Baltimore Metro Real Estate

The Internal Revenue Service has released the new form that eligible home buyers need to claim the first-time home buyer credit this tax season, as well as new documentation requirements to deter fraud related to the first-time home buyer credit.  Processing of those tax returns will begin in mid-February.

With the release of Form 5405, First-Time Home Buyer Credit and Repayment of the Credit, and the related instructions, eligible home buyers can now start to file their 2009 tax returns. Taxpayers claiming the home buyer credit must file a paper tax return because of the added documentation requirements.

Some of these early taxpayers claiming the home buyer credit may see tax refunds take an additional two to three weeks. In addition to filling out a Form 5405, all eligible home buyers must include with their 2009 tax returns one of the following documents in order to receive the credit:

-A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.

-For a newly-constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

In addition, the new law allows a long-time resident of the same main home to claim the home buyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home.

The IRS has stepped up compliance checks involving the home buyer credit, and it encourages home buyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

-Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
-Property tax records or
-Homeowner’s insurance records.

The IRS also reminds home buyers that the new documentation requirements mean that taxpayers claiming the credit cannot file electronically and must file paper returns. Taxpayers can still use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.Normally, it takes about four to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached.

For those home buyers filing early, the IRS expects the first refunds based on the home buyer credit will be issued toward the end of March 2010. The IRS encourages taxpayers to use direct deposit to speed their refund.

For more information, visit www.IRS.gov.

Upgrade your insulation, windows, doors, roofing, heating and air-conditioning system or water heater, and you could qualify for a federal tax credit for 30% of the purchase price of the product—up to a $1,500 maximum credit. The credits can be claimed on a homeowner’s income taxes for 2009 or 2010, whatever year the improvements were purchased. With a credit, the amount comes off any taxes you owe. The credit is nonrefundable, meaning it allows taxpayers to lower their tax liability to zero, but not below zero, according to the Internal Revenue Service. 

To qualify for the credit, you must place those purchases in service between January 1, 2009 and December 31, 2010.  The $1,500 cap applies to the aggregate amount of credits claimed in both years combined. Only improvements made to your principal residence qualify—vacation homes are not considered.” Typically, for more costly improvements—including solar water heaters, solar panels, small wind-energy systems and geo-thermal heat pumps—the credit is for 30% of the purchase price, with no cap, according to the Energy Star website. Fuel cells also are covered, at 30% of the cost, up to $500 per 0.5 kilowatt of power capacity. Credits for these improvements are available through 2016, but you must claim them for the tax year in which you made the purchase. And all but the fuel-cell equipment can be used for a vacation home as well. To qualify for the credits, all of the products must be used inside a home. That means equipment used to heat a pool or hot tub doesn’t qualify.

Also, the federal tax credits don’t always cover the cost of installation. The installation costs for heating and cooling systems and some other higher-cost improvements qualify, according to the Energy Star site. But installation of windows, insulation, doors and roofs doesn’t. The tax-credit rules are different if you are building a new home. In this instance, you can qualify for the credit for some upgrades, including geo-thermal heat pumps, solar panels, solar water heaters, small wind-energy systems and fuel cells. But you won’t get a tax credit for the purchase of windows, doors, insulation, roofs, heating and air-conditioning systems, and nonsolar water heaters, according to the Energy Star site. 

Make sure any products you purchase come with a Manufacturer Certification Statement, a signed statement from the manufacturer that says the product qualifies for the tax credit. You will need that and any receipts when you claim the credit on your taxes.

When looking to make a home more energy efficient, consumers typically first turn to insulation and windows. If you have an older home and never looked at the insulation, now is the time to do that. Insulation is one of the easiest things to do that is covered by the tax-credit promotion.The federal tax credit doesn’t cover the cost of installation.  Still, the credit makes the cost of a more efficient window competitive with a lower-grade window that doesn’t qualify.

Last week, Federal Reserve Chairman Ben Bernanke said that as the economy heals, the Fed will be very vigilant to protect against inflation. While inflation is not a problem at present, it will most certainly become a problem down the road. So why does this matter if you are considering purchasing or refinancing? Because inflation is the arch-enemy of Bonds and home loan rates, and just them idea of it coming has caused both Bonds and home loan rates to worsen in recent days. In addition to the fear of inflation, the Fed’s purchasing program of Mortgage Backed Securities is already slowing down, and the reduced demand for these Bonds is also driving home loan rates higher.

Bottom line:

Home loan rates are already on the rise, and we won’t likely see these low historic levels again. Still, despite the fact that I run into people who can’t conceive of a rate over 6%, interest rates are still very near historic lows, and the opportunity these low rates present is huge for homebuyers or people looking to refinance. 

Mortgage rate Forecast for the Week :

Despite the Bond market being closed on Monday for Columbus Day, the Stock market will be open, and the week ahead has plenty of market-moving economic reports on tap.

On Wednesday, the Retail Sales Report will be released. This is the most-timely indicator of broad consumer spending patterns, so the markets will be watching to see if it comes in near expectations. Thursday brings us inflation news when the Consumer Price Index (CPI) is reported. After Bernanke’s comment last week about the Fed protecting against inflation, the markets will be watching this report closely.

On Friday, the Preliminary Consumer Sentiment Index will be reported. This survey is conducted by the University of Michigan and measures consumer attitudes regarding present and future economic conditions. The index rose at the end of September, so the markets will be watching to see if that boost in confidence continued into this month’s preliminary report.

In addition to the important economic reports described above, industry experts and traders will be paying close attention to the release of the Meeting Minutes from the Fed’s most recent Open Market Committee meeting. Once again, any talks about future inflation could move the markets - particularly after Bernanke’s comments last week.

Remember:

Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.  Mortgage Bonds were unable to close above a tough technical ceiling of resistance last week and were ultimately pushed lower, causing home loan rates to rise.

Feel the First-Time Homebuyer Tax Credit should be extended or expanded? Let your Senator or Representative know.

“In normal times, we would not favor government involvement, but these are not normal times,” says RE/MAX International President Vinnie Tracey. “At RE/MAX International, we feel strongly that such Tax Credits will not only help stabilize housing prices, but will help us from falling back into recession.”

Excerpts from Tracey’s email to associates include:

…Over a third of all sales have been to First-Time Homebuyers, and research shows that each home sold puts about $60,000 into the local economy. A great return on the government’s investment.

…In normal times, we would not favor such government involvement, but these are not normal times. At RE/MAX International, we feel strongly that such Tax Credits will not only help stabilize housing prices, but will help us from falling back into recession.

…Many independent analysts favor such a Tax Credit. Mark Zandi, Chief Economist with Moody’s, says market conditions “remain extraordinarily fragile” and that “the risks of not doing something like this are too great.” Zandi also says that the benefit multiplier of a Tax Credit for all homebuyers is greater than most other credits for individuals and businesses.

For those of you who would like to have some influence on the process, I would encourage you to write to your Senator or Representative in Washington. Now is the time to take action, before the Tax Credit expires.

If you would like information on specific legislation to extend the Tax Credit, you may like to visit Senator Benjamin Cardin’s web site (SB 1678). To learn about legislation that would expand the Tax Credit to all homebuyers, I would encourage you to visit Senator Johnny Isakson’s web site, or Representative Howard Coble’s web site.

Although the RE/MAX International Chairman and Co-Founder Dave Liniger sees continued real estate turbulence over the next few years – especially with another wave of foreclosures coming in 2010 – he predicts a significant rebound in 2012 and beyond; a sustained stretch of increasing home sales will start when Millennials enter their prime home-buying years.

“What’s more, the upswing won’t be built on questionable lending practices, overextended buyers or insane debt-to-income ratios. Instead, it will be based on a combination of pent-up demand and demographics. And the youngest group of adults, Generation Y, will provide much of the spark,” Liniger writes in a bylined article headlined “74 Million Young Adults Will Lead the Next Wave of Demand” in an article appearing in the September/October edition of The Real Estate Professional.

The sheer size of Gen Y, Liniger notes, virtually ensures a steady stream of first-time buyers over the coming decade. Immigrants and minority families will add to the volume.He writes: “Household formation, a key component in housing demand, has been slipping recently. Annual net additions fell from 1.37 million in the early 2000s to 1.06 million the past three years. Estimates suggest a figure close to 800,000 for 2009. Historically, new households have a major impact on our industry, as they represent a vital influx of renters and/or buyers. It is important for these families, often first-time buyers, to push the market upward and forward.

“Ultimately, he writes, true professionals find ways to succeed under any market conditions.

Another highlight in the edition is a story noting that Richard Parke, Broker/Owner of RE/MAX Central in Lansdale, Pa., is one of five new inductees into the REBAC Hall of Fame. Welcome to the club, Richard!

There will be big economic reports to bookend the week, starting with Monday bringing the Fed’s favorite gauge of inflation, the Core Personal Consumption Expenditure (PCE) index, which is found within the Personal Income Report. Remember, inflation is the archenemy of Bonds and home loan rates, and if this report shows inflation is on the rise, it could dampen the improvement that Bonds and home loan rates mustered up on Friday.
To end the week, Friday will bring the always important Jobs Report. Last month’s report showed that there were 539,000 jobs lost in April versus expectations of a 610,000 loss, representing the smallest job loss since October. Even though the Unemployment Rate moved higher and hit a 26-year high of 8.9% in April, this is a lagging indicator, and many other data points have hinted that the worst could be over for the job market. It will be important to see if the most recent numbers continue to move in that direction.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bond prices and home loan rates were able to end the week on an improving trend after record supply caused them to worsen dramatically midweek. I will be watching closely to see if Bonds can continue to climb their way out of last week’s free fall.
Chart: Fannie Mae 4.0% Mortgage Bond (Friday May 29, 2009)

Many people believe their home is a good investment, but according to the Wall Street Journal, it is not.

Now, I like the WSJ, but like most all media coverage I’ve seen, they have forgotten that real estate is local (very local), and they have not exactly covered the issue from all sides.

The article really only looks at property appreciation to determine the value of the investment. There is no discussion of the income tax deduction for mortgage interest, no mention of the fact your home value doesn’t suffer the ups and downs of daily economic trends, and no thought that a well-selected property can be renovated and updated to perform well for resale no matter what the market. Oh, and I’d say there is value in the fact that it is the only investment I know of that you can sleep in…

Still, the gist of the article is correct - your primary residence should not be considered an “investment,” the kind makes money for you, but that doesn’t mean real estate isn’t a good investment.

Now there is a story - there are plenty of people out there with investment properties with positive cash flows, and of course, there are the other factors, such as depreciation, the ability to defer taxes through 1031 exchanges, etc.

While I am glad the WSJ article points out that people’s primary residences are not generally good investments, I’m afraid some readers might come away from the article thinking all real estate is a bad investment.  Don’t.

It is a buyer’s market for sure.

Buyers have everything going for them: 50-year low mortgage rates, wide inventory selection, tax credit for first-timers, and a record high affordability index.

The only thing they lack is confidence, and some would say, jobs.

Even so, rising affordability has been associated with rising home sales even in times of recession because about 90 percent of the workforce still have jobs. Assuming 20 percent of the households with jobs are filled with anxiety about losing those jobs, that still puts us at 70 percent of the workforce with stable employment who can respond to housing incentives.

The home buying process requires several months; the kick from the stimulus will not show up in the data until at least May, for which the data will be reported in June/July, at which time we should hear some positive reporting.

While most of the media chatter has been about the provisions in the stimulus package, there is another issue on the table. There is a proposal to limit mortgage interest deduction among very high income households, supposedly in order to raise tax revenue and reduce the size of the budget deficit. The National Association of Realtor’s position is that this will worsen the U.S. economy and thereby lower U.S. tax revenue. Falling home prices beyond the levels that can be justified will lead to consumer spending contraction, rising foreclosures, rising re-default rates on modified loans, and further destruction in the bank balance sheet.

Neither the stock market nor the economy can recover in a sustainable way without home price stabilization. Any changes to mortgage interest deduction will apply more pressure for home prices to fall.

Anne Arundel County – March 2009 Sales,  $100K to $5M

Anne Arundel County, MD
From: 03/01/2009 to 03/31/2009                Statistics generated on: 04/08/2009

Source: Metropolitan Regional Information Systems, Inc. - MLS Resale Data