Real Estate Bubble: Fact or Fiction?

The real estate market buzz across the country these days revolves around the anticipated and much feared “bubble”. The implication is that once burst, prices will spiral downward taking with them the major assets of those foolish enough to buy at a time when disaster looms large. It could happen.

However, it would take a major cataclysm in the underlying financial underpinnings of the global economy. Granted, any significant blow to world confidence in the fundamentals of the U.S. economy could easily check the flow of overseas investment into the long-term securities markets. The result would likely be a sudden spike in mortgage interest rates. This most likely would spell the end of the present bull market in real estate.

The profits of doom, meanwhile predict just such a meltdown, citing the trade deficit, the national debt and the debt future generations will owe to Entitlement, to name a few. This too could happen. No one knows for sure. We are in uncharted economic waters, where past experience or interpolations from other countries’ issues do not necessarily apply. (see Greenspan’s Conundrum: http://www.mises.org/story/1859)

But what if it happens? In the worst case scenario, assets such as real estate would be the last resource to vanish—not the first–largely because of widespread laws to prevent foreclosure except in extreme cases. Most likely, we would simply have reached another top in the normal real estate cycle, not unlike any of the 21 cycles that have occurred since 1978.

Busts do not usually follow booms. In only 17% of the cycles noted above did a real estate downturn follow on the heals of a boom—and these typically in areas that had experience significant distresses to the local economy. (see FDIC http://www.fdic.gov/bank/analytical/fyi/2005/050205fyi.html)

Safe Prediction: In the years since I was first licensed as a Realtor® I have experienced all 21 of the full cycles noted above. When I was a new license I too anticipated “The Big One” where the bottom would drop out of the market permanently. Now I know that view is mere paranoia. People are not going to forego living in houses; real property will always have solid value, and the pendulum swings both ways.

“Lies, Damn Lies, and Statistics”, as Mark Twain said. Nowhere is this more evident than the real estate market. Statistics that are used to show loss of value mostly show reductions in the number of sales.

Let me explain: while the mean average or the medium sales price of all home sold in a given period fairly accurately represent rises in home prices in an seller’s market they do not, paradoxically, reflect the apparent drop in prices experienced in buyers market.

The unassailable law of Supply and Demand states that as prices rise fewer and fewer people can afford to buy. This creates a market glut.

When a glut occurs sellers must contend with greater competition from other sellers. Those that lower their price sell. Those that do not or cannot must stay.

(This has yet to happen. see David Lereah of National Association of Realtors: [http://www.realtor.org/Research.nsf/Pages/housingoverview?OpenDocument])

The result on market statistics, however, is that the dollar amount of those homes that do sell by lowering their price effect a statistical drop in the apparent overall market prices.

The news that prices appear to be falling further exasperates the situation as buyers feel the need to protect themselves from the perceived downward trend by only investing in properties that are seen as solid bargains. Again, only those that choose to sell or must sell make up the ever downwards statistical spiral.

What is not figured in the averages are the majority of homes that do not sell because their owners are not desperate enough to take what they can get. Their value remains intact.

What falls is not value but volume. Especially in today’s market where 100% or greater loans are common, few homeowners will choose to bring money to the closing to table to make up the shortfall between what they owe and what they can sell for at that point in the cycle—in essence paying someone to take their home. And though this scenario may cause hardship, it also has the effect of limiting the number of homes on the market, which acts as a downward buffer to the bottom actually falling out, though statistics may even indicate a continued downward trend.

If it doesn’t stop raining it will be the first time. I tell my buyers to only buy if they feel confident that they can remain in the home at least seven years to ride out (in comfort) the coming down cycle. If, during this time, they are forced to sell (usually because of an employment or domestic issue) they could get hurt.

I tell my sellers not to try to predict the exact market top and to watch the rate of foreign investment for signs of weakness that may signal a lack of confidence in the U.S. economy and the rise in home mortgage interest rates that will likely turn the market. No one knows when and if this will occur. But the market will eventually turn. At least it always has.

What to do now: Those that buy wisely, and who can choose the point in the natural cycle to sell, are far more likely to make money than in most other forms of investment. All this while enjoying the fruits of homeownership.

In addition, they will benefit from major tax advantages and the eventual equity value of their home, which will not always rise astronomically but will always rise in the long run.

Benefits of Real Estate Investing Courses

Today real estate investing is one of the profitable markets which will give you super opportunities to make money easily. This is a market which has very little risks or losses. It is considered that, real estate investing is much more profitable and beneficial when compared to share market or buying and selling currency or gold or silver. Our government also provides investors with many tax benefits such as special government refunds and saving like the HST and GST. This is one of the reasons why so many people take up real estate investing courses to become an investor and this the biggest financial industry for many Americans. Now there are numerous benefits, when it comes to investing in real estate. For example you are the boss of your business and you don’t need to have a showroom or an office. You can actually work sitting at your home! But you are required to do some home work, as you need to know more about the real estate market, latest trends, mortgages and taxes to become a successful investor.

If you are interested in real estate investing and serious about it, then you must be taking courses from an approved real estate school which will give you seminars, books, magazines, online journals, audio and video CDs that will provide all the necessary information that you need to get ready to become an investor. Taking such courses will basically widen your knowledge about real estate investing. It will give you many useful website that you can refer to develop your business. It will also provide you with other useful information like the costliest and cheapest real estate areas, articles to refer, blogs and news which will keep you updated about the world of real estate investing! This information will give you all the adequate knowledge to pass the required test.

Once you have prepared well, you must take up a licensing exam to become an investor which is compulsory in all states of America. Once you pass this exam, you will be provided with a license to practice as an investor, and later you can take up more courses to improve your skills and knowledge. Before you take up a course, make sure that you are taking the right course for the right exam. There are many people who have wasted money and precious time on seminars and courses which will give no benefits.

Short Sales in Residential Real Estate

Home values are down more than twenty-five percent from their peak in 2006 and continue to fall rapidly across the country. Some experts predict an additional fifteen percent decline in the upcoming year. As a result more than 12 million homeowners now have mortgage debt that exceeds the value of their homes.

WHAT IS A SHORT SALE?

A short sale occurs when the lender agrees to discount a loan balance and accept less than the total amount due incident to the sale of a home due to financial hardship. In today’s economic environment more and more lenders are initiating short sale programs to assist people in selling their homes and thereby avoiding foreclosure.

WHO QUALIFIES?

Once homeowners find themselves in a circumstance where their home is worth less than the mortgage balance this is just the beginning of the process to determine if they are eligible for a short sale. Moving into 2009 more lenders appear ready to assist homeowners in loan modifications and short sales in an attempt to slow down the ever growing foreclosure crisis.

In virtually every short sale negotiation the lender will be looking for a statement of hardship from the homeowners which explains why they need relief and more specifically why the homeowners cannot pay the difference still due on the mortgage after the short sale. Declining property values coupled with a need to relocate or upwardly adjusting mortgages and unable to refinance are the beginning, in many cases, of the hardship picture. The declining home property value, increasing adjustable rate mortgages coupled with unemployment greatly defines the downward spiral leaving many homeowners in desperate need to sell their homes, which would not be possible without short sale assistance.

THE SHORT SALE PROCESS

The first and most prudent step would be to seek the assistance of a competent real estate lawyer to assist in the process. While each lender has their own specific requirements there is a consistency in the nature and type of documentation that can be expected.

The first step is to contact the lender to see if they have a person or department set up to respond to inquiries regarding short sales. While the situation seems to be improving as lenders become more and more organized in dealing with short sales it still may require some persistence in getting the proper individual on the phone to ascertain the lender’s procedure.

Once contact is made with the workout or short sale department typically a lender will want an authorization signed by the borrower(s) which would allow the real estate attorney to communicate directly with the lender regarding the potential short sale. Many lenders will merely accept a letter, others will require a signed authorization and still others will require their specific written authorization form to be signed.

Once proper contact and authorization is in place the following requirements can be expected from your lender:

o Hardship Statement

This is a written statement which describes for the lender what has changed making it difficult/impossible for the homeowners to continue paying their current mortgage. Specifically, this is the statement where it is outlined for the lender if the homeowner(s) has lost a job or had a significant decrease in income, was hospitalized or had some other unexpected illness or medical emergency contributing to their problems, or simply had their mortgage adjust up making the payments no longer affordable. Again, your real estate attorney should assist you in writing this letter making a strong plea to your lender to accept less than the full payoff.

o Statement of Income/Assets

Most lenders will require a financial statement outlining all liquid assets, including savings accounts, checking accounts, money market accounts, stocks, bonds, cash and other real estate. Obviously this statement needs to be consistent with the facts outlined in the hardship statement in order for a lender to seriously consider the request. In many cases the borrower should be prepared to provide backup information including bank and other statements for the accounts disclosed in your statement of income and assets.

o Appraisal/Comparative Market Analysis

As part of the short sale process most lenders will require either that an appraisal be performed confirming the value of the property or in the alternative a current market analysis obtained from a real estate agent which will compare the suggested price of the home to that of similar homes that are either currently on the market for sale or have recently sold.

o Listing Agreement and Purchase Agreement

Many lenders also require a copy of a Listing Agreement with a real estate brokerage for the sale of the property together with a copy of the Purchase Agreement for the sale of the property as part of the short sale package. Obviously, any such Purchase Agreement should be carefully worded to include language that the sellers’ obligations are expressly contingent upon lender approval. The lender may also require a preliminary settlement statement or net sheet which includes estimated closing costs and reflects the bottom line payoff to the lender.

In most circumstances after a complete short sale package is received by the lender it will take thirty to sixty days for approval and if granted sellers may move forward and close the sale of the house to the prospective purchaser.

CREDIT CONSEQUENCES

Selling a property by short sale will cause a hit on the sellers’ credit report and in many cases the affect on credit and FICO scores could be the same as a foreclosure. As such, a short sale should only be considered, and in most cases will only be considered by your lender, to avoid a foreclosure. The good news for short sale sellers is that in most circumstances the wait involved before qualifying for a loan to buy another home is much shorter than if a foreclosure occurs. New Fannie Mae guidelines now require only twenty-four months seasoning before a short sale seller can again buy with a reasonable interest rate. In most cases a person who wants to buy another home after a foreclosure may end up having to wait as long as thirty-six to seventy-two months before a lender will offer a reasonable interest rate in relation to the current market.

One of the key areas that must be negotiated for sellers incident to the short sale is whether or not they will be subject to a deficiency judgment, meaning having to repay the difference between the loan amount and the amount paid to the lender at the short sale. In most cases it is up to the lender to decide whether to require a payback of some or all of the deficiency and as such the seller should discuss this matter with a real estate lawyer prior to finalizing a short sale. A lender’s position regarding pursuing a deficiency varies from institution to institution and is greatly impacted by the hardship circumstance as well as the seller’s income and assets. In many cases a good attorney can present the case to a lender and reach some agreement that is acceptable with regard to the deficiency.

TAX RAMIFICATIONS OF A SHORT SALE

While I am a licensed attorney, I am not a CPA and cannot advise on tax consequences. Generally speaking the cancellation or forgiveness of debt is included as taxable income. If a lender forgives that balance of a mortgage there is cancellation of that debt which could be taxed as ordinary income. Fortunately, tax relief has been enacted for such debts secured by a principal residence. Congress has passed the Mortgage Forgiveness Debt Relief Act of 2007 which is effective for discharge of indebtedness on or after January 1, 2007 and before January 1, 2010. The federal bailout legislation passed in October, 2008 extended this relief through December 31, 2012. In most circumstances, under this law, the forgiveness of debt incident to the sale of a qualified principal residence is excluded from taxable income.

CONCLUSION

Given the ever changing challenges of today’s economy short sales are going to become more and more prevalent. With continued declining property values homeowners are in need of assistance and both lenders and the government are recognizing this need and enacting programs to provide for that assistance. While a short sale will have a negative impact on credit in many cases it is the only opportunity a seller may have to avoid foreclosure and will potentially afford the short sale seller the opportunity to qualify to purchase a new home sooner. The need to get out from underneath the negative equity is something that has been recognized by our government and the IRS but should only be considered after consultation with the appropriate real estate and tax professionals.

Always seek legal counsel before attempting to pursue a short sale. A real estate agent, although qualified in other aspects of real estate, is not qualified or licensed to give legal advice.