Post-war Real Estate / Mortgage Market Looks Good May, 2003 By Jim Woodard As the negative impact of the war in Iraq passes into history, real estate and mortgage industry leaders are predicting a steadily improving market for at least the rest of this year. The number of newly constructed homes will probably equal or surpass last year’s volume of 1.7 million units, it is predicted by the National Association of Home Builders. The construction of single-family homes will remain especially strong, with multifamily production receding only slightly. A key reason for this prediction, according to a report from NAHB, is that mortgage interest rates are unlikely to increase until at least late this year, and possibly not until early next year. Long term rates this year will be about half a percentage point lower, on average, than they were last year. They will climb only slowly as the year progresses, the NAHB report predicts. Housing has greatly contributed to the growth in the nation’s economy through the past recession and into the current period, it was noted by David Seiders, NAHB chief economist. “One question for the economy is what will happen when housing activity tapers off and is no longer a `growth engine’ for the Gross Domestic Product. The housing component of our Gross Domestic Product grew 12 percent in this year’s first quarter. That’s faster than any other part of the economy.” As interest rates push a bit higher, the current refinancing boom should lose some steam, the report noted. But there are at least a couple more good months in store for refinancing, according to Frank Nothaft, chief economist for Freddie Mac. “Refinancing an average $130,000 to $140,000 home loan last year reduced monthly payments by $100. That extra money every month in a family’s pocket is as good as a tax cut. And in cash-outs from refinancing last year alone, homeowners took away an extra $90 billion from the settlement table,” Nothaft noted. He also reported that the current inventory of homes for sale is at its lowest level in 30 years. “This, too, is evidence that a so-called `price bubble’ isn’t forming. You need oversupply for a price bubble.” * * * Baby boomer seniors pay/borrow more for retirement home What happened to the old traditional practice of empty-nesters selling their old homestead where they raised the kids and buying a much smaller and less expensive retirement home? Now we learn that more than a fourth of home buyers, age 50 and older, are paying more for their retirement home than the price received for their big homestead. Their mortgage balance and monthly payments actually go up, not down, in many cases. This was revealed in a recent survey conducted by the National Association of Home Builders. That new home may be smaller but it often includes up-to-date amenities like structured wiring, facilities for an office and exterior maintenance services. These are the type of features demanded by today’s baby boomer home buyers. “Probably the most striking aspect of the initial results of the NAHB study is that many home buyers over age 50 are not simply cashing out the equity they built up in the home where they raised their children and downsize into a less expensive house or apartment,” it was stated in the survey report. “Baby boomers continue to rewrite the rules of consumer behavior at every stage of life, and home builders and mortgage lenders need to be prepared to meet their changing demands.” * * * Mortgage companies are upgrading procedures Mortgage companies have recently taken a leap forward in making their operations more sophisticated and efficient. This trend, motivated by increasing competition and advancements in high-tech capabilities, makes it possible for mortgage brokers and loan officers to provide much improved and faster processing and closing services for their borrower clients. “Our firm utilizes the very latest technologies to make processing a loan quick and efficient,” said Julie Gaiser-Levy, a particularly active loan officer with Home Savings Mortgage, a rapidly growing mortgage banking firm based in Oxnard, Calif. “Everything is automated throughout our operations. I can track my files on a computer at any point from start to finish. It’s great to be able to provide this kind of information access and reporting service for clients,” she said. Her firm has established a color coding system to minimize the chance of confusion and distinguish each type of loan they offer. This ensures that the right loan package always goes to the right individual or department. “Another step we’ve taken to enhance our efficiency is the establishment of a special group of individuals who work closely with loan officers to track and expedite each loan being processed,” Gaiser-Levy said. “We call this our Liaison Department. Their sole purpose it to aide loan officers in making sure all loan packages move through the system quickly and problem-free.” * * * HUD getting tough The Department of Housing and Urban Development (HUD) is beefing up its enforcement capabilities in cases where kickbacks and referral fees are illegally paid by settlement providers. Provisions of the Real Estate Settlement Procedures Act (RESPA) prohibits such under-the-table payments. But HUD has been weak in enforcing it. The staff at the RESPA enforcement office has been increased for the precise purpose of getting tough on this enforcement. This should result in increased credibility for the mortgage lending process generally, thus benefiting mortgage bankers and brokers. “We are literally tripling our enforcement staff,” said John Weicher, HUD assistant secretary. “We will have 30 people working on RESPA enforcement before the new RESPA rule comes out.” HUD receives about 900 RESPA-related complaints a year. About a third of those involve Section 8 complaints about illegal kickbacks and referral fees. These complaints come primarily from the industry. Another 23 percent of complaints deal with servicing issues under Section 6 of RESPA. * * * Key problem for renters who want homeownership Not surprisingly, a new survey shows that the biggest hurdle for renters who want to become homeowners is coming up with the needed down payment to purchase and finance a home. About 51 percent of those surveyed said that was the key problem the faced. It’s also interesting to note that 84 percent of renters indicated they do not plan to make a 20 percent down payment when the time comes to make a home purchase. The survey was sponsored by the Mortgage Insurance Companies of America. Most of the renters also noted that an important incentive to purchase a home is the capability to borrow against their home’s equity when emergencies arise. * * * Market booms or busts As a worldwide trend, housing booms usually end up in busts, according to results of a study conducted by the International Monetary Fund (IMF). At that point, a sharp downturn is more likely in housing than in the stock market, the study revealed. However, a housing bust is less likely in the United State than in most other countries, according to David Seiders, chief economist for the National Association of Home Builders. Looking at the experiences of 21 industrialized countries over the past three to four decades, the IMF study found that booms in housing prices preceded sharp home price declines much of the time. “It should be noted that the U.S. has not had a housing bust over that period,” Seiders said. “And for a number of reasons, including a remarkably stable economy and a unique system of housing finance, our experiences with housing in this country are not the same as in the rest of the developed world.” While the IMF study found housing price busts clustered around economic recessions, our recession is now more than a year behind us and our economic outlook beyond the middle of this year is good, Seiders noted. “Fiscal and monetary policies already are very expansive and could become even more stimulative before long.” Current housing factors in the U.S. do not fit the housing cycles in most other countries. The prevailing factors here include record low mortgage interest rates and the absence of constraints on credit availability. Also, enhancements to the tax treatment of housing, strong population growth, levels of household formations, growing shortages of buildable land, and growing regulatory restraints on housing are also important factors to consider in the U.S. “Housing prices have been holding up remarkably well in this market,” Seiders said. “And while we are seeing some price adjustments in certain markets where prices were rising at unsustainable rates, there are no indications on the horizon that we are about to suffer the type of major decline in home prices that the IMF has identified in other countries.” * * * New home-related tax law for military personnel Congress is now hammering out a new Armed Forces Tax Fairness Act – a law that will allow military people involved in the war in Iraq, and other areas, to benefit from capital gains tax breaks afforded to most other home sellers. As it now stands, home sellers can take up to $250,000 tax-free exclusion (single tax filers) in calculating their tax on gains received in a sale of their home. For married homeowners who file jointly, they can receive up to $500,000 exclusion. However, to qualify in either case they must have owned and occupied their home as their principal residence for at least two years out of the five years preceding the sale. “Many service members keep their homes while reassigned overseas in hopes of returning to their residence,” the Military Officers Association of America reports. “On occasion when this proves impossible and the home must be sold to permit purchase of a new principal residence, service members find themselves subjected to substantial tax liabilities simply for following their military orders.” The new legislation is expected to pass both houses of Congress and be signed by the president soon, and will correct that inequitable situation. It’s expected to save home-selling military families an average of $23 million per year in federal taxes over the next ten years. Key wordage in the bill: “The running of the 5-year period with respect to a property shall be suspended during any period that such individual or individual’s spouse is serving on qualified official extended duty as a member of the uniformed services or Foreign Service.” | 
