Something to fall back on

Multiple factors have contributed to the current slump in the housing market that has been proclaimed the worst in the past 16 years. One of the major causes of the current slump, however, can be attributed to the fact that more and more people have been using their homes as ATM machines. Whenever they want or need something that they cannot afford, instead of saving for it or denying themselves the luxury, they've simply borrowed against the equity in their homes either by refinancing or taking out a home equity loan or line of credit.

Some of the borrowing has come from necessity. If a major breadwinner of a family becomes seriously ill and does not have sufficient medical and disability insurance, they may have no choice but to cash out the equity in their home. However, much of this borrowing does not arise from necessity. Many homeowners borrow money to pay for non-essential items, including vacations, home renovations, new furniture, fancy new cars, and so on.

When the housing market is booming and prices for homes are soaring, equity seems like a never-ending river of gold. You can borrow and borrow and borrow, because a couple years down the road, your home will be worth tens of thousands of dollars more than it's worth now, and you will still have plenty of equity to protect you. At least that's what the booming market of the past lulled homeowners into believing.

Now that real estate prices are on the decline in many areas of the country, homeowners who have cashed out all of the equity in their homes are facing a harsh reality of negative equity. They owe more on their homes than their homes are worth.

If you are wondering why the housing market is slow right now, that is one of the reasons. Many homeowners simply cannot afford to move. As soon as they sell their homes, they need to come up with tens of thousands of dollars extra to pay off their loans, and they simply don't have the cash on hand to do that.

50 years ago, this problem was not as widespread as it is today for one simple reason: People tended to buy what they could afford; they worked hard to pay down their debts. For many homeowners, their goal was to have their home paid for by the time they retired, so they would not have a house payment in their golden years. In today's buy-now-pay-later society in which we use our homes as ATM machines, we have become much more vulnerable to slumps in the housing market. Now, when a slump hits, we cannot even rely on the equity in our homes to pad the fall. For many homeowners, this message probably comes too late, but for those who are just starting out, I highly recommend that you work toward building up equity in your home. Find the lowest-cost loan available, and then pay down the principal on or ahead of schedule. If hard times hit, you then have a cushion to fall back on.

Tough loans

Spending a little less this holiday season may not be what local merchants want to hear but it could make the difference between owning a home and remaining a tenant. While homebuyers have many advantages in our current market, an easy time financing a home isn’t one of them. Lenders are becoming increasingly discriminating when lending money. Home ownership isn’t for everyone anymore. It’s only for those determined enough who can prove a history of saving, a steady secure income and prudent credit management.

Up until a few years ago, making the decision to buy a home was a major lifestyle commitment. It required advanced financial positioning to insure that a lender would make a favorable determination in granting a mortgage. Saving for a downpayment required financial sacrifice. Eliminating debt in order to qualify for a loan was a priority and paying monthly bills on time became an obsession. Buying a home was so important that it was considered an intragal part of the “American Dream.” It was a place of permanence, an opportunity to become a responsible part of the community and raise a family. There were milestones along the road of life worth the required sacrifice and homeownership was an important one.

Somehow that changed a bit. Buying a home became as easy as buying a car. Lenders became increasingly creative in their quest for profits and home financing became their vehicle of choice. Traditionally, lenders had considered a home mortgage as a secure but boringly long-term use of their money. The thirty-year conventional mortgage with fixed qualifying guidelines was routine with down payments averaging 10 to 20 percent. Government insured loans were popular with buyers who had less than a 10 percent down payment. That arrangement worked quite well for 40 years.

Lenders began tampering with traditional loan qualifying guidelines in 2000. They discovered that less was more. The less qualifying requirements imposed on borrowers, the more business in loans they could generate. Since the loans did not meet the set traditional qualifying guidelines, lenders sold these non-traditional but high yield loans to investors through Wall Street. This creative financing experiment became so successful that national lenders were rewarded with record growth and billions in profits. The competition in promoting the most creative loan program was fierce. It was a lending free for all. No credit?…no income?…no job? No problem!

The pendulum, as it always seems to do, has swung in the opposite direction. Lenders are over correcting for their past lending exuberance. Faced with an increasing number of mortgage defaults, Congressional investigation and unable to sell their non-conforming loans to investors, lenders are subjecting every loan applicant to greater scrutiny than ever before.

Financing a home isn’t going to be the slam-dunk that it was last year. It’s going to be more difficult and take longer. The California Association of Mortgage Brokers estimates that 25 percent of all loan applicants during September and October were turned down for a mortgage. The California Association of Realtors is also concerned. "Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months," said C.A.R. President William E. Brown. The decline in sales at the upper end of the market, resulting from mortgage turndowns, has contributed to a significant decline in the statewide median price. Today’s homebuyers have their best opportunity in years to own a home. The number of competing homes on the market is high, forcing sellers into deep discounts and concessions not seen in 10 years. Home prices in El Dorado County continue to decline making them more affordable than ever and interest rates are historically low. But with foreclosures rising and prices falling, prospective homebuyers will need to clearly demonstrate that they are financially mature enough to warrant the lender’s risk. Here are a few traditionally proven concepts necessary to convince a lender that a borrower is ready or homeownership.

Get some money in the bank. If Santa isn’t expected to bring a package full of cash to your house this year, it’s up to you to bank as much as possible. Being thrifty is a prerequisite to homeownership. Most of our expenditures are discretionary. We have choices. Spend money for what you need not for what you want. Demonstrate the ability to save. There are still loan programs that do not require a downpayment but they all have closing costs and they all require thousands of dollars in cash reserves. If buying a new high definition plasma is more important than a home, you are not ready.

Pay off as much debt as possible. I know this is a unique concept but when evaluating a loan applicant, debt is bad and saving is good. Having an established good credit history is necessary to demonstrate financial self-discipline. Credit card balances should be kept to a minimum. If you’re addicted to charge cards and minimum payments forget about buying a home.

Ask for help. It’s okay to ask for help and advise. Unsure how to get started? How much of a home you can afford? How does your credit report look? Seek out a trusted advisor, tell them you want to position yourself to buy a home and ask them to look at your situation. Local Realtors and mortgage originators are a good source of information. Ask lots of questions. Too many currently defaulting borrowers didn’t ask enough questions about their resetting adjustable rate mortgage. Don’t make the same mistake.

The truth about foreclosure filings

Foreclosure filings are up form November of 2006 to November of 2007. That’s not a surprise to anyone since the major news media broadcasts daily how bad the real estate market is and appears anxiously waiting for it to get worse. Last month there were 200,000 foreclosure filings across the country and 40,000 filings in California reported by Realty Trac Inc.

Home foreclosures are getting more ink (press) than the war on terror. Congress has been obsessed with drafting new lending legislation, the Federal Reserve is adjusting the nterest rates, builders and lenders are closing their doors, filing bankruptcy and laying off thousands of employees. Potential homebuyers are so frightened by the current housing market that sales have dropped 40 percent and prices continue to fall. It’s a national crises or is it?

The Sacramento Bee’s headlines “Foreclosure filings up 68% over last year” are enough to stop anyone from considering buying a home but reading between the lines provides a different perspective.

When is a “Foreclosure filing” not a foreclosure? When Realty Trac reports it. Realty Trac’s numbers are exaggerated. In addition to actual foreclosure filings they include default filings, (most defaults never end in an actual foreclosure) auction sale notices and bank repositions. When Realty Trac includes auction sale notices and bank repositions the numbers have been counted more than once.

What most readers don’t understand is that many over financed troubled homes will have a first and second mortgage, requiring two notices of default. If the homeowner doesn’t bring the mortgage payments current, the lender will file an auction sale notice and then if the lender takes position of the property, a bank reposition is recorded. So up to four recorded documents could be filed on one defaulting property. More accurate number could be found on the number of actual foreclosures not on the “foreclosure filings.”

Any foreclosure or foreclosure filing is too many but there are signs that the worst may be over. November filings were actually 10 percent less than October. In California default filing fell by 21 percent from October. This is the second time filings have decreased since September when they fell 8 percent.

Don’t be too surprised if you don’t hear or read about monthly foreclosure filings down 10 percent and 21 percent in California. The real estate market has taken a beating over the past two years but it’s not as bad Realty Trac and the major news media makes it out to be.

November Sales for El Dorado County

The El Dorado County Board of Realtors reported only 104 monthly home sales for November. It was the weakest month for county homes since March of 1997 when 102 sales were reported. The months of November and December are typically the slowest for sales but last month was the worst November since 1996. November of 2003 and 2004 had twice the number of sales than was reported last month. The historical 10 year November average is 190 residential units closing escrow. As poor as the sales numbers were for last month, December will probably be worse.

Along with the weak sales numbers, the average price of a county home closing escrow last month declined $25,000 from November of 2006 settling at $457,000. The county’s average selling price has remained above $500,000 for 9 months during 2005, 11 months during 2006 and 7 months for this year. Our average selling price has been propped up by million dollar deals but last month only four homes sold in excess of a million dollars. Three were located in El Dorado Hills and the most expensive sale was located in Greenstone and closed escrow for 1.6 million.

The median price rather than the average is considered a better gauge to judge the market’s temperature. The medium price is the midway price point between the highest priced home sold and the lowest. Last month the median dropped to $383,700. Last year during the same month, the median was $450,000. Twenty-five percent of all county sales were priced below $300,000 while another 25 percent were priced above $600,000.

A third of all county home sales were located in El Dorado Hills. The average selling price of $674,500 was nearly the same as November of 2006. The area currently has 383 listings so at the current rate of sales there is a 12-month supply of homes available.

Another 20 percent of all county home sales took place in Cameron Park where the average price of $342,000 on the 20 homes closing escrow was $117,000 less than the same month a year ago. The area has 173 homes for sale for an eight and a half month supply.

The Greater Placerville area currently has 147 homes for sale. Last month 12 sold for an average price of $332,000, a decline of $100,000 from the 12 sales that were reported in November of 2006.

Another 12 sales were reported between Camino and Pollock Pines. The 5 homes in Camino had an average price of $504,000 while the 7 sales in Pollock Pines/Sly Park averaged $383,000. The area has 169 properties listed.

The 12 monthly sales on the Georgetown Divide equaled the same as in November of 2006 but the average selling price declined significantly. The average selling price for a home in Georgetown, Greenwood and Garden Valley was $282,000, down from $356,600 in November of 2006 while the average price for a home in Cool and Pilot Hill closed at $399,000 down from $495,000 at this time last year.

The number of new “for sale” signs going up on county homes has eased a bit. The 253 new listings last month was an 18 percent decline from the new listings in October. There are currently 1,300 county homes for sale and this time last year there were 1,500. It’s a small improvement but still out of balance for the meager number of sales.

One of the attractions for buyers looking to relocate in El Dorado County is our rural countryside. Locating a home on acreage isn’t a problem since nearly half of all homes currently listed for sale are resting on an acre or larger. Currently 400 listed homes are considered horse properties and 335 homes for sale come with 5 or more acres.

The basic fundamentals of the real estate market in El Dorado County is better than the sales numbers reflected. Our county has a large percentage of high earning residents, most of who are homeowners with large amounts of equity. Our foreclosure rate is one of the lowest in the region and our average selling price of a county home is a hundred thousand less than the state’s average. Unlike Sacramento or Placer Counties we are not overbuilt with new track homes. The small amount of new home sales occurring in El Dorado Hills is not heavily discounted.

Our county’s real estate market is primarily suffering from a lack of buyer’s confidence. If a buyer is convinced that it isn’t a good time to buy, no amount of price discounts, incentives or the plethora of available inventory is going to change their mind. When consumers begin to feel better about the market, things will improve.

Tax break for surviving spouse

Hardly anybody noticed it, but Congress tucked away a valuable bit of holiday cheer for real estate when it passed its final tax bill of the year. It was the first substantive change in years to the generous capital gains rules governing sales of principal homes.

Most homeowners and real estate professionals can recite these rules in their sleep: Married, joint-filing sellers of houses can exclude up to $500,000 of gain, and single-filing sellers can take up to $250,000 … provided they've used the property as a principal residence for a cumulative two of the previous five years.
But what happens when a married home owner dies? Does the surviving spouse still qualify for the full $500,000 -- or does she or he only get to exclude $250,000?

The answer from the IRS has been this: you only get the full $500,000 if you sell during the tax year in which you were married and filing a joint return. Otherwise, the tax code sees you as single, and then you're limited to $250,000.

In other words, if your wife or husband died in June of 2007, you can only claim the full $500,000 benefit if you sell before December 31, 2007. After that, as long as you remain unmarried, you're capped at the $250,000 limit for single taxpayers.
As a practical matter, most surviving spouses inherit their husband's or wife's share of the property at what's known as a "stepped up" tax basis, with no capital gains tax liability at the current market value.

But here's the problem: Some surviving spouses complain that they feel rushed into sales by the current tax rules. This is especially true for people who've lost their loved ones during the final few months of the year. With everything else going on, they don't want the additional pressure of having to make the decision to sell the family home quickly. They want more time. Fair enough.

Well, now they've got it. Legislation signed into law before the holiday recess gives surviving spouses two full years to qualify for the $500,000 exclusion -- even though technically they're single.
And who says Congress doesn't have a heart?