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A professor once told me, “People are creatures of habit and cycle.  If you know the habit you can predict the cycle, and if you know the cycle you can predict the habit.”  That being said, the cycle I am used to seeing this time of year is a robust Spring real estate market followed by a lazy relaxing summer only to pick up again early fall.  Even past years when the economy was sluggish by mid March buyers are shopping for homes and each week more and more sellers put their home on the market.  The habit is to act quickly to get the right house, close by June, get the kids into a new neighborhood at the beginning of summer and meet new friends, and be ready to start at their new school by fall. That’s the normal cycle and habit.

This year is different. We need to look at the habit first and predict the next cycle.  Buyers are not buying and sellers are not selling.  People are out of work or hear they may lose their job.  There is less money coming into the household, but expenses remain the same or increased.  People are not spending.

In real estate this means buyers will negotiate an amazing price for their new home.  Distressed homes will need to sell for even less to compete, home values may drop further, but as prices continue to drop eventually buyers will come out and take advantage of the “good deals.”  As new buyers come out interest rates will go up. 

The time to get into the market is when everyone else is out of the market.  My advise, jump into real estate now and beat the next cycle.  Do not follow the habits of everyone else.  Do the opposite.

New look – Thank you Jamey Austad at Dala Ad Agency

John asked me, “What price range do I qualify for?”

Before home buyers hit the streets to shop for homes with their realtors, buyers are required to meet with a mortgage lender and get preapproved.  Answering John’s question should be a simple answer.  It’s not.

Take two people with the exact same income, assets and debts and they will differ on the amount they want to spend each month on housing.  One couple wants the home of their dreams and is willing to shop at the top of their price range to purchase their forever home.  They are comfortable living a meager life style now for the right home.  Compared to John, he wanted food with his meals, be able to afford furniture and be able to take vacations. 

If you want to stretch your budget take 45-50% of your total gross income and that’s the amount you have left to pay your mortgage and your monthly debts.  Keep in mind Uncle Sam takes money too. 

Planning to furnish your new home? Purchase at 36% of your gross monthly income to cover housing and your monthly debts. 

I worked with John to figure out a budget and the amount of monthly payment he felt he could afford.  After all, I an tell John what he qualifies for, but I’m not the one making his house payment. 

FYI: From my experience…the most conservative home buyers purchase under 25% of their gross income.

FHA announces increase to Upfront Mortgage Insurance Premium. Currently at 1.75%, as of 4/5 going up to 2.25%.  On a $200,000 loan this is a $1000 increase.  Purchase prior to April to save money.

European Central Bank announced it will help bail Greece out of their financial woes – this will take the steam out the recent support of our bond market which kept rates low the past few days.  If you are floating your interest rate, it’s time to consider locking in.

The bonds market favored a weak jobs report, which showed less people working than estimated.  This was just enough to send rates down a tick, when earlier this week everyone held our breath as rates appeared to be moving higher (rates will move higher, soon, but not this week).  Next week retail sales could shake up the market for a day or two.  I’ll keep you posted.

When will rates go up? Most likely in March or April as the Fed’s stop purchasing mortgage backed securities.  Just in time for the sleeping home buyers who decided to take a nap once the home buyer tax credit was extended.  If you know someone purchasing a home this Spring to take advantage of the $8,000 home buyer tax credit – wake them up! They could buya larger home and it would cost less per month if rates stay at their current levels.  Eric Rosengren of the Federal Reserve Bank of Boston has predicted rates could increase .75% in 2010. 

HOW BIG? – The US economy shrunk by 2.4% in 2009 to 14.5 trillion in size. China’s economy grew by +8.7% in 2009 to 4.9 trillion in size (source: Commerce Department).

THIS YEAR? – the US economy is projected to grow +2.7% in 2010. China’s economy is projected to grow +10% in 2010 (source: International Monetary Fund).

Mortgage bonds are having a few bad days and interest rate are going up.  Get used to it.  We may see rates come down a bit in the next few weeks but by March rates should be on a stiff climb as the Federal Reserve Bank stops buying up Mortgage Backed Securities and the “real” rates begin to appear. 

Keep in mind even with rising rates, this is still considered an incredible interest rate market.  Waiting for the bottom, the lowest of the lows.  That’s passed folks. The fat lady sang. If you are buying are planning to purchase a home in 2010 do it this Spring while rate are low.

Watching interest rates the past few days is similar to watching a ping pong match, although instead of watching the ball move quickly from side to side this ball is moving rapidly up and down. The bond market is moving between resistance and support between 50 and 200 day moving averages.  That’s a lot of movement in a short amount of time.  What does this mean to you? If you are watching rates to refinance – lock in when the rates see some improvement because the next day it’s likely to be gone. In my opinion, take the week off.  Enjoy the Holiday season and start watching rates again January 4th. It’s likely to be a wild game for the next two weeks.

From The Mortgage Market Guide -

Homebuyer Tax Credit Update!

TAX CREDIT OVERVIEW

Who Gets What?

First-Time Homebuyers (FTHBs): First-time homebuyers (that is, people who have not owned a home within the last three years) may be eligible for the tax credit. The credit for FTHBs is 10% of the purchase price of the home, with a maximum available credit of $8,000

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

Current Owners: The tax credit program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

What are the New Deadlines?

In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

What are the Income Caps?

The amount of income someone can earn and qualify for the full amount of the credit has been increased.

Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible

Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.

What is the Maximum Purchase Price?

Qualifying buyers may purchase a property with a maximum sale price of $800,000.
  
What is a Tax Credit?

A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.

How Much are First-Time Homebuyers (FTHB) Eligible to Receive?

An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.

Who is Eligible fort FTHB Tax Credit?

Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible.

This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.

As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.

How Much are Current Home Owners Eligible to Receive?

The tax credit program includes a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Can Homebuyers Claim the Tax Credit in Advance of Purchasing a Property?

No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.

Can a Taxpayer Claim a Credit if the Property is Purchased from a Seller with Seller Financing and the Seller Retains Title to the Property?

Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Some examples of this would include a land contract or a contract for deed.

According to the IRS, factors that would demonstrate the ownership of the property would include:

1. Right of possession,
2. Right to obtain legal title upon full payment of the purchase price,
3. Right to construct improvements,
4. Obligation to pay property taxes,
5. Risk of loss,
6. Responsibility to insure the property, and
7. Duty to maintain the property.

Are There Other Restrictions to Taking the FTHB Credit?

Yes. According to the IRS, if any of the following describe a homebuyer’s situation, a credit would not be due:

• They buy the home from a close relative. This includes a spouse, parent, grandparent, child or grandchild. (Please see the question below for details regarding purchases from “step-relatives.”)
• They do not use the home as your principal residence.
• They sell their home before the end of the year.
• They are a nonresident alien.
• They are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
• Their home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
• They owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.

Can Homebuyers Purchase a Home from a Step-Relative and Still be Eligible for the Credit?

Yes. As long as the person they buy the home from is not a direct blood relative, the purchase would be allowed.

If a Parent (Who Will Not Live In The Property) Cosigns for a Mortgage, Will Their Child Still be Eligible for the Credit?

Yes, provided that the child meets the other requirements for the tax credit.