The Negative Equity in homes is rising, with 18.3% of the US population now finding themselves in negative equity territory, and 23.3% finding themselves at the tipping point to owing more on their house than it is worth.
Download this one page state-by-state report to see how your state is doing so far.
Modification of $250,000/$500,000 Exclusion –
We have had a lot of questions on this, and I'm going try to simplify the impact and provide you some additional insight.
The Section 121 tax incentives modification under HERA affects the $250,000 / $500,000 exclusion of gain on the sale of a principal residence. It is the only real modification to the existing traditional Section 121 and Section 163 real estate tax codes.
Beginning 1/1/2009, a second home (or rental property) that is converted to a principal residence will have to play by some new rules.
When the second home is sold, any gain attributable to use as a second home (or rental property) will be taxed at capital gains rates at that time. Any gain attributable to use as a principal residence will remain excludable, up to the $250,000 and $500,000 limits. Essentially you must now prorate the usage, whereas before you could potentially live there for 2 years and get the full exclusion... now you'd have to look back over the 5 year period and prorate the time spent as second home or investment and treat that based on capital gains, and the balance would apply toward the $250,000/$500,000 Exclusion.
Want to learn more, watch this short video for a case study example...
On July 30, 2008, President Bush signed H.R. 3221, the Housing and Economic Recovery Act of 2008 (the "Act"). The Act is a legislative package that is made up of the Housing Assistance Tax Act (otherwise known as the "Housing Act"), the Federal Housing Finance Regulatory Reform Act, and the Foreclosure Prevention Act.
Key provisions of the Act include:
New agency created to regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks: The Act creates a new regulatory agency, called the Federal Housing Finance Agency, to oversee and regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The agency is charged with the responsibility of monitoring the portfolio holdings of the entities it oversees and ensuring they maintain sufficient capital to operate healthy national housing finance markets.
FHA Program updated: Effective January 1, 2009, the FHA loan limit for conforming loans increases to as much as $625,500 in the most expensive U.S. markets. This affects both home equity conversion mortgages (reverse mortgages) and jumbo loans. Down payment requirements on FHA loans increase from 3 percent to 3.5 percent.
The Hope for Homeowners Program: The Act creates a new Federal Housing Authority (FHA) program designed to help borrowers in danger of losing their homes to foreclosure. Eligible homeowners may be able to pay off their original (foreclosing) lenders with a fixed-rate, 30-year-term mortgage for up to 90 percent of the appraised value of the property. Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31 percent of their monthly income on their mortgage, and are currently in danger of foreclosure. Borrowers would have to share future equity with the FHA. The program is completely voluntary; banks may elect not to participate. The program begins on October 1, 2008 and ends in September of 2011.
Temporary mortgage foreclosure protection for servicemembers: The Act provides mortgage foreclosure protection for members of the U.S. Armed Services by temporarily increasing (through December 31, 2008) the maximum loan guarantee for VA loans. The period a lender must wait before initiating foreclosure proceedings after a service member returns from service is extended from 90 days to 9 months. Increases in mortgage interest rates above 6 percent are suspended during the period of service and for one year after a service member ends service. This provision will sunset on January 1, 2011.
Temporary tax "credit" for first-time homebuyers: First-time homebuyers of a principal residence purchased after April 8, 2008 and before July 1, 2009 may take a refundable tax credit of 10 percent (up to a maximum of $7,500; $3,750 for married persons filing separate returns) of the purchase price of the property. The credit is phased out for individual taxpayers with adjusted gross incomes (AGIs) ranging from $75,000 to $95,000 ($150,000 to $170,000 if married filing jointly). However, taxpayers must repay the credit taken over 15 years in equal installments as a surcharge on their annual income tax return.
Temporary standard property tax deduction for non-itemizers: For 2008 only, taxpayers who do not itemize their deductions will be allowed to take a real property tax standard deduction (in addition to the standard deduction) of up to $1,000 if married filing jointly ($500 for all other filers).
Reduced homesale exclusion for nonqualified use: For sales and exchanges of a principal residence after December 31, 2008, the $250,000 ($500,000 if married filing jointly) homesale exclusion won't apply to the extent the gain is allocated to periods (not including any period before January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse.
Temporary increase in low-income housing credit: For 2008 and 2009 only, the Act provides a 20 cent increase in the low-income housing credit per-resident cap, and increases the small state minimum by 10 percent. The technical rules relating to the credit have also been simplified.
Expansion of the rehabilitation tax credit: The Act taxpayers to qualify for the full amount of the rehabilitation credit so long as less than 50 percent (up from 35 percent) of the rehabilitated building is leased to state and local governments or other tax-exempt entities.
Repeal of AMT limitations: on tax-exempt housing bonds, low-income housing credit, and rehabilitation tax credit. Generally effective after December 31, 2007, interest on tax-exempt housing bonds are not subject to the alternative minimum tax (AMT), and the low-income housing credit and rehabilitation tax credit can be used to offset AMT liability.
REIT modernization: The Act liberalizes the rules for real estate investment trusts (REITs) by clarifying that they can earn foreign currency income associated with real estate activities, increasing the permissible size of REIT investments in taxable REIT subsidiaries, modifying the REIT safe harbor for dealer sales, and extending the special rules for lodging facilities to health care facilities.
Election to accelerate recognition of historic AMT/R&D credits: The Act allows taxpayers to elect to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of the bonus depreciation tax benefit allowed under the Economic Stimulus Act of 2008. The amount taxpayers can receive is calculated based on the amount invested in property that would otherwise qualify for said bonus depreciation. This amount is capped at the lesser of 6 percent of historic AMT and R&D credits or $30 million.
Each year I post the updated Nations Housing study, and here is the new one for 2008. It is a great read, well done as usual, with great thought on what is happening, and what may happen in the future of real estate.
Download NationsHousing2008.pdf
Highlights include: (some obvious)
Housing prices went up faster than income increased, and builders didn't stop building, so huge excess inventory will continue to put pressure on house prices (appreciation), until that inventory is absorbed. Vacant for sale houses was up by 800,000 units as compared to prior market down turn in 2001.
Subprime went from 8% to 20% of originations between 2003 and 2006, and the interest-only/option ARMs went from 2% to 20% over that time period, fueling the layered risk of the compound death spiral that happened across the board, check out all declines.
The MBA estimates foreclosures to exceed one million units by the end of 2007, double the norm, further depressing house values as houses are sold at deep discounts and inventory continues to rise.
Clearly the home ownership percentage in the US was being fueled by people not yet ready to buy a house. As subprime lending became more prevalent, the % of Americans buying a house increased, and then declined. 
Housing costs burdens are such that even homes with two or more full time workers find themselves spending close to 40% of their total income on housing alone.
Housing demand should handle about 1.9 million units purchases a year, but that is after working off the 1 million vacant units that could trim that number back over the next few years.
Much of the growth will come from Minorities, with only Seniors outpacing them as a Percentage in household growth, a good sign for reverse mortgages and starter home communities. 
MBA Current State of Housing Finance Industry: Download mbahousing.pdf
This is floating around as a recent presentation by the MBA on Housing that discussion a few key questions - how bad is it, how bad is it going to get, how long is it going to last, how did it get so screwed up, and what should be done to keep it from happening again?
Shadows:
43% of foreclosure starts are on sub-prime ARMs.
California and Florida are hardest hit, but Arizona and Nevada are gaining fast as speculative investor properties start to get foreclosed on.
There are only 8 states that had average price decreases of -1% to -6.6% (the worst), while all the rest of the US averaged -1% to +9.3% appreciation) in the fourth quarter of 2007.
There will be a 15% drop in existing home sales, and a 21% drop in new home sales.
There will be a 21% drop in purchase originations, and an 11% drop in refinance originations from last year.
Bright Spots:
Reduced competition in the mortgage industry will lead to better pricing and underwriting for the lender.
Well capitalized parties with flexible execution will dominate the market.
Affordability is improving and FHA is growing in importance.
In the span of two months, both Money Magazine and Consumer Reports have issued the question - "Should you prepay your mortgage, or invest?" It is interesting that both magazines would ask the same question, and more interesting still that both would come to the same conclusion. We've been asking that question a long time and believe it is still a key question worth asking. Wile we can't say they did an exhaustive study here, their overall approach was sound.
In our Borrow Smart approach, we don't believe there is a one size fits all. Market Risk and Discipline Risk must be considered for the 'individual' borrower. The math itself is pretty simple. Historically over any extended period of time, it has been much more beneficial to invest excess cash flow than it would be to prepay the mortgage, but this is based on average market returns and average costs of borrowing - the longer your time horizon the more likely you are to be average in those respects.
There are of course many other facts to consider, but at a minimum I wanted to make you aware of these these two articles and how they approached their recommendation to invest, instead of repaying over time.
Consumer Reports - Download crprepayinvest.pdf
Money Magazine - Download moneyprepayinvest.pdf
Mentor II is only 3 weeks away, we have 8 seats left - contact Larry Herst at 919.688.8222 if you want to see if you qualify: click here.
