Michael White’s Blog

I am alway intriqued to listen to our political leaders, who have never, nor will ever experience one day’s personal stress regarding issues on which they legislate.  I go to the grocery store having to make decisions whether I am going to buy milk this week or not.  I drive a 10 year old car which I rarely fill up.  My number is about $30.00 regardless of how many gallons that allows me.  Often, I silently protest rising food prices by consciencely not purchasing and item which one week was $2.89 and the following week it is over $3.00.  I noticed my heating bill is averaging $180/per month, regardless of how often I have sit in the living room with a jacket on, wrapped by a blanket.

Fortunately I did not get caught up in the housing debacle and my mortgage is not increasing.  With everything else around me going up every week, I would be in a serious delima if that were to happen.

My question is, “How can someone who has no concept of these issues be truly concerned, except for how it might affect votes?  I submit that if it did matter, there would be less debate about how to help and more action to help at a micro level. 

What I hear from the administration is that the economy will eventually correct itself over the longrun.  Unfortunately, you and I have to eat, pay bills and buy gasoline in the short run.

 What are your thoughts about a solution?

Thinking About Buying or Selling a Home In Hampton Roads——Think About www.tidewaterdreamhomes.com.

Selling Your Home in today’s market requires a mind shift.  A shift in the seller’s thinking is necessary because the market has shifted.  This seesaw motion over the past few years favored the seller.  Housing inventory was scarce and buyers were plentiful.  I have been told during the height of the sellers market there were 11 qualified buyers to every available home for sale on the market at that time.  Today I am told that statistic has nearly reversed itself.  I have not verified this stat, however the concept is the point I wish to make clear.   This requires sellers to be more, creative, and flexible.

We are all adverse to change, particularly when that perceived change is believed to hurt us or is contrary our perceived beliefs.  Our minds usually latch on to some pleasant or identifiable reference point.  That point for most current sellers relates back through the abnormally active period in the real estate market in 2003, 2004 and 2005.

Many sellers, against the recommendation of their Realtors and despite current selling prices in their area will test the market by overpricing their properties based on emotions rather than logic and analysis.  During this test period, buyers (the market) recognize the overpriced property and loose their enthusiasm for the property because of the availability and abundance of alternative substitutable properties with similar characteristics.

Buyers have their own set of obstacles.  As inventory increases, they feel compelled to see as many homes as possible without making a decision in the hope that the next one will be better than the previous. This strategy can lead to overload and indecision.  There are additional factors affecting buyer behavior.  The perception that prices will continue to fall; move-up buyers cannot purchase a new home until there home sells, coupled with the fact that buyers are experiencing more difficulty obtaining purchase financing.

As buyers have trouble purchasing due to the difficulty in obtaining financing, a bottleneck is created in the housing market.  If you have not considered how interwoven and fragile the financial system is; the current market makes it clear.  Investors will not purchase mortgage securities from Wall Street to provide additional liquidity (cash) to the banks to underwrite additional mortgages. This in turn causes the banks to make it more difficult for buyers to obtain mortgages.  Homes on the market are now sitting longer.  As this inventory of homes for sale increases, the economy begins to suffer.  Buyers are not out shopping for furniture or making improvements to their new homes or buying other durable goods. Since builders are having difficulty selling existing housing inventory they are not building as many homes.  This series of events is filtering into the general economy creating a downward spiral. Retailers are not experiencing expected revenue growth. 

To stimulate the economy the fed has reduced short-term interest rates to induce additional spending to create additional liquidity.  Note that the reduction of short term federal funds rates have not effect on mortgage rates, which are typically tied to the 10 year treasury. What a complicated and difficult concept.

Not all is lost Hampton Roads, this the number eighth best real estate market in the country, according to Forbe.com.

The current state of the mortgage market may be blamed on governmental authorities, mortgage lenders, and us as consumers.

No one foresaw the macro impact to the
US economy; not even the experts. 

No need to place blame on anyone.  We should now be looking for solutions.  The government will attempt legislate a solution.  Lenders will volunteer to self regulate. 

The only real solution is public education.   

As the consuming public, we need to understand very basic finance concepts along with the documents you are signing.  If the general rates of returns on financial instruments is 8% and someone offers you a below market rate, one needs to ask why, how and who. 

Why is the rate so low compared to other market instruments? 

1. Why would a bank, business or investor want an investment with a return less than available alternative investments?
2. How can they afford to accept below market returns?
3. Who would be foolish enough to give you a better deal than they are receiving?

The obvious answer is that it does not happen.

After these basic, questions have been answered and you still have a desire to move forward, do not rely upon verbal representations.  READ THE DOCUMENTS! 

I cannot stress this point enough.

The volume of documents is overwhelming. The language is typically difficult to understand and the typeset is usually so small that it is difficult to read, this is unless you are 21 years old or less.

These real estate purchase, sale, and mortgage finance documents are legally binding instruments that should be thoroughly read and understood.  You can request sample documents for review in advance.  If there is a problem obtaining sample documents, this may be your first red flag.  A strategy for getting through these documents is;

-        not to become intimidated by the volume of verbiage

-        break the material down into small bits before you attempt to consume

-        to read for understanding

-       better to read two paragraphs and understand the material rather than 5 pages where you don’t comprehend any of the material

-        to read one sentence at a time. Make sure you understand the sentence. Most of use have to create a mental picture for clarity.  For instance, when I use the term “house”, most of us have to actually see a house in our mind to comprehend. The color “blue.”  Do you not see some shade of blue in your mind that you relate to?

-        Read the next sentence. Make sure you understand it by creating a mental picture of the concept being conveyed.  The term “subprime” is not intuitive to the layman, in my opinion.  As a layman, I think of something subprime as being beow the prime rate, particularly if we are referring to financial matters.  In the mortgage world “subprime”, relates to credit quality and one’s ability to repay; i.e., (less than the best borrower)

-        As you finish a paragraph, scan the paragraph to make sure you have an idea of the entire paragraph.

-        You are under no obligation to read the entire set of documents in one sitting.

There will be a number of areas you may not understand.  Take notes and ask someone for clarity.  Preferably an attorney.  The language in a legal document often times has a different meaning to an attorney than it may to a layman.

You may be surprised to learn that your Realtor, lender or advisor may not know the contents of the documents as thoroughly as they should.  Besides, after the transaction has closed, it will be YOU who will be bound by the terms of the documents not the Realtor, lender or advisor.

There is a structure to these documents.  Most important to you, will be your defined responsibilities, what you are obligated to do, not do, what you are to pay, when you are to pay and where you are to pay,  what happens if you don’t do what you are obligated to do, how long the organization will give you to comply if you.

Ask for an amortization schedule, based upon the type of financing you are obtaining to include the amount financed, term and interest rate. This document will show you exactly what your payments will be and the remaining balance after each payment.  Should you notice the payments and remaining balance are not behaving the way you expected or the way it was explained to you, ASK WHY? 

For instance, in a negative amortization loan you would notice that after the payments are made, your remaining outstanding balance increases rather than decreasing.  If the note is structured with a “teaser rate” make sure the amortization schedule covers the entire term so that you see when and how much the monthly payments increase.

If you don’t feel comfortable or certain about the meaning of the documents you are signing, seek the advice of a real estate attorney for clarification.  THIS MAY BE THE BEST INVESTMENT YOU WILL EVER MAKE WHEN BUYING YOUR HOME.

This article in intended as a service to remind potential short sellers to be aware of potential tax issues.   Anyone seeking a short sale should seek the advice of a tax consultant.

The current real estate market has a number of homeowners considering a short sale as a strategy to relieve themselves of their mortgage obligation. Nothing bad about the strategy, just be aware of possible later tax liabilities.

IRS regulations consider a “short sale” as debt cancellation. A short sale occurs when the lender accepts an amount less than the mortgage amount as the total payment to settle the mortgage debt obligation. Keep in mind that the Bank may or may not agree to a short sale. The Bank is going to make its decision based upon the best interest of the depositors, shareholders and itself.

The IRS considers the cancelled or forgiven mortgage debt as income to the poor borrower who thought he/she was finished with the mortgage after the short sale closing. Further IRS regulations require the taxpayer to report “Worldwide Income”.  Therefore you may end up with a large and unexpected tax bill on April 15^th of the next year.

Within the tax year of the debt cancellation, your Bank will send to you an IRS Form 1099C-Cancellation of Debt. 

Box 2 of the form will include the total amount of your cancelled debt.  IRS tax regulations require the financial institution to send you a 1099C for any cancelled debt over $600.00. If any portion of the cancelled debt includes interest you will see the cancelled interest in Box 3.

You would be responsible to report this cancelled debt on Line 21 of your 1040 tax return. This is the income section of the tax return.

As a simplified example, let us assume your mortgage to be $150,000 and you have become delinquent on the mortgage. You decide you need to sell your home to be relieved of the remaining mortgage. The market however has robbed you of any expected equity. Your real estate agent tells you based upon recent sales in your area that similar properties sell for $135,000 today. You have been communicating with the Bank, keeping them apprised of your situation.

The Bank typically will not agree to a short sale early in the process. You should obtain a purchase contract, for argument sake, its $135,000. Once presented to the Bank and upon satisfying their requirements of information from you, (income, expenses, balance sheet showing all accounts, cash, recievables, stocks, bonds, other owed debt, etc.) they agree to the $135,000 purchase contract. For sake of simplicity and clarity, we shall omit other fees and expenses.

The Bank has now agreed to forgive $15,000 of your $150,000 mortgage. This $15,000 will now be reported to the IRS as cancelled mortgage debt on your behalf and Form 1099C will be sent to your to be reported as income in the tax year the debt was cancelled.

Noted earlier in a previous blog, we discussed how investors are less eager to purchase mortgage backed securities.  In an attempt to pump additional liquidity into the credit markets the Fed has reduced the discount rate by 50 basis points to 5.75%.

What does this mean to you and me.  In the short run, not much.  In the long run, it could mean the difference in the degree of down turn we see in the US economy.   This liquidity provides additional funds in the economy for mortgages, business expansion and consumer credit.

The discount rate is the rate the fed charges banks for borrowing directly from the federal reserve system.  Banks generally have an aversion to borrowing from the Federal window as it has generally been deemed the “bank of last resort”, indicating financial weakness.

A more widely used  and more useful indice would be the federal funds rate.  Banks created as system to borrow excess overnight funds from each other rather than the fed.

It is all designed to help stabilize the credit markets in order that the US economy does not slip into a recession, which some would argue began as the result of the current mortgage financing crunch.

I think not.  The motivating factor for a homeowner choosing to place his home on the market without the assistance of a Realtor is to save the commission.  The motivating factor for a buyer choosing to make an offer for the purchase of a For Sale By Owner (FSBO) home is to save the commission. 

Who typically wins?  I submit not typically the seller.Americans generally are not good negotiators.  The profile of the person willing to approach a FSBO is generally one who has more real estate shrewdness than the unsuspecting homeowner does. This individual more often than not considers himself an investor and may have several transactions under his belt.The typical American buyer is working with a real estate agent in order to take advantage of that person’s knowledge and experience in real estate. 

 It is the real estate agent who often approaches the FSBO on behalf of a buyer because the buyer understands negotiating on his on behalf may cost him more money by becoming emotional during the negotiating phase of the transaction.  I know, I know you Mr. and Mrs. FSBO had a very successful and profitable transaction with a buyer who approached you as the principal.  This is the exception rather than the rule.

According to the National Association of Realtors the number of FSBO transactions has been declining over the years.  Additonally, FSBO’s generally net less than when represented by a Realtor. 

Price is a function of demand and demand is a function of exposure. The Realtor provides the exposure to create the demand which ultimately creates a higher price for the home.  The laws of supply and demand state the greater the supply the lower the price and the greater the demand the greater price.

Generally, a FSBO does not have the medium to expose his property to as large a market as a Realtor.The italized and indented print was taken directly from an article published by the National Association of Realtors providing supporting statistics. The link is also provided should you choose to read more.  In 2006, just 12 percent of sellers chose the FSBO (“For
Sale By Owner”) route, down from 13 percent the previous year, according to NAR’s 2006 Profile of Home Buyers and Sellers. This is down from about 20 percent in 1987.   But more telling than the decline in FSBOs is the fact that 40 percent of all FSBOs sold their homes to someone they knew prior to the transaction. This means that only 7 percent of all home sales are open market FSBO transactions. The rest are simply unrepresented sellers in private transactions.

From NAR’s 2006 Profile of Home Buyers and Sellers Eighteen percent of FSBO sellers indicated that preparing the home for sale was the most difficult task when selling without the assistance of an agent, followed closely by understanding and performing paperwork (16 percent) and selling within their desired time frame (15 percent).  As for profit — after all is said and done, FSBOs don’t always come out with fatter wallets.

Again, the numbers tell the truth.   Homes sold with the help of a real estate professional in 2006 sold on average for 32 percent more than FSBO sales. The median FSBO selling price in 2006 was $187,200, compared with $247,000 for agent-assisted transactions.

A number of FSBOs” think they can sell their homes because they cannot mentally move away from the aberration in the market a couple years back.  The thought is I will put my house on the market and buyers will line up in pairs to bid up the price and buy it. 

Not much thought is given to the drudgery of keeping your marketing fresh, showing the home, qualifying buyers, creating contracts and negotiating the contracts and handling problems which may occur.

Oh, what if it takes 3, 6, 9, 12 months for the house to sell.  How much time and money have you wasted?In a difficult market as we are currently in, will you eventually have a Realtor list it anyway. 

The risk of exposing your home to a complete stranger is also a concern. Typically, but not always, a Realtor knows the buyer or at least has access to their personal information.  For a FSBO as stranger walks up to the door, knocks and says, “I am interested in purchasing your home, may I come in a tour it?”  Your response will be, “Oh, yes, come on in.”  You will proceed to tell him all about the property as he visually explores all the valuables in the home. This person for all you know is casing your home for a breakin and now knows exactly where everything of value in the home is located.  What an easy target!!!!

FSBOs in Hampton Roads, if you want more money for your home, less aggravation and less stress in your life, please consider a Realtor. 

If you are sitting on the fence thinking about purchasing a home, NOW is a great time to do so here in Hampton Roads.  You may feel the bottom has fallen out of the real estate market listening to the national news media.  Real estate values are regionalized.  While it is true the entire market has been affected, there are many excellent properties and sellers in Hampton Roads willing to consider offers which a year ago they may have not considered.  Markets which experienced incredible appreciation over the past 3 to 5 years are now seeing incredible market adjustments.  Those markets which tend to creep along with 4 to 8% appreciation have a tendency to adjust with less volitility. 

Buyers who think they are great market timers may just find they missed the market.  One typically knows only with hindsight.  Conventional wisdom tells us to buy low and sell high.  The challenge there is that no one, and I do mean no one, can predict the absolute low point or the exact moment we reach a high point.

My thoughts are focused around “optimization” rather than “maximization.”  Attempting to maximize savings or profits typically causes sleepless nights and is difficult to accomplish without considerable time and effort.  This is an optimal time to purchase.  Real estate values are good now, especially if you are purchasing the home as your primary residence.

There seems to be a herd mentality in the market.  I predict, with the reporting of a national news celebrity who indicates the market is showing some signs of rebounding, buyers will show up in droves with cash in hand ready to purchase that real estate they should be considering now.  A sudden spurt in demand will undoubtedly stabilize falling home prices and may create a sudden rise in prices, causing a shift back to a sellers’ market.  If you follow the crowd you will generally find yourself with less negotiating strength in the market.

Be a contrarian: buy now while housing supply exceeds demand.  You will be in a stronger negotiating position.

The major difference in the market for most of us who did not get caught up in the real estate hype of the last few years is ___________ (what?)  I don’t refer to those who were swayed by teaser rates to purchase more house than they could afford without the incentives.  Those of us who saw through the hype and who practice fiscal responsibility are in a strong position currently.

There is mortgage money available to those who deserve it. Lenders who did not alter their underwriting criteria during the real estate boom are still lending and in fact anixous to lend to sound borrowers.

Buyers in this market have the opportunity to examine the property carefully making sure it truly meets their needs without the fear of losing it.

Great time to buy the home you will occupy over the next few years.  

This is a call to action for prudent buyers. 

Welcome to Michael White’s Blog! This blog will provide you with valuable information, tips, and general insight into the real estate market in Hampton Roads. Visit my website at http://MichaelWhite.topproducerwebsite.com.