It’s no secret that there are federal tax credits available for many people who are looking to buy a home.  Both first-time and non-first-time homebuyers now can play the game.

The people who are among most aware of the credits, of course, are people wanting to sell a home.  It’s not difficult at all to find For Sale signs also advertising the $8,000 tax credit, and, as I may find out soon, it will probably enter the conversation at the negotiation table.

Especially if the initial offer is a lowball offer:

“Why, Mr. M.B. Hunter, that offer is awfully low. Perhaps you aren’t aware of the $6,500 tax credit you and your lovely wife are eligible for, as qualifying second-time homebuyers?”

To which I can reply:

“Ahh, yes, Ms. Realtor®, that’s very true!  But if my job takes me away from the area and I have to move within three years, then we have to pay that $6,500 back!”

(I’d like to claim credit for thinking of this, but it was actually from a financial planner I know.)

Actually, as of right now, I’m just assuming that I’ll have to pay it back under that circumstance.  The law is new enough that IRS Form 5405 doesn’t reflect the situations of the long-time homeowner.  But if I were a first-time homebuyer (taking advantage of the $8,000 tax credit) then I’d definitely need to be paying that back if I moved within three years of the purchase.

Just as it’s a bad idea to mention your trade-in when you’re buying a car, it’s a bad idea to let tax credits enter real estate negotiations.  Why?  Because the tax credits only enter the equation after the sale, not before. It’s a red herring.  Additionally, it’s unlikely that the bank will take potential tax credits into account when they underwrite the mortgage, because it’s a bit of a financial wild card.

Happy lowballing!

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The real estate mess is hurting not only homeowners, but businesses as well.  Bad things happen at both ends when the mortgage payments stop coming in.  The homeowner of course loses his house and his good credit rating, but the businesses that were involved in lending the money lose out as well.  Banks may get the house back but this is an expensive procedure, and house prices are falling across the country.  Home equity lines of credit get sacked, too.

Private mortgage insurers have to pay as well.  These are the companies that underwrite insurance, usually purchased by the homeowner for the benefit of the lender, on mortgages for which the down payment was less than 20%.  Although insurance companies do have to pay out claims as part of the course of business, they don’t make money paying out a lot of claims.  (No insurance company does.)  So that’s why some private mortgage insurers are helping certain homeowners keep their payments current.

Businesses are in business to make money, and if paying $2,000 per month for six months while one of their clients looks for a job saves them from losing their home — which means they don’t have to pay tens of thousands of dollars to the lender — then they win.  This is loss mitigation, and it’s a happy and healthy way for businesses to take care of themselves.  They’ll do what they need to do in order to stay in business.

The more I see of all of the mortgage fallout, foreclosures, whatever, the more I’m in favor of seeing the involved parties work things out to their benefit, by themselves, without subsidies, regulations, kickbacks, rate controls, etc.  It will hurt more, but it will be over with that much sooner, and everyone comes out ahead in the long run.  Try to subsidize and it will last longer and cost everyone more.

So if you’re behind on your mortgage payments, talk with those people who stand to lose if you default or are foreclosed on. They may just listen to you.

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Say you live in a subdivision.  You bought your brand-spanking-new house only a couple of years ago.  Today, you cannot afford to carry the house for whatever reason (job loss, move, can’t refinance, etc.)

“No problem,” you think to yourself.  “I’ll just find a renter for it until the market turns around enough so that I can sell.”

Not so fast:  Your homeowners’ association, or maybe your city, won’t let you rent it.

In the wake of lots of homes quickly becoming unaffordable by their owners, cities and HOAs have tightened no-rental rules, forcing homeowners either to occupy their home, or leave it vacant until it’s sold.  Rules in some communities may have changed after observing a correlation between increased renter occupancy and disturbances, deterioration, and crime.  Meanwhile, the mortgage payments for the strapped homeowners still come out each month, unabated,  until they don’t.  Then the home is foreclosed on.  Joy.

I generally think HOAs have very little purpose in life except to provide an outlet for busybodies.  Yet, if I support being able to work to my best interest, I have to let them do likewise.  If the purpose of an HOA is to maintain common property, and hold up the valuations of the properties under its watch, then promoting owner occupancy rather than tenancy is what it should do.  The fact that this is a reaction to large numbers of tenants coming in is a separate issue.

Banning rentals in this environment is a community’s way of buying time. The hope is that the curb appeal of the community can be salvaged, or even maintained, by sticking it to the homeowners who got caught with an upside-down house.  (”You may get foreclosed on, but at least our subdivision won’t be degraded to a row of rentals.”)  I can see that once a subdivision gets a lot of rentals in it, it’s hard to turn it around.  So this is a legitimate concern for the people who don’t intend to move.

Nonetheless, I think this will backfire on communities. There’s only so much time that can be bought this way.  There are still many, many adjustable-rate mortgages that will reset.  The foreclosure bailout is a drop in the bucket.  Holding a homeowner’s feet to the fire and preventing her from renting out her house will increase the likelihood that she’ll be foreclosed on.  Some would-be buyers are investors, and they’ll be reluctant to buy if they can’t use the property as easily to produce income.  Though rentals aren’t desirable, vacant houses are less desirable, and more attractive still to vandalism and squatting.  Insurance against loss on these houses is prohibitively expensive, if it can be gotten at all.

This may turn out to be a huge, horrific game of musical chairs.  Make it difficult for homeowners to stay afloat, and you (a community or a subdivision)  may either get more foreclosures and more vacant properties, or fewer foreclosures and more owner-occupants.  It all depends on when the music stops: strapped homeowners run out of money.  Or, you might opt out of this game, and accept renters into your community.  The cost of doing this is knocking down the desirability of your community a notch or two.

In any case, it will be exciting how it plays out.  (”Exciting” doesn’t always mean “fun,” unfortunately.  A rollar coaster is exciting, until it derails, and then it gets really exciting.)

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Flexo takes issue with Robert Kiyosaki’s definitions of asset and liability:

An asset is something that puts money in my pocket.

A liability is something that takes money out of my pocket.

I can see Flexo’s point in that Kiyosaki is recasting the definition of the words.  The proper financial terminology would say that:

An asset is something that is owned, while

a liability is something that is owed.

I live in a house which has a mortgage against it.  I don’t really own the house yet, because I still owe tens of thousands of dollars on my mortgage.  (Even after that, I can readily find out who the real owner is if I fail to pay my property taxes.)  The home itself has some value.  I can sell it to someone for money.  It’s an asset in the financial sense of the word.  The mortgage loan is owed to the bank.  It’s a liability in the financial sense.

At the same time, though, I can see the merit in Kiyosaki’s definitions, as they’re more practical.  The financial definitions deal with cash value, while Kiyosaki’s deal with cash flow.

In terms of cash flow, my mortgage is of course still a liability for me.  But, my house itself is also a liability.  Maintaining it, removing mold, keeping it warm, keeping it clean, keeping it looking pretty, keeping it dry, etc., take a lot of money.  A house deteriorates just like anything else if it’s left alone.

Going back to the financial definition for a second, I can rephrase this statement by saying that the value of my asset, my house, will go down if I don’t take care of it.  It costs me each month so that the value of the asset isn’t affected by my carelessness.

In the cash flow sense, the house would be an asset only if I were renting it out for more than it cost me to maintain it.  That is, only if it put money in my pocket.

I’m not sure that clears things up at all.  If anything, it makes things more confusing.  If so, then I’ve accomplished something.   Seriously, though, I do like Kiyosaki’s definitions because they bring the focus to the cash flow.  If you buy a boat, you have an asset, but while you own it it’s a huge liability — unless you get the credentials to boat people around for hire, in which case it becomes an asset.  Thinking about purchases this way brings the spotlight to the lifetime cost (or lifetime earning potential) of an item.  Maybe fewer people would buy boats if they knew that BOAT stands for “bring on another thousand.”

Anyway, what are your thoughts?

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My wife has wanted to move into town for quite some time so that she can be a little closer to friends and to our other activities.  I’ve been reluctant to move for a few reasons.  First, I think if we bought now, it would be like trying to catch a falling knife.  Second, it would be a longer drive to work for me.  Third, I don’t like change.  (None of these are her fault. )

And just as much as I feel pressured when my wife tells me about a good house that’s come up for sale, she probably feels frustrated by my reluctance to take any serious action on it because “this is just the beginning of the downturn” and “there will be more, and better, deals later.”

Actually, regardless of how far I feel the housing market is going to go down, I don’t really know.  I can get warm fuzzies that it’s getting to be more of a buyer’s market, but I won’t really know until I start tracking home prices.  Tracking prices is pretty straightforward, and has some advantages:

• It’s easier to recognize a deal when it comes along.  There is a huge amount of information literally a mouse click away, and tracking the price of desirable houses over time shows clearly what these houses were being offered at.  Rather than sensing that a house is a good deal, I can see that it is.
• It’s active.  It’s searching with a purpose.  It’s still basically window shopping, but I know which stores I’m going to. 
• It’s focused.  We’re looking for a house to move into.  This narrows our search and makes it more time-effective.

Here’s how we’re going about it now:

1. I signed up for an account at Realtor.com.  This allows me to save searches — and have daily or weekly e-mails sent to me — filtered by ZIP code, price, number of bedrooms, etc.
2. Since my wife is pickier (!) she chose the acceptable candidates among the few dozen houses that met the search criteria that Realtor.com allowed.  We could have fewer results to go through if we filtered by square footage, but not all of the listings include a square footage.  So, we pile through some more listings but turn up a few more candidates.  We eliminate most split foyers since she really doesn’t like those.
3. We build up a spreadsheet with the following columns:  ZIP Code, Address (to identify the house), Subdivision, Bedrooms, Bathrooms, Square Footage, Basement (no, yes, or split level), Garage (no, one-car, or two-car), and Asking Price.  We make one row per house, and add columns at the end to track the asking price over time.  We also list the houses that meet the search criteria but don’t meet our criteria so that we don’t have to re-visit those listings each week.  The columns are the criteria that are important to us; if you do this, you may have other columns you want to consider.
4. Houses keep getting prices added as long as they’re listed.  If they’re taken off, then we keep them to see if they come back on again.
5. Later we may add houses listed for auction or on other services, since some sellers are going the route of national real estate listing without the commissions.

Here are some of the measurements that can be done from these numbers:

• Number of listings.  The number of listings can fluctuate with the seasons (winter is slower).  If prices are going down for similar properties, or if the prices for properties we’re following are going down, then an increase in the number of listings could be good, as it means people are coming to their senses and trying to sell for what they can get.
• Time on the market.  We’ve gotten a few new listings, so we can see how long they stay on the market.  Knowing this would help us should we want to make an offer.  If the house has been on for a good long time, we can offer more aggressively (lower).
• Price per square foot.  This is a rough measure but a useful one.  If we really can buy more house for our money, we should see a reduction in the price per square foot.

The nice thing about this method is that it’s free.  Once we get the hang of this and get closer to making a decision we may sign up for www.RealtyTrac.com to get a handle on foreclosed and bank-owned properties.  We’ll probably pull the trigger on this when we are in a better position to make offers.

Tracking prices takes a little time but I’m sure this will help us to make a wise decision when we decide to look in earnest.

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I was a bit surprised to hear that the word subprime has just now made it into Merriam-Webster’s Collegiate Dictionary. I guess it takes a full-blown crisis to get a word in edgewise.

The “sub” refers to the quality of the loan rather than the rate, since the rates of subprime loans usually end up higher than loans to people with excellent credit. (”Superprime” just sounds like a Number 17 with big muscles, I suppose.) It’s an innocuous enough of a term to not induce utter panic but has enough of a twinge of badness that we suspect that things aren’t quite right.

At least this euphemism for “risky” can modify both borrower and lender, so any comeuppance can be equally shared. (Or not. Since there is enormous pressure for lawmakers to Do Something About It, comeuppance will probably just get spread around to the rest of us, too.)

So again, I was a bit surprised that subprime wasn’t a full-fledged dictionary word, but I’m also very happy that it’s getting the legitimacy it deserves.

Now if we could just get deflabbify in there too …

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This is impressive. Impressive how is the question:

Single mom selling home, heart online

Sound bite version: Forty-two-year-old single mother needs to sell her south Florida home — and is offering her hand in marriage as part of the deal.

First, it was free closing costs. Then it was free upgraded appliances and a bonus room. Then, a free Porsche. Following that, a free house. Now, apparently, it’s a free spouse! Curiouser and curiouser.

A sign of the times? Unusual even given the times? A headline for the National Enquirer? Dr. Demento? Twilight Zone?

What’s your take?

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Curiouser and curiouser the housing market gets. The San Diego Union-Tribune (via Smart Spending) reports that Michael Crews Development is giving away $400k Escondido row homes with the purchase of a $1.6M+ San Pasqual Valley estate home.

That’s a huge concession. Mark Connal, vice president of realty, says:

We want to reduce our inventory … We’re prepared to bite the bullet. … Right now, every builder I know is selling houses at less than it costs to build them.

Bite the bullet, indeed. This is telling. Michael Crews Development is running for cover, and their competitors are taking it on the chin. If they’re unloading at a loss now, they must not expect things to get better soon.

This buy-one-get-one-free offer seems pretty smart as a form of damage control. The high-end houses like these have the furthest to go down. This deal gets two properties off of the builders’ books — a good thing to do when there’s eleven months’ worth of inventory on the market.

If you’re looking to buy a house, I think a little patience will pay off. The real estate market isn’t very happy right now, and will be more downtrodden next year.

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Free Money Finance posted a question from a reader who’s paying on a house that’s now worth less than what’s owed on it. The reader is upside-down on his mortgage, but the mortgage is a 30-year fixed-rate, and he paid 20% down. It wasn’t a teaser loan by any stretch, and it didn’t really sound like he was having trouble making the payments.

He’s like to be able to leave Las Vegas, but he’s stuck now unless he sells at a loss on top of losing his down payment. He bought near the top of one of the hottest local housing markets in a really big housing boom. (Las Vegas was one of a handful of metropolitan areas where real estate had appreciated more than 80% from 1998 to 2006.) That market is rapidly cooling and has now consumed all of his equity.

Maybe he couldn’t have chosen to live elsewhere, but he could have chosen not to buy. Immobility is the consequence of his decision to buy at that time. Moving is a poor option, if it’s an option at all. If he can’t swing the shortfall between what the house would sell for and what’s owed on it, he’s stuck. Hopefully the development he lives in — and will live in for a while — is completely built; others in a similar predicament may have a not-so-beautiful view of empty dirt lots and an unfinished clubhouse.

Misery loves company, and he’s certainly got lots of company. Most homeowners, if they’re not upside-down on their mortgages, have lost equity or at least have handed back some of their paper gains. I’m not in the same boat as this gentleman but I know I wasn’t really that much better informed than him, or that much more conservative in the amount of house I bought. I bought a house that I could afford, I got fixed-rate financing, and I put a good-sized down-payment, as he did. I just happened to buy a few years earler than he did, and that has kept me in the black so far. But my house wouldn’t sell anywhere close to what it appraised for in 2005 when I refinanced.

This softening housing market will strand a lot of people who bought near the top, and only a recovery will give them their mobility back. If they didn’t buy with crazy financing and didn’t buy more house than they could afford (like this gentleman) then that’s all that will happen. If not, then it will hurt more. We’ll see.

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(NOTE:  You’re not experiencing deja-vu; I posted this twice by mistake.  My internet connection dropped when I posted it the first time and I didn’t think it made it through.  But since there are comments on both versions, I’ll see where they both go.  This is known as A-B testing.  Enjoy! )

On the way home from town this past weekend, we passed a farm that was going to be sold at auction. My wife saw that the sale was an absolute auction. She asked me what was so great about an absolute auction. When she said that, my ears perked up.

An absolute auction implies that a sale will occur as long as at least one person bids any amount on the item for sale. So if I were the only person to show up for that auction and I bid a dollar, I’d get the whole farm for a dollar. Neither the seller nor the auctioneer could rescind their offer.

Auctions, unless otherwise specified, may have a reserve price, meaning that the auctioneer can refuse to sell an item if the bid price isn’t high enough. Sometimes the auctioneer will state that a particular item has a reserve, but they don’t have to do this.

If the auctioneer has advertised the sale as an absolute auction, though, his hands are tied. He cannot refuse any bids. Now the flip side is that an absolute auction is likely to draw more bidders than an auction that isn’t absolute (that is, one that can have a reserve price), because the bidders know that they won’t be wasting their time by going to an absolute auction. (Basically, I’m not going to be able to get the farm for a dollar. Someone else will outbid me.)

I don’t know what the reason for the sale of the farm is, but the seller is taking a risk by selling it at absolute auction. The farm could go for peanuts. But the seller may not have a choice. There are some reports of foreclosure auctions failing to get any bids because the minimum bid, or else the reserve, is too high. The fact that the seller is giving up the right to refuse low bids is a really big deal.

I suspect that as this housing crisis wears on there will be more absolute auctions: sellers getting whatever they can.

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