The American dream has always included home ownership. However, with foreclosures mounting and home values plummeting, for some that dream has become a national nightmare. Trying to decide whether to buy, sell or rent a home in the current real estate market can be tricky, but there are ways to hedge against loss.
The first thing on many buyers’ minds is: Are housing values going to continue to fall? While no one has a fail-safe crystal ball, the foreclosure crisis does not appear to be over in many places. Large inventories of unsold homes can certainly put downward pressure on housing values for an entire area.
Those large inventories, however, also give a buyer negotiating power. Some of that leverage will be lost as the market improves, so waiting for additional price drops can be a risky gamble. According to the National Association of Home Builders, homes are more affordable now than they’ve been for the last 20 years, and adjustments to market values in most areas seem to be slowing.
Buyers can get a feel for housing value trends from the S&P/Case Shiller Home Price Indices. Monthly reports issued by Standard and Poor’s, these charts show month-over-month, as well as one-year movement of housing prices in 20 metropolitan markets.
For some time, Las Vegas has had the dubious distinction of being one of the most depressed housing markets in the nation. As of last fall, the city had led the pack of losers on the S&P/Case Shiller Index for 38 consecutive months. Add to that, the U.S. Bureau of Labor & Statistics’ classification of Nevada as the state with the third-highest unemployment rate, and Nevada may be one market to steer clear of for housing purchases, regardless of price.
Markets that are bouncing back sooner than others include Atlanta and Dallas, where home values rose before the bubble burst at a lower, more consistent rate than some other areas. While the market has taken a downward spiral nearly nationwide, housing markets in Los Angeles, New York, and Washington, D.C., have appreciated 70 to 80 percent above their 2000 averages, according to the S&P/Case-Shiller Index.
San Diego even saw a slight 0.9 percent increase in home values in the 30 days ending last September after only a moderate (5.7 percent) decline from the year before. When considering either Los Angeles or San Diego, however, factor in California’s 12.5-percent unemployment rate (fourth highest in the country as of last fall) and high taxes. California has some of the highest sales tax rates in the country (8.25–10.25 percent) and a state income tax.
Mortgage interest rates were low earlier this year, in part due to the Federal Reserve’s purchase of mortgage-backed securities. But the Fed stopped doing that on March 31, so rates there could return to the 5.25- to 6.5-percent range.
If you are counting on a mortgage backed by the FHA, Fannie Mae, or Freddie Mac, keep in mind the loans are limited by Congress. The current cap of $417,000 may affect you if you are considering a home in the high-end markets of California, Hawaii or New York City.
The first-time homebuyer credit has not only been extended, it has been modified to include current homeowners, and the income cap has been increased. The new limits are $125,000 for a single person and $225,000 for married couples. First-time buyers may be eligible to receive a credit of 10 percent of their purchase price, up to $8,000. The cap for current homeowners is $6,500 and requires the homeowner to have lived in their current residence for at least five consecutive years of the past eight. If you qualify for this credit, time is short to take advantage. You must have contracted by April 30 and close by June 30, 2010.
Like most government programs, there are exceptions and stipulations. Sales between immediate family members do not qualify, and special rules apply to buyers who are serving in the military. The National Association of Home Builders provides updated information through its Home Buyer Tax Credits website.
Buying now means you can get a great purchase price, a great interest rate and possibly even a first-time homebuyer’s credit. Weigh these savings when considering holding out for another big drop in home values.
Should You Sell?
The decision to sell should be based as much on the “why” as the “when.” If you must relocate, selling your home at a depressed market price may be your only option. If selling is not an imperative and the cost of living in your current home still fits within your budget, you may do well to sit tight and weather the housing storm. As the market recovers, so should the value of your home.
While a short sale, or even returning your home to the bank, may seem like a viable option, especially with the lure of alternative, lower-cost housing options, these actions can trigger situations with huge financial implications.
A primary issue to resolve immediately is whether or not the bank will release you from your financial obligation in a short sale or a voluntary repossession. Do not assume that if the bank agrees to release the mortgage on the home, it will automatically absolve you of any shortfall on the note. A discharge of indebtedness should be included in any short sale or voluntary repossession. Due to the complex nature of these transactions, it is advisable to enlist the aid of a real estate agent who is experienced in handling short sales or legal assistance in the case of a voluntary repossession.
If the bank does discharge any deficiency between the sales price and the amount owed by the borrower, expect to receive a Form 1099-C from the mortgagor after the end of the year. Forgiven debt is considered income by the Internal Revenue Service. Consult your financial adviser as, if you qualify, you may be able to exclude the discharge as income by filing a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.
A secondary consideration will be options for subsequent housing. Credit criteria has tightened up substantially for the best rates, which means potential homebuyers with foreclosures, even voluntary ones, may find it difficult to buy, or even to rent. Be certain of your ability to obtain acceptable alternative housing. You should be fully aware of your new housing costs before ridding yourself of your old ones.
If you decide to stay in your home, consider refinancing to the current low-interest rates and be sure to check with several different lenders. Last August, Chase Mortgage implemented a 1 percent cash-back reward on new mortgage loans and refinances. If payments are made through an automatic debit from a Chase checking account, the borrower receives an annual cash-back reward equal to 1 percent of the annual monthly principal and interest payments.
The U.S. Department of Housing and Urban Development has a streamlined refinance plan for those with FHA-insured mortgages. For homeowners whose loans are owned or guaranteed by Freddie Mac or Fannie Mae, the Making Home Affordable program has a refinance element. This program is designed for those who are current on their payments but cannot refinance conventionally because of the devaluation of their homes. Refinances are available for up to 125 percent of current value.
In addition to the refinance accommodations available to Freddie Mac and Fannie Mae borrowers, the government’s Making Home Affordable program offers loan modifications to qualifying borrowers who are having difficulty making their payments. If your current monthly mortgage payment (principal, interest, taxes, insurance, and homeowners association fees) is more than 31 percent of your gross monthly income, you may qualify.
Other stipulations include: primary residences only (no second homes); consumer credit counseling is required if total debt exceeds 55 percent of income; the outstanding first mortgage balance must be equal to or less than $729,750; and the original loan must have been signed prior to January 1, 2009.
Through the loan-modification plan, mortgage interest rates are reduced to as low as 2 percent to reach the 31-percent-of-income mark. If reducing the interest rate is not enough, repayment may be extended to 40 years. If your payments are still not at the 31-percent level, a balloon payment may be utilized.
You have until December 31, 2012, to apply for a modification.
Is It Better to Rent?
One of the great advantages of buying is that mortgage interest and real estate taxes are 100-percent deductible from federal income tax if you itemize rather than elect the standard deduction. The significant amount attributed to mortgage interest alone can often make itemization a better tax advantage than the standard deduction. Once you’re over the standard-deduction benchmark, many other expenses, like charitable giving and certain medical expenses, can add up to additional tax savings.
One of the great advantages of renting is that maintenance is usually covered by the landlord. If you are not handy around the house or just have no desire to spend your Saturdays on home improvement and repair projects, renting may hold other, non-monetary, attractions.
An oft-overlooked factor in deciding whether to rent or to buy is: How long do you anticipate being in this home? Buying may not be the best option if you plan on selling the home in less than five years. Depending on the area’s rental rates, the time to recoup your buying investment may stretch out as long as 11 years.
Michigan has been especially hard hit in these financial times. With a double-digit unemployment rate and a flood of foreclosures, the housing market has tumbled. Even a nearly 2-percent gain in housing prices in September 2009 could not put a dent in the nearly 20-percent decrease that the Detroit housing market suffered between 2008 and 2009. This market is going to take much longer to pull out, and homebuyers should plan on spending many years in their Michigan home before seeing a return on investment.
Need to see it in hard figures? There are numerous online calculators that allow you to compare the cost of buying versus renting a home. Yahoo Real Estate and Ginnie Mae each provide easy-to-use features.
HUD-backed housing counseling services are available throughout the country and include free or low-cost advice on buying, renting, foreclosures, reverse mortgages, and credit issues. You can find an agency in your area by calling HUD’s interactive voice system at (800) 569-4287.
Martha Fry is a freelance writer based in suburban Atlanta. Her work has appeared in the Tampa Tribune newspaper and other publications.