Fed Prepares for Commercial Market Bailout

Real estate experts agree that the best hope for avoiding a commercial real estate crisis similar to the residential one is another bailout from the federal government.

Last week, Federal Reserve Chair Ben Bernanke suggested at least $1 trillion in credit would be forthcoming in order to avoid a “looming crisis.”

Analysts say that while delinquencies are few, office vacancy rates are nearing record levels. This leaves banks holding $1.72 trillion in outstanding commercial loans and many of them are on buildings that are nearly empty. In 2009, $300 billion of these loans are due to be refinanced by commercial banks, but the banks are reluctant to refinance because the properties are dropping in value.

Since both insurance companies and pension funds are heavily invested in commercial real estate, they, too, are at risk.

“The need is urgent,” says Kenneth Rosen, a professor of real estate at the University of California in Berkeley. “It is important to get this done before we have another problem.”

Source: Christian Science Monitor, Ron Scherer (03/09/2009)

Is Now the Best Time to Invest in Apartments?

Industry experts say consider investing in a duplex, triplex or small apartment building.

“Smaller units are typically older … and during a downturn people prefer lower-quality properties with fewer amenities,” says Hessam Nadji, managing director of research at real estate brokerage Marcus & Millichap.

Nadji also pointed out that young people are the most likely tenants in these older units and that segment of the population is growing. The baby boom peaked in the 1950s and those boomers’ children, born in the 1980s, are just going out on their own. While they have one of the highest unemployment rates now – 12 percent – they will likely be the first hired when the economy improves, says Reis Research Director Victor Calanog.

Reis identifies San Diego and Sacramento as areas expecting strong growth, as well as San Antonio, Texas, and Fairfield County, Conn., a suburb of New York City.

Nadji urged investors to buy now while prices are down. “There is a good chance that if an investor waits for a recovery to materialize, they’ll see prices go up again,” Nadji says.

Source: Investor’s Business Daily, Amy Reeves (02/26/2009)

What’s Next for Fannie, Freddie?

What’s to become of Fannie Mae and Freddie Mac, which are bleeding red ink as home owner defaults continue to increase?

The rising losses will force the government to decide whether to keep putting money into the firms to keep them operating or divide them into smaller businesses and remove government support.

Daniel Mudd, a former Marine, was Fannie Mae’s CEO before the government fired him and put James Lockhart, director of the Federal Housing Finance Agency, in charge. He likened the situation to the U.S. invasion of Iran. “The troops got to Falluja in a couple of weeks and seized the radio towers, but there was no plan to run the country once the shooting stopped,” he said.

Under the Obama plan, Fannie and Freddie are expected to refinance as many as 5 million underwater mortgages.

Fannie’s government-appointed CEO, Herbert Allison, said: “It’s not about maximizing returns on equity or profits. It’s really about being of use to the country during this very difficult period.”

Source: The Wall Street Journal, James R. Hagerty and Damian Paletta (02/27/2009)

Despite Market, Many Choose Real Estate Career

Despite challenges facing the real estate business, the state of New York administered more than 700 licensing exams to aspiring real estate professionals in December 2008.

“We’ve been much busier than we thought we’d be,” said Stephanie Barron, a manager at the New York Real Estate Institute, which offers licensing classes.
Although 25 percent fewer sat for the exam in December 2008 than in December 2007.

Recruiters for New York City real estate firms say that a new associate can expect to earn about $50,000 a year, but getting started can be a challenge and newcomers may take weeks to close their first deal.

“Someone coming into the biz, who is going to focus on sales from day one, should have at least a six-month nest egg, and it would probably be better to have more than that,” said Stephen Love, who directs recruiting at Ardor New York Real Estate.

Source: The New York Times, Michael M. Grynbaum (02/13/2009)

Expect to Hear More on Housing Assistance Plan

The Obama administration is considering plans to subsidize mortgage payments for owners facing financial troubles and allow underwater homeowners to refinance. Plans are likely to be announced Wednesday.

The refinancing proposal is expected to include a test that troubled homeowners could use to prove eligibility before their mortgage becomes delinquent.

The administration also is expected to endorse a cram-down plan that will allow judges to modify mortgages during bankruptcy procedures. And it will push for legislation that will remove obstacles that prevent mortgage servers from modifying troubled loans.

Mortgage giants Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc. have halted foreclosures until Obama announces details on these plans.

Source: The Wall Street Journal, Deborah Solomon and Robin Sidel (02/14/2009)

Stimulus Advances With Tax Credit Changes

The $790 billion stimulus package hammered out by House and Senate conferees late yesterday increases the home buyer tax credit to $8,000, from $7,500, and drops the repayment feature for buyers who hold on to their property for at least three years.

The NATIONAL ASSOCIATION OF REALTORS ® has sought removal of the repayment requirement because it discourages buyers from taking advantage of the tax credit. The three-year minimum holding period is a safeguard against speculators’ use of the credit.

The legislation also extends the effective date of the credit to December 1 from June 30, and extends eligibility to borrowers who buy their home with the help of state or local financial assistance that comes from the proceeds of tax-exempt mortgage revenue bonds.
The credit remains open only to first-time buyers (those who haven’t owned in at least three years) and some income eligibility restrictions apply, but those are unchanged from the existing program.

Other provisions reportedly in the bill that could help housing markets and communities include:

• FHA and conforming loan limits. Specifics have not been released but reports indicate that the 2008 limits have been reinstated for 2009 except in those communities where the 2009 limits are higher. Additional increases in individual communities may also be available at the discretion of the secretary of the U.S. Department of Housing and Urban Development.

• Foreclosure mitigation and neighborhood stabilization. Funding for states and localities to be used for neighborhood stabilization activities for the redevelopment of abandoned and foreclosed homes are authorized. Some news reports put the funding level at $2 billion.

• Rental assistance. Up to $1.5 billion to provide short-term rental assistance and other aid for families during the economic crisis.

• Transportation infrastructure. Up to $29 billion for highway construction projects, $8 billion for rail projects, and $5 billion to weatherize low-income homes.

• Rural housing development. Increased funding for the Rural Housing Service direct and guaranteed loan programs.

• Low-income housing grants. Allow states to trade in a portion of their 2009 low-income housing tax credits for Treasury grants to finance the construction or acquisition and rehabilitation of low-income housing, including those with or without tax credit allocations

• Tax-exempt housing bonds. Tax-exempt interest earned on specified state and local bonds issued during 2009 and 2010 will not be subject to the Alternative Minimum Tax (AMT). In addition, financial institutions will have greater capacity to purchase tax-exempt state and local bonds

• Energy efficient housing. Grants for energy retrofits for federally assisted housing (Section 8), funding for energy efficiency and conservation block grants to states, and Increases in the residential tax credit through 2010 for certain energy efficient upgrades.

Source: NAR, AP, Washington Post, New York Times, Bloomberg, and Wall Street Journal.

Fannie and Freddie Ask for $45 Billion

Fannie Mae and Freddie Mac are expected to ask the Federal government for at least $45 billion in the next few weeks so they can continue to operate despite increasing losses.

Rising delinquencies and falling values of bonds cause the need for the cash infusion.

Freddie Mac is likely to be the hardest hit. It said late last week that it would probably have to seek $35 billion in capital from the Treasury.

Fannie Mae will probably need $10 billion, although it has been reported that it will ask for as much as $16 billion.

The losses underscore the need to break the downward spiral in the housing market, economists say.

Source: Reuters News, Al Yoon (01/26/09)

Tax Credit Changes Could Unleash Home Sales

If all home buyers become eligible for a tax credit without a repayment feature, it could result in an additional 555,000 home sales, enough to meaningfully draw down excess housing inventory, the NATIONAL ASSOCIATION OF REALTORS® says.

An evaluation of options for a home buyer tax credit by NAR shows wide ranging implications and benefits. A full credit to all buyers means an additional 2.22 million households would meet the income requirements for purchasing a home, but only one in four of those households would actually make a purchase.

Under the current $7,500 first-time home buyer tax credit, which must be repaid over 15 years, 264,000 households meet the purchase requirements. Using the same assumptions, with plans to hold their home for a median 10 years, it would mean only 66,000 additional sales.

Lawrence Yun, NAR chief economist, said NAR is advocating a tax credit for any home purchase meeting qualifying underwriting standards. “A home buyer incentive is critical to help reduce housing inventory and stabilize home prices,” he said. “The bigger the incentive, the faster housing can help pull the economy out of recession. The cost to the Treasury would be far less than the additional costs of a prolonged recession with insufficient housing stimulus.”
Analysis of other options shows that if only first-time buyers are eligible and the repayment feature is dropped, it could mean an additional 202,000 home sales. If extended to all home buyers but the repayment feature is retained, the gain would be 181,000 home sales.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said a flexible approach to the tax credit would have added benefits. “A home buyer tax credit also should be allowed to be used as a part of downpayment. This would instantly add an equity cushion for homeowners – a vested financial interest provides the foundation for sustainable homeownership, which helps improve economic stability,” he said.

NAR estimates only 25 percent of newly eligible households would become homeowners, and does not capture the effect of increased trade-up buying activity. As such, these projections may understate the full impact of a home buyer tax credit.

Source: NAR

Home Buyer Tax Credit: How It Works

First-time homebuyers in 2008 can take an income-tax credit on their purchase, thanks to passage in Congress earlier this year of the first-time home buyer tax credit.

The definition of first-time homebuyer is generous. To get the credit, the homebuyer cannot have owned a home in the previous three years. The home must be a principal residence and purchased between April 9, 2008 and July 1, 2009.

The credit is equal to 10 percent of the purchase price, up to $7,500. Single taxpayers with modified adjusted gross income up to $75,000 and couples with MAGI up to $150,000 will qualify for full credit. Singles with MAGI up to $95,000 and couples with MAGI up to $170,000 will get a reduced amount. Those with higher incomes don’t qualify.

If the amount of tax a homebuyer owes is less than the amount of the credit, they get to keep the difference in the form of an IRS refund.
The homebuyer must begin to repay the credit in two years in increments of about $500 a year over a 15-year period for those who received the full credit
Homebuyers who sell their home before the credit is repaid must pay off the loan with any profits. If they sell the home at a loss, the loan is forgiven.

[Editor's Note: The credit is set to expire in mid-2009, although industry groups, including the NATIONAL ASSOCIATION OF REALTORS®, are encouraging Congress to extend it. NAR is also encouraging Congress to make the credit available to all buyers and to eliminate the repayment requirement. More detail on how the credit works is available from NAR on REALTOR.org.]

Source: Chicago Tribune, Mary Umberger (12/28/2008)

Housing in 2009: Up as Well as Down

Overall housing news in 2009 could continue to be grim if – as predicted – a flood of Alt-A and option adjustable-rate mortgages reset and push homeowners with previously strong financial situations into foreclosure.

“We’re in the middle of the game here,” said Joseph Seneca, professor of economics at Rutgers University in New Jersey. “There’s significant further unwinding to come. We’re in a downward spiral with job losses that is reinforcing the weakness in the consumer markets, particularly in the largest investment the consumer makes, in his home.”

Seneca says the government’s aggressive efforts to stabilize housing are helping, but housing won’t really recover until prices fall so far that large numbers of buyers jump back into the game.

In the meantime, the price of housing is increasing in some areas that are immune to the economic slowdown. These areas include the energy-producing states of North Dakota, South Dakota, Okalahoma, Alaska and Montana. Washington, D.C. with its host of government and defense jobs is doing well. Boston, San Diego and Orange County, Calif., where prices have dropped enough to increase affordability significantly, are also seeing price increases.

Source: Business Week, Prashant Gopal (12/24/2008)

Next Page »