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By Kim, September 2, 2010

The New York Times featured an op-ed yesterday (September 1) from Karl E. “Chip” Case, professor emeritus of economics at Wellesley and co-creator of Standard & Poor’s Case-Shiller housing index. The article, entitled A Dream House After All, concludes – even after (and perhaps because of) all the negative sales hype the past two or three years – that “housing has perhaps never been a better bargain” and that “the American dream is not dead — it’s just taking a well-deserved rest.”

He notes that what has happened in the housing markets since 2005 is undoubtedly a catastrophe. Apparently some thought “the American dream is owning property that appreciates by 30 percent a year, making a house into a vehicle for paying bills . . . those kinds of dreams have become nightmares.” But for most people, he believes, “it means having a solid and fairly safe long-term investment that is coupled with the satisfaction of owning the house they live in. That dream is still alive.”

In fact, “for people with a more realistic version of the American dream, buying a house now can make a lot of sense:”

Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. This part of the yield is counted as part of national income by the Commerce Department. It is the equivalent of about a 6 percent return on your investment after maintenance and repair, and it is constant over time in real terms.

Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free.

The second part of the yield on investment in a house is the capital gain you receive if it appreciates and you sell the house. Gains are excluded from taxation if the property is a primary residence and the gain is less than $250,000 for a single filer or $500,000 for a married couple filing jointly.

Consider a few other bonuses of buying a home today. You can deduct the interest you pay on the mortgage. Interest rates are about as low as they can get. And, don’t forget, home prices are down by 30 percent on average from the peak. The mortgage-interest deduction and the tax-free income from housing cost the government at least $200 billion a year.

Do the math. Four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of about 6.6 percent was $1,533. Today that $300,000 house would sell for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. In addition, the down payment would be $42,600 instead of $60,000.

He goes on to discuss projections from  the Census Bureau and other demographers suggesting that the number of  households will increase by 1 – 1.5 million annually, so with little new construction, we should be experiencing a tightening market – but instead of falling, vacancy rates remain high. While demographic numbers might be off, he attributes the continued downturn to the “steady drip of bad news” impacting confidence.

Real estate sales are unlike other financial transactions. You can place a rough inherent value on a stock or bond by looking at fundamentals: a company’s profits, price-to-earnings ratios, quality of its products and management, and so forth. But a house is worth what someone is willing to pay for it. That’s a very personal, emotional decision.

In a given year, the number of completed sales is about 4 percent to 5 percent of the housing stock. Thus it doesn’t take a change in mood of a large number of buyers to change the overall direction of the market.

He concludes that the “sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again.”

Glad to hear it. I’ll bet you are, too.

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By Kim, August 10, 2010

Delightful View and METRO Too!

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$180,000 Condominium For Sale Main Features 2 Bedrooms 1 Bathroom Interior: 1069 sqft Location 2622 Fort Farnsworth Rd #218 Alexandria, VA 22303 To get updates on open home dates and other property events, please click the “Like” button below:

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Kim Hannemann Samson Properties (703) 861-9234 Kim.Hannemann@gmail.com http://www.KimHannemann.com Listed by: Samson Properties

Our recent listings Delightful View and METRO Too! Elegance in the Woods! Subscribe to our listing feed

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By Kim, August 6, 2010

Update – FHA decided to change implementation from September 7 to October 4.

The Federal Housing Administration (FHA) announced yesterday that the monthly premium for it’s mortgage guarantee program will increase from 0.55% of the loan amount per year to 0.90% per year for loans with down payments under 5% and to 0.85% for loans with higher down payments. At the same time, the FHA “upfront premium” – paid at the time of closing the home purchase – will be reduced from the current 2.25% of the loan amount to 1.00%. The upfront premium is often “rolled into” the loan amount to reduce its impact on the amount of cash needed to purchase the home.

These changes have been expected but were awaiting Congressional approval, received yesterday. The FHA had increased the upfront premium from 1.75% to 2.25% as a temporary measure to bolster its reserves to required levels. The changes will take effect with loans originated (FHA case numbers issued) on or after OCTOBER 4, 2010. Existing and already pending FHA-guaranteed loans are not affected.

The effect of the change to a monthly payment is about an additional $29.17 per $100,000 borrowed, but a reduction of $1,250 in the upfront payment. If you were to finance the upfront payment, as most borrowers do, the net increase to your monthly payment resulting from the change would be about $22.46 instead of $29.17 per $100,000, assuming a 5% interest rate on your mortgage.

The takeaway – if you are on the fence, better to buy/refinance before OCTOBER 4!

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By Kim, July 8, 2010

There was a Dilbert cartoon a few days ago that was so good I decided to grab the punchline panel and write a post around it. So here it is.

Contracts can be dangerous things. Now, most people don’t deal with contracts on a regular basis, and for those who do – like lawyers – it’s usually their employer’s or client’s money on the line, and it’s their business. In my business, I have to work with contracts for residential real estate every day, but go beyond that and I’m stretching my legal abilities. Not to mention the matter of practicing law without a license, which the state allows me to do in a very, very limited way.

Often one of the greatest challenges even the best Realtors face is managing the transaction once a contract is achieved. Most buyers and sellers have no idea how much work is involved in getting from there to an actual closing. It is difficult to juggle the demands of gathering the necessary documents, maintaining communication with your client and managing the other parties. The 10-page DC area contract is just the beginning. There’s a 6-page addendum for Virginia, plus multiple disclosures and optional addenda on top of that. This creates an unbelievable amount of paperwork to maintain, deadlines to track and requirements to be met. Additionally, licensing requirements make it way too easy for the less-than-professional person to be an agent, further increasing the challenges.

I tell people that every time something goes awry with a contract in Northern Virginia, we get another form, or at least another paragraph in an existing form. Most of my contracts are at least 25 pages of stultifying fine print, a lot of which simply serves as CYA material. Occasionally, however, there occurs a situation proving the importance of knowing exactly what’s in there.

Case in point: I have been working with some very nice people who want to buy a home, but need to sell their own home. According to their lender, they could qualify to carry both mortgages – to which they say, “Sure, but we like to have food with our meals.” They contracted to buy a new home, but because the owners wouldn’t agree to it, they did not include a contingency requiring that they sell their own home. They did, however, include home inspection, appraisal, and financing contingencies, and the state of Virginia requires a contingency for reviewing homeowner association (HOA) rules and finances (that’s important, as it turns out).

They quickly put their home on the market and we (they, me, and the other agent) thought it was so nice we would surely get an offer right away. Two weeks went by with a total of 5 visitors. My clients are getting more nervous by the day, and our contingencies are running out – home inspection’s done, the financing is not a problem, and the appraisal is not within our control. But wait – the HOA packet has not appeared!

The seller’s agent (of 30 years’ experience) was going to drop off the packet on June 16, but for some reason she was delayed or forgot. We received it on June 24 instead, thus giving us until 9 PM on June 27 to back out. On June 25 we received a too-low offer and tried to counter it, but the prospective buyers refused to respond within 48 hours to the counter. The sellers refuse to give my buyers a home sale contingency at this point – perhaps they thought we were bluffing? So, given the constraints, my clients had to use the HOA contingency, inadvertently extended by their seller’s agent, to back out of a contract for a home they dearly wanted. I’d warned the other agent about it, and gave her two days’ notice that we were looking for alternatives, but she still claimed to be “shocked” that we used the HOA contingency to back out when there was nothing wrong with the HOA. Her sellers were upset too, of course – but after the warning we gave them and the opportunity they had to hang on to the contract, I couldn’t be very sympathetic. They had to put their home back on the market, with a month less to sell before they move, not to mention all the negotiations and inspections they would have to put up with all over again.

Fortunately for all concerned, my sellers did get a contract they could work with, and they did come to agreement on a new contract with their sellers (at the same terms), so we made it through that mess unscathed except for deep psychological scars. But it was a very near thing.

In contracts there are some things we can’t control, but we must pay attention to those things we can.

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By Kim, June 24, 2010

It s All Done – Just Unpack!

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$465,000 Single Family Home For Sale Main Features 5 Bedrooms 3 Bathrooms Interior: 2904 sqft Lot: 15,047 sqft Location 7016 Galgate Drive Springfield, VA 22152 To get updates on open home dates and other property events, please click the “Like” button below:

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Kim Hannemann Samson Properties (703) 861-9234 Kim.Hannemann@gmail.com http://www.KimHannemann.com Listed by: Samson Properties

Our recent listings It’s All Done – Just Unpack! Home Sweet Home! Subscribe to our listing feed

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By Kim, June 24, 2010

Buyers should take this seriously – once you have applied for a mortgage and received preapproval, don’t open new credit cards or buy anything substantial using credit until after your settlement!

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By Kim, June 18, 2010

A “reverse mortgage” allows you to trade equity in your home for cash, access to cash through an equity line of credit, or a monthly income, that you never have to pay back. You can use your current home or buy a new home or even a vacation home using a reverse mortgage.

Got your attention?

The catch—you have to be 62 or older. But hang on, kids, there are potential advantages for you too, if you’re on the good side of, ahem, those “mature individuals distinguished by their vast experience.”

Reverse mortgages, or as FHA calls them, Home Equity Conversion Mortgages (HECM), have been available for seniors for many years. The basic deal was that they use the equity in their primary residence as a source of cash, they can live in the home as long as they want without paying anything back, and the mortgage is paid off when the home is sold, with the owners or the estate getting the difference. If there isn’t enough money from the sale for the payoff, FHA eats the difference, not the estate or heirs.

Now comes the HECM for Purchase Program. The FHA developed the program because it saw that seniors were selling their homes, buying smaller, more affordable homes and then taking out reverse mortgages on the new properties. That meant they were paying closing costs twice—first on the purchase closing, and a mortgage if they needed one, and then again when they switched to a reverse mortgage. But the new program allows seniors to buy a home directly with a reverse mortgage—paying closing costs only once. A sale of an existing home is not necessary and is not part of the transaction.

The program allows seniors to use a reverse mortgage to buy a home or a small multifamily residence, and allows them to convert some of the equity in their existing home to cash. They never have to make a single payment. Instead, they can collect monthly payments out of the equity on a tax-free basis as long as the home serves as their principal residence. If they do not sell their previous home, they could get additional income out of renting that property. Under the plan, you can choose to take the money either in monthly payments, as a lump sum, a combination of the two or even in a line of credit that you can access whenever you need cash.

This year, seniors can access up to $625,500. In 2011, unless Congress changes its mind, the amount reverts to $417,000. Most reverse mortgages range from 35 percent to 55 percent of the home’s equity.

You must agree to pay your taxes and make any necessary home repairs. No credit check or income verification is required. To qualify for the reverse mortgage, a senior, age 62 or older, must:

• Agree to live in the reverse-mortgaged house as a primary residence.
• Own the home outright or have enough equity to pay off any existing mortgages and equity lines with the proceeds from the reverse mortgage. Those with more equity may be able to access even more cash.
• Not be delinquent on any federal debt.
• Participate in a consumer information session given by an HUD-approved counseling agency or HECM counselor.

Generally, three factors will affect the amount you can borrow:

• The value of your equity (the higher the better).
• Your age (the older the better).
• Interest rates (the lower the better).

Here are some hypothetical examples of how it can work:

1. Problem—you want to buy a new one-level home for $450,000 with no mortgage payment. You cans sell your colonial in Springfield with net proceeds of $300,000. Solution—you take out a reverse mortgage on the new home for $275,000, paying $150,000 of your cash for the balance. Instead of a $150,000 mortgage to pay, and no cash, you have $150,000 in cash left to invest, and no mortgage payment!
2. Problem—you own your Springfield home worth $500,000 and want to keep it as your principal residence. You have no mortgage, or a small one. You would like to buy a $300,000 vacation condo in Ocean City, but on your teeny retirement income you can’t afford a regular mortgage on either the condo or your main home. Solution—you take out a reverse mortgage on your main home for $250,000, paying $50,000 cash from other sources for the balance. You just bought your vacation condo for $50,000, and no mortgage payment!
3. Problem—you want to keep your current home, but it needs remodeling and updating to fit your changing needs. Solution—use your equity to take out a reverse mortgage for remodeling. No mortgage payments.
4. Kids, pay attention here! Problem—you want to help your son and his family buy a new home. You could take some cash out of the equity in your own home—but you can’t afford the additional mortgage payments. Solution—use your equity to take out a reverse mortgage to gift their down payment.

One added cost to a reverse mortgage is an extra insurance premium, usually more than a conventional mortgage, which has to be paid by the homeowner to insure the lender against the possibility the homeowner lives longer than anticipated. The insurance guarantees you will never pay more than a stated amount despite increased borrowing costs over time. You can finance this premium into the mortgage itself.

Interest rates on reverse mortgages today are similar to conventional mortgages. Fixed rates I’ve seen quoted by Wells Fargo recently are 5.4% fixed, or 2.5% adjustable (monthly adjustment tied to LIBOR). Of course, since you aren’t paying it, how much can it matter?

Here is the link to the HUD/FHA site for all the straight info.

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By Kim, June 18, 2010

This report covers Alexandria, Arlington, Fairfax County and the towns within.

A total of 1,957 homes sold in May 2010, an increase of almost 9% from May 2009 home sales of 1,803.

Active listings decreased by about 4% from last year, with 7,710 active listings in May, compared with 8,050 homes available in May 2009. The average days on market (DOM) (for sold homes) decreased by 47% to 40 days, compared with 76 days in May 2009.

Sales prices rose by about 6% compared with last year. The average sales price this May was $460,828, compared with last May’s average of $433,257.? ?The median sales price – usually a more accurate indicator – was $404,000, which is an increase of almost 8% compared with May 2009’s median price of $375,000.

The number of pending home sales decreased by 28% with 1,901 sales pending compared to 2,637 in May 2009. This was an expected result of contract signings pulled into April by the tax credits, which expired April 30.

My take on the market in the area is that it’s still strong, driven by the ridiculously low interest rates (under 5% fixed, and 3.5% for 5/1 ARMs) which look to be with us for at least the next couple of months as signs of inflation remain low. If you’re on the fence about buying, I’d say it’s time to jump.

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By Kim, May 24, 2010

For the accountants and engineers – or otherwise spreadsheet-inclined – here is a really detailed Rent vs Buy Calculator from the New York Times.

The calculator provides not only for basic mortgage and tax info, but also includes the opportunity to add and change advanced settings such as rate of return on investments, condo or common fees, utilities and more. It provides a graphic output with the breakeven point, and all the details for whatever number of years you wish to carry out the calculations.

Try it!