The closely watched Standard & Poor's/Case-Shiller index of home prices in 20 cities fell nearly 11 percent in January from a year earlier, the biggest drop in its two-decade history.
Prices were down about 20 percent in Las Vegas and Miami, both paying the price for especially rampant speculation and too much new construction during the housing boom. Fourteen other cities posted record declines in the Tuesday report.
The only bright spot was a 1.8 percent increase in Charlotte, N.C., where real estate agents say prices rose more modestly during the boom years and the regional economy is relatively strong.
Everywhere else, mounting foreclosures, falling consumer confidence and sellers slashing their asking prices are taking an increasing toll on the market.
"It's just a spiral that will end up taking this year to get out of," said Pava Leyrer, president of Heritage National Mortgage in Detroit, adding that the market there is not expected to improve until the spring of 2009.
In Las Vegas alone, nearly half the homes currently on the market have seen their prices reduced at least once, according to an analysis by ZipRealty, a discount real-estate firm.
Greg and Barbara Abbott have already cut the price twice on the two-bedroom condominium they are trying to sell on the Las Vegas strip. They're asking $669,900 now -- and an offer in the $650,000 range means they'll lose money.
Abbott thinks hesitant buyers don't realize how reasonable the current price is. "They're not really being realistic about what the place is worth," he said.
Rising foreclosures have become the biggest factor driving prices lower, Moody's Economy.com chief economist Mark Zandi said.
There were already too many homes on the market, and foreclosures bring even more property -- priced at a deep discount -- into the mix. Zandi said while prices are still falling steeply, demand seems to have stabilized.
"The psychology of the market has completely shifted," Zandi said. "Sellers do realize that homes are worth fundamentally less than they thought."
Meanwhile, consumer confidence is spiraling down as buyers worry about tighter credit and the weaker job market. The Conference Board reported Tuesday that confidence sank to a five-year low in March.
On Wednesday, economists will watch a Commerce Department report on February new-home sales for any improvement in volume. Those figures are more forward-looking than existing-home sales.
Economists are already worried that the usually busy spring season could be in jeopardy.
"I wouldn't be looking for a pattern of improvement until April, May or June," said Brian Bethune, chief U.S. economist at Global Insight.
On Monday, new data for February showed the biggest drop in at least nine years in the median sales price of existing homes. Still, more homes were sold in February -- 3 percent more, the first increase in seven months.
"Home prices continue to fall, decelerate and reach record lows across the nation," said David Blitzer, index committee chairman at S&P. "No markets seem to be completely immune from the housing crisis."
Prices have fallen month-to-month for five straight months in all 20 cities tracked by S&P. And the declines are getting steeper, with 13 of the 20 cities reporting their biggest single monthly decline in January.
The vast majority of homes in the U.S. are not in danger of foreclosure. But the housing slump has raised concerns about a recession and has had ripple effects across the economy.
A separate survey Tuesday from the Office of Federal Housing Enterprise Oversight said home prices fell 3 percent in January from the same month last year. That index is calculated using mortgages of $417,000 or less that are bought or backed by Fannie Mae or Freddie Mac.
With prices falling, more would-be buyers have decided to rent.
Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors in Miami, said three-quarters of all transactions in the past few months were for rentals and the rest were for home sales, a reversal of historical trends.
Abbott, the condo owner in Las Vegas, is asking a monthly rent of $2,300, down from the $3,500 he had originally wanted.
"It's empty at the moment," Abbott said. "We'd intended to rent it, but the timing, of course, was bad."
His broker, Bruce Hiatt of the Luxury Realty Group in Las Vegas, said there was no shortage of interested buyers -- but none had decided to buy.
"They're all waiting for the magic bottom," he said.
AP Business Writer Dan Caterinicchia in Washington, D.C. contributed to this report.
Results of Operations Revenue [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Year Ended December 31, 2007 2006 2005 Revenue from collaborative agreements: HIV/AIDS vaccine - NIAID $ 5,389,000 $ 1,548,000 $ - Heart failure - Celladon 3,982,000 4,220,000 777,000 HIV/AIDS vaccine - IAVI 309,000 2,262,000 5,588,000 Huntington's 52,000 47,000 315,000 disease - Sirna Other - 37,000 194,000 Other revenues: License agreements - AMT 600,000 1,750,000 - Total revenue $ 10,332,000 $ 9,864,000 $ 6,874,000
Paying a Broker to Sell Your Home Faster
by Prashant GopalSaturday, March 22, 2008provided by
As houses are becoming harder to sell, some agents are charging more than the standard 6% commission to guarantee better results
Jim McCarty decided a year ago to give real estate agents an added incentive to guide buyers past the clutter of for-sale signs to his vacant four-bedroom house about 20 miles outside of Minneapolis. He agreed to pay his agent an 8% commission, which would be split (55%/45%) with the agent representing the buyer. Full-service agents in the past few years have been charging 6% commissions and frequently less. Discount brokers charge much less.
McCarty's investment property was under contract within a month for just under the asking price of $324,000 despite competition from about a dozen similar houses for sale in the development, his agent said. "I wanted more agents to show the property," said McCarty, 70, who is a speaker on leadership and business growth strategies. "I was willing to take a little bit more of a hit and pay a higher percentage. But if the house is sitting there vacant, you want to move the house."
Most agents charge 6% and will sometimes agree to less. But more and more agents, especially successful ones, have started charging more than 6%, in part because selling a house is more time-consuming and expensive than it used to be. And fewer homes are selling. Sellers in some parts of the country are paying up to 8% and sometimes more, agents said. Builders, eager to get rid of inventory, sometimes offer more than 10%.
A Brokers' Market
"When the market was really going crazy, there were sellers out there trying to get any realtor for 4% who would undercut the guy next to him," said Arthur Tassaro of Friedberg Properties in Cresskill, N.J., where he says commissions are holding steady at about 6%. "Now you don't have to do that anymore. Now sellers want the home on the market and sold."
Frank D'Angelo, the broker for EXIT Realty Executive who represented McCarty, says he offers customers a transparent, tiered system of payment. For 6%, sellers get the typical menu of services. Sellers who agree to pay 7% get additional benefits, including a guarantee that if the home isn't sold within 39 days, he'll return up to $10,000 of his commission (2% of the sales price). For 8%, buyers also get free home-staging and a "media blitz" of advertisements.
But the primary benefit is more buyer traffic and the hope that agents might point out subtle pluses of the home, such as new paint or serene views.
Bonus Might Raise Red Flags
"If they [buyers' agents] have to choose from 12 homes, they don't have time to see all 12 homes," D'Angelo said. "They're going to select from buyer's criteria so anything that's marginal is thrown out. But [they might say] 'here's a marginal home with a hefty bonus if I show it.'"
D'Angelo said simple cash bonuses for buyer's agents don't work because they raise red flags that the home might be a distressed property and could lead to lower sale prices. Plus the seller's agent can be motivated by a higher commission.
Ilyce Glink, publisher of thinkglink.com, a free Web site that offers real estate and personal finance advice, said sellers should never agree to pay more than 6% and the buyer's agent should always get at least a 50% commission split. Glink said it's better to lower the asking price than put more money in agents' pockets. Glink said the last time she saw 7% commissions was during the downturn in the early 1990s, but only for properties that were particularly difficult to sell.
Agents Are Working for the Money
"The whole concept of paying 7% or 8% is silly," Glink said. "It used to be that by not doing any work, agents would have buyers lining out the door and they'd collect a big fat commission. Now they have to do some work. You have to allocate dollars where it's most important."
J. Patrick Lashinsky, president and chief executive officer of national real estate brokerage ZipRealty in Emeryville, Calif., said commissions seem to be rising in some markets where agents are cautious about taking on listings because of the work involved. His agents are seeing commissions of more than 7% in Atlanta, Minneapolis, and some markets in California.
ZipRealty typically charges 4.5% to 5.5% commission, and slightly more than half of the money goes to the buyer's agent, the company said. "They say they have to charge more because homes are taking longer to sell," Lashinsky said.
Higher Commission Might Speed the Sale
Mike Collard, an Atlanta-based real estate agent who trains other agents, said brokers who have a record of selling homes are finding they can charge more for their services. They are "unbundling" services and charging more for additional services, he said. "The sellers' agents have to do more work, more open houses, take better pictures, stage the house, and pay for it all themselves," Collard said.
Melonie Haag, an agent with Exit Realty Leaders in Crystal River, Fla., said agents charge between 6% and 8% and builders are sometimes willing to pay up to 12%. "Sometimes if sellers want to get out quicker, agents charge more commission," Haag said. "The truth is, I'm not going to show a house regardless of the commission, but [for] another agent who sees it [the higher commission] might show it more often, so often times it doesn't hurt."
Gopal writes about real estate for BusinessWeek.com in New York.
Copyrighted, Business Week. All rights reserved.
The news is grim. Housing values are dropping, subprime mortgage meltdowns are spreading, the stock market's uncertain and the overall economy seems to be heading into a recession.
No wonder plenty of us are worried.
Still, you can protect yourself. Here are some experts' top five must-make strategies to do your best now that the economy is likely in for a choppy ride.
5 rules for economic survival 1. Don't panic 2. Bullet-proof your portfolio 3. Don't let your home become a trap 4. Dust off your resume 5. Reduce your debt and build savings Rule No. 1: Don't panicThe stock market's gyrations can give even the hardiest investors a case of the jitters.
However, converting all your investments to cash is likely to cause you far more harm than good, says Joe Baker, CFP and president of Alcus Financial Group in Mount Pleasant, S.C.
"People are scared," he says. "They're asking, 'Is the economy crashing? Should I move my 401(k) to a money market?'"
Baker answers: "Please do not, unless you need the cash tomorrow. You'd be making a huge mistake."
Unless you need the money short-term -- say, within two years -- it's best to remind yourself that good and bad times pass. Historically, the market's made up all its losses fairly quickly.
Since 1945, there have been 11 recessions as officially defined by the National Bureau of Economic Research. The S&P 500 -- the index of widely held stocks used as a barometer for the overall market -- generally has hit bottom six months into the typical 10-month-long recession, according to Sam Stovall, chief investment strategist at Standard & Poor's.
After that point, the market typically starts regaining its footing. If you include the very worst meltdowns, when the S&P 500 lost more than 45 percent of its value, it took 19 months for investors to recoup their losses. But exclude the mega losses, and you find that it's actually taken just eight months on average for the index to bounce back.
"The reason the market peaks before recessions start on average and troughs before they're finished is that investors are anticipators," says Stovall. They're willing to become more optimistic once the bad news is out," says Stovall.
Stovall's advice to today's worrywarts is direct: "Don't freak out."
Rule No. 2: Bullet-proof your portfolioSure, we all know the warnings about putting all our eggs in one basket. But when it comes to investing, too few heed this advice.
One study by Hewitt Associates, for example, found that three out of five workers participating in a 401(k) plan never rebalanced their portfolios over a four-year period from 2000 to 2004. Failing to rebalance causes your portfolio to skew over time, leaving you overloaded with one kind of asset while owning too little of something else. If you've neglected your assets, such imbalance could put you at greater risk.
Recent drops have left many investors in a position where they need more equities and less fixed-income. That may come as a shock for safety-hungry investors who are eager to stock up on fixed-income, cash and other "safe" assets.
"If your asset allocation was good for you six months ago, it should be good for you today," says Ellen Rinaldi, executive director of investment planning and research at Vanguard. "The fact that the market is volatile should remind you to be appropriately diversified."
Personal factors like your age and risk tolerance -- not the current state of the economy -- should drive your investing. For example, workers in their 20s and 30s should generally devote roughly 80 percent to 90 percent of their assets in equities while people in their 60s approaching retirement may devote up to 50 percent of their assets to stocks.
"Use market declines as opportunities to add to holdings," says Stovall.
Remember, it's a misstep to put your faith in gold, commodities or any other particular asset that seems popular now that the stock market is roiling.
"If you liked the market four months ago, it's at a 15 percent discount," says Brett Horowitz, a financial planner at Evensky & Katz. "It's a great time to buy. When you buy at a point when everything looks ugly, that's good. You're buying low. It's forward thinking."
Rule No. 3: Don't let your home become a trapExperts agree that tough economic times mean homeowners must figure out if they've got the best mortgage possible. Many people have adjustable-rate mortgages that are about to reset higher, causing their monthly payment to balloon.
It's imperative for these homeowners to refinance to a lower, fixed-rate mortgage that will give them more stability in their month-to-month finances.
Unfortunately, that's easier said than done right now.
The nation's credit crunch and subprime mortgage debacle mean access to loans is fast disappearing, or becoming prohibitively pricey, for borrowers with less-than-sterling credit.
"Interest rates are being more unevenly applied in the marketplace than they have been in recent years," says Keith Gumbinger, vice president of HSH Associates, which tracks mortgage trends nationwide.
If you count yourself among those with good credit and have a FICO score of at least 680, don't squander current opportunities to save.
Recently, mortgage rates have moved up and down in yo-yo fashion. Try to take advantage of the best rate you can find.
It may be more prudent to spend a little extra on a fixed-rate loan and lock in a super deal rather than selecting an ARM that may cost far more when it resets, says Gumbinger.
Those with less-than-stellar credit have fewer options. That's especially true of borrowers who took out ARMs to pay for their homes.
"ARMs are strangling people. They are like a B-rated horror movie. If at all possible, get out of them," says Dee Lee, a Certified Financial Planner and author of "Let's Talk Money."
Consumer groups may help those whose credit is making it difficult to reset. The Homeownership Preservation Counsel, (888) 995-4673, has a 24/7 hot line where you can reach counselors. The Homeowner Crisis Resource Center, (866) 557-2227, also has professionals who can help individuals facing foreclosure.
Rule No. 4: Dust off your resumeWhen the threat of recession looms, it's smart to pay extra attention to your job.
"Corporations are in a wait-and-see mode when it comes to hiring," says John Challenger, CEO of Challenger, Gray & Christmas, the Chicago-based staffing firm. "Employers are getting more cautious about opening new offices, adding staff."
Working hard can help protect your job, but may not be enough. Instead, be strategic and figure out where you stand. Workers who cost employers money are most likely to be laid off. These include support staff in bureaucratic positions or workers in overstaffed departments.
By contrast, employees who add to a company's revenues are more likely to be viewed as valuable assets. So, try to take on work that no one else can do, or volunteer to head up long-range projects vital to your employer.
Also take note of your boss' performance. If your one ally looks like he or she may be at risk of getting bounced out, start forging additional alliances.
"Connect with higher ups so if your boss leaves, you aren't stuck," Challenger says.
Meanwhile, start networking now. It takes time to get a new job, especially if you're already several rungs up the career ladder. Entry-level employees in lower-paid positions need roughly two months to get re-employed. But higher-paid executives generally will spend five months on average to find another position.
"Keep your resume updated," urges Lee. "Keep a list of projects you've worked on as success stories."
Rule No. 5: Reduce your debt and boost savingsIt's even more important to get rid of bills and amass extra cash now that the economy is on shaky ground. That's because various assets, such as homes and stocks, that helped bail out Americans out in the past few years have now plummeted in value.
For example, homeowners tapped $1.6 trillion in home equity from 2001 to 2006 to access extra cash, according to the watchdog group Demos. But that lifeline is already well-frayed.
"You need an emergency fund," Lee says. "Three months is realistic. No frills such as meals out or vacations -- just basics."
Unfortunately, "more low- and moderate-income households don't have adequate savings," says Stephen Brobeck, executive director of Consumer Federation of America.
So start saving.
"Most families can find $100 a month," Brobeck says.
This is also the time to eliminate plastic debt. Six out of 10 households don't pay off their entire credit bills from month to month, according to Demos.
Pay off your most expensive credit cards first. While credit card rates may fall, don't count on it, especially if you have a tarnished payment history. A shaky economy often gives banks a reason to increase rates.
"Banks are writing in terms that say 'We can change our rates for economic conditions or financial conditions,'" says Linda Sherry, director of national priorities at Consumer Action. "If they're not making profits in other areas, they have to make up that income."
Those who make late payments shoulder any increase in rates.
"At any given time, 5 percent of the population is delinquent," Robert Hammer, chief executive of R.K. Hammer, a bank card consulting firm. "You'll generally have to pay on time for at least a year before you can start renegotiating lower rates."
However, if a job loss pushed you to fall behind on payments and you have found new employment, don't wait the year.
"Call the company and ask for relief," Hammer says. "You may get it."
You've heard the news: Foreclosures are up, home prices are down and even borrowers with good credit are increasingly late with their mortgage payments.
Previously, many of those borrowers would look to home equity as a resource to cover shortfalls. But with that option off the table for many, increasing numbers of people are considering tapping into a second large asset -- retirement savings.
For some people, "It's more important to have the cash in hand today than in retirement, which is a much more abstract goal," says Brad Huffman, a Certified Financial Planner with Future Finances in Columbus, Ohio.
Most 401(k) plans and IRA accounts have rules in place that let you use your retirement savings to prevent foreclosure on your primary residence, either by offering loans on the balance or allowing you to simply withdraw the money.
"Congress wrote the rules so that in an emergency you can use the money to meet your needs," says Stephen Utkus, director of Vanguard's Center for Retirement Research. "The rules reflect a realism about our financial lives."
About 85 percent of employees with a 401(k) have access to loans, and 89 percent of 401(k) plans will let you withdraw money if times get really tough, according to 401khelpcenter.com. A closer look shows 18 percent of workers had a loan outstanding from their retirement plan last year, according to the Transamerica Center for Retirement Studies. And the Employee Benefit Research Institute says approximately $320 billion in 401(k) loans were outstanding at the close of 2006.
But is tapping hard-earned dollars earmarked for your golden years a good idea?
Before you use retirement assets to bail yourself out of a housing crisis, there's a lot to consider. It might not be the life raft you'd hoped it would be, and you could be making an irreparable dent in your retirement assets.
Option No. 1 -- BorrowIf you participate in an employer-sponsored 401(k) plan, you likely have two options to get needed cash. You can either take a loan against your account balance or take a hardship withdrawal.
The loan is the easiest to get. The rules vary from employer to employer, but in general you're eligible for a loan of up to $50,000 or half of your vested 401(k) balance, whichever is less. The money must be paid back within five years, with interest. Payments start immediately, and usually are deducted from your paycheck. One important thing to keep in mind: Loans must be paid back with after-tax dollars, which could put a big dent in your ability to contribute pre-tax dollars to your 401(k).
There are no penalties or taxes on 401(k) loans, but of course you miss out on market gains on the amount you've borrowed.
If you quit or lose your job before the loan is paid off, you have 90 days to pay the remaining balance. If you don't, you'll get socked with a 10 percent early withdrawal penalty if you are younger than 59½, and you'll have to pay income tax on the money you took out of the plan.
Option No. 2 -- WithdrawalHardship withdrawals are much harder to get and come with stiffer penalties. Requirements vary from plan to plan, but in most cases you'll have to prove that you are, in fact, facing a serious hardship.
IRS guidelines allow hardship distributions only for "immediate and heavy financial needs," including medical and funeral expenses, college tuition costs, and to stop an eviction or foreclosure.
Each plan has its own rules governing how much of your account balance you can withdraw, and what you need to do to qualify.
In some cases, you may actually have to have a foreclosure notice in hand -- not just be behind on your mortgage payments or facing a resetting interest rate -- to qualify, says Rick Meigs, president of 401khelpcenter.com.
Other employers aren't that strict. Only a visit to your company's human resources department can clear up any gray areas.
If you do manage to qualify for a hardship distribution, you'll have to pay income tax on any money you withdraw. And if you are younger than 59½, you'll pay a 10 percent penalty for early withdrawal. You'll also be barred from making any contributions to your 401(k) plan for six months.
For example, if you're younger than 59½, take a hardship distribution of $10,000 and are in the 25 percent tax bracket, you immediately lose 35 percent of that money -- 25 percent tax plus 10 percent penalty -- or $3,500. The higher your tax bracket, the bigger the bite.
If you take money out of your IRA, the same penalties apply.
A loan is a much better deal, and won't have as much impact on the amount of money you'll have available when it's time to retire, Meigs says. "The money is at least earning some sort of market interest rate and will eventually be returned to the account."
That's why some plans will only approve a hardship withdrawal after you have exhausted all of your 401(k) loan options.
With hardship distributions, you're simply taking the money out with no concrete plans to return it. "That obviously can have a tremendous effect on the assets you'll have available in retirement," he says.
To tap or not to tap?Now that you know your options, should you take advantage of them?
It depends. Using retirement money to keep up with the mortgage can be a good move for some people, but could dig others into an even deeper hole.
A loan or hardship distribution, "can be a good idea if it'll get you to a place where you can refinance, or if you're using it to buy time to get to a sustainable financial situation," Utkus says.
But if your house is simply unaffordable -- even if you refinance -- "it's better to recognize that fact early on, rather than sink the pension pot into the house," says Anthony Webb, a research economist with the Center for Retirement Research at Boston College.
"If the house is eventually repossessed, you'll lose all of your retirement savings, too."
Figuring out which category you fit into isn't necessarily easy. Most people tend to think their problems are temporary, even if they aren't, Webb says.
A setback in your ability to pay bills, such as a short-term job loss or medical problems resulting in lost wages, likely qualify as temporary -- if you're on your way to resolving those issues -- says Rich Call, vice president of housing with Consumer Credit Counseling Service of Central Ohio.
A sign of bigger problems? High credit card debt and a budget that can't support the house even after cutting the fat and liquidatinassets such as cars and savings accounts. In that case, "There might not be much you or the lender can do to save the house," says Dianne Reichel, a certified credit counselor with GreenPath in Detroit.
If you have big problems, "don't tap into money you're going to need later. You'll just be throwing good money after bad."
Try other options firstEven if your mortgage problems are temporary, tapping your retirement assets to bail yourself out should be the last resort.
"Before you take the money out, try everything else," Call says. "Even if you're very serious about saving your house and you have no other money, (retirement assets) should be on the bottom of the list."
Instead, see a HUD-certified housing counselor, nonprofit credit counseling agency or financial planner. They'll be able to tell you where you can cut your expenses and what options, if any, you may have to save your house, Call says.
You might be able to refinance your mortgage or modify the terms of your existing loan rather than spend your retirement savings.
Options include a forbearance, a temporarily halt to mortgage payments that can give you time to get your finances in order. The missed payments are either added to the mortgage balance or tacked on to the end of the loan.
Lenders may also be willing to extend the number of years you have left to pay the loan, thus reducing your monthly payment, or substitute an adjustable interest rate for a fixed one. In rare instances, the lender may even reduce your loan amount to reflect a decline in the home's value.
"Lenders are more willing to work with people than in the past because they're getting stuck with houses they don't want," Reichel says.
If you've explored all of these options and you still feel like you need to tap your retirement savings to get out of a tough situation, "figure out if that money is really going to get you out of trouble," Webb says.
"If the numbers don't add up, it's better to lose the house than to risk the only other asset your family may have."
Denise Trowbridge is a freelance writer based
You've been saving diligently for your retirement, but now you need some of that cash to cover today's expenses. Can you get to it without incurring Uncle Sam's tax wrath? In some instances, the answer is yes.When you take money out of an individual retirement account before you reach age 59½, the Internal Revenue Service considers these premature distributions. In addition to owing any tax that might be due on the money, you'll face a 10 percent penalty charge on the amount.
But there are times when the IRS says it's OK to use your retirement savings early.
Two popular, penalty-free withdrawal circumstances are when you use IRA money to pay higher-education expenses or to help purchase your first home.
OK for school
When it comes to school costs, the IRS says no penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse or your children or grandkids.
You must make sure the eligible student attends an IRS-approved institution. This is any college, university, vocational school or other post-secondary facility that meets federal student aid program requirements. The school can be public, private or nonprofit as long as it is accredited.
Once enrolled, you can use retirement money to pay tuition and fees and buy books, supplies and other required equipment. Expenses for special-needs students also count. And if the student is enrolled at least half-time, room and board also meet IRS expense muster.
First-home exemption
Then there's your home. Uncle Sam offers various tax breaks for homeowners. He'll even bend the IRA rules a bit to help you get into your house in the first place.
You can use up to $10,000 in IRA funds toward the purchase of your first home. If you're married, and you and your spouse are both first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.
Even better is the IRS definition of first-time homebuyer. Technically, you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse) didn't own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.
Be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.
Different treatment for Roths
These homebuying IRA options apply to traditional retirement accounts. The rules are a bit different if your nest egg is in a Roth IRA.
The $10,000 you take out for your first home is a qualified distribution as long as you've had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you'll have no IRS bill either.
If, however, you opened your Roth IRA less than five years ago, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10 percent penalty, but might owe tax on earnings that are withdrawn.
You can reduce the tax bite by withdrawing first the already taxed contributions you made to your Roth. In fact, the IRS has specific rules about the order in which you can take unqualified Roth distributions: contributions, conversions from traditional IRAs and earnings. Check chapter 2 of IRS Publication 590, Individual Retirement Arrangements, for details.
Allowable, but not preferable, distributions
Early IRA withdrawals also are penalty-free in a few other instances. Unfortunately, most of these are hardship situations that no taxpayer wants to face:
You also can get IRS-approved early access to your nest egg if you take IRA money on a specific schedule. Known as substantially equal periodic payments, this method allows you to begin withdrawing from your IRA early as long as the amounts are determined by an IRS-calculated life-expectancy table.
Finally, keep in mind that the early withdrawal exceptions do not eliminate your tax bill if you take the money out of a traditional IRA. Unlike Roth accounts where you eventually can withdraw your money tax-free, taxes are merely deferred on traditional IRAs. So when you take the money out of such an account, regardless of your age or the purpose of the withdrawal, you'll owe your regular tax rate on the amount.
But the early withdrawal exceptions do protect you from paying the IRS more in penalty charges. To let the IRS know that you used the retirement money early for a tax-acceptable purpose, file Form 5329. When you report your withdrawal here, you'll also enter a code, found in the form's instructions, that lets the IRS know the distribution is penalty free.
Consider recent history: The Fed issued an emergency cut of short-term rates in early January, and then trimmed more just a few days later - but the 30-year fixed mortgage rate has responded by bouncing up from 5.6% to 6.4%.
The Fed's main tool is control over the short-term fed funds rate, which determines what banks charge each other for overnight loans. Long-term mortgage rates are mostly tied to the 10-year Treasury yield, which is determined by bond traders worldwide.
"There is a long disconnect between the fed funds rate and fixed mortgage rates," said Keith Gumbinger, vice president of mortgage and consumer loan information publisher HSH.com.
Inflation drives long-term fixed rates. When the Fed cuts short-term rates, the intent is to lower borrowing costs for corporations so that they'll invest and hire. But this economic growth can lead to inflation.
That in turn leads bond traders to demand higher rates on their long-term bonds - and that drives up mortgage rates too.
"Mortgage rates are determined by how fearful the market is of inflation," said Gumbinger.
The Fed began a series of cuts to its key interest rate last September, taking the rate to 2.25%, from 5.25%.
ARM borrowers may get help. There is more of a connection between Fed rate cuts and short-term and adjustable rate mortgages (ARMs). In fact, homeowners with ARM loans could see lower rates from further interest rate cuts.
Adjustable rate mortgages are pegged to a number of different indexes, including the one-year Treasury yield and the international Libor, or London Interbank Offered Rate, which tend to move with the Fed funds rate.
With Tuesday's rate cut, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners.
For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan.
But after Tuesday that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride of Bankrate.com. "The Fed rate cuts far are more significant to [borrowers with ARMs] in terms of staving off delinquencies on loans," he said.
Long-term rate solution. Sending long-term fixed rates back down will be more complicated than fixing inflation, because the continuing housing crisis is also exacerbating the rise in long-term fixed rates.
Generally mortgage rates are about 2 percentage points higher than the yield on the 10-year Treasury, which currently stands at 3.29%.
But the housing market is in such turmoil that rates are even higher right now, with lenders concerned that borrowers will not be able to pay back loans.
"The 30-year fixed rate mortgage should be at 5.5%, but instead it's above 6%," said McBride. "The 30-year jumbo loan [a large mortgage that is not federally guaranteed] is a full two percentage points higher than it should be."
So for long-term fixed mortgage rates to go down, the Fed must successfully make banks more willing to lend again.
The strong Fed action seemed to convince investors, at least for now, that the central bank will do whatever it can to keep the country out of a steep recession. The Dow Jones industrial average finished the day up 420.41 points at 12,392.66.
The latest Fed move brought the federal funds rate -- the interest that banks charge each other -- down to 2.25 percent, the lowest since late 2004.
That's important far beyond bank boardrooms. The reduction triggered announcements from commercial banks that they were cutting their prime lending rate to 5.25 percent from 6 percent. This rate is the benchmark for millions of business and consumer loans.
The Fed action was designed to lower borrowing costs and boost spending by consumers and businesses and thus increase economic activity. Economic growth slowed to a near standstill in the final three months of last year as the nation was hit by a series of blows including the credit crunch, a prolonged housing slump, rising unemployment and surging energy prices.
The Federal Reserve has now cut its rate by three-fourths of a percentage point twice this year. The first occurred at an emergency meeting on Jan. 22 and was followed by a half-point cut at a regular meeting on Jan. 30. The three rate cuts over the course of two months represent the most aggressive Fed credit easing since mid-1982 when the Paul Volcker-led Fed was working to get the country out of a deep recession.
Fed Chairman Ben Bernanke and his colleagues have now cut the funds rate six times since last September, with the reductions becoming more aggressive since January as the central bank has faced growing turmoil in global financial markets.
The Fed also announced Tuesday that it was reducing its discount rate for banks by a similar three-quarters of a point, pushing it down to 2.5 percent. That cut, which followed a quarter-point reduction on Sunday, was seen as a clear signal that the Fed is ready to supply significant amounts of credit in direct loans to banks and other institutions through its discount window in an effort to stabilize financial markets roiled by the collapse over the weekend of Bear Stearns, the nation's fifth largest investment bank.
"We had been on the brink of the biggest financial meltdown this country had ever seen, but I think the Fed has now turned the psychology around," said David Jones, chief economist at DMJ Advisors. "The Fed is saying it is ready to supply all the emergency credit banks need to get us out of this crisis."
Many analysts said they believed the Fed may cut rates only once more, perhaps by a more ordinary quarter-point at the next meeting, and then sit back and see if economic stimulus checks that will begin arriving at 130 million households in May will do the trick along with the rate cuts to jump-start the economy.
There was opposition to Tuesday's decision, which was approved on an 8-2 vote. Richard Fisher, president of the Dallas Fed regional bank, and Charles Plosser, president of the Philadelphia regional bank, both dissented, preferring less aggressive moves. It marked the first time there have been as many as two dissents since the fall of 2002.
However, there has been no apparent change in the stance of Bernanke and the majority of Fed members that at the moment the greatest threat to the economy is from a possible recession, which may have already started, rather than from inflation that might be kindled by low rates.
"The Fed's statement signaled that the risks still are very much on the downside and they are willing to do whatever is necessary to make sure the economy doesn't slide away," said Mark Zandi, chief economist at Moody's Economy.com.
In explaining its actions, the Fed said that it was having to navigate a difficult policy environment that included sluggish economic activity and rising inflation pressures. It said anew that it was prepared to take further actions.
"Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the Fed said in its statement.
In Jacksonville, Fla., Tuesday, President Bush said the government will take further action -- if necessary -- to help the sagging economy.
The spectacular fall of Bear Stearns has raised concerns about what other banks might fail as a result of multibillion-dollar losses that began last year with rising defaults on subprime mortgages, loans made to borrowers with weak credit histories. However, two investment banks, Lehman Brothers Inc. and Goldman Sachs Group Inc. reported better than expected first quarter results on Tuesday, easing market worries.
Stocks had already been up strongly Tuesday before the Fed action. After the interest-rate cut was announced, stock prices slid lower as investors digested the fine print, then the buying resumed in earnest.
The purchase of Bear Stearns by JPMorgan Chase & Co. was helped by a pledge from the Fed that it would supply a $30 billion line of credit to back up Bear Stearns' assets.
That offer was the latest in a number of unconventional moves the central bank has made, including employing Depression-era procedures to pump cash into the financial system.
In addition to providing support for the Bear Stearns sale, the Fed also announced Sunday one of the broadest expansions of its lending authority since the 1930s, saying it would allow securities dealers for at least the next six months to borrow directly from the Fed. That privilege had been confined to commercial banks.
In other moves, the Fed last week announced that it would lend up to $200 billion of Treasury securities that it owns to investment banks starting March 27 for a period of up to 28 days in return for a like amount of the investment banks' shunned mortgage-backed securities. The Fed also announced recently that it was boosting the size of special loans it has been making since December to commercial banks.
Prices Down 11.7%
Like much of South Florida, Tampa's current situation is the result of unsustainable price growth that was motivated more by speculation than by economic growth. Prices are down 11.7% from last year, and there are 56,386 homes up for sale.
Homeowners' portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter -- the third straight quarter it was under 50 percent.
That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.
Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.
Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.
Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.
The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007 compared with a year ago, the steepest decline in the 20-year history of the index.
The news follows a report from the Mortgage Bankers Association on Thursday that home foreclosures skyrocketed to an all-time high in the final quarter of last year. The proportion of all mortgages nationwide that fell into foreclosure surged to a record of 0.83 percent, while the percentage of adjustable-rate mortgages to borrowers with risky credit that entered the foreclosure process soared to a record of 5.29 percent.
Experts expect foreclosures to rise as more homeowners struggle with adjusting rates on their mortgages, making their monthly payments unaffordable. Problems in the credit markets and eroding home values are making it harder to refinance out of unmanageable loans.
The threat of so-called "mortgage walkers," or homeowners who can afford their payments but decide not to pay, also increases as home values depreciate and equity diminishes. Banks and credit-rating agencies already are seeing early evidence of this.
On Tuesday, Fed Chairman Ben Bernanke suggested lenders reduce loan amounts to provide relief to beleaguered homeowners.
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"This situation calls for a vigorous response," Bernanke said in a speech to a banking group meeting in Orlando, Fla.
Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise "for a while longer," Bernanke warned.
Rising foreclosures threaten to worsen the problems in the housing market and for the national economy, which many fear is on the verge of a recession or in one already.
"Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole," Bernanke said. "Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done," the Fed chief said.
One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.
Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. "They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.
Bill Stevens, chief executive officer of CapitalBank in Greenwood, S.C., said: "We've been talking about it as bankers. It's a tough business decision."
Tom Loonan, vice president of the State Bank of Easton in Minnesota, suggested that debt relief for some who got in over their heads may anger others, who took out mortgages that they could afford. "There's going to be some animosity," he said.
Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again. "When the mortgage is `under water' a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.
To date, permanent home mortgage modifications that have occurred have typically involved a reduction in the interest rate, while reductions of the principal balance of the loan have been quite rare, he said.
"Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs," Bernanke said.
Brookly McLaughlin, spokeswoman for the Treasury Department, which has been leading the Bush administration's relief efforts, noted that foreclosures are expensive for both lenders and homeowners, giving parties an incentive to renegotiate a mortgage contract. However, "we're not going to dictate how those renegotiations should be accomplished," she said. "If lenders find that in some cases a principal writedown is less costly than foreclosure, then that is an option they have the incentive to consider."
More than half of the projected 1.5 million home foreclosure proceedings started in 2007 were on subprime loans given to borrowers with blemished credit histories or low incomes.
The housing collapse dragged down home values, clobbering these subprime borrowers. Many were left with mortgages that exceeded the value of their homes. They were further socked by low introductory rates on their adjustable mortgages resetting to higher rates, making their monthly payments difficult or impossible, to afford. Problems in the credit markets have made refinancing a mortgage harder.
This year, about 1.5 million loans -- representing more than 40 percent of the outstanding stock of subprime adjustable-rate mortgages -- are scheduled to reset to higher rates, Bernanke said. The Fed estimates that the interest rate on a typical subprime ARM slated to reset in the current quarter will increase to about 9.25 percent from just above 8 percent. That would raise the monthly payment by more than 10 percent, to $1,500 on average, he said.
Declines in short-term interest rates and a Bush administration initiative involving rate freezes will "reduce the impact somewhat, but interest rate resets will nevertheless impose stress on many households," Bernanke said.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., also said it's important to think long-term. "Repayment plans or brief deferrals of payments will not allow us to get past our current problems. They are analogous to `kicking the can down the road,'" she told lawmakers Tuesday.
On Capitol Hill, a number of measures have been offered to help stressed homeowners.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, welcomed Bernanke's call for more action. "It is now clear that we will not be able to avert a more serious and prolonged economic slowdown if we don't address the problem of increasing mortgage foreclosures," Frank said. "Bernanke's willingness to work with us in a cooperative way, and his outline of the principles that we should be applying are very hopeful signs."
Associated Press Writer Travis Reed contributed to this report from Orlando, Fla.
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