SPECIAL REPORT Road to Rescue

$8,000 fast cash for first-time homebuyers

HUD plans to tweak $8,000 tax credit rules so first-time homebuyers can get instant down-payment assistance.

NEW YORK (CNNMoney.com) -- Home prices are cheap. Affordability is at a record high. And the market is littered with distressed properties looking for a buyer.

But there is one big obstacle for many first-time house hunters looking to take advantage of the market: cash for down payments. The typical first-time buyer has only saved enough to cover 4% of the purchase price, according to the National Association of Realtors.

As part of the stimulus package, Congress created a refundable first-time homebuyers tax credit in hopes of helping on-the-fence buyers to take the home-purchase plunge. But buyers couldn't collect the $8,000 credit until tax time, rather than at closing time - when it's needed.

Now the U.S. Department of Housing and Urban Development is planning to change that. The agency is working on a plan that will allow Federal Housing Authority-approved lenders to provide buyers with the tax credit cash up front.

"We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a down payment," said Shaun Donovan, HUD secretary, in a speech last Tuesday before the National Association of Realtors.

States first

Donovan did not reveal many details, but the plan could be modeled after programs in Colorado, Missouri, New Jersey, Pennsylvania, Tennessee and Washington. To quickly infuse cash into their housing markets, these states created "bridge loans" that allow buyers to borrow against the $8,000 credit and then repay it with their tax refunds.

The first state to launch such a plan was Missouri, which rolled out its Missouri Housing Development Commission Tax Credit Advance Loan program on January 14 - a month before Congress approved the stimulus package. Since then, Missouri has approved applications by more than 300 borrowers and closed on 128 of them.

Lamar Cherry and his wife, Chrishanna, used the program to augment their down payment when they bought their home in Kansas City.

The couple purchased a four-bedroom, three-bath split-level home for $150,000, putting about 6% down. Much of that $9,000 came from the loan program, which they tapped so they wouldn't have to drain their reserves.

"We had money saved up that we were going to use for the down payment," said Cherry. "Now we can use some of that to buy some things we need for the house."

At closing, the Cherrys, like all buyers in the program, signed for their first mortgage, plus a second mortgage issued by the state. The second note is good for 6% of the price of the home, up to $6,750; there is a $350 set-up fee, but no interest is charged if the debt is repaid by June 2010.

In Missouri, borrowers can only access $6,750 of the $8,000 credit for down payments. "We wanted them to have a cushion below that $8,000 in case other tax liabilities show up," said Greg Spurgeon, the single-family homeownership administrator for the Missouri Housing Development Commission.

If borrowers don't pay off the note, it becomes a 10-year fixed-rate mortgage with an interest rate one-half percentage point above that of their first mortgages. For example, borrowers paying 6% on their first mortgages would be charged 6.5% on the second.

So far, Spurgeon said, a significant proportion of participating homebuyers have repaid their loans. He expects most of the others to do the same before the deadline.

Cherry has claimed the federal tax credit on his 2008 taxes, but he hasn't gotten his refund yet. He definitely intends to repay the loan before the 2010 deadline because, he said, not doing so would add about $75 a month to his house payments.

First Published: May 19, 2009: 12:29 PM ET

Housing Starts Hit Record Low in April

Housing Starts Hit Record Low in April
Housing starts hit a record low in April, the U.S. Commerce Department reported, but the news wasn't all bad as single-family construction rose 2.8 percent, the second straight month of gains in that sector.

Overall, housing starts fell 13 percent to an annual rate of 458,000, driven by the decline in construction of apartment buildings and condominiums. Building permits, an indicator of future construction, fell 3.3 percent to a record low of 494,000.

Here's a look at housing starts at the regional level:

● Northeast: fell 31 percent
● Midwest: dropped 21 percent
● South: declined 21 percent
● West: rose 43 percent

Analysts believe that while joblessness will keep some people from starting new households, increased demand for more housing is inevitable.

“Now that fewer homes are hitting the market for sale, the growing U.S. population will have fewer homes to choose from,” Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. in New York, wrote in a note to clients. “This will undoubtedly be a game changer for inventories and prices.”

Source: Bloomberg, Bob Willis (05/19/2009)

Price Stabilization Is First Step to Recovery

Price Stabilization Is First Step to Recovery
Home prices must stabilize before the broader economy can turn around, a panel of housing and economic experts said yesterday at a real estate summit hosted by the NATIONAL ASSOCIATION OF REALTORS® as part of its Midyear Legislative Meetings in Washington, D.C., this week.

Although there are encouraging signs in the housing market—including a pick-up of home sales in previously hard-hit markets, record affordability, and continuing low interest rates—prices have not yet hit bottom.

That’s keeping many households on the fence and making it hard for those who do jump in to get financing in the conventional market. What’s more, it’s making it harder for troubled homeowners to refinance, leading to more distressed sales, and thus further erosion in prices.

Tax Credit Bridge Loans on the Way

To put a floor under the market, the federal government must continue to intervene, panelists said, and expanding the first-time homebuyer tax credit is a good place to start. The credit should be expanded to all households, including those with higher incomes, increased significantly in value, perhaps to $15,000 to $16,000 instead of the current $8,000.

“Then it would start move real estate,” said Robert Sibcy, president of Sibcy Cline, REALTORS®, based in Ohio.

In a positive move, the U.S. Department of Housing and Urban Development is set to roll out guidelines permitting HUD-approved lenders, public housing finance agencies, and some nonprofit organizations to make bridge loans to home buyers. The loans would be collateralized by the $8,000 tax credit, giving buyers the upfront funds for a down payment.

The inability to use the credit for the down payment has been a major stumbling block for the tax credit. NAR has been calling for HUD to use its authority to allow the bridge loans.

During the summit, HUD Secretary Shaun Donovan announced that HUD has decided to allow bridge loans, sparking a loud cheer of appreciation from more than 1,000 REALTORS® attending the session.

“We want FHA consumers to access the credit to use as a down payment,” Donovan said. “I want to thank NAR for its partnership with FHA.” More details on the guidelines will be released in a few days, he said.

Donovan said the credit is expected to stimulate 100,000 first-time homebuyer purchases and 60,000 move-up purchases this year before it expires Dec. 1.

Further Government Actions Could Help

The credit alone isn’t enough to spur sales, many panelists said. Barry Bluestone, a professor of political economy at Northwestern University, called for the federal government to step in for a defined period of time, such as 18 months, to insure buyers’ home equity.

Providing protection against price drops would remove buyers’ reluctance to get into the market now, and since the program would be of limited duration, it could lead to a critical mass of households buying in the short-term and thereby shore up prices. Bluestone said he envisions the federal government insuring up to 85 percent of an owner’s home equity.

“This could stabilize prices over the next 18 months and cost the government practically nothing,” he said. “A small, temporary program can have a huge impact. It’s an idea whose time has come.”

Foreclosure Actions

The other way to stabilize prices is to finally get a handle on foreclosures, which exert heavy downward pressure on prices. Donovan said the administration is making gains in this effort with the voluntary cooperation of 14 of the country’s largest mortgage servicers, representing 75 percent of the market.

But several panelists said the voluntary effort hasn’t proven to be effective yet, and that a new wave of foreclosures is expected this summer.

“If modifications don’t work, we need to stop waiting for voluntary compliance,” said John Taylor, CEO of the National Community Reinvestment Coalition. “The government should buy [the loans] at fair market value, take them out of the market, modify them, and end the foreclosure crisis.”

The big worry about federal intervention among several panelists is the apparent lack of an exit strategy. It tends to be far easier for the government to get involved in the market, through interventions like the giant federal bank rescue plan, than it is to get back out.

“Right now the Federal Reserve is the mortgage-backed securities market,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association. “I don’t know the exit strategy and how long this can continue. It’s scaring off other investors. If the Fed stops buying, [what happens?] How do we get out of it?”

Don't Skimp on Mortgage Modifications

Martin Feldstein, the noted deficit hawk who chaired the Council of Economic Advisors for President Ronald Reagan, said mortgage modifications are one area where the administration shouldn’t skimp, even at the cost of growing the federal deficit, so he was disappointed that the administration is balking at the cost of that.

Referring to comments made by HUD Secretary Donovan, he said, “I’m disappointed the HUD secretary said it’s too expensive for the government to deal with negative equity mortgages…. We still have not dealt with the overhang of underwater mortgages.”

Even without further federal intervention the housing market will turn around, the panelists agreed.

The unknowns are how long recovery will take, how much damage will be done to the economy, and how strong the recovery will be.

The Shape of Things to Come

When the recovery does take hold, the housing market will be very different from what it was before, panelists said. The boom years of 2002–2007 were fueled not by income growth but by debt. After what’s been learned from that debacle, any future growth will have to be based on income growth, said Sarah Rosen Wartell, executive vice president of the Center for American Progress. Such growth will likely be far more moderate, but also more sustainable.

Wartell said the Obama administration was right to focus both on short-term stimulus and investment in clean energy, education, and healthcare reform, because those are the kinds of investments that can lead to the long-term income growth.

—Robert Freedman, REALTOR® Magazine

Competitive Pricing Called Key to Timely Sales

One of the hardest things for a home seller to do is to agree to drop the price, but in this tough market, realistic pricing is crucial, experts say.Home sale price reports can be behind the curve because these reports are based on property closings that lag the market, says Gary Malin, president of Citi Habitats in New York City. He recommends monitoring current sale listings instead.Mollie Carmichael, senior vice president of John Burns Real Estate Consulting in Irvine, Calif., says that setting the initial asking price 15 percent to 20 percent below other listings from the very beginning can get things moving and even trigger a bidding war."If you close fast and sell fast, you have a better opportunity to retain value," Carmichael says. "Premiums are very, very difficult to achieve in a market like the one we have today."

NAR- Homes Sales on the Rise

The National Association of Realtors, in its latest economic forecast, anticipates that the nation's unemployment rate will hit 10.2 percent next year. The group also boosted its expectations for resale home prices and sales in 2010 from an earlier forecast.
In 2009, NAR expects the median price of resale homes to drop 4.9 percent compared to 2008, dipping to $188,500, before climbing 4.4 percent to $196,800 next year.
NAR's latest forecast also calls for 4.97 million resale home sales this year, a 1.1 percent rise compared to 4.91 million last year, with sales of resale homes projected to rise 6.3 percent in 2010.
In its previous forecast, released last month (see Inman News), NAR estimated that the median price of resale homes would drop 5.1 percent this year and rise 4.1 percent in 2010, and that sales of resale homes would rise 1 percent this year and climb another 5.8 percent in 2010.
NAR's affordability index, which measures how affordable homes are for households based on mortgage rates and income levels, decreased in March but remained near its record-high February level -- the index was up 30.8 percentage points from its March 2008 level.
Also Monday, the association released the Pending Home Sales Index, which is based on home-purchase contracts signed but not yet closed.
The index, for the month of March, gained 3.2 percent compared to February and was up 1.1 percent over the March 2008 index.
Regionally, the index experienced a monthly rise in the South (8.5 percent) and West (3.9 percent) regions while dropping in the Northeast (-5.7 percent) and Midwest (-1 percent). And the index rose in the Midwest (8.2 percent), South (7.7 percent) and West (1.7 percent) while plummeting in the Northeast (-24.1 percent) region in March 2009 compared to March 2008.