Fewer Home Equity Loans

It should be no surprise that fewer people are taking out home equity loans. After all, how many home equity lines of credit can you have on a home? Currently in the Capital Region, one out of every four homeowners has a second mortgage. According to DataQuick Information System, area homeowners have extracted $22 billion from their home’s equity and converted it to cash over the past year. Most of that new cash has been spent on a variety of goods and services, which has been a substantial boast to the local merchants.

Rising interest rates and slower (if any) home appreciation is giving pause to the home equity lending industry. Borrowing by area residents has dropped 10 percent from January as interest rates have risen to 8 percent or higher on the popular equity loans.

When area homeowners are borrowing less they will spend less. How will that affect the local economy? Christopher Thornberg, senior economist of UCLA’s Anderson Forecast (and always an outspoken pessimist) said in an interview, “Keep an eye out. It’s going to get worse.” The growth in employment, decline in unemployment and increase in tax revenue in our region doesn’t support Chris’s opinion. Will the current employment gains offset the loss of consumer spending that has been driven by debt? Probably.

While the number of home equity loans is declining, thousands are still tapping their home’s equity. Between January and April 27,000 homeowners in the eight-county area borrowed $2.5 billion against their home’s value. The total numbers will continue to decline but for many a home equity loan despite the higher interest rates have a number of benefits. A home equity loan carries a lower interest rate than a credit card and the interest on equity loans is tax deductible.

Enjoy your weekend. I think I will go someplace cool like the Artic. Maybe preview some homes in Alaska. What are you doing to stay cool? Drop me a note so I can share with our readers.

The Best Place to Live in California

I don’t have a lot of faith in surveys, opinion polls or someone’s subjective ranking of things. I read them like some read the newspaper comics but I tend to be skeptical of their findings. It was interesting to note however, that CNN Money Magazine recently published their findings on the country’s “Best Places To Live” and Folsom ranked number one in California and number 34 in the nation. I like Folsom and have helped many folks buy homes in the community of 65,000 but I am not sure it is the best city in all of California to live. I was in Folsom yesterday and it was 105 degrees. I wonder if the people living there yesterday were thinking it was the best place to live? If they were to have a choice of Folsom or Santa Barbara which do you think they would have picked?

Folsom does have a famous prison (Folsom) a famous employer (Intel) and a large (but not so famous) lake (Folsom Lake). Visiting Costco or the Factory Outlet Mall in Folsom, is more fun than visiting Folsom Prison.

I do think that Folsom is one of the best cities in Sacramento County to live. Most people who have a choice (unlimited financial resources) would pick Folsom over Del Paso Heights or Antelope. People don’t move from Folsom to other cities in Sacramento County. They do move to El Dorado Hills and to Rocklin and Granite Bay but they don’t move to Citrus Heights or Fair Oaks.

In order to live in Folsom you must own a yacht or a large recreational vehicle, in which you use to escape from the “Best Place To Live In California” every weekend. I know this because I see them at every home I show. Some developments in Folsom will not allow personalized water crafts to be parked on the street, so the well educated home and yacht owners park their trucks on the street and their yachts in the garage.

Another requirement of living in Folsom is that you must have a second mortgage or home equity line of credit. This is required in order to pay for your yacht, pool, or granite counter tops. All the homes in Folsom have been built within the past 5 years but none came with granite counter tops. Remodeling, is another requirement in Folsom on all homes built after 2004. According to another survey published by Remodelers Magazine, Folsom is leading the nation of favorite places to live for Home Remodeling Contractors. Every third person living in Folsom is a contractor. The other two either work for Intel or are real estate agents. No wonder Money Magazine rakes Folsom as the “Best Place To Live In All Of California.

More fun stuff:
A man and his ever-nagging wife went on vacation to Jerusalem. While they were there, the wife passed away. The undertaker told the husband
"You can have her shipped home for $5,000,or you can bury her here, in the Holy Land, for $150."
The man thought about it and told him he would have her shipped home. The undertaker asked, "Why would you spend $5,000 to ship your wife home, when it would be wonderful to be buried here and you would spend only $150?"
The man replied, "Long ago a man died here and was buried here but three days later he rose from the dead. I just can't take that chance."

Piggyback loans

"Piggyback" mortgage programs are one of the most popular ways to afford a home purchase in many high-cost markets like California. Their use may be curtailed, however because they are getting tough new scrutiny from Wall Street. In fact, bond market restrictions that took effect July 1 could raise interest rates and fees for some home buyers who expect to take out a piggyback this summer.
The name piggyback refers to the combination of a standard, conventional 30-year mortgage with a junior lien or second mortgage. The two loans are closed simultaneously and allow home purchasers to put little or nothing down while avoiding payment of private mortgage insurance (PMI) premiums.
PMI is required by most lenders whenever a borrower puts less than 20 percent down. In a piggyback plan, by contrast, a purchaser might combine a conventional first mortgage equal to 80 percent of the home value and a floating-rate home equity credit line equal to 15 percent of the property value. The purchaser would make a 5 percent downpayment to complete the deal.
Piggyback lenders frequently sell the first loan into the secondary market (to Fannie Mae, Freddie Mac, or private bond issuers), and retain the home equity credit line or second mortgage in their own portfolios. Loans that are sold into the secondary market usually end up in giant pools of mortgages that are converted into bonds for institutional investors.
Wall Street ratings agencies tell investors how risky the underlying mortgages in a pool are -- i.e., how likely they are to default and cut off the investor's income stream. The most influential of the ratings agencies in the mortgage arena is Standard & Poor's. Though consumers may be unaware, S&P's ratings and criteria often affect what rates and fees are charged to borrowers at the time of origination.
Recently S&P conducted an extensive analysis of nearly 640,000 piggyback first-lien mortgages contained in bond pools. Many of the mortgages helped fund home purchases in California and other high-cost areas between 2002-2004. S&P's findings amounted to a big dose of bad news for fans of piggybacks: First-lien mortgages connected with piggybacks are far more likely to go into default than stand-alone first mortgages of comparable size. According to S&P credit analyst Kyle Beauchamp, first mortgages that were originated as piggybacks are 43 percent more likely to go into default than standard first mortgages.
To counter the higher risk of nonpayment, S&P has begun imposing higher credit enhancements or pool insurance requirements on piggyback mortgages. That added cost to lenders selling loans to Wall Street, in turn, will be passed along to individual borrowers in the form of higher rates or fees.

Interest & Tax Deductions

What's the mortgage interest deduction worth to the typical homeowner who claims it at tax time? Nearly $10,000 on average, according to a new analysis of federal incentives for homeowners nationwide.

But there are many parts of the country where the "typical" tax deduction for mortgage interest is far bigger, and plenty of others where it is considerably smaller. Take, for example, California's 14th congressional district in and around high-cost Silicon Valley. The average taxpayer there took a whopping $35,000 in mortgage interest deductions during the year, more than six times the average mortgage interest write off taken during the same period by residents of Oklahoma ($5,710).

The homeowners of the 14th district took an aggregate $3.2 billion worth of mortgage interest deductions and that total was about the same as all the mortgage interest write offs claimed by all the homeowners in seven states -- Alaska, Montana, North and South Dakota, Vermont, West Virginia and Wyoming -- combined.
The new research study by the National Association of Home Builders used the latest available IRS tax data -- tax year 2003 -- and broke deductions down by the state and congressional districts of the taxpayers. The report was prepared in part to demonstrate the size and economic importance of the mortgage interest and real property tax write offs to individual congressional representatives.

Confronted with the $3.2 billion write offs taken by 14th district constituents in a single year, any savvy congressman would be loath to cut back on the deduction, even to reduce the federal deficit.
In tax year 2006, according to estimates by Congress's joint committee on taxation, homeowners will claim a total of $81 billion in mortgage interest deductions. By 2009, the write offs are expected to hit $100 billion a year. The deduction is available on all qualifying principal residences where the mortgage amount does not exceed $1 million. Homeowners can also write off local real property taxes paid on a principal residence during the tax year without limit. In 2006, according to congressional estimates, homeowners will deduct $15 billion in local property taxes.
The NAHB research found that the highest states for property tax write offs were New Jersey (an average $6,005 per homeowner), New York ($5,187), New Hampshire ($4,830), Illinois ($4,129) and Vermont ($3,845). The highest states for mortgage interest write offs on average were California (($14,217), Hawaii ($12,766), the District of Columbia ($11,759), Nevada ($11,522) and Washington ($11,223).

Jerry Howard, executive vice president and CEO of NAHB, said "The report shows that millions of working families around the nation use and depend upon these important tax incentives to help them maintain their current standard of living. Because the mortgage interest and real estate deductions significantly reduce federal tax liabilities for homeowners, they are important tools for promoting homeownership."

New Home Sales Up & Down

New home sales in the region are up and down. The good news is…. sales of new homes during the second quarter of this year are up 51 percent over the first quarter, according to the Gregory Group, a Folsom based research group that studies such. There were 3,124 new homes sold during the three-month period around our six-county area.

But new home sales were also down 25 percent from this time last year and builder’s price concessions are higher, cutting into their profit margins. Year to date new homes sales in El Dorado County are down 26 percent from last year while Sacramento is off 26 percent but Placer County is only down 3 percent in new home sales. Elk Grove is off 60 percent from this time last year, Folsom is off 11 percent, Roseville is down 16 percent, Yolo County is off 45 percent, Sutter County down 54 percent and Yuba County off 21 percent.

Although the average price concession from a builder has risen from $5,000 last year to $15,000 this year sales prices are holding. At the end of the second quarter, the median selling price of a new home in the region was unchanged from last year at $460,000. The area’s median high is in El Dorado Hills is at $767,000 and the median low is Yuba City at $343,000.

“The market is showing signs of life, showing sign of improvement,” said John Orr, president of the North State Building Industry Association. “The good news is it’s not continuing to move down,” said Greg Paquin, president of the Gregory Group. “It’s not a market that’s falling off a cliff or through the floor”. It may be a little early for optimism. This winter could see some median price declines as builders dump their remaining unsold inventory.

Over the last four years new home construction has averaged 15,500 new units a year in the region. During the first six months of this year there has been 5,000 sales and another 4,200 in some stage of construction. I predict the housing industry will finish the year under 10,000 new home sales. Most builders will also curtail their projected numbers for next year, build fewer homes upper end homes and fewer condos.