Why home prices could drop 25% more on average before the market finally hits bottom
As Washington policymakers struggle to keep the U.S. out of recession, the swirling confusion over the housing market is making their job a lot tougher. Will American consumers keep shopping or be forced to pull back? Will banks lend freely or be hamstrung by mortgage defaults? What are the best policy options right now? Those and other important questions simply can't be answered without a good idea of whether home prices will rise, flatten out, or keep dropping.
Some experts have begun to suggest that a bottom is in sight. Pali Research analyst Stephen East wrote in a research note to his firm's clients on Jan. 25 that "the sun is not shining very brightly, but at least the worst of the storm has likely passed." With optimism budding, Standard & Poor's beaten-down index of homebuilder stocks soared 49% from Jan. 15 through Jan. 29.
But it's considerably more likely that the storm is still gathering force. On Jan. 30 the government said annual economic growth slowed to just 0.6% in the fourth quarter as home construction plunged at a 24% annual rate. The Standard & Poor's/Case-Shiller 20-city home price index fell 7.7% in November from the year before, the biggest decline since the index was created in 2000.
And that could be just the start. Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That's even with the Federal Reserve's half-percentage-point rate cut on Jan. 30.
While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. "We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide.
Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.
Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy. "A down market is getting baked into expectations," says Chris Flanagan, head of research in JPMorgan Chase's (JPM) asset-backed securities group. "People say: I'm not buying until prices are lower.'" He predicts prices will fall about 25%, bottoming in 2010.
Nobody can be sure how far prices will decline. Still, if prices drop that much, it could mean big trouble for the U.S. economy, which is already on the brink of recession. It would blow a hole in the balance sheets of banks and households, slicing more than $5 trillion off household wealth. That's roughly the size of the drop in stock market wealth from the peak in early 2000, a big reason for the recession of 2001. Yale economist Robert J. Shiller, a longtime housing bear, points out that a housing decline that started in 1925 and ran until 1932 weakened banks and contributed to the Great Depression, which started in the U.S. in 1929.
MACARONI AND CHEESE
It has become a cliché, but an accurate one, that Americans used their homes as ATMs during the boom years. They lined up for cash-out refis or home-equity loans to turn housing wealth into spending money.
So far, the amount of equity being withdrawn has remained surprisingly strong—$700 billion at an annual rate in the third quarter. But it's bound to dwindle if prices keep falling, giving the economy a further downward push. According to an analysis conducted for BusinessWeek by Zillow.com, the real estate Web site, a further 20% decline in prices nationwide would mean that two-thirds of people who bought in the past year would owe more than their homes would be worth, meaning they couldn't take out cash if they wanted to.
Sanchez, who works for the city of Las Vegas, and her husband, Craig Mireles, a project manager for an architect, are living that problem. Their house in Summerlin, Nev., has quickly gone from a money geyser to a drain. The couple raised about $70,000 in cash in 2005 by refinancing less than a year after they bought their home. They put the money toward student loans, medicine for Sanchez's rheumatoid arthritis, and other things. Now the cash is gone and the interest rate has ratcheted up to 11%. Alesandra says the new payment of $4,200 a month "is doablebut it's like eating macaroni and cheese: It doesn't leave room for anything else." No wonder that retail sales fell 0.4% in December, and economists are projecting a sharp slowdown in overall consumer spending this year.
The second shock to the economy from the housing bust will come from the financial sector, which has been weakened by losses on mortgages as well as mortgage-backed securities and more exotic derivatives. Banks borrow so much money to fund their investments that if a loss on some holding reduces their capital by $10, they have to reduce their lending by $100 to avoid exceeding their self-chosen leverage targets, calculates Goldman Sachs (GS) chief U.S. economist Jan Hatzius. He estimates that banks and other financial institutions will suffer about $200 billion in real estate losses and respond by cutting their lending by $2 trillion, or about 5% of total lending. The cutback could be even more extreme if they react to the turmoil by lowering their leverage ratios, he says, rather than keeping them intact. Banks have already begun tightening lending standards. In the third quarter, mortgages were harder to get than at any time in the 17-year history of the Federal Reserve's survey of senior loan officers.
Prices won't fall uniformly, of course. Once-booming cities such as Las Vegas and Miami and weak economies like Detroit are likely to fare worse than Seattle or Charlotte, N.C. The price decline will be smaller if it's stretched out over longer than, say, two years, because inflation will have more time to do some of the job of eroding the real value of homes. Still, if the national average decline is anywhere near 25%, the entire U.S. economy is in for trouble. Keep in mind, says Merrill's Rosenberg, that the relatively puny price decline to date has already pushed home-loan delinquencies to their highest level in 20 years. The plunge in residential construction reduced the economy's annual growth rate by a full percentage point in the third quarter of 2007. A bigger decrease would wipe out even more jobs—carpenters, real estate agents, mortgage brokers, furniture salespeople.
Starting in 2000, home prices soared far above their long-term trend. They've only just started to return to normal. This chart shows the history of home prices adjusted for inflation going back to 1890, compiled by Yale University economist Robert Shiller. The black line is BusinessWeek's calculation of the long-term trend growth rate: just 0.4% a year after inflation.
For American consumers, meanwhile, huge losses would almost certainly undermine the long-held premise that homeownership is the most reliable way to build wealth and a middle-class life. "I know you're not supposed to say I told you so,' but I'm at the age where I can do it: Homeownership was oversold," says 67-year-old House Finance Committee Chairman Barney Frank (D-Mass.).
One look at the long-term home price chart tells you all you need to know: Starting in 2000, prices crossed above their trend line and just kept going up. The spike had never happened in modern U.S. history, according to data dating back to 1890 that Shiller painstakingly compiled for the second edition of his book, Irrational Exuberance, in 2005. Back then he predicted a sharp drop in house prices.
Now he says lawyers won't let him publicly forecast home prices because he's involved in preparing the market-sensitive Standard & Poor's/Case-Shiller home price indexes. All he'll say is: "This is a historic turning point."
Optimists point out that the Fed, Congress, and the White House are all committed to keeping housing aloft so it doesn't kill the economy. The Fed reduced the federal funds rate by three quarters of a percentage point on Jan. 22 and followed with a half-point cut on Jan. 30—an extremely rapid move for a major central bank. Homebuilders also are doing their bit to support prices: They've cut production so drastically that even though home sales fell more than expected in December, the backlog of unsold new homes shrank slightly. Douglas Duncan, chief economist of the Mortgage Bankers Assn., predicts existing home prices will slip less than 2% this year before beginning to rebound in 2009.
Pessimists aren't impressed. One of the first high-profile bears on housing, Ian Shepherdson of consulting firm High Frequency Economics, is looking for a 20% decline in prices from their peak but says 40% wouldn't shock him. "We've never been here before, so there's no road map," he says.
There's even uncertainty about where prices are right now, since many would-be sellers are refusing to cut them enough to make a sale. A Harris Interactive (HPOL) survey for Zillow.com in December found that 36% of homeowners thought their homes had increased in value over the past year, vs. 23% who thought they had decreased. That willful optimism translates directly into the record overhang of unsold existing homes: more than 4 million.
For a truer picture of the market, look at sales by banks and builders, which don't have the luxury to wait things out because they have to worry about cash flow. Deutsche Bank (DB), among other banks, has been slashing prices on repossessed homes to get rid of them. In a recent transaction mentioned on BusinessWeek's Hot Property blog, Deutsche Bank sold a house in Woodbridge, Va., in December for $150,000, less than half its last sale price of $315,000 in the spring of 2005. In November, Lennar (LEN), the big builder, sold 11,000 home sites to a joint venture it formed with Morgan Stanley Real Estate for $525 million, 60% below what they were valued on Lennar's books. That's capitulation, and it's likely to occur more often as sellers get the idea that waiting won't solve their problems.
MORTGAGE HURDLES
Plenty of other evidence supports the notion that home prices have further to fall. There's a crisis of confidence in the securitization of mortgages, which pumped up housing demand by giving buyers access to nationwide and even global pools of capital. The loose links in the securitization chain allowed risky loans to be made at low rates. Trust in that system is broken and will not be mended quickly.
Almost the only mortgages being securitized successfully are the ones bought by Fannie Mae (FNM) and Freddie Mac (FRE), the private companies with implicit government backing. They accounted for about 87% of mortgage securitizations in December, vs. fewer than half in 2005 and 2006, according to the publication Inside MBS & ABS and the investment bank UBS (UBS). Subprime lending is nearly shut down, home-equity loans and lines of credit are scarce, and jumbo mortgages (too big for Fannie and Freddie to purchase) command premium rates. A survey of real estate agents found that a third of planned home sales were canceled or delayed last fall because of loan problems.
Even Fannie and Freddie, which style themselves as the last resort of the home buyer, have tightened standards and raised fees. And they remain reluctant to raise funds to buy mortgages if it means lowering returns to shareholders.
Fannie Mae Chief Executive Daniel H. Mudd joked to Wall Street analysts in December that the process of cutting the dividend and selling preferred shares to raise money pained him so much that "I wanted to cut off both my arms and both my legs, and my head, and my kidney."
Cheaper mortgages won't necessarily ride to the rescue, either. Thirty-year conventional fixed-rate mortgages failed to fall after the Fed's two January rate cuts, averaging 5.5% on Jan. 30. Financing remains cut off for subprime borrowers (BusinessWeek, 12/11/07) and for owners whose home equity has dipped too low to qualify for a new loan. Fed rate cuts will ease, but not eliminate, the pain from resets on adjustable-rate loans.
For another bearish view, there's what economists refer to as the Mankiw paper. In 1989, long before working in the White House as chief economic adviser or writing his best-selling textbook, Principles of Economics, Harvard University economist N. Gregory Mankiw co-wrote a paper that was startlingly negative on housing. He and David N. Weil predicted that home prices would decline by 47% after inflation over the next 20 years, based on a shrinking pool of potential first-time buyers and an expectation that baby boomers as a group would spend less on housing as they grew older.
It could be that Mankiw and Weil were not so much wrong as premature. Although boomers have thwarted expectations by adding on rooms and second homes as they age, they won't thwart nature. "At some point, death or illness will cause baby boomers' houses to come onto the market," observed John Krainer, a senior economist at the Federal Reserve Bank of San Francisco, in an in-house publication in 2005. When the huge boomer generation shuffles off, the nation's housing needs will wane. That will create an oversupply unless builders see it coming and reduce construction. Judging from the recent overbuilding binge, though, their forecasting abilities leave a lot to be desired.
NECESSARY EVIL
Observers with a Calvinist streak see a housing crash as not only necessary but also positive. It will force Americans to live within their means, which will enable the U.S. to work off some of its towering debt, says Peter D. Schiff, president of Darien (Conn.) brokerage Euro Pacific Capital, who was early in predicting the crash. In 2005 the share of gross domestic product devoted to residential construction reached the highest since 1950, when the U.S. was racing to house the baby boom generation and make up for the lack of construction during the Depression and World War II. Now, says Schiff, "if there's any construction, it's going to be factories, oil exploration, mines." He takes almost unseemly delight in predicting tougher times ahead: "Americans are going to have their credit cards taken away from them by the lenders. We're going to turn the American economy into a cash economy."
Foreclosure counselors such as Mildred Wilkins foresee similar changes, except in looking back they put more of the blame for the fiasco on builders and lenders and less on borrowers. "We have been fed the illusion that acquiring a home was a magic key to stability, to wealth-building," says Wilkins, who travels the country advising lawyers and others on how to handle foreclosures. Even though she is president and founder of an Indianapolis company called Home Ownership Matters, which promotes responsible ownership, Wilkins says she never believed the "poppycock" that homeownership was a sure path to wealth, calling it a myth foisted on lower-income Americans by politicians serving the builders and bankers.
The sense of betrayal is probably most intense among the working-class families who were supposed to be the greatest beneficiaries of easy access to low-down-payment mortgages. The less-pricey outskirts of expensive cities such as Los Angeles and San Francisco are precisely the areas where the biggest share of recent buyers are underwater on their mortgages. Cindy and Larry Chaffold, who live in the desert east of Los Angeles in Apple Valley, bought a house for $216,000 in 2005 that's now appraised at $190,000. Cindy was ready to hand the keys to the bank until she got her loan modified.
Says Chaffold: "I have been screwed, chewed up, and spit out."
HARKING BACK TO FDR
If home prices really fall an additional 25%, Washington's rescue program is likely to seem seriously inadequate. So far the Bush Administration is pushing two main ideas: FHASecure, which offers new mortgages to certain well-qualified borrowers, and Hope Now, a private-sector program to streamline the modification of unaffordable loans. But FHASecure isn't open to people who are underwater on their mortgages—in other words, those who most need help. And the Hope Now alliance doesn't seem to be coping successfully with the mounting backlog of loan delinquencies. The other big Washington initiative, to crack down on loose lending practices, could be ineffective and even counterproductive, because it's making loan funding less available right when it's needed most.
The next big reform ideas may hark back to President Franklin D. Roosevelt. Many of the housing market's props today—including Fannie Mae and the Federal Housing Administration—were launched during the 1930s. If things get bad enough, say some analysts, it could raise interest in renewing another innovation of the Depression years, the Home Owners' Loan Corp., which lent money directly to hard-pressed borrowers to prevent foreclosure. If enough banks get into trouble, Congress might even create something roughly parallel to the 1980s-era Resolution Trust Corp., which cleared up the savings and loan crisis by shutting down weak thrifts, thus wiping out the investments of the owners, and then selling off their assets to the highest bidders.
And with homeownership no longer seeming like such a sure thing, national housing policy could become more evenhanded toward renters. Congress is weighing the creation of a National Affordable Housing Trust Fund that would build, rehabilitate, and preserve 1.5 million units of housing for the lowest-income families over the next 10 years. The national homeownership rate has already fallen about one percentage point from its peak, to 68.2% in last year's third quarter.
However things unfold, the changes are likely to be wrenching. The bigger the boom, the harder the fall.
Today is was announced that Pasco County is a distressed market. What that means is conventional financing maximum loan to value is 90%. You would use conventional financing for primary residence, second home and investment properties. FHA loans are a way to overcome this; however, FHA financing is for primary residence only and the maximum loan amount in our market is $222,300. FHA is expected to raise the loan limits on 3/7 but I do NOT have that in writing as of yet. There is also discussion they will reduce the required down payment from 3% to 1.5% - again I do not have that in writing.
When in doubt write your offers as FHA loans to save time and stress.
I will be doing FHA training in the office VERY soon.
Should you have any questions, please do not hesitate to call me.
Stacey
Stacey Van SchenckHome Mortgage ConsultantCapstone Home Mortgage LLC, An Affiliate of Wells Fargo Home MortgageMAC M1965-0113126 Little RoadTrinity, FL 34655727.842.6275 Tel727.843.8654 Fax 866-406-7661 Faxhttps://www.homeloans.com/wfhm/stacey-vanschenck/index.page
US Home Foreclosures Soar in JanuaryTuesday February 26, 7:40 am ET By Alex Veiga, AP Business Writer
Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc. Nearly half of the total involved first-time default notices.
The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions
"You have more people going into default and a higher percentage of the properties going back to the banks," said Rick Sharga, RealtyTrac's vice president of marketing.
The U.S. foreclosure rate last month was one filing for every 534 homes.
The Cape Coral-Fort Myers area in Florida posted the highest foreclosure rate of any metro area in the nation, with one of every 86 homes in some stage of foreclosure, said RealtyTrac Inc.
Stockton, Calif., was ranked second, with one of every 97 homes involved in a foreclosure filing, while the Riverside-San Bernardino metro area in Southern California had the third-highest foreclosure rate with filings for one of every 101 properties.
January's tally represented an 8 percent hike from December.
RealtyTrac follows default notices, auction sale notices and bank repossessions. Lenders typically consider borrowers delinquent after they fall three months behind on mortgage payments.
Attempts to help struggling home owners have fallen short.
"The loan workout modification programs aren't having a significant material effect on keeping properties from going back to the banks," Sharga said.
One dramatic trend last month was a 90 percent spike in the number of properties that were repossessed by banks, compared to January 2007.
"It suggests that there's little or no equity in a lot of these homes, because they're not even being sold to investors at auctions, and it suggests a continuing weakness in a lot of markets in terms of real estate sales," Sharga said.
Falling home values and tighter lending standards have extended the housing slump, making it tougher for homeowners unable sell their homes or refinance when they face mortgage payments they can't afford.
A wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default.
During the past year, 30 states saw an increase in the number of homes that had received at least one filing.
Nevada led the nation, with 6,087 properties receiving at least one filing, up 95 percent from a year earlier but down 45 percent from December, the firm said.
That translates to a rate of about one foreclosure for every 167 households.
Rounding out the top 10 states with the highest foreclosure rates were California, Florida, Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan.
California had 57,158 properties reporting at least one filing, the most of any state. The total increased 120 percent from a year ago and 7 percent from December.
Florida had 30,178 homes on the foreclosure track, up about 158 percent from a year earlier and down 3 percent versus December, RealtyTrac said.
Investors, while still wary of recession, grew hopeful after the National Association of Realtors reported existing homes fell less than forecast. Some experts interpreted this as a housing market on the verge of bottoming out with a rebound expected to start toward the end of this year.
Wall Street also found encouragement after Visa said it still planned to go ahead with a $19 billion initial public offering this year that could go down as the biggest in U.S. history. Further, investors remained hopeful that troubled bond insurer Ambac Financial Group Inc. would receive a cash injection to help preserve its coveted "AAA" rating.
"The home sales, even though they were weak, showed some signs of stabilization," said Chris Johnson, president of Johnson Research Group. "People will get very excited if they sense a bottom in the financials because they've been the Achilles' heel of this market."
However, he warned that the market still remains highly volatile -- and that the Dow Jones industrials can fluctuate back and forth into positive territory several times during a session. The market this year has been prone to quick swings as investors buy on dips and then quickly cash out.
In midday trading, the Dow rose 13.27, or 0.11 percent, to 12,394.27. The blue chip index had been up more than 100 points earlier in the session.
Broader stock indexes were mostly flat. The Standard & Poor's 500 index shed 0.68, or 0.05 percent, to 1,352.43; and the Nasdaq composite index fell 1.65 or 0.07 percent, to 2,301.70.
But Charlton, a 40-year-old account executive at an Irvine, Calif., trucking company, said he had little choice because he and his wife could not keep up with monthly expenses after American Express reduced the limits on three credit cards.
As home prices fall and banks tighten lending standards, more people are doing the same thing: raiding their retirement savings just to get by and spending their nest eggs to gas up SUVs, pay mortgages or put food on the table.
But dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is under 59 1/2 years old. That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.
"People who take out a loan or withdrawal are adding to a looming retirement crisis over the next 30 to 40 years," said Eric Levy, a partner at global consulting firm Mercer. "And what implications will that have (for) our economy?"
Some of the nation's largest retirement plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests, a sharp departure from levels that traditionally varied little.
Administrators say consumers are using retirement savings to pay for unmanageable mortgages, maxed-out credit cards, and costly utilities and groceries.
Charlton and his wife used the retirement money and $7,000 from savings to pay down their credit card debt. They also cut monthly expenses by pawning a diamond ring and selling camera equipment he owed money on. And he's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April.
Charlton said his goal is to pay off the 401(k) loan in two years. He has not decided whether he will contribute to the plan during that time.
"I made the best decision I could," he said "I keep hearing about bankrupting your future retirement. But I feel like it's far enough away that I'll be able to save up enough."
Charlton's predicament arose as lenders are taking steps to rein in credit because more consumers are missing payments on mortgages, credit cards and loans. Borrowers are finding their credit limits suddenly reduced and low-interest cards hard to come by. Mortgage lenders have also reduced limits on home-equity lines of credit.
Meanwhile, jobs are harder to find, and consumers are getting pinched by higher food and fuel prices.
Consumers who tap their retirement accounts can take a loan from their 401(k) accounts worth up to $50,000, or 50 percent of the amount invested, whichever is less. There are no tax consequences for a loan in good standing. But if a borrower defaults, the loan is considered a withdrawal and subject to the same tax penalties.
If Charlton repays his loan and continues making contributions, his account balance at 62 will be nearly the same as if he had not borrowed, according to projections by Alicia Munnell, director of The Center for Retirement Research at Boston College.
But if he repays the loan and suspends contributions for five years, his final account balance would fall by 18 percent.
Based on current savings rates, the center estimates that 43 percent of households risk not being able to fund the same standard of living during retirement as they have in their working years. That percentage increases to 49 percent for Americans between 36 and 43 whose main retirement plans are 401(k) accounts, not employer-funded pension plans like older generations.
Some plans don't allow workers to make contributions while making payments on loans. Others require workers to wait a set time before contributing again after taking a withdrawal. If the employer matches contributions, workers are taking a double hit.
"The idea of paying yourself back is not necessarily a plus," said Charlie Nelson, a senior vice president at Great-West Retirement Services. "For a loan, you're paying back using after-tax dollars, so generally, over time, you won't earn as much."
Great-West Retirement Services, the unit of a Colorado-based insurance company that manages 3.5 million accounts for employers, said hardship withdrawals jumped 14 percent last year, and the number of loans rose almost 13 percent, with a dramatic increase occurring in the fourth quarter.
Fidelity Investments, which jockeys with Vanguard Group as the nation's largest mutual fund provider, said it saw withdrawals surge 17 percent in 2007, with record withdrawals in December, but a smaller increase in loans. Vanguard saw no change.
"What we're talking about is people spending their retirement now and lowering their standard of living when they retire ... People aren't willing to make some of the tougher choices in the short-term to make a better future for themselves," said Stuart Ritter, a certified financial planner with T. Rowe Price.
In the last three decades, 401(k)s have replaced traditional pension plans as employers' preferred retirement offering, which has shifted the responsibility of saving to employees from employers. Only 32 percent of workers ages 36 to 43 have any coverage by a pension plan.
If Americans find they didn't save enough, they may have to work longer and shorten their "golden years" of retirement, Munnell said. Otherwise, workers will have to cut corners and settle for a frugal retirement.
Theresa Perry, who manages benefits for the firm PinkSlip LLC in San Francisco Bay, said she's been surprised by the number of people using hardship withdrawals to make payments on so-called "piggyback" loans, which are home-equity loans wrapped with a first mortgage to allow borrowers to fully finance a home's value.
"I've been doing benefits administration for 15 years and using 401(k)s to keep mortgage payments under control is new to me," Perry said. "They're not taking money out to purchase homes anymore. They're taking money out to keep the home they already have."
Ritter worries that unaffordable mortgages or other financial troubles will persist for many consumers, even after they have tapped retirement funds.
"That's not a smart strategy. You don't want to apply a short-term fix to a long-term issue," he said.
But for Americans who are struggling to keep afloat in a slumping economy, today's money problems are more urgent than a far-off retirement date.
Said Charlton: "We have to take care of ourselves now and put retirement on the back burner."
Prudential Tropical Realty Welcomes First Choice Realty To Our Team
Please join us in welcoming the sales executives and staff of First Choice Realty to our family! Prudential Tropical Realty purchased the New Port Richey based company this week. First Choice Realty will blend into our Trinity office with Larry Stockton as Managing Broker.
“This latest purchase was a strategic move to further strengthen our growing presence in the Pasco market,” explains Dewey Mitchell, co-owner of Prudential Tropical Realty. “We are actively pursuing companies that not only fit our mission and culture but allow us to strengthen our brand and position throughout Hillsborough, Pasco, Pinellas & Hernando Counties.”
First Choice Realty has served the Pasco County market since 2000. Company Co-Owners Kathy Despota and Cathy Progin decided the time was right to align themselves with a company that has strong national brand recognition and chose Prudential Tropical Realty.
Buyer Full Page CMA Page
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The nation's largest mortgage lender and servicer said loan delinquencies as a percentage of unpaid principal balance increased to 7.47 percent last month from 7.2 percent in December and 4.32 percent in January 2007.
Loan servicers collect mortgage payments and distribute them to the owners of the mortgages. The Calabasas, Calif.-based lender services mortgages totaling about $1.48 trillion.
Foreclosures pending as a percentage of unpaid principal balance increased to 1.48 percent in January, from 1.44 percent in December and 0.77 percent in January 2007.
Delinquencies and pending foreclosures increased despite stepped up measures outlined by Countrywide in recent months to help borrowers manage their mortgage payments.
Mortgage loan fundings slipped 6 percent to $22 billion from $23.4 billion in December, and were down 41 percent from $37 billion a year earlier.
Still, the lender's average daily mortgage applications rose last month to $2.6 billion from December's $1.5 billion.
Interest rates have been falling this year, and that's fueled a spike in mortgage applications industrywide, particularly as homeowners look to refinance existing loans.
Countrywide's mortgage pipeline -- loans in progress that have not been funded -- stood at $51 billion at the end of January, up from $35 billion in December, the company said.
Following last summer's collapse of the subprime mortgage market, the lender has tightened underwriting criteria and all but ceased making subprime loans for borrowers with past credit problems.
It did not list a January figure for fundings of subprime mortgages. It funded $2.9 billion in subprime loans a year earlier.
Home equity loan fundings plunged to $872 million, down 93.6 percent from $3.6 billion a year earlier.
The lender's slate of adjustable rate mortgages fell by 79.5 percent to $2.8 billion, from $13.7 billion in January 2007.
Countrywide has been struggling amid a nationwide housing downturn and lingering credit crisis.
The company previously reported a loss of $422 million in 2007's fourth quarter, as higher defaults forced the lender to boost its provisions for anticipated losses.
In January, Bank of America Corp. agreed to purchase Countrywide for about $4 billion in stock. The transaction is projected to close in the third quarter.
Shares of Countrywide rose a penny to $6.93 Friday.
There are a number of ways you can teach your children to form healthy savings habits. This article offers some age-specific teaching tools.
"Reading, writing, arithmetic" -- too bad that list doesn't include personal finance. Most kids learn the basics of money and making change in grammar school, but probably won't learn how to manage money unless they choose finance as a career path. That means it is up to all of us to see that our children reach adulthood prepared to face life's fiscal challenges.Back to top
The benefits of teaching your children about money early on are both immediate and long term. In the short term, they may develop strong saving habits, learn how to make smart purchases, begin to understand the true meaning of "investment," and perhaps even learn why they can't immediately get everything they want. In the long term, you can help them avoid accumulating debt. And by teaching the value of saving for the future, you can help them plan for financial security.
As you think about how, what, and when to teach your children, consider letting them direct you by using their natural inquisitiveness. (But remember, it's never too late to start teaching -- even adults can be taught the basics of personal finance.) Back to top
An ideal time to begin teaching your children about the basics of money is when they first begin to notice it. In a child's world, money comes from Mom and Dad's pockets. And when Mom and Dad are tapped, a machine magically spouts dollars after merely pushing a few buttons. It's natural for them to assume that money is readily available whenever it's needed.
When they can't understand why you can't meet their every demand -- and you're about to use a standby response such as, "Money doesn't grow on trees" -- remember that a more constructive explanation may serve both of you better.
Even very young children can begin to understand the concept of earning money. Explain to your children that money is earned by working, and that you can only spend what you earn. To help them understand what it's like to get paid on a schedule, begin paying an allowance. Then help them set goals for how they spend and save their allowance. It's important, however, to make sure that you stick to the payment schedule; otherwise the lesson may be lost.
Experts differ on whether or not allowances should be tied to household chores. Although many people say children will learn more about personal responsibility if they are NOT paid for pitching in around the home, others feel it teaches them valuable lessons about working and earning. You might consider paying your children for chores outside of daily duties, such as helping to garden or wash the family car.Back to top
You hear it every time you walk by a toy store: "I want...Buy me this... !" Again, pause and take a moment before responding. This situation presents a great opportunity to teach another important lesson about personal finance: savings and interest. Explain that people often save their money for items they want to buy.
A simple savings lesson involves using a piggy bank, shoe box, or empty peanut butter jar. Make the lesson fun by having your children decorate the "bank," while explaining to them how you also use a real bank to save your money. Encourage your children to save a portion of their allowance for a special goal. As they save money, you might reward them with a small additional amount, just like a bank pays interest. At the end of each month, calculate how much they have saved and then chip in a certain percentage as interest.
Last, to further encourage the learning process, you might consider plotting a visual chart of their savings (include the goal) so they can easily see their savings grow. Remember to keep it as simple as possible, geared toward each child's level of understanding. Back to top
Once your children have been saving enough to accumulate $10 or $20, take them to the bank to open their first savings account. Most community banks will allow children to open first accounts with low minimum deposits. Some even have accounts especially marketed to kids to make the learning process fun. Make sure that your children receive a passbook so they can see the progress of their savings efforts, as well as the interest that accrues.
Once your children have mastered banking with an institution, you can begin to teach them about investing. When your children want something that they can't quite afford, discuss the value of saving versus borrowing. If you do extend credit, use a written IOU, establish a repayment schedule, and charge interest. By doing this, you establish the framework for teaching your children that bonds and certificates of deposit are IOUs representing loans from investors to institutions. Back to top
As your children get older and perhaps take on part-time jobs to earn more money, their savings will likely amass at a quicker rate. Now is the time to review the lesson of compounding, or the ability of earnings to build upon themselves. Explain how compounding can be more dramatic over time; the longer money is left alone, the greater the effect. This can lead into a discussion about investing and how certain investments can have a greater ability to compound over time.
Giving a gift of stocks of well-established or kid-oriented companies can be ideal ways to teach your children about investing. Most children would love to think of themselves as owners of Ben & Jerry's, Disney, or Toys "R" Us. Some companies even have shareholder meetings directed to children.
Mutual funds may be good vehicles as well. Like banks, some fund companies have specific programs to teach children about investing. Often such funds have low initial investments, as well as marketing materials designed to make the investing process fun. Back to top
Teaching your children about our complex financial system may seem daunting, but you can help put your child on the right track by encouraging smart habits now.
Is it worth your time and effort to help your children learn about money? As Benjamin Franklin once said, "An investment in knowledge always pays the best interest." Answering your children's questions honestly and in terms they'll understand can help them begin life on sound financial footing. Back to top
Retirement Planning Buy Real Estate in Your IRAA little-known IRS provision lets you extend your real estate purchasing with tax-deferred dollars.BY KELLI L. CLICKAre stock market woes preventing you from building wealth in your retirement account? If so, you might be interested in a small, but growing, trend among individual retirement account owners—investing their retirement funds in real estate. How It WorksIf the option of using tax-deferred funds to purchase property sounds appealing, you’ll need to locate an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account. Most banks and brokerage companies—the most common IRA account options—limit your choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. But Section 408 of the Internal Revenue Code permits individuals to purchase land, commercial property, condominiums, residential property, trust deeds, or real estate contracts with funds held in many common forms of IRAs, including a traditional IRA, a Roth IRA , and a Simplified Employee Pension plan, or SEP-IRA.To find a custodian that specializes in real estate, search under terms such as “real estate IRA” or “self-directed IRA.” This latter term was coined by the financial industry in the 1980s to distinguish the self-directed IRA from other IRAs that focus on stocks and bonds. The IRA account holder can’t serve as the custodian of his or her own account. However, it’s important to select a custodian knowledgeable about the types of investment you’re interested in, because the custodian holds title to the real estate. Do your homework, and understand what you’re getting into.Fees can vary widely among custodians, as can the flexibility of the services provided for account holders. If the custodian holds real estate on your behalf, but does not service it (collect the rent, etc.), you may have to contract with other providers. However, be sure that all rents are paid into the IRA and that all taxes are paid by the IRA.Purchasing the PropertyMost IRA custodians that hold real estate will usually allow you to purchase raw or vacant land, residential properties, or commercial buildings for your portfolio. In addition, some custodians may permit foreign property or leveraged property.Since buying a property may require more funds than you currently have available in your IRA, you also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note.Unfortunately, Internal Revenue Service regulations will not let you use the real estate owned by your IRA as your residence or vacation home. Nor can your business lease space in your IRA-held property. The underlying premise for any real estate investment purchased with IRA funds is that you can’t have any personal use or benefit of the property. To do so may cost you plenty in taxes and penalties.There are a few other IRS limitations as well. You cannot place a real estate property that you already own into your IRA. Your spouse, your parents, or your children also couldn’t have owned the property before it was purchased by your IRA. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only “lineal descendents” be disqualified.Once you’ve chosen a property, your IRA custodian—not you personally—must actually purchase it. The title will reflect the name of your IRA custodian for your benefit (such as Silver Trust Co., Custodian FBO John Doe IRA). In addition, if you put up earnest money with your personal funds, you’ll need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.Operating an IRA-held Property Because all property expenses, including taxes, insurance, and repairs, must be paid from funds in your IRA, you’ll need liquid funds available in your account. Of course, all income generated from the property will be deposited in your IRA account so you can use that money to cover your costs. You also can make annual contributions within federal guidelines. Currently, you can contribute $3,000 annually to a traditional or Roth IRA ($3,500 if you’re age 50 or older) and as much as 15 percent of your annual compensation, up to $40,000, if you’re a self-employed individual with a SEP-IRA. If your account doesn’t have funds to cover property expenses, you will have to withdraw the property from your IRA and pay taxes on the value of the property, as well as possible penalties for early withdrawal.It’s also possible to sell properties while they are held by your IRA, so long as the purchaser is not a family member. Once a deal closes, your IRA account now holds the cash proceeds—ready for you to make your next investment. An alternative is to sell an IRA-held property with seller financing so that all payments made by the buyers are paid to the IRA. Distributing Your Property You can withdraw real estate from your IRA and use it as a residence or second home when you reach retirement age (age 59½ or older for a penalty-free withdrawal). At that time, you can elect either to have the IRA sell the property or take an in-kind distribution of the property. Under that arrangement, your IRA custodian assigns the title to the property to you. You will then have to pay income taxes on the current value of the property if it’s been held in a traditional IRA. If the property was held in a Roth IRA, you won’t owe taxes at distribution. This makes a Roth IRA extremely attractive if you anticipate that your real estate investments will appreciate over time.Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement.IRA OptionsWhile any form of IRA allows for real estate investment, there are other pluses and minuses to consider when choosing the account type that’s best for you:
The Realtors, in its monthly economic and sales outlook, is forecasting a 1.2% drop in prices of existing homes sold this year. A month ago it was still forecasting that prices would be flat this year and that a home market rebound in the last half of 2008 would make up for declines in the first half of the year.
Last year, when the median price slipped 1.4 from 2006 levels, was the first on record that the Realtors recorded full-year decline in existing home prices.
The group is also forecasting a 4.8% decline in the number of existing homes sold this year. A month ago it was still forecasting a 0.9% pickup in the sales. Existing home sales plunged 12.8% in 2007, according to the group's figures.
"We're seeing a pattern that is consistent with skimming along the bottom of the cycle, and sales could ease modestly," said Lawrence Yun, the group's chief economist, in a statement.
The group's forecast sees even greater weakness in new home sales in the year ahead, with a 4.3% drop in median prices and a 17.7% plunge in the number of sales.
In addition, the group's Pending Home Sales Index for December showed the number of homes under contract fell once again to the second-lowest level on record.
The index fell 1.5% to a reading of 85.9. That was better than only the record low of 85.5 set in August, when the meltdown in the mortgage finance market made it difficult for many buyers to arrange financing.
The pending home sales index is more forward looking than the group's more widely followed reading on existing home sales, which tracks closings. A home is generally under contract for a month or two before closing.
1. Making math blunders
Far and away, says the IRS, the most common mistake on tax returns is bad math. Numbers are transposed, left out or totaled incorrectly. And since a total figured on one tax form or work sheet often is transferred to another form (or forms), that one simple mistake could quickly compound into a very costly miscalculation.
Even if you use tax software, you're not off the hook. Sure, the computer program will do the figuring for you, but if you put the wrong numbers in to begin with, the machine won't catch that. So double-check your entries, whether on paper or on your PC.
2. Entering wrong ID numbers
These nine-digit identifiers are crucial to tax forms. Write your Social Security number correctly and clearly on each page of your tax return. If you're married and filing jointly, be sure that your spouse's Social Security number is entered correctly, too.
Don't forget about your dependents, be they your children or an older relative for whom you're financially responsible. An incorrect Social Security number in any of these cases could delay your refund or cause the IRS to nullify some credits you might claim.
Your Social Security number also shows up on various income documents, from your W-2 form to investment and savings account statements to retirement plan contribution reports -- and the IRS gets copies of all of these. Tax examiners will be looking at each of these documents closely, both the amounts earned and the taxpayer's ID number.
3. Ignoring IRS material
More than 73 million people filed electronically this year. But almost 63 million others sent in paper forms. If you still fill out your return by hand, use the label preprinted with your name and address along with the envelope that comes with your tax packet to send in your form.
Your address label will help IRS employees more easily read your personal information. Even if it's not correct because, for example, you moved, use it and simply cross out the wrong information and correct it by hand.
The envelopes, or in some instances, labels printed with the IRS delivery information, are color-coded to notify tax processors whether you're getting a refund or are sending in a check. By using the appropriate envelope or label, your 1040 will get to the correct office sooner, meaning you'll get your refund more quickly.
Similarly, the pre-addressed envelope or label will ensure that your return goes to the proper processing site. The IRS has reorganized its service center operations in recent years, so it's possible your return could be handled at a different location than it was last year. The envelope or label has the correct delivery data.
4. Picking the wrong 1040 form
There are three types of 1040 forms, and tax experts, including those at the IRS, suggest taxpayers use the simplest one possible that meets your tax needs. But make sure that it does indeed get you the best tax result.
In some cases, the long Form 1040 is the best move, even if your tax life is not that complicated. You don't have to fill out every line on the two-page form, just the ones that apply to you. And since it offers several more ways to cut taxes than are found on the slightly shorter 1040A or shortest 1040EZ, it could really pay off.
So take a few extra minutes to look over all three forms and determine which one best suits your tax situation.
5. Omitting some forms
Again, this is a problem primarily for paper filers. These taxpayers need to be sure they include their W-2 forms (Copy B) to avoid delays in processing their returns.
If you received a Form 1099-R that reports federal income tax withheld, Copy B of that form needs to go into the envelope, too.
And if you have several additional forms, don't forget those either. That extra paperwork you worked through to gain a tax credit or deduction won't do you any good if it doesn't make it to the IRS. The IRS also recommends that you put the forms in proper order behind your 1040. Each one has an attachment sequence number in the upper right corner, just beneath the year notation.
6. Overlooking unearned income
Thanks to your Social Security number on financial accounts, the IRS knows exactly how much you make in interest and dividend income each year. The tax agency gets copies of your Form 1099 earnings each tax season, and they will use the documents to double-check your filing information.
So be sure to collect all those earnings statements and put the total taxable amount on your return. If you don't, IRS return examiners will let you know what you forgot, usually along with an added bill for penalty and interest charges that accrued because of your interest and dividend filing oversight.
7. Using the wrong tax table
It's easy to make a mistake reading the tax tables found in the tax return instruction booklets. The print is small, and there's a lot of data crammed on the pages. Make sure you use the correct column for your filing status.
Using any tax table could be an even costlier mistake for some filers. If you have long-term capital gains income, you'll need to do some additional figuring to ensure you don't overpay your taxes, since the tax rate on this money is usually much lower than regular income tax rates.
8. Fumbling payment procedures
If you write a check for any taxes you owe, be sure you sign it, include your Social Security number on it and make it payable to the U.S. Treasury, not the IRS.
Don't staple the payment to your form; simply include it in the envelope. IRS examiners want to get payments into the government account as quickly as possible, even before they check the accuracy of returns. If they have to pull the check off your form, some other documents (for example, your W-2) that are necessary to complete the processing could be separated and lost.
Be just as careful if you're getting, instead of making, a tax payment. If you have your refund directly deposited, make sure that you correctly enter your financial institution's routing number and your account number on your return. Wrong numbers can cause your refund to be delayed or misdirected.
9. Forgetting to sign the return
It's the last thing you must do when filing, but many taxpayers who send in paper 1040s forget to sign the form. The oversight could be quite costly. The IRS won't process a tax return that lacks a signature.
If you make this mistake in February, you still have plenty of time for the IRS to notify you and then refile a signed form. But if you forget to sign a return you mail just before the April deadline, by the time you correct the oversight, you'll be in late-filing territory, which carries an automatic penalty.
10. Missing the deadline
You wouldn't think that people could overlook April 15, but it does happen. Maybe time just got away from you or an emergency arose that prevented you from filing on time.
Regardless, the result is the same: If you owe the government and don't pay by the deadline, you'll end up owing additional money. The IRS imposes both failure-to-file and failure-to-pay penalties. The total late-filing penalty is usually 4.5 percent of the tax you owe for each month, or part of a month, that your return is late; this accrues for up to five months. If your return is over 60 days late, the minimum penalty for late-filing is the smaller of $100 or 100 percent of the tax owed.
And remember, you'll also owe interest on the unpaid amount.
If you just can't get the forms completed on time, ask for an automatic six-month extension by filing Form 4868. By filing the extension, you avoid the late-filing penalty. However, Form 4868 does not extend the time to pay your income tax. So, estimate your tax bill and send that amount with your Form 4868. If you can't pay it all, at least pay whatever amount you can. The IRS is amenable to several tax payment options.
