Existing home sales fell 2.2 percent in May.  As many buyers doubtlessly rushed to get under the April 30^th homebuyer tax credit, many economists thought the downturn might be even sharper.  The drop in new construction was deeper than expected and much more severe than the drop in existing homes.  The seasonally adjusted drop in new construction is now 33 percent below projections.

David Crowe, the chief economist of the National Association of Home Builders, said the decline is really due to “larger factors” in the economy.  Citing high unemployment and a general lack of consumer confidence, Crowe suggested that homebuilders were not entirely caught off-guard.

The homebuyer tax credit may have taken some buyers out of the May market but it had some advantages.  May re-sales were 2 percent higher than last year. 

Real estate prices were higher in 16 of 20 of the nation’s biggest marketplaces.  In the Western region, housing prices were 7.4 percent higher than last year.  Nationwide, home values gained 2.6 percent in the latest month.

In surveys conducted by Corelogic, prices were higher in 60 of the last 100 metropolitan markets. In year-over-year comparisons, all 100 markets were lower a year ago. 

Many economists believe the real estate market may have peaked earlier this year.  By the end of 2010, short sales will dominate the marketplace.  With government programs like HAFA in full swing, the short sale opportunities will be at their highest level since the recession began.

Government guaranteed mortgage loans have flooded the country’s REO inventory.  Distressed sellers who are using the HAFA program are providing an unparalleled opportunity for investors who have been hesitant to get involved in the complications of short sales. 

HAFA sellers are pre-qualified, have agreed to price and occupancy terms and are motivated to sell.  If you are a serious investor, learn more about HAFA.  There is great potential for profit in this program.        

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There are many reasons the rental market is hot.  The instability of the labor market is just one of those reasons.  The instability of the real estate market and the fact that homeowners are walking away from their underwater homes also impact the rental market.  When a buyer walks away, his buying days are over for a minimum of three years.  This has helped to create rental demand.

Despite the increase in demand for rental housing and the absence of the 2010 tax credit, investors in residential property still have many tax advantages.  A homeowner with a $150,000 mortgage at eight percent will pay $9,969.27 dollars in interest the first year.  That amount will reduce slightly in subsequent years but only nominally.

That same homeowner may pay $4000-$5,000 or more in property taxes.  In this case, let’s use $4,000.  Those property taxes, which may pay for snow removal on your street, your school district, your trash removal, the lights on your street and many other benefits are all tax deductible. 

By purchasing this home, you have just earned $9,969.27 plus $4,000 or $13,969.27 in tax deductions.  And, your children are being educated. 

With today’s real estate, you can invest in green energy practices and improvements that will earn you even more tax deductions.  Are you kidding?  Today’s real estate market may have risk, what investment doesn’t, but today’s real estate acquisitions also have great tax advantages.

There are lessons we have learned during this recession.  We have learned that real estate does involve risk.  But, we have also learned that the tax advantages of ownership will not go away.  And, these advantages can help in difficult times.

The rental market also carries risk.  When buyers obtain a fixed rate mortgage, they know what their home will cost every month for the remainder of the life of the mortgage.  When tenants rent, they are exposed to factors beyond their control. 

Landlords can raise the rent, list the property for sale and decide not to rent any longer.  In all these situations, the cost of renting increases.  Every time a tenant has to relocate there are significant expenses and unrest.  Many times school districts must change.  The renting experience is unstable at best.

If you invest and invest wisely, you enjoy tax deductions, a feeling of ownership and stability and the creation of equity all at the same time.  There is no comparison to that formula versus the rental experience.  Real estate investing is a wise decision, even today. 

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In 2009, commercial loan defaults hit their highest level since 1993 and astonishingly doubled the number of 2008 defaults.  In the fourth quarter alone, the commercial default rate rose 3.8 percent.  In 2009, multi-family property default rates climbed from 1.8 percent to 4.4 percent.

Default rates for all combined forms of commercial real estate rose to 3.8 percent in 2009 and is projected to top 5.1 percent by the end of 2010 and 5.4 percent by the end of 2011.  Chairperson of the Senate Oversight Panel for TARP said that 50 percent of commercial mortgages would be underwater by the end of 2010.  Commercial real estate owners who leveraged their properties are in trouble as commercial real estate values decreased by as much as 29 percent in 2009.

At the end of 2009, U.S. banks held $1.1 trillion in commercial real estate paper not including $211 billion in multi-family mortgages.  The nation’s smaller banks are carrying a 33 percent higher percentage of default loans. If these smaller banks absorb these losses, they will be unable to provide much-needed regional loans to local borrowers.

Delinquency rates in multi-family properties (13.19 %) and lodging properties (16.89%) lead all forms of commercial delinquencies.  Industrial delinquencies increased 76 percent in year-over-year comparisons while lodging increased 88 percent.  Retail and office space delinquencies rose by more than 70 percent over 2008 rates.

If you believe in the buy low and sell high basic real estate investment theory, this is your time to realize big opportunities.  While there is no doubt buy low properties are out there, investors must make sure they can fill the commercial space. 

Lenders may be receptive to shirt sales and creative financing packages but these lenders want to see occupied space. Many businesses are entering the investment world.  As U.S. companies continue to shed jobs, their space requirements are changing and centralizing.  Many of these companies are now positioned to convert from tenant to owner and banks could not be happier.

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There are many theories about how to succeed in real estate investment.  There are high-risk strategies, low risk strategies, new-age theories and proven strategies.  As we have advocated in numerous articles, every investor needs to define their own strategy.

We recommend one of three well-tested strategies.  If the property or properties you are considering do not fit into one of these categories, you may want to reconsider your purchase.  Again, the key to successful real estate investment is to have a plan and pursue it unemotionally and consistently.

The three most consistent strategies are:

·                     Buy-the-bargain

·                     Increase-the-value

·                     Double-digit capitalization rate

If you are purchasing in order to profit, figure out which of these options fits your personality, abilities and budget and stick with your business plan.  One purchasing concept applies to all these strategies and that is that you must always buy right. 

Buying right is the name of the game with the buy-the-bargain plan.  In today’s real estate market, this strategy has some risk because turning the property over quickly or flipping it is no easy task.  While we can find plenty of opportunities to purchase at 20% or more below fair market value, we may end up holding the property because of oversupply.  To use the buy-the-bargain strategy today, the investor needs to be confident that a tenant can be found until such time as the shadow inventory clears.  Today, buy-the-bargain investors only consider purchasing at 30-40% below market value.

Increase-the-value is a solid investment strategy, especially appetizing to the handyman or investors who can make improvements.  The idea is to buy well below value and tailor cost-effective improvements that will raise the value.  In today’s labor market, there is a plentiful supply of affordable handymen.

The double-digit-capitalization rate is all about the numbers.  The formula for success is easy.  The capitalization rate is determined by taking the net operating income, or rent minus operating expenses exclusive of debt service, and dividing that net income by the purchase price.  Experiment with this formula and you will see that achieving a double-digit cap rate is not as easy as you think.  That is exactly what makes it a great strategy.    

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Once the borrower has received the Notice of Default and the notice has been posted publicly and usually printed in the local newspaper, the formal foreclosure process is in motion.  The borrower’s failure to comply with repayment terms has activated the mortgage’s acceleration clause and the lender requires full payment of the loan.

If the Notice of Default does not result in full repayment, the lender next issues a public Notice of Sale.  A copy, stating the time, date and address of the public auction where the property will be sold is sent to the homeowner.  The notice is also posted on the property.

The sale is called a Sheriff’s Sale.  It is the second major stage of the foreclosure process and follows the preforeclosure stage, which commenced when the first payment was missed.  The typical Sheriff’s Sale involves the following steps:

·                     The auctioneer reads a description of the property and any legal notices related to the address.

·                     The bidding begins.  Usually the bidders have prequalified to participate by depositing a check in advance.  The bidding process continues until the auctioneer accepts the highest bid.

·                     The paperwork is drawn for execution by the successful bidder.  The successful bidder is usually given a grace period to arrange financing for the property.  Once the financing is in place and paid, the title is given to the new owner.

At this time, the original owner may still reside in the home.  The Sheriff’s Sale is not an eviction proceeding.  The successful bidder may initiate eviction proceedings at any time after receipt of the title.  The evicted homeowner may have to vacate within 72 hours.

In the event the property is not sold at the auction, the property becomes Real Estate Owned (REO) and ownership goes to the lender.  This usually occurs when prospective bidders feel the property is not worth what is owed.  If the borrower and lender agree to sell the property to the lender prior to the auction stage, this step can sometimes be avoided.  In either case, when a successful bidder is found or when the home enters the REO stage, the foreclosure process is essentially complete.

The entire foreclosure process usually take anywhere from six to eight months but can occur more rapidly.  Homeowners who anticipate difficulty making timely payments must act rapidly.  There are a number of possible remedies but inaction is not one of them.

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Lawrence Yun is the Chief Economist for the National Association of Realtors, the nation’s largest trade organization with 1.2 million members.  In early September, Mr. Yun offered members his views on the recession, the recovery and the status of the national real estate market.

From an economist’s perspective, the recession is over.  Economists who see recent production trends feel the fundamentals of a recovery are in place.  The troubling unemployment figures are considered a lagging indicator.  Unemployment is not expected to begin recovering until late 2010.  Yun asserts that the country will not fully recoup the 7 million lost jobs for three years.  This cannot spell good news for the struggling housing market.

The 2009 first-time homebuyer tax credit has been a successful initiative of the Obama Administration.  Unlike its predecessor, the 2009 version does not require repayment.  The NAR credits the bill with creating 1.2 million transactions, which in turn created 1.2 million sellers, most of whom became purchasers.  The 2009 first-time homebuyer tax credit is set to expire on November 30^th 2009.  Yun and the NAR are pushing hard for an extension of the bill.  In fact, the group has proposed some fairly sweeping changes, which would add all homebuyers to the tax credit eligibility list and increase the amount of the credit from $8,000 to $15,000.

While Yun feels the recovery is underway, he takes a guarded view of the sustainability of the trend.  The uncertainty lies in the commercial and industrial real estate markets.  Neither of these sectors received stimulus assistance.  However, Yun takes heart in the fact that the Federal Reserve is taking the commercial real estate market under consideration.

Yun was generally optimistic about the status of the healing residential market.  Existing home sales in July rose 7.2% over June sales to a seasonally adjusted rate of 5.24 million units.  This marks the largest month over month gain in 10 years.  Sales of existing homes rose 5.0% above sales in July 2008.  The July Affordability Index dropped slightly but still remains favorable.

To sustain the positive trend in the housing market, Yun outlined a few critical essentials.  Primary to the recovery is the extension of the existing tax credit bill or adoption of the newly proposed version.  Currently both bills are under review in Congress, but neither Treasury Secretary Geithner nor President Obama has whole-heartedly endorsed the legislation.

Yun is pushing for an expansion of the stimulus citing that an increased government investment to $15 billion is certainly justified for the largest segment of taxpayers, the American homeowner.  Echoing a consistent theme long referenced by Warren Buffett, Yun cites the need to clear the marketplace of the existing backlog of inventory as critical to the success and sustainability of the recovery.  Yun further points out that the treacherous combination of high unemployment and the rising number of homeowners whose properties are underwater will continue to plague the foreclosure market through 2010.  

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The 2009 First Time Homebuyer Tax Credit is scheduled to expire on November 30^th 2009.  Only transactions that close on or before the cutoff date may qualify for the tax credit, which does carry certain income standards.  Currently, the FHA requires a minimum down payment of 3.5% for its financing alternatives. 

As of May, 2009, the U.S. Department of Housing and Urban Development (HUD) announced changes to the agency’s original position and began allowing first time homebuyers to use the tax credit as part or all of the purchaser’s down payment.  This change opened up an entirely new sector of homebuyers and has sparked increased real estate sales activity.  Currently first time buyers are scurrying to beat the fast-approaching November 30^th deadline.

Originally there were eleven states that accepted the HUD revisions.  For use as part of the down payment, the 2009 tax credit can be used as a subordinate loan until such time as the credit is actually received, when it must be applied to the down payment advance.  Qualified homebuyers can use up to $7,000 of the tax credit as part of the down payment as long as it does not exceed 5% of the purchase price.  A $250.00 fee is assessed for this use.  $150.00 is refundable upon repayment of the loan on or before the due date.

The due date of the advance is July 1, 2010.  The loan accrues interest at a rate of 3%.  The loan must be repaid from the borrower’s tax refund. 

The National Association of Realtors was instrumental in assisting Congress with formulating the 2009 Tax Credit, which unlike its predecessor does not require repayment.  The NAR has requested a further expansion of the 2010 credit and recommended that the new bill not be limited to first time homebuyers.  Congress has not responded to this request.

Earlier this summer, Congress was considering a $15,000 tax credit with some limiting income considerations.  As of now, the Obama Administration has not offered support for the increased initiative.

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REOs and foreclosures have many similarities, and both are brought about by the same reason of the borrower not being able to match up to the repayment schedule. For both, the principal driving force is to get the property sold of to a new buyer.

REOs usually happen as a result of a property not getting a buyer in the normal process of foreclosures. Therefore, the lender is forced to own the property since there are no takers at that moment.

Usually, most real estate brokers would second the idea of owning a foreclosed property due to many advantages. In fact, many would reason that it is the safest bet for many first time buyers, which would translate into minimal efforts of ownership except for the money and some due diligence. Even statistics back the idea that REO sales are more popular selling methods when it comes to buying foreclosed properties.

Essentially, a REO sale happens by the normal method of selling, whilst the foreclosure sale is usually through the auction method. In the REO sale the lender offers a price that is usually lower than the market and sometimes gives support to the buyers in owning the home. However, in the foreclosure through auction the buyer has to bid for a price and bear the unpaid amount.

In addition, in the foreclosure proceedings the property would be received by the bidder in the ‘as is’ condition; sometimes the eviction of a tenant may also be pending. In the REO sales, the lender usually takes care of the issues like the down payments, paper work, eviction, etc. These advantages make REO sales a much better option than foreclosure sales.

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The tax credit extended to the first time homeowners provided a good push to the home seekers. The application for sales has really jumped in the last three months, mostly to qualify for the Nov 30th deadline, which has now been pushed back to June 30th 2010. In addition, the tax credit to the existing homeowners of $6500 should add to the buying numbers. Adding to this right mix of buying stimulants is the interest rate, which has climbed down to a staggering 4.98 percent for the 30-year fixed-term loan. This lowering of interest rates, with the slowing down of prices, has made it lucrative for individuals who have been waiting with cash in hand for the right moment.

For real estate agents, the news is that one should look at focusing on low end, small budget homes, which are really making a big splash. In addition, the agents should understand the foreclosed property sales and the short sales. These are the two areas people are focusing on due to the current market conditions.

Stephen R Pearson, working with the Century 21 Classic Properties, commented that there is a lot of activity in this segment and it would really benefit the buyers if there were someone to help. There are certification programs available in the market, which act as great awareness and enrichment programs for the professional that wants to be ready for action.

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It is believed, however, that almost 80 percent of those who need help haven’t received it yet. This help would eventually stop these borrowers from turning delinquent and prevent foreclosure. Lenders are trying their best to get more into the trial mortgage modification program. In the year 2009, lenders other than the government machinery have extended the mortgage assistance program to nearly 2.3 million owners according to Hope Now. These programs would include different options like modifying loans, repayment plans, reducing principal amounts, forbearance.

There are many assistance plans working outside the government’s requirement mandates. Bank of America, for instance, has covered 14 percent of the eligible population with default payment terms of 60 or more days under the government’s modification plan. This number has reached 136,994. Under its own program, Bank of America has offered modification programs to close to 450,000 customers since 2008. This year the bank has completed the loan modification for around 220,000 homeowners. What this essentially tells us that the system is working for many homeowners that might otherwise be facing foreclosure.

As per the Home Affordable modification program guidelines of March 2009, the lenders have to reduce the mortgage payments to a 38 percent debt to income ratio at the front end. The treasury will match this offer by a 31 percent reduction for the borrower. There are preconditions to avail the program, which include that the occupancy should be a single family, that it should be primary residence and that the unpaid balance on the principal is $729,750 or below for a single unit. The borrowers who are bankrupt or are in litigation are not disqualified from this program.

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