Comment
Today’s Wall Street Journal real estate blog post debated whether or not it’s a good time to sign a lease.
With higher vacancy rates due to unemployment, the article suggested rents will continue falling for the next few months.
After all, landlords are offering incentives and slashed rents just to fill vacant units. Therefore, the article stated, it might be a good time to negotiate a better deal on a lease.
Of course, if you’re a prospective landlord, those words cause a sick feeling to start brewing in the pit of your stomach. Who would want to invest at a time when it will be so hard to fill vacant units?
As the article continued, however, there was a single line that nearly screamed out the fact that it is, in fact, a great time to buy.
It read, “Demographics favor landlords as the echo-boomers (the children of the baby boomers) will swell the ranks of apartment renters at a time when new supply is limited.”
Echo-boomers?
At a population of nearly 80 million, they are the largest generation since the 1960’s. In fact, they represent nearly one-third of the entire U.S. population.
So?
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Comment
The Housing and Economic Recovery Act passed by Congress and signed into law by President Bush on Wednesday is a mixed bag for first time home and duplex buyers.
The most dramatic and immediate impact will be felt by those who needed to avail themselves to down payment assistance programs like Ameridream, Nehemiah and Futures. These programs allowed sellers to make contributions toward a buyer’s down payment, with that contribution folded into the buyer’s loan. Essentially, it was an FHA version of a no money down loan which helped millions of first time home buyers.
Why did Congress do this? Well, the thinking was since most of these transactions involved inflating the purchase price of the property by three percent, then obtaining financing in that revised amount, property values were artificially inflated. This, theoretically anyway, helped create the crisis we are in now.
On a personal note, this has not been my experience.
Most first time homeowners in the Twin Cities are uncomfortable buying a home or a duplex in which their payments are greater than the equivalent of a $150,000 mortgage. Three percent of $150,000 is $4500. Buying a $150,000 house for $154,500 isn’t the kind of grossly inflated pricing that has caused this crisis. Most appraisals fall in a range anyway, and an honest appraiser will be frank as to the property’s true value.
After October 1, 2008, no one with a financial interest in the sale of a property may contribute toward a down payment. It does not, however, prohibit buyers to receive assistance from other programs provided by nonprofit agencies or gifts from family members. In other words, until the smoke clears, no raising the purchase price by three percent for the down payment. The buyer will need to have that money saved.
However…
The new requirements for an FHA loan will raise the required down payment for all borrowers (FHA loans are available to all buyers, not just those purchasing a home for the first time) from three to 3.5 percent.
Historically, FHA loans have been capped at an amount roughly equivalent to the median home price of an area. The bill makes permanent the temporary FHA loan limits which were increased earlier in the crisis. These loan limits are the greater of $271,050 or 115 percent of the local median home price, which cannot be greater than $625,000. This should help more owners and buyers take advantage of FHA loans, which typically are easier to qualify for and at a lower interest rate than a jumbo loan.
A bit of good news in the bill is it contains a Homebuyer Tax Credit of $7500 which would be available for first time buyers who purchase a home between April 8, 2008 and June 20, 2009. This credit is repayable over 15 years.
Of course, the hope is that this helps stimulate the lower end of the market, the momentum of which would help pull the rest of the housing train forward.
Comment
Over the years I’ve met countless first time home buyers. More often than not, they in a popular area (near a lake, river, shopping or great architecture) and understandably have decided they would like to put down roots there.
The trouble is, these popular neighborhoods aren’t exactly a real estate secret. Almost everybody wants to live there — which is where that stuff from that high school economics class kicks in — the law of supply and demand. There are only so many single family homes in these areas (supply), the demand for which is high, thereby forcing the price upwards.
In the Twin Cities market, most first time home buyers are uncomfortable spending more than $250,000. More often than not, the homes in the neighborhoods and with the features they like start at that price.
OK, yeah. What about a fixer? Well, fixer’s require cash. Lots of it. And most first time home buyers don’t have the thousands of dollars required for immediate repair.
It’s usually at this point that I ask whether the buyer has thought about a duplex. And I usually get a dumbfounded look as a reply.
Instead of looking at the whole price for a duplex, why not take the number and cut it in half? So if a duplex is listed at $400,000, the buyer would only pay for half, or $200,000. The tenants would pay for the other half (providing, of course, the rent was substantial enough). And, typically, properties can be found at or near those prices in these neighborhoods — in part because not as many people have thought of it!
“Yeah, but…,” buyers say. “I can’t afford that much”. Well, if the property has been a rental for more than two years, 75 percent of the rent can be counted toward the buyers income to qualify.
There’s more. The buyer can depreciate and write off the half he or she doesn’t live in on his taxes. Not to mention the ability to get a higher deduction for the amount of interest paid on the home loan (because the property cost more than a $300,000 single family home).
Finally, in coming years, if the buyer chooses to sell the property, the income he earned from tenants can be counted as income to help qualify for the loan for a new property.
Then again, it’s always nice to own a piece of property in a neighborhood everybody loves. Better still when it pays for itself!
