12/22/08: Looking Optimistically at the Future
By Benny L. Kass
Every year at this time, I take a break from trying to answer the many questions I receive from readers. Instead, I try to look into my two crystal balls to determine the future of housing -- at least for the next year.
The financial crisis this year has been called a "once in a century" phenomenon. There are, of course, lots of finger pointing that we all can do - to Congress, to mortgage lenders, to governments at all levels and to consumers as well - but I don't want to go this route.
Instead, and even though my crystal balls are cloudy, I want to stay on the optimistic side. Cynically, perhaps, since I am not sure that we can sink much lower next year.
So, what's positive today? For one thing, gas and oil prices have dramatically come down in the past few months. That's good news for those of us who heat our homes with oil.
And interest rates are perhaps at an all time low. A friend just obtained a loan commitment for a 30 year fixed rate at - believe it or not - 4.875 percent. And a mortgage broker told me that for a brief moment in time last week, rates dipped down to 4.5 percent.
These rates mean it is time to refinance, especially for those of you who have adjustable rate mortgages. The loan requirements have been dramatically tightened, and you will need a good FICO credit score, and you may need to have at least 40 percent equity in your house, but it certainly makes sense to ask your lender if you can qualify for a lower interest rate mortgage.
And if you can obtain a loan, it is also a good time to buy. In all my years in real estate, I cannot recall a better, stronger "buyer's market" than now.
It's also a good time to consider renting out your house - and not only for the Obama inauguration, where rents are going at astronomical prices. A lot of new people will be coming to Washington to join the new administration, and the old guard usually stick around as lobbyists or publicists. A lot of people do not want to sell their house at a loss (or at least what they consider a loss). And many consumers are either unable to qualify for a loan or just plain afraid to jump into the real estate market. Accordingly, I believe that the rental market will remain strong in the Washington metropolitan area in 2009.
Investors are concerned that Congress may increase the capital gains tax from its current 15 percent, and thus I predict we will see more and more Section 1031 (Starker) exchanges this coming year. While many people mistakenly call these "tax-free" exchanges, since you generally do not have to pay any tax if you conduct a successful exchange, in reality it is only a "tax-deferred" process. But call it what you will, such an exchange is a good way to rid yourself of property that you feel may no longer be productive, and obtain (in exchange) a more potential piece of property.
Additionally, for those investors who plan to retire in a couple of years and move to a warmer climate, the exchange process is just right. They obtain the replacement property in the area where they plan to live, rent it out for a couple of years, and then move into the house and treat it as their principal residence. There are significant tax savings if the process is done right.
What are some of my other predictions for 2009? First, in my opinion, interest rates will continue to stay approximately where they currently are, at least through the end of the year. Hopefully, this will stimulate homebuying.
Mortgages themselves will change. We will begin to see 40 year loans, thereby making the monthly payment more attractive.
Reverse mortgages are also becoming more popular, especially as more and more baby-boomers - who did not bother to save money in the past - are reaching age 62, and realize that their only asset is the house they live in.
However, there is one disturbing trend which Congress, State legislatures and governments at all levels must address. This involves the many mortgage and homeowner scams and fraud that is being aimed at all economic levels of society. Homeowners have bought property that the seller never owned. Homeowners facing foreclosure are being persuaded to work with unscrupulous people who promise to take care of their loan, but in reality take possession of their home.
And while there are many legitimate reverse mortgage lenders out there, I have begun to see the dark side - namely lenders who extort huge sums of money up front using the guise of attempting to assist the elderly.
Investors are also being preyed upon. We all heard about how Mr. Bernard Madeoff made off with billions of dollars from gullible (but believing) people. But what about the intermediaries involved in 1031 exchanges who went belly-up, thereby not only losing moneys for potential exchangors, but depriving them of the opportunity to complete a successful tax-deferred exchange. The IRS has made it very clear that the exchangor is out of luck if the intermediary cannot meet the strict deadlines imposed by law for such exchanges.
The Department of Housing and Urban Development (HUD) is about to institute new rules regarding the Real Estate Settlement Procedures Act (commonly known as RESPA). Only time will tell if these rules will have effect of making homebuying easier - and less expensive - for consumers.
But apparently no one has heard my annual plea: please reduce the number of legal (and non-legal) documents which buyers and sellers are required to sign when they go to closing. Because of the volume of paperwork, consumers often are asked "just sign here", and do not fully understand the impact that such documents may have on them. Many years ago when I first started in the real estate business, when you obtained a mortgage you signed two or three papers and that was all. Now, in addition to the mortgage documents (deed of trust and note), you have to sign such miscellaneous documents as: name affidavit, clerical error affidavit, affidavit of debts and liens, disclosure statements, flood hazard insurance statement, etc. While relief in this area is desperately needed, unfortunately I do not believe that the mortgage industry will rise to the call this year. Nevertheless, we must remain optimistic.