cope and walk away from **all** their debt. We all lose in that scenario.
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Astute Observation by zoiks
2008-11-01 11:26 AM
Yeah, right, what we need is a more complicated tax code. How about we simplify the tax code to “zoiks pays no taxes, every one else can eff off”.
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Astute Observation by Gray
2008-11-01 11:31 AM
Feeling so special after the robocall? Just wait for national TV on November 7th, this would be a “special” experience: http://www.cnnbcvideo.com/index.html?nid=fY3TWTZfHXOfejIU2sfzwjkzMjc4OQ--&referred_by=13429144-ae0dQ5x
Sry, IR, I couldn’t resist! :D
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Astute Observation by IrvineRenter
2008-11-01 02:23 PM
That is really funny. LOL!
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Astute Observation by brea
2008-11-01 02:35 PM
Thanks for that laugh. That was great.
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Astute Observation by Dean
2008-11-01 11:35 AM
Probably the best thing to do is figure out a way to keep as many fully-employed, tax-paying families in their homes as possible, while limiting the assistance to pure price speculators. I seriously doubt that there is much to be gained “helping” renters by letting prices fall all the way to their natural price support levels.
That said, now really is the time to take some steps to prevent another bubble from inflating. Here are my thoughts: 1) I like the idea of a “luxury tax” or cap on the interest deduction. I’d set it at the interest on $415,000 for sole property, $533,850 for a home owned jointly by a married couple and bump the cap $26,000 for every dependent under 17. 2) This would encourage equity. Let’s take an average sizes house of 2,300 square feet, assume a per square foot rental price in the area of $2.00 and the 30 year average Irvine rent multiple of around 200. That house has a market price of $920,000. A married couple with one child would only able to write off the interest on the first $559,000 in debt, or 60% of the market price. If they are going with a traditional 20% down, then it raises the effective interest rate on the last $184,000 borrowed from, say, 6% to 8%. That would slow the use of leverage. 3) As long as mortgages are being converted into securities and re-sold, there needs to be a method for folks to do work-outs with a third-party. Bankruptcy courts are not ideal, but it is better than having mass foreclosures.
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Astute Observation by Landmark
2008-11-01 03:27 PM
Dean--- I agree--- if a fully employed family can afford their payment by refinancing into a 30 year fixed, fully ammortized loan, at 5 or 6% but as a result of too little equity the banks won’t help them a govermnent gaurantee could be in order.
For most others, they may need to short sell, or may be faced with foreclosure and have to rent. This will not be the end of the world for them. As I repsonded to Brea above, if the goverment weren’t committed to being involved that would be plenty, however, since the goverment seems to be committed, there has to be better options than what they are proposing.
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Astute Observation by Dean
2008-11-01 04:47 PM
I’d be a bit more generous. Anyone who put their own cash money into a purchase and has lost 100% of that equity plus some of the bank’s money should have a chance to get the principal brought down. Also, the interest rate could get tweaked to a fixed rate that matches an appropriate percentage of their W2 income.
Clearly, there need to minimums. Like, say 10% of the purchase price. Also, there needs to be some kind of real penalty. Like, no further access to credit for, like, seven years. No new Lexus, or fancy colored AmEx Cards, would be a real penalty for OC debtors. That would keep folks in their homes, the broader economy out of free-fall and punish the irresponsible.
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Astute Observation by Landmark
2008-11-01 06:51 PM
Dean-- you are more generous than me. First, I do not see any room for principle write down without creating more issues than it solves. Although, I agree with your comment regarding a penalty or consequence. Second, I do not think it’s fair to give a certain percentage of the poppulation and special interest rate because they bought when they shouldn’t have and took a loan when they shouldn’t have. Many people are renting and gave up on buying as a result. Are those people going to be given special rates when they choose to buy based upon their W2 income?
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Astute Observation by brea
2008-11-01 12:34 PM
I like MalibuRenters’s idea of increaseing the standard deduction. A 20k deduction would be apropriate of the high cost of living areas, but that would be to high for the midwest and such.
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Astute Observation by MalibuRenter
2008-11-01 05:37 PM
I’m ok with the idea that in some cities and states almost everyone would be below the standard deduction. People who live in expensive places would have an added complexity in their lives: itemizing for their taxes.
I’ve had some related discussions with IrvineRenter. Under the current tax code, in places where most people have lower tax rates, or where most of them have mortgage interest below the standard deduction, the price to rent ratios should be lower.
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Astute Observation by WEJ
2008-11-01 02:14 PM
Couldn’t all the modifications backfire and encourage otherwise solvent borrowers to stop paying? If I’m living next door to a guy who has his loan written down by $100,000 I’d want to get in on that action, even if I were otherwise able to continue making payments on a higher loan.
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Astute Observation by Landmark
2008-11-01 03:29 PM
Exactly-- if you download the PDF- you are example 1 and you’re are not alone. Modifications only make the problem worse.
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Astute Observation by MalibuRenter
2008-11-01 05:30 PM
IR writes, regarding increasing the standard deduction “I wonder, would this create a tipping point where you would have incentive to jack up your mortgage. Once you crossed the threshold, the larger your deduction the better.”
While I am not sure how many people would be astute enough to run the calculations, an interesting thing occurs. If you have a mortgage which is just moderately over the standard deduction limit, you won’t get an interest deduction in a few years. Why?
1. Assuming a fixed rate amortizing loan, the amount of your fixed payment which is interest drops over time.
2. The higher standard deduction would also rise over time.
The combination of these two can act pretty fast. For example, take a couple with at $400k mortgage at 6% and no other itemized deductions. The first year the interest is about $24k. By the 5th year it’s $22,672. If inflation is 3.5% per year, the standard deduction the 5th year is $22,950. They are no longer getting any tax break for their mortgage interest.
Take another example, $500k loan and similar terms. By the 9th year, they get no break for their mortgage interest either.
For any loan size, the mortgage interest deduction gets smaller each year, until it reaches zero.
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Astute Observation by MalibuRenter
2008-11-01 05:44 PM
IR - I hadn’t realized the full effect of my proposal on bank liquidity and foreclosures. It’s starting to sound even better.
For someone who isn’t getting any marginal benefit from itemizing their mortgage interest, the aftertax return on paying down their mortgage is the same as the pretax return. That means a return of 5.5-8.0%. In the current investment environment, that’s pretty good.
If more people start paying down their loans, they also increase bank liquidity, are less likely to have their loans go underwater, and are less likely to default on their mortgages.
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Astute Observation by Rebarbarian
2008-11-01 06:49 PM
For every government action there is an equal and opposite market reaction.
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If anyone knows how I can enable comments on here please let me know.
Thanks!
_______________________
comments from the Irvine housing blog below
link: http://www.irvinehousingblog.com/blog/comments/open-thread-11-1-2008/#comments
The proposal is not a fix for the foreclosure crisis. There is no fix. It does address the problem of saving for a house and the use of exotic financing, and I like that.
I also received an email from MalibuRenter:
As I was looking at your model of the cost of buying vs renting, I realized the potential of a simple policy change: make the standard deduction much larger. For example, instead of the current $10,200, go to $20,000 for a married couple. About 75% of all home mortgages are for $300k or less (see http://www.federalreserve.gov/pubs/bulletin/2008/pdf/hmda07draft.pdf , page 53). For someone with a new $300k loan at 6.5% and no other itemized deductions, they would no longer have to itemize. For people with a few other itemized deductions like income taxes and property taxes, they still might take the higher standard deduction with a $200-$250k loan. That would mean more than half of all mortgageholders would have no reason to itemize.
This has some nice implications. 1. For anyone whose itemized deductions including mortgage interest fits under the new limit, they are no worse off. Usually, they will be better off. Many more people with modest incomes will not have to keep records or have to understand the code in order to itemize. It is a way to both reduce and simplify taxes for people with modest incomes. 2. Paying off your loan earlier, or starting to pay faster, would not lower your income tax deductions for people under the $20,000 standard deduction. 3. There would be more incentive to refinance to lower interest loans, because the Federal Govt would subsidize less of the interest cost, frequently they would subsidize none of it. 4. There would be less marginal incentive toward larger homes, higher loan to value ratios, home equity loans, and cashout refis. 5. In general, homes would be financed with less leverage.
I like the idea. The following was my response:
This would also make interest-only loans less appetizing because you would get less bang for the buck. It would certainly be more politically feasible than trying to eliminate the HMID. I wonder, would this create a tipping point where you would have incentive to jack up your mortgage. Once you crossed the threshold, the larger your deduction the better. I suppose you could always lower the cap as well. You could make the window of opportunity to benefit from the HMID so small that only a small band of middle to upper income homeowners get any benefit. Also, for our new Democratic president and Congress, raising the personal exemption lowers the taxes on the most needy and trickles its way up to the middle class. They would like that.
The Home Mortgage Interest Deduction is a direct government subsidy of ownership that encourages excessive debt loads. It would be very difficult to get rid of politically, but since excessive debt was the primary cause of the house price collapse and huge lender losses, it is something that should be examined.
I have my own proposals for preventing the next housing bubble. The following is the last chapter of my book The Great Housing Bubble:
Preventing the Next Housing Bubble.pdf
When the new administration comes into office this January, the housing crisis will be one of the most important issues facing the new President. There will be many ideas floating around. Some of them good; most of them bad.
What do you think of these ideas? What do you think should be done?
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Astute Observations
Astute Observation by CapitalismWorks
2008-11-01 08:27 AM
How much impact could loan modification have on the pace of the decline and the ultimate destination in terms of pricing. It seems that banks, recognizing the huge downside to foreclosing in such massive numbers, as working in earnest to modify loans.
From my perspective these efforts are not beneficial to us renters.
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Astute Observation by IrvineRenter
2008-11-01 08:45 AM
All these events are designed to slow the rate of price decline, and in that regard, they may have some impact. I still think it is trying to put out a forest fire with a garden hose. The number of distressed homeowners is much too large, and these programs do nothing to address affordability. The greatest declines for Irvine are in front of us rather than behind us. Irvine is not quite half way to the bottom, IMO. Some other areas are much farther along, and some of the most beaten down markets may actually be at the bottom.
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Astute Observation by dafox
2008-11-01 01:49 PM
IR- What would you classify Irvine as? Alt-A or Prime (I highly doubt its subprime)? I’m looking primarily in south Huntington and its still WAY out of affordable according to median incomes on the redfin/onboardnavigator demographics.
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Astute Observation by IrvineRenter
2008-11-01 02:20 PM
Ordinarily, I would say Irvine was Prime, but the prices were so high, and there was so much refinancing going on that much of it is now Alt-A.
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Astute Observation by Hormiguero
2008-11-01 08:36 AM
I think you guys are being a bit naive - the whole idea is to keep the taxpayer in a state of serfdom, with maximum debt and maximum income. that’s how you keep them on the treadmill paying for those congressional pensions. their worst nightmare is a citizen with a free and clear home, a nice pool of stable, balanced savings and a good long-term care insurance policy. a person like that doesn’t need to make much income, nor need much of anything from the federal govt, and that is their worst nightmare.
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Astute Observation by Surfing in Newport
2008-11-01 09:13 AM
Don’t forget that housing is the only asset you can sell at a profit and reinvest without paying taxes...and every 2 years you can even pocket a few hundred thousand tax free. The differences in capital gains treatment made investing in homes ripe for a bubble.
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Astute Observation by JoeSez
2008-11-01 06:52 PM
I disagree with motivations. Capital gains is only 15% - right? Tax rates we’re NOT major driver for the bubble.
People bought homes as financial investments because they could get highly leveraged on an asset, a home, with little exposure and lending standards were lax.
If capital gains was 0.0%, there would have been the same housing bubble.
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Astute Observation by brea
2008-11-01 10:35 AM
Why can’t we just keep things simple. When the prices fall, downpayments should be no problem for a disciplined saver. If someone is not disciplined, what are they going to do about the 30 years of payments. Downpayments are the test.
I am not a fan of savings accounts that lock the money into a specific purposes. What if you want or need to spend the money in a different way. What if your kid won’t go to college or you inherit the house of your dreams.
If they do this, there will be a guy that will go buy a house just so he can apply is tax free downpayment money, and then in the next breath pull it out in an equity withdrawal.
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Astute Observation by Landmark
2008-11-01 03:15 PM
Brea- I agree with you, when prices fall downpayments should not be a problem for many and they are not, however many need an extra push in this type of market.
In addition, in a perfect world the government would not tinker. However, that’s not the case, they have committed to tinkering. Since that’s the reality we’re dealing with, at least they could encourage and reward positive behavior rather than negative. If mine/our/your tax dollars are going to be used for this bailout, would you rather it make the situation better or worse? Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited? (see entire PDF version to understand the dangers of the curren proposals)
The question is not whether the goverment is going to get involved and use our taxes to do it. It’s how wisely they are going to use this money and who’s going to benefit.
There are hundreds/ thousands of potential buyers out there waiting for prices to come down to reasonable levels. The foreclosures need to flush through the system the quicker the better. Do you think that it’s possible that this or similar legislation may get these buyers into the market and help prevent legislation that rewards irresponsible behavior?
Great point regarding the equity withdraw, provisions would need to be added to prevent that.
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Astute Observation by brea
2008-11-01 04:15 PM
landmark,
Regarding your comment: “Would you prefer your money be given to those that were part of the problem when they bid up a home in the first places and took exotic loans they couldn’t afford or someone that was responsible and chose to save, sacraficed and waited?”
I would prefer that tax money not be used for anyone’s personal interest. So far, the modifications I have read about, don’t look like a windfall to the reckless borrower. I just don’t see were a banker/investor will give up anything unless it is in his own best interest to do so. The talk of the politicians just disgust me, but it may just be pandering to voters.
Your proposal is a separate matter. Why should income taxes not be paid on downpayments? It is income. We have deficits. In the case of retirement IRA’s, the withdrawals are taxed when the money is withdrawn. I assume the Home Equity Accounts would not be taxed when the money is pulled out at the house purchase, otherwise, you would just be postponing taxes for just a few years. Why bother. The while the housing market’s has been extreme, it will eventually return to a buyer’s market with prices tied to wages. That is when buyer’s should come back and they will.
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Astute Observation by Landmark
2008-11-01 06:42 PM
Brea--- Frist, again, I agree- tax money should not be used for personal interest. However, we have a problem that was started with housing. The general belief is that it will end with housing. If people believe that and goverment is set on doing anything they can to shore up the housing market there has to be better plan that modifying loans through principle reduction. “So far, the modifications I have read about, don’t look like a windfall to the reckless borrower.” -I do not do loan modifications, so I cannot speak to the average modification, however I have heard numerous stories of modification that I would consider reckless. For example, a good friend of mind lives in Victorville, he’s a vice principle, makes over 100k/year, bought a new home for circa 400k. His neighbor bought his home at a similar time for a similar price. His neighbor went to the bank for a modification, they said no because he was making his payments. So he quit making his payments and asked them again a few months later. They took $100,000 off of his principle. What makes this even worse is that his neihbor quit making his mortgage payment but kept paying his payment on his quads and “toys”. I would consider that a “windfall to a reckless borrower” do you agree? I have heard at least 1/2 dozen stories like that. Guess what my friend wants--- a modification.
Great point regarding the money when it is pulled out of the home. My thought is that it would be treated similar to a 1031 exchange. If the money is then put into another home it can be tranferred tax free. However, once the home is sold taxes will be paid.
In addition, I do not think that legislation should go on forevor, I believe the government is trying to create a softer landing and avoid a major catostrophe. If we are in as bad of a spot as they are saying and something needs to be done I think we need to explore every avenue.
Do you have any ideas besides do nothing. Which again, I tend to agree with you that the market will work itself out and the goverment should only step in if the situation is incredibly extreme.
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Astute Observation by IrvineRenter
2008-11-01 04:09 PM
Mortgage equity withdrawal is one of the big problems with this proposal. As I read it, someone could pay down their mortgage, get a tremendous retroactive tax break, then HELOC the money right back out again after they got their check from the government.
The best solution to that problem would be to tax HELOC money. In fact, I think HELOC money should be taxed as income since defaulting on it is not taxed now. The way our current tax system is set up, people are strongly encouraged to take on this debt. The money is essentially tax free, and the service on the debt is tax deductible.
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Astute Observation by brea
2008-11-01 04:50 PM
IR,
I am torn between reading your book and reading this site. What I have read is very interesting and useful. I am so glad you wrote it.
I hate when politicians make sweeping rules just to look like they care. IMO, this tax relief on debt forgiveness could have been handled on a case by case basis. When they can’t pay, harass them and then write it off.
Based on the IRS website:
http://www.irs.gov/irs/article/0,,id=179073,00.html
HELOC money used to improve the home, would qualify for the tax relief. When they bought cars and still claim they used it to improve the home, they are cheating. Maybe they will audit some of the returns. I still believe that we need to tax income and not loans. The real issue it that they get relief from the forgiveness of debt and isn’t that why we are in deep trouble now.
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Astute Observation by JoeSez
2008-11-01 06:47 PM
Case-by-case relief is ideal but apparently impractical. The financial system has repackaged these loans as investments and apparently it is hard to find paperwork and expensive to do case-by-case assessment.
The problem with NOT doing anything is debtors can’t cope and walk away from **all** their debt. We all lose in that scenario.
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Astute Observation by zoiks
2008-11-01 11:26 AM
Yeah, right, what we need is a more complicated tax code. How about we simplify the tax code to “zoiks pays no taxes, every one else can eff off”.
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Astute Observation by Gray
2008-11-01 11:31 AM
Feeling so special after the robocall? Just wait for national TV on November 7th, this would be a “special” experience: http://www.cnnbcvideo.com/index.html?nid=fY3TWTZfHXOfejIU2sfzwjkzMjc4OQ--&referred_by=13429144-ae0dQ5x
Sry, IR, I couldn’t resist! :D
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Astute Observation by IrvineRenter
2008-11-01 02:23 PM
That is really funny. LOL!
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Astute Observation by brea
2008-11-01 02:35 PM
Thanks for that laugh. That was great.
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Astute Observation by Dean
2008-11-01 11:35 AM
Probably the best thing to do is figure out a way to keep as many fully-employed, tax-paying families in their homes as possible, while limiting the assistance to pure price speculators. I seriously doubt that there is much to be gained “helping” renters by letting prices fall all the way to their natural price support levels.
That said, now really is the time to take some steps to prevent another bubble from inflating. Here are my thoughts: 1) I like the idea of a “luxury tax” or cap on the interest deduction. I’d set it at the interest on $415,000 for sole property, $533,850 for a home owned jointly by a married couple and bump the cap $26,000 for every dependent under 17. 2) This would encourage equity. Let’s take an average sizes house of 2,300 square feet, assume a per square foot rental price in the area of $2.00 and the 30 year average Irvine rent multiple of around 200. That house has a market price of $920,000. A married couple with one child would only able to write off the interest on the first $559,000 in debt, or 60% of the market price. If they are going with a traditional 20% down, then it raises the effective interest rate on the last $184,000 borrowed from, say, 6% to 8%. That would slow the use of leverage. 3) As long as mortgages are being converted into securities and re-sold, there needs to be a method for folks to do work-outs with a third-party. Bankruptcy courts are not ideal, but it is better than having mass foreclosures.
Reply to this astute observation
Astute Observation by Landmark
2008-11-01 03:27 PM
Dean--- I agree--- if a fully employed family can afford their payment by refinancing into a 30 year fixed, fully ammortized loan, at 5 or 6% but as a result of too little equity the banks won’t help them a govermnent gaurantee could be in order.
For most others, they may need to short sell, or may be faced with foreclosure and have to rent. This will not be the end of the world for them. As I repsonded to Brea above, if the goverment weren’t committed to being involved that would be plenty, however, since the goverment seems to be committed, there has to be better options than what they are proposing.
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Astute Observation by Dean
2008-11-01 04:47 PM
I’d be a bit more generous. Anyone who put their own cash money into a purchase and has lost 100% of that equity plus some of the bank’s money should have a chance to get the principal brought down. Also, the interest rate could get tweaked to a fixed rate that matches an appropriate percentage of their W2 income.
Clearly, there need to minimums. Like, say 10% of the purchase price. Also, there needs to be some kind of real penalty. Like, no further access to credit for, like, seven years. No new Lexus, or fancy colored AmEx Cards, would be a real penalty for OC debtors. That would keep folks in their homes, the broader economy out of free-fall and punish the irresponsible.
Reply to this astute observation
Astute Observation by Landmark
2008-11-01 06:51 PM
Dean-- you are more generous than me. First, I do not see any room for principle write down without creating more issues than it solves. Although, I agree with your comment regarding a penalty or consequence. Second, I do not think it’s fair to give a certain percentage of the poppulation and special interest rate because they bought when they shouldn’t have and took a loan when they shouldn’t have. Many people are renting and gave up on buying as a result. Are those people going to be given special rates when they choose to buy based upon their W2 income?
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Astute Observation by brea
2008-11-01 12:34 PM
I like MalibuRenters’s idea of increaseing the standard deduction. A 20k deduction would be apropriate of the high cost of living areas, but that would be to high for the midwest and such.
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Astute Observation by MalibuRenter
2008-11-01 05:37 PM
I’m ok with the idea that in some cities and states almost everyone would be below the standard deduction. People who live in expensive places would have an added complexity in their lives: itemizing for their taxes.
I’ve had some related discussions with IrvineRenter. Under the current tax code, in places where most people have lower tax rates, or where most of them have mortgage interest below the standard deduction, the price to rent ratios should be lower.
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Astute Observation by WEJ
2008-11-01 02:14 PM
Couldn’t all the modifications backfire and encourage otherwise solvent borrowers to stop paying? If I’m living next door to a guy who has his loan written down by $100,000 I’d want to get in on that action, even if I were otherwise able to continue making payments on a higher loan.
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Astute Observation by Landmark
2008-11-01 03:29 PM
Exactly-- if you download the PDF- you are example 1 and you’re are not alone. Modifications only make the problem worse.
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Astute Observation by MalibuRenter
2008-11-01 05:30 PM
IR writes, regarding increasing the standard deduction “I wonder, would this create a tipping point where you would have incentive to jack up your mortgage. Once you crossed the threshold, the larger your deduction the better.”
While I am not sure how many people would be astute enough to run the calculations, an interesting thing occurs. If you have a mortgage which is just moderately over the standard deduction limit, you won’t get an interest deduction in a few years. Why?
1. Assuming a fixed rate amortizing loan, the amount of your fixed payment which is interest drops over time.
2. The higher standard deduction would also rise over time.
The combination of these two can act pretty fast. For example, take a couple with at $400k mortgage at 6% and no other itemized deductions. The first year the interest is about $24k. By the 5th year it’s $22,672. If inflation is 3.5% per year, the standard deduction the 5th year is $22,950. They are no longer getting any tax break for their mortgage interest.
Take another example, $500k loan and similar terms. By the 9th year, they get no break for their mortgage interest either.
For any loan size, the mortgage interest deduction gets smaller each year, until it reaches zero.
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Astute Observation by MalibuRenter
2008-11-01 05:44 PM
IR - I hadn’t realized the full effect of my proposal on bank liquidity and foreclosures. It’s starting to sound even better.
For someone who isn’t getting any marginal benefit from itemizing their mortgage interest, the aftertax return on paying down their mortgage is the same as the pretax return. That means a return of 5.5-8.0%. In the current investment environment, that’s pretty good.
If more people start paying down their loans, they also increase bank liquidity, are less likely to have their loans go underwater, and are less likely to default on their mortgages.
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Astute Observation by Rebarbarian
2008-11-01 06:49 PM
For every government action there is an equal and opposite market reaction.
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Thank you IrvineRenter for including the following on your blog!
The election is coming up in a few days. Has all the bull$hit being thrown around left you dazed and confused? I got a call from Robo-Bill Clinton today. I felt so special. I am planning to sit down with my California General Election voter information guide this weekend and make up my mind on how I plan to vote on the various initiatives. Since the topic of the weekend is politics, I thought it would be good to explore some of the politics of the housing bubble.
There are many ideas floating around the blogosphere regarding what can and should be done about the housing crisis. I have received a couple of emails recently from people with ideas on changes to our current system. One is from a local realtor named Shevy Akason who is championing legislation that would help the flagging housing market and get it on more solid ground (His blog is here). This isn't a bailout, and although I think there are some issues, it is a proposal worth examining:
Homeowner taxpayer relief act.pdf
The proposed bill adds provisions to the current IRS code that allows for SEP IRA deductions outlined in IRS Publication 560 to be expanded to cover HEA (Home Equity Accounts). The bill will allow prospective homeowners to put money into a designated HEA (Home equity account). This money must be used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 50% equity to place money into an HEA account designated for homes they purchased after January 1, 2000 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later. Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2000 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions.
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Above is merely the summary. The PDF contains more information. It is an interesting proposal. Personally, I like the idea of a tax advantaged savings account for downpayments. However, I don't believe expanding our subsidization of real estate through the tax code is a good idea. We already oversubsidize real estate with the home mortgage interest deduction. Encouraging debt in this way is part of the problem. I do like how the proposal encourages saving and paying down mortgage debt. I do think this program would not do much for those on the margins who are likely to go into foreclosure. The problem these people have is too much debt and too little income. To qualify for the program as outlined, people would need to refinance into a fixed-rate mortgage. I like that idea, but very few marginal borrowers can afford to do this, and those who are distressed are underwater and could not obtain fixed-rate financing even if they could afford it. Basically, this proposal would help those who need it least.
The proposal is not a fix for the foreclosure crisis. There is no fix. It does address the problem of saving for a house and the use of exotic financing, and I like that.Read the rest of this entry »
There are many ideas floating around the blogosphere regarding what can and should be done about the housing crisis. I have received a couple of emails recently from people with ideas on changes to our current system. One is from a local realtor named Shevy Akason who is championing legislation that would help the flagging housing market and get it on more solid ground (His blog is here). This isn't a bailout, and although I think there are some issues, it is a proposal worth examining:
Homeowner taxpayer relief act.pdf
The proposed bill adds provisions to the current IRS code that allows for SEP IRA deductions outlined in IRS Publication 560 to be expanded to cover HEA (Home Equity Accounts). The bill will allow prospective homeowners to put money into a designated HEA (Home equity account). This money must be used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 50% equity to place money into an HEA account designated for homes they purchased after January 1, 2000 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later. Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2000 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions.
window.google_render_ad();
Above is merely the summary. The PDF contains more information. It is an interesting proposal. Personally, I like the idea of a tax advantaged savings account for downpayments. However, I don't believe expanding our subsidization of real estate through the tax code is a good idea. We already oversubsidize real estate with the home mortgage interest deduction. Encouraging debt in this way is part of the problem. I do like how the proposal encourages saving and paying down mortgage debt. I do think this program would not do much for those on the margins who are likely to go into foreclosure. The problem these people have is too much debt and too little income. To qualify for the program as outlined, people would need to refinance into a fixed-rate mortgage. I like that idea, but very few marginal borrowers can afford to do this, and those who are distressed are underwater and could not obtain fixed-rate financing even if they could afford it. Basically, this proposal would help those who need it least.
The proposal is not a fix for the foreclosure crisis. There is no fix. It does address the problem of saving for a house and the use of exotic financing, and I like that.Read the rest of this entry »
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