Daily Mortgage Gazette

California’s first time home buyer and new home tax credit for 2010 that passed legislature and signed by Governor Arnold Schwarzenegger last week has raised questions, home buyers spirits and tax payers blood pressure.

Low blood pressure is important to me, therefore, I will concentrate on maintaining high spirits for you potential homeowners by answering the main questions and introduce some specific scenarios that many of you will relate to.

In March 2009, the initial $100 million tax credit for new homes only was launched. By July 3, 2009 the state had roughly 12000 applications, of which about 10,700 were allocated their credit. The new tax credit for 2010 launching on May 1, 2010 for $200 million will be split evenly; $100 million for new home sales and $100 million for first time home buyers. Should a first time home buyer want to buy a new home, their credit will fall under the new home allocation. At the current pace of resales in California, the first time home buyer allocation could be exhausted within 1 maybe 2 months, whereas the new home credit should last equal to that of 2009, about 4 months. Can you say FRENZY?

FAQ for California Tax Credit
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New Home Tax Credit Highlights
◦$100 million allocation for brand new home purchases
◦Any taxpayer can apply
◦Move up buyers, first time home buyers eligible
◦Detached or Attached single family residence; does not include rentals, 2nd homes or vacation homes
◦Ability to reserve tax credit for home not yet completed
◦Must be primary residence for at least 2 years or tax will need to be refunded
◦Homes must close escrow after May 1st, 2010 but before December 31, 2010
◦If credit lasts this long – you may obtain a contract by December 31, 2010 and close by August 1, 2011
◦Seller must submit Certification of home never been occupied
First Time Home Buyer Credit Highlights
◦$100 million allocation for existing homes; if FTHB buys a new home the credit is taken from the new home allocation
◦Standard sales, short sales, foreclosures are eligible
◦Escrow close date is considered purchase date – those that enter a purchase contract prior to April 30th, 2010 and close after May 1st, 2010 could be eligible for both the Federal refundable credit and the state credit
◦“First Time Home Buyer” = never purchased or no ownership in a principal residence during the preceding 3 year period ending on the date of purchase of the new principal residence
◦Must be primary residence for at least 2 years or tax will need to be refunded
◦Certification from taxpayer that they are a first time home buyer
Scenario #1
My wife and I are in the process of purchasing a new home jointly with my parents (50, 50). The new home is about $450,000 and the closing date of this new home will be in September 2010. There will be 4 persons on the title: me, my wife and both of my parents. However, only my wife, my kid and I will be living in the new home as our primary residence.

With my parents who are not going to live in the new home, on the title, will this affect my being qualified for the full amount of $10,000 California 2010 new home tax credit?

$450,000 purchase price
4 people on title, parents will not live in home
Husband/wife will occupy as primary residence = Qualified for credit

$450,000 x 50% ownership = $225,000 qualified purchase price
$225,000 x 5% credit = $11,250, however $10k is the max

50% Ownership x $10,000 credit = $5000 credit amount

You and your wife would be eligible for a $1666.66/year credit for 3 years as long as you stay in the home as your primary for the first 2 years.

Scenario #2
My wife and I plan on purchasing a home between May 1 2010 and Dec 2010; However, she and her sister are co-owners of a rental condo. Do we still qualify for first time homebuyer credit for CA?

As long as the residence that is held by your wife and her sister has not been a principal residence for her in the preceding 3 years up until the date you purchase the new home, she will be okay. So basically that condo has to be a rental or claimed as such on the tax returns.

Scenario #3
I am in the process of closing our escrow on April 19th for an existing home (not new) and I am a first time home buyer. Given that the tax credit is going to be effective from May 1st 2010, does it makes sense to push our closing date to May 1st ?

This is simply to take advantage of both credits, the Federal $8000 tax credit and the state. My suggestion if you choose to extend your escrow would be to speak with your tax professional to make sure you will be receiving a benefit from the tax credit.

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The California Tax Credit for new homes and first time home buyers is certainly a booster to those purchasing right now. This is a temporary boost folks. This should not be the only reason that you are out trying to purchase a home. If it is, well, you better hurry.

The Franchise Tax Board just released the update to the new credit on their site on March 30, 2010.

Standard & Poors released its Case-Shiller Index Wednesday. The report shows that, on a seasonally-adjusted basis, between December and January, home prices rose in more than half of the index’s tracked markets.

The strength of this month’s Case-Shiller report, however, should be put in context.

For one, the report is on a 2-month delay; it’s showing data from January, before the start of the Spring Buying Season and before the rush to beat the tax credit. Anecdotally, buyer interest has been strong since, leading to the types of multiple offer situations that drive home prices northward.

In other words, home values may be even higher than what’s reflected in the January Case-Shiller data above.

Furthermore, the Case-Shiller Index measures home values in just 20 cities nationwide and they’re not even the 20 biggest cities. Houston, Philadelphia, San Antonio and San Jose are specifically excluded from the report and each ranks among the country’s 10 most populous areas.

Despite its flaws, though, the Case-Shiller Index remains important. Much like the government’s Home Price Index, the private-sector report helps to finger broad housing trends and housing is still considered a keystone in the U.S. economic recovery.

Even if it’s two months slow.

Starting Monday, April 5, 2010, getting an FHA mortgage in Modesto and nationwide will be more expensive for borrowers.

In new guidelines set forth earlier this year, the FHA announced plans to raise additional revenue and reduce the overall risk of its mortgage portfolio. 

The changes include the following:

1. Increase Upfront Mortgage Insurance Premiums from 1.75% to 2.25% for everyone
2. A plan to reduce seller concessions from 6 percent to 3 percent
3. An increase in minimum downpayment for FICOs 580 or lower

For your own loan, to avoid being subject to higher loan costs, make sure to have your FHA Case Number assigned prior to Monday, April 5, 2010.  That means you’ll want to give a full mortgage application before the weekend so your lender can register your loan in time for the deadline.

But don’t leave your application to the last minute.

Friday is Good Friday so most banks will be closed. Your true FHA deadline, therefore, is Thursday April 1.

Also worth noting is that the FHA isn’t done with its changes.

In its policy statement, the group also announced its plans to petition Congress to raise monthly mortgage insurance premiums.  The FHA’s formal request, in summary:

1. Raise monthly premiums by roughly 0.30%, or $25 per $100,000 borrowed per month
2. Lower upfront mortgage insurance premiums by 1.25%, or $1,250 per $100,000 borrowed at closing

For now, the request is neither approved nor acknowledged by Congress. It’s merely a request. And in the event that Congress does approves it, the FHA reserves the right to change its projections.  Either way, it means higher costs for consumers. 

The best plan, therefore, is to get your FHA mortgage into underwriting ahead of the switches because borrowing money will be harder, and more costly.

Mortgage markets tanked last week, raising rates in California to their highest levels in a month. 

Most of the losses occurred Wednesday in what was the worst 1-day mortgage market performance in more than 6 months. Even Friday’s rally could barely dent the losses. Most of the movement was tied to geopolitical concerns and worries of a ballooning federal debt load. 

The best time to lock a conventional or FHA mortgage rate last week was Tuesday morning.

This week, markets should remain volatile. There’s a large set of economic data due for release, plus trading volume will thin as the week goes on because markets are closed Friday for Good Friday.

Coincidentally, Friday is also the day that the March jobs report is released.

The non-farm payroll report is expected to show net job growth of 187,000 in March. This is a large number as compared to last month’s net loss of 36,000 job. However, analysts are already dismissing March’s numbers as skewed by both the bad storms of February, and the temporary hiring of Census workers.

In most months, major job growth would be bad for mortgage rates.  This month, that won’t be the case. It will take a figure north of 200,000 to cause rates to rise and the higher the actual number, the more that rates will respond.

Also this week, on Wednesday, the Federal Reserve’s $1.25 trillion program to support mortgage markets sunsets. Fed insiders estimate that the program dropped rates 1 percent since its inception in 2008. It’s reasonable that mortgage rates will rise after its end, therefore.

Home values fell again in January, according to the Federal Home Finance Agency’s Home Price Index. Values were reported down 0.6 percent, on average.

We say “on average” because the Home Price Index is a national report. It doesn’t capture the essence of a local market like Stanislaus County , or even a city market like Stockton.

The most granular that the monthly Home Price Index gets is regional and January’s report shows that:

• Values in the Mountain states rose 2.0%
• Values in the Pacific states were flat
• Values in the East North Central states fell 1.8%

It’s hardly helpful for home buyers entering the market, or home sellers trying to properly price a home.  Furthermore, because the Home Price Index reports on a 2-month delay, its data fails to reflect the current market conditions.

Versus January — the period from which HPI data is collected — mortgage rates are lower, buyer activity is up, and the federal home buyer tax credit is closer to expiring.  These each can have an impact on housing.

Ultimately, national real estate data like the Home Price Index is best suited for lenders and policy-makers.  National data helps to identify trends that shape formal policy, but it doesn’t help you, specifically. 

Since peaking in April 2007, the Home Price Index is off 13.2 percent.

April 15 is Tax Day and the IRS estimates that the average U.S. household will receive a $2,800 tax refund this year.  If you’re among the Americans expecting a refund, this 4-minute piece from NBC’s The Today Show may be helpful. It’s a talk about how to receive a refund and what to do with it.

Some of the key points discussed include:

1. Why state-issued tax refunds may be delayed this year
2. How wage-earning people can claim their “Making Work Pay” tax credit of up to $800
3. How to direct a tax refund to a 529 college savings plan for an even bigger tax refund

There’s also some sensible pointers on using tax refunds to pay down credit card debt, and to fund retirement plans, among other purposes.

If you haven’t started your tax planning yet, try to avoid leaving it for the last weekend.  Not only will your tax preparer have more time for you now, but you’ll leave yourself more time to track down important statements and receipts that can boost your federal and state tax deductions.

Taxes are due in 21 days.

As expected, Existing Home Sales fell in February, slipping 30,000 units versus January’s numbers. It’s the 4th straight month in which Existing Home Sales were lower, month-over-month.

An “existing” home is one that is previously owned and lived-in (i.e. not new construction).

Existing Home Sales peaked in November 2009, just as the First-Time Home Buyer Tax Credit was set to expire. Immediately thereafter, according to the National Association of Realtors®, monthly sales plunged 17 percent in December, then another 7 percent in January.

Comparatively, February’s dip is a modest 0.6 percent and is more in line with the pre-tax-credit Existing Home Sales trend.  The real estate market is rediscovering its normal. 

But “normal” may not last for long.

When the federal home buyer’s tax program was extended last year, the new rules stated that home buyers must be under contract for their new, respective homes on, or before, April 30, 2010 in order to claim up to $8,000 in federal money.  That deadline is approaching and many markets — Modesto included — are experiencing a surge in buyer traffic as April 30 nears.

The Existing Home Sales data doesn’t reflect this new demand, nor the number of new contracts written. It only accounts for home closings and, in February, closings were down.

For today’s buyers, the market looks favorable. The federal tax credit is in place, mortgage rates stubbornly stick near all-time lows, and home prices are staying in check.

Existing Home Sales should gain through March and April, pressuring home prices higher. And, by the time the press reports the gains, the best deals in the city may already be gone.  Consider acting sooner rather than later.

CNNMoney.com recently published its 2010 forecast and projections for home prices in the country’s largest metro markets. 

Listed as “Top 25″ and also comprehensively by state, CNNMoney.com’s home price forecasts puts Santa Rosa, California at the top of 2010’s home appreciation list and Hanford, California at its bottom.

The 10 cities projected for highest home appreciation in 2010 are:

1. Santa Rosa, CA : +6.0%
2. Cheyenne, WY : +4.7%
3. Kennewick, WA : +4.6%
4. Merced, CA : +4.4%
5. Bremerton, WA : +4.2%
6. Fairbanks, AK : +4.2%
7. Corvallis, OR : +4.1%
8. Tacoma, WA : +3.9%
9. Anchorage, AK : +3.8%
10. Bend, OR : +3.3%

The Pacific Northwest is the region most heavily-represented among price gainers. The Southeast and Middle Atlantic are most represented on the under-perform list.

However, just because a city’s homes are expected to appreciate (or depreciate) in 2010, that doesn’t mean that every home within its limits will follow suit.  Real estate cannot be grouped on a city level like CNNMoney.com tries to. There will always be areas in demand within city limits in which prices rise, just as there will be out-of-demand areas in which prices fall.

Real estate data can’t be grouped by city or even by ZIP code, really.

Real estate in Modesto is more local than that.

When we say “real estate is local”,  it means that every street in every town has a distinct set of traits that drives its home values. Homes that are one block closer to the train; or, homes that are facing north; or, homes that are made of brick. Each of these characteristics can affect a home’s desirability which, in turn, can affects its sales price.

National surveys can’t capture “essence” like this. They only report on the aggregate.

For local real estate data, look to established, publicly available websites and to active, local real estate agents.  Both will have data and insight that can help you.  National surveys often make for good headlines, but do little to help homebuyers find good value.

Mortgage markets closed unchanged last week, but that’s not say mortgage rates were calm. Monday through Wednesday, rates improved steadily before a swift, late-week sell-off unwound the gains.

Mortgage rates have been very low for a very long time — against the expectations of most market experts.  The speed of the Thursday-Friday reversal may signal that markets are preparing for change.

One key story from last week was the Federal Open Market Committee’s scheduled Tuesday meeting. Upon adjournment, the Fed voted 9-1 to hold the Fed Funds rate in its current target range near 0.000% and reiterated its plan to keep rates low for “an extended period of time”. 

Kansas Fed President Thomas Hoenig was the lone dissenting vote.

For rate shoppers in California , take note. 

The Fed specifically mentioned that the its $1.25 trillion mortgage buyback program will end, as planned, March 31, 2010.  This could force rates higher over the next two weeks because, according to the Fed, the existence of a buyback program forced rates lower by 1 percentage point in 2009.

When the program ends, it’s expected that markets will give back some of that 1 percent, leading to higher mortgage rates for conventional and FHA borrowers.

This week, in addition to the buyback program’s looming end-date, there’s several other potential influences on mortgage rates:

1. The Existing Home Sales data for February is released Tuesday, along with the Home Price Index
2. The New Home Sales data for February is released Wednesday
3. Consumer Confidence data hits Friday

Strength in any — or all three — of these reports should put pressure on mortgage rates to rise.

But there’s one wildcard this week and that’s the aforementioned Kansas Fed President Hoenig’s scheduled speech Wednesday morning. Typically, Fed members stay on message when making public appearances, but Hoenig is expected to talk about why rates should be higher, and what the Fed needs to do to prepare the economy for late-2010 and beyond.

His words could lead Wall Street to rethink its position on the mortgage bond market and that could cause rates to spike Wednesday afternoon.

Mortgage rates remain volatile and are still relatively low. If you’re unsure of whether now is a good time to lock in, consider that there’s a lot more room for rates to rise than to fall right now. Especially with momentum shifting for the worse.

Homes are more affordable in Stanislaus County and across the nation as the housing market emerges from a slow winter season with mortgage rates still near 5 percent.

Soft housing and low rates are an excellent combination for home buyers but whereas home values rise with a gradual pace, mortgage rates change in an instant.  It’s something worth watching.

Each 0.25% increase to conventional or FHA rates adds approximately $16 per month for each $100,000 borrowed. Mortgage rate volatility can change your household budget.

If you’re trying to gauge whether rates will be rising or falling, one keyword for which to listen is “inflation”. Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that goods are more expensive, per se. It’s that the dollars used to buy them are worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  Mortgage rates move opposite of bond prices. 

Prices down, rates up.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of homeownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Modesto home may be as good as it gets.