First-Time Home Buyers Tax Credit Extended and Expanded

On 11/6/09, President Obama signed a law that extends through next spring a temporary tax credit of up to $8,000 for first-time home buyers, which was due to expire Nov. 30. The law also adds a new tax credit of up to $6,500 for certain repeat home buyers. The package, which the government estimates will cost a total of $11 billion, is intended to help spur housing sales, a critical part of the economy.

Here are some answers to common questions about the new rules.

Q: What has stayed the same in the new law?

1) First-time home buyers still get a credit of as much as 10% of the purchase price, up to a maximum $8,000. "First-time" means people, including both partners of a married couple, who haven't owned a principal residence for three years before the purchase.

2) All taxpayers who claim a credit must use the home as a principal residence for the next three consecutive years.

3) The credits offer dollar-for-dollar reductions of tax and are refundable. This means that a taxpayer who doesn't pay enough tax to offset the credit can get a refund. For example, if you qualify for an $8,000 credit but only owe $5,000 in tax, you could receive a $3,000 check from the Internal Revenue Service.

4) Under the new law, as under the old, 2009 home buyers may claim the credit on either their 2008 or 2009 returns, and 2010 buyers may claim the credit on either their 2009 or 2010 returns.

5) Taxpayers do not qualify for a credit if they buy from a lineal ancestor or descendent, including parents or grandparents and children or grandchildren.

Q: What has changed?

Several important features took effect as of Nov. 6:

1) To take advantage of the tax credits, a buyer must have a contract in place before May 1, 2010, and the deal must close before July 1, 2010. No further extension is expected.

2) The price of the house is now capped. For purchases made after Nov. 6, no credit is available for any home costing more than $800,000.

3) There is now a tax credit for repeat buyers as well as for first-time buyers. Taxpayers who have lived in one residence for five consecutive years of the past eight can now qualify for a tax credit of as much as 10% of the purchase price, up to a maximum $6,500, of a new principal residence. The new home does not have to cost more than the old one.

4) Income limits for people who qualify for a tax credit are far more generous than under the previous law. For single filers, the credits now phase out between $125,000 and $145,000 of modified adjusted gross income; for married couples, the range is $225,000 to $245,000. For most people, modified adjusted gross income will be the same as adjusted gross income.

5) The new law contains anti-abuse measures designed to stem fraud, which became a problem with the previous home-buyer tax credit. Most buyers must be 18 or older, and no taxpayer may take a credit if he or she is claimed as a dependent on someone else's return. Taxpayers taking the credit will also have to furnish proof of purchase. According to Robert Dietz of the National Association of Home Builders, this will usually be a HUD-1 form.

6) People taking the tax credit, as under the old law, aren't allowed to buy a home from a lineal ancestor or descendent. The new law, applying to purchases made after Nov. 6, also says a person may not take a credit if the home is purchased from a spouse or the spouse's lineal relatives.

Q: If I bought a house last spring or summer, can I get a tax credit?

You qualify if you are a first-time buyer and meet the other requirements, but not if you are a repeat buyer. The new credit for repeat buyers applies only to purchases made after Nov. 6.

Q: What is the definition of "principal residence"?

If you own more than one home, your principal residence is usually the one where you spend most of your time. In determining residence the IRS may also consider where your family lives and your mailing address for bills and correspondence, among other factors.

Q: Can a principal residence be something besides a conventional house?

Yes. A principal residence may also be a condominium, co-op apartment, attached or semi-attached townhouse, or even—if it has eating, sleeping and toilet facilities—a boat, motor home or trailer. Manufactured homes qualify in some states.

Q: Does the person who claims the credit have to use the home as a principal residence?

Yes.

Q: If I buy a new home and live in it, do I also have to sell my old one in order to take advantage of the credit?

This is unclear. The law appears to allow repeat buyers to retain their old home, for which no tax credit was given, while claiming a credit for the new one. What is clear is that if you buy a new home using the credit, you must use it as your principal residence.

Q: How may the credits be allocated among two or more unmarried buyers?

This also is unclear. But if the IRS adopts the rules that applied to the previous tax credit, which are detailed in IRS Notice 2009-12, there is room for planning. The notice says that taxpayers may use "any reasonable manner" to allocate the credit. It even provides an example in which two unmarried buyers allocate the credit to the lower earner in order to qualify for it.

Q: I need the credit refund to help make the down payment. What can I do?

There's no rushing the IRS. But one option is to adjust your current withholding from your paychecks to reflect the fact that you will be taking the credit later. But be careful: If you don't make the purchase, then you may owe interest and penalties. Consult a tax adviser.

Q: Is it possible to qualify for a credit if I am building a home on a lot I already own?

Yes, according to the National Association of Home Builders. The purchase date is usually considered to be the date of first occupancy, so you would need to move in before July 1, 2010.

Q: May I take a credit if I am building a large addition to my home?

No; these credits apply only to the purchase of a home.

Q: Are there special rules for the military?

Yes. In general, members of the military and foreign service and intelligence communities who are serving overseas on "official extended duty" for at least 90 days during 2009 and the first four months of 2010 have an extra year to take advantage of these credits. Consult a tax adviser who specializes in this area.

Q: Where can I get more information?

Go to federalhousingtaxcredit.com for more information. You can also look for links from the IRS's home page, or search for Homebuyer Credit. Another option is to consult a professional tax adviser.

Source: Wall Street Journal

Senate Panel OKs Extension for Home Buyers Credit

Senators reached a compromise to extend the $8,000 tax credit for first-time home buyers, a boost the housing industry expects will help it pull out of its two-year-old downturn.

Lawmakers in Washington also added a $6,500 tax credit for other primary-home purchasers and raised the qualifying income limits to $125,000 for single taxpayers and $225,000 for joint taxpayers, housing-industry sources said.

Under the Senate compromise, buyers must have sales agreements in hand by April 30, but they will have until June 30 to go to settlement, the sources said. The measure still faces votes in the full Senate and the House.

The current tax credit did little for the new-home market in September, the Commerce Department reported – news that took many industry analysts by surprise. Sales fell 3.6 percent from August and 7.8 percent from September 2008.

Industry observers had expected a fifth consecutive monthly increase in new-home sales, believing that the tax incentive for qualified first-time buyers – credited with 357,000 sales of previously owned homes so far this year – would do the trick.

Instead, sales of typically more expensive newly built houses slipped.

“The decline in new-home sales seems to us to be more a function of the attractive pricing available on resales in the current environment than a reflection of weakening demand,” said Michael Feder, president of Radar Logic Inc., of New York, which tracks the market.

“Big deal,” said Joel L. Naroff, of Naroff Economic Advisors, of Holland, Bucks County. “Since hitting rock bottom in March, demand is up 20 percent.”

For Naroff, the robust rise in existing-home purchases – 9.2 percent year over year in September – indicated that the housing market was not faltering.

“Maybe the issue is supply, which fell to its lowest level in 27 years,” he said. “Builders, at least those left standing, have been making sure they don’t have any houses sitting around, and they have been very successful in controlling inventories.”

IHS Global Insight Inc. economist Patrick Newport echoed that, noting new-home inventories “sank for the 29th straight month to their lowest level since November 1982.”

Naroff maintained housing had recovered enough to stand without the tax credit. But Newport said he believed that if the credit were not extended and expanded, housing demand would take a hit, and home sales would drop.

Until the Senate compromise today, the extension of the credit seemed mired in what National Association of Home Builders vice president Jerry Howard called “a game of partisan chicken.”

Howard’s take on the lower September numbers: It was too late to sign a contract on a house that would be completed by the current Nov. 30 deadline, and many buyers were concerned the credit would not be extended.

The credit has helped, acknowledged Marshal Granor, a principal in Granor Price Homes, of Horsham. But he added, “I’d love for it to go away, for a month.”

“People who believe there is no rush aren’t buying, they are waiting for more bargains from more squeezed sellers,” Granor said.

Still, said Feder of Radar Logic, lower home prices have carried “buyers further into the autumn than we would expect, based on historic patterns.”

Declining inventory means builders will have to ramp up production, Newport said.

As the Senate worked on the compromise, third-quarter data were released showing that the burden of foreclosure filings in the post-bubble market continued to shift from the subprime-ridden “sand” states (California, Nevada, Florida and Arizona) to areas with rising levels of unemployment and adjusting rates on the “exotic” mortgages prevalent in high-cost metropolitan markets.

Yet Las Vegas remained the toxic-loan capital, according to the third-quarter survey by RealtyTrac Inc., of Irvine, Calif. – its rate of foreclosure filings was seven times higher than the national average.

Source: The Philadelphia Inquirer

Senators Differ on Extending Homebuyer Tax Credit

Top Democrats in the Senate are pressing a plan that would extend a popular tax credit for first-time homebuyers but gradually phase it out through March 31st of next year.

The proposal, by Majority Leader Harry Reid, D-Nev., and Senate Finance Committee Chairman Max Baucus, D-Mont., would extend the $8,000 tax credit – which expires Nov. 30 – through March 31. Its value would drop by $2,000 for each of the subsequent three quarters of 2010.

The plan, which could face a vote in the Senate this week, appears aimed at countering a far more generous $17 billion bipartisan plan that would extend the $8,000 credit through June 30, 2010, boost the income cap for eligibility and open the credit to all buyers, rather than first-timers.

Senators are maneuvering to add the homebuyer tax credit extension to legislation to extend unemployment benefits by up to 20 weeks.

Supporters say the tax credit has helped revive the housing market and say that if it’s cut off as scheduled at the end of next month, home sales could drop off.

Reid sought to schedule a vote on the competing measures on Monday but was blocked by top Senate Republican Mitch McConnell of Kentucky, who is demanding votes on unrelated GOP proposals.

One such proposal would require people receiving unemployment insurance to be processed through the E-Verify program to prove legal immigration status and would require all federal contractors to use E-Verify. E-Verify is an Internet-based system that employers use to check on the immigration status of new hires.

The Democratic plan also would extend the ability of money-losing businesses to claim refunds on taxes paid during profitable times up to four years ago. All businesses could take advantage of the credit; when passed in February it was limited to smaller companies with annual revenues of $15 million or less.

Source: The Associated Press

Tax Credit Fuels Rise in Florida's Home and Condo Sales in September

Florida’s existing home sales rose in September, which marks more than a year (13 months) that sales activity has increased in the year-to-year comparison, according to Florida Realtors. September’s statewide sales also increased over sales activity in August in both the existing home and existing condominium markets.

Existing home sales rose 34 percent last month with a total of 14,419 homes sold statewide compared to 10,778 homes sold in September 2008, according to Florida Realtors. Statewide existing home sales last month increased 4.1 percent over statewide sales activity in August.

Florida Realtors also reported a 77 percent increase in statewide sales of existing condos in September compared to the previous year’s sales figure; statewide existing condo sales last month rose 8.9 percent over the total units sold in August.

All of Florida’s metropolitan statistical areas (MSAs) reported increased existing home sales in September; all but one MSA also showed a gain in condo sales. A majority of the state’s MSAs have reported increased sales for 15 consecutive months.

Florida’s median sales price for existing homes last month was $142,000; a year ago, it was $174,900 for a 19 percent decrease. Housing industry analysts with the National Association of Realtors® (NAR) note that sales of foreclosures and other distressed properties continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes. The median is the midpoint; half the homes sold for more, half for less.

The national median sales price for existing single-family homes in August 2009 was $177,500, down 12.1 percent from a year earlier, according to NAR. In Massachusetts, the statewide median resales price was $315,000 in August; in California, it was $292,960; in Maryland, it was $265,862; and in New York, it was $205,000.

NAR’s latest industry outlook notes positive signs in the housing sector, but adds that extension of the federal first-time homebuyer tax credit would help sustain a fragile recovery. “Now that the market is showing some momentum, we have an opportunity to achieve a more rapid and broader stabilization in home prices,” said NAR Chief Economist Lawrence Yun. The outlook for home sales and prices depends on whether the tax credit is extended, he said, describing it as “the best tool in our arsenal to encourage financially qualified buyers to stimulate the economy and help reduce the budget deficit.”

In Florida’s year-to-year comparison for condos, 5,088 units sold statewide last month compared to 2,870 units in September 2008 for a 77 percent increase. The statewide existing condo median sales price last month was $102,500; in September 2008 it was $153,500 for a 33 percent decrease. The national median existing condo price was $179,300 in August 2009, according to NAR.

Interest rates for a 30-year fixed-rate mortgage averaged 5.06 percent last month, a significant drop from the average rate of 6.04 percent in September 2008, according to Freddie Mac. FAR’s sales figures reflect closings, which typically occur 30 to 90 days after sales contracts are written.

Among the state’s smaller markets, the Pensacola MSA reported a total of 275 homes sold in September compared to 267 homes a year earlier for a 3 percent increase. The market’s existing home median sales price last month was $135,000; a year ago it was $146,900 for an 8 percent decrease. A total of 48 condos sold in the MSA in September, up 41 percent over the 34 units sold in September 2008. The existing condo median price last month was $190,000; a year earlier, it was $180,000 for a 6 percent gain.

Source: Florida Association of Realtors

Economic Growth Expected to Slow in First Half of 2010 before Picking up in Second Half

Mortgage Bankers Association (MBA) expects economic growth to continue through the rest of 2009 before slowing in the first half of 2010. Unemployment is expected to climb to 10.2% by the middle of 2010 before beginning to moderate as economic growth resumes sustained growth in the second half of the year.

Mortgage originations should reach $1.5 trillion in 2010. Modest increases in home sales should drive purchase originations but refinance originations are expected to decline as mortgage rates rise.

“The recession is behind us, but the effects of the recession will linger for some time in the form of higher unemployment, and lower levels of business investment and home construction. One of the big questions regarding growth will be the behavior of consumers. The large losses of consumer wealth in the form of reduced home values and stock market losses, as well as the absolute losses of income resulting from unemployment, reduced employment and the fear of unemployment have constrained consumer spending,” said Jay Brinkmann, MBA’s chief economist and senior vice president for research and economics.

“Timing of the economic recovery is very much tied to the growth in consumer spending. In addition, the effect of the bulk of the federal stimulus package, particularly the construction components, is not expected to be felt until 2010.

“Perhaps the biggest unknown is the level and volatility of interest rates. While the lack of inflation, high unemployment and excess capacity in the economy should hold interest rates down, there is a lot of uncertainty regarding rates immediately following the termination of the Federal Reserve’s purchase of mortgage-backed securities. No doubt the Fed will do its best to minimize adverse effects, but the elimination of these purchases will put upward pressure on all long-term rates as well as the spread between mortgage rates and Treasuries. The size of any resulting rate move will largely determine the size of the refinance market.”

Following are the key points of the latest MBA forecast:

-Real GDP growth was negative in 2009, with the economy contracting by around 0.5% resulting from sharp drops in the first half of the year followed by growth in the second half. Growth is expected to be about 3% in 2010.

-The unemployment rate will continue to increase from the current level of 9.8% to about 10% by the end of 2009 and peak at 10.2% in the second quarter of 2010, before declining slowly through 2011.

-Fixed mortgage rates are expected to average about 5% in the fourth quarter of 2009 and increase to 5.6% by the end of 2010.

-Total existing home sales for 2009 will end up about 2% higher than those for 2008. Existing home sales are projected to increase further in 2010, increasing by about 11.2%.

-New home sales for 2009 will be down by about 18% relative to 2008. Sales seemed to have bottomed in the first quarter of 2009 and have been rebounding modestly since. For all of 2010, new home sales should post an increase of about 21% from 2009’s very low levels.

-National average home price declines should abate by early 2010, but will vary by state and home value. The demand will be highest for entry-level homes.

-Purchase originations for 2009 will be $718 billion, about 2% below the 2008 level of $731 billion. Purchase originations should rise about 12% in 2010, as existing home sales recover and home prices stabilize.

-Refinance originations will end 2009 at $1.245 trillion, up about 60% from $777 billion in 2008. Refinance activity will likely decrease in 2010 to about $745 billion as mortgage rates increase.

Source: www.mortgagebankers.org

Homeowners with Modified Loans Re-Default Within a Year

As lenders are ramping up efforts to avoid home foreclosures, bank regulators report that more than half of borrowers who get help fall behind again.

More than 50 percent of homeowners with loans modified in the first half of last year had missed at least two months of payments a year later, according to the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision.

But the results were better among those who saw their payments drop substantially.

About one in three borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again within a year. That compares with more than 60 percent for borrowers whose loan payments were left unchanged or increased.

The report highlights a significant challenge for the Obama administration’s plan to tackle the foreclosure crisis, backed by $50 billion in money from the financial industry bailout fund.

The administration’s effort got off to a slow start, but has picked up speed in recent months. As of last month, about 360,000 borrowers, or 12 percent of those eligible, have signed up for three-month trial modifications. They are supposed to be extended for five years if the homeowners make their payments on time. There is currently no data on redefaults within the plan.

Traditionally, most lenders have offered payment plans that allowed borrowers to catch up on missed payments. But those modifications often do not involve an interest rate reduction and result in a higher monthly payment.

All that does is set the borrower up for failure because they are not true loan modifications.

Bank regulators say they have pressed lenders to shift their focus to modifications that reduced borrowers’ payments. They made up nearly 80 percent of new modifications in the April-June quarter, up from about half in the first three months of the year.

The report covers 34 million loans, representing more than 60 percent of primary home mortgages. Consistent with other reports, it showed borrowers are continuing to fall behind as job losses mount. More than 11 percent of borrowers covered by the report had missed at least one payment as of June 30, up from 10 percent in April.

It also highlighted mounting problems with an especially troubling category of loans's “pick-a-payment” or option ARM loans, which allowed borrowers to defer some of their interest payments and add them to the principal. At the end of June, 10 percent of these loans were in foreclosure, more than triple the rate for all mortgages in the survey.

The lenders included in the report offered help to about 440,000 borrowers in the April-June period, they started foreclosure on about 370,000 homes, unchanged from the January-March period.

Source: Federal Office of the Comptroller of the Currency, The Office of Thrift Supervision, The Associated Press

Record Streak Continues for U.S. Pending Home Sales

Pending home sales have increased for seven straight months, the longest in the series of the index which began in 2001, according to the National Association of Realtors.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in August, rose 6.4 percent to 103.8 from a reading of 97.6 in July, and is 12.4 percent above August 2008 when it was 92.4. The index is at the highest level since March 2007 when it was 104.5.

Lawrence Yun, NAR chief economist, said not all contracts are turning into closed sales within an expected timeframe. “The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules,” he said. “No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month.”

The Pending Home Sales Index in the Northeast jumped 8.2 percent to 85.3 in August and is 12.0 percent higher than August 2008. In the Midwest the index rose 3.1 percent to 90.8 in August and is 7.6 percent above a year ago. In the South, pending home sales increased 0.8 percent to an index of 104.6 and is 8.2 percent above August 2008. In the West the index surged 16.0 percent to 130.5 and is 22.3 percent above a year ago.

“There is likely to be some double counting over a span of several months because some buyers whose contracts were cancelled have found another home and signed a new contract to buy,” Yun explained. “Perhaps the real question is how many transactions are being delayed in the pipeline, and how many are being cancelled? Without historic precedents, it’s challenging to assess.”

Yun also noted that the data sample coverage for pending sales is smaller than the measurement for closed existing-home sales, so the two series will never match one for one.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said first-time buyers need to act now. “Potential first-time buyers must make a contract offer very soon to have a reasonable chance of qualifying for the tax credit,” he said. “Congress needs to extend and expand this program because it’s stimulating the economy and reducing inventory close to price stabilization points.”

McMillan said a sizable number of homebuyers already in the pipeline could be let down because of the tight deadline. “We know there is a pent-up demand because sales are below normal levels for the size of our population. The faster we absorb excess inventory, the sooner we’ll turn the corner on home prices, prevent additional families from becoming upside-down in their mortgages, and give Wall Street the confidence to extend credit to other sectors,” he said. “Each home sale pumps an additional $63,000 into the economy through related goods and services, so the benefits of extending and expanding the tax credit far outweigh the costs.”

Yun said the forecast for home sales and prices depends very much on whether a tax credit is extended. “All we can say for certain is sales will decline when the tax credit expires because we are not yet on a self-sustaining recovery path. It also raises a risk of a double-dip recession,” he said. “Extending and expanding the tax credit is the best tool in our arsenal to encourage financially qualified buyers to stimulate the economy and help reduce the budget deficit.”

Source: Florida Realtors

Jacksonville Ranks 38th for Income Growth

Jacksonville ranks 38th in a new bizjournals study of income growth among 100 large U.S. cities over the last quarter-century.

As of 2008, per-capita income in metro Jacksonville was $39,305, up nearly 225 percent from 1983 and up 26.2 percent between 2003 and 2008, bizjournals reported. Bizjournals is the online division of American City Business Journals, the parent company of the Jacksonville Business Journal

The rankings were based on comparisons of growth among 100 cities over 25 different time spans, all ending in 2008, ranging from a 25-year span to one year, so the results are weighted toward more recent growth.

Bizjournals ranked New Orleans No. 1, noting that the city has experienced rapid income growth since it was ravaged by Hurricane Katrina in 2005.

New Orleans’ per-capita income (now $44,136) grew 255.8 percent between 1983 and 2008, and 50.9 percent -- highest of all 100 cities -- between 2003 and 2008.

Rounding out the top 10: Oklahoma City; Bridgeport-Stamford, Conn.; Tulsa, Okla.; Houston; El Paso, Texas; San Francisco-Oakland; Baton Rouge, La.; Birmingham, Ala.; and Boston.

See income growth chart.

Source: Jacksonville Business Journal

Rates on 30-Year Loans Drop Again

Rates for 30-year home loans edged down for the third-straight week and are close to record lows reached over the spring, providing an excellent opportunity for borrowers to save money by refinancing their home loans.

The average rate for a 30-year fixed mortgage was 5.04 percent, down from 5.07 percent a week earlier, mortgage company Freddie Mac said Thursday. Rates, while above the record low of 4.78 percent hit in the spring, are still attractive for people looking to buy a home or refinance.

It was the lowest weekly average since the week of May 28, when rates averaged 4.91 percent.

To prop up the housing market and help the economy revive from the worst recession since the 1930s, the Federal Reserve is spending $1.25 trillion on mortgage-backed securities, which has driven down rates on home loans.

That money is set to run out by winter, though some analysts expect the central bank to add more money to the program or allow it to last longer by gradually reducing its purchases.

Sung Won Sohn, an economics professor at California State University, Channel Islands, said rates are likely to stay low for another six months or more, because the central bank does not want to imperil a recovery in the housing market and the overall economy by acting too quickly.

“That would be economically and politically unwise,” Sohn said.

Despite an extraordinary level of government intervention to prop up the mortgage market, qualifying for a loan is still tough. Lenders have tightened their standards dramatically, so the best rates are available to those with solid credit and a 20 percent downpayment.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate significantly, even within a given day.

The average rate on a 15-year fixed-rate mortgage fell to 4.47 percent, from 4.5 percent last week, according to Freddie Mac. That was the lowest level on records dating to 1991.

Rates on five-year, adjustable-rate mortgages averaged 4.51 percent, unchanged from a week earlier. Rates on one-year, adjustable-rate mortgages fell to 4.58 percent from 4.64 percent.

The rates do not include add-on fees known as points. The nationwide fee for loans in Freddie Mac’s survey averaged 0.7 point for 30-year loans and 0.6 point for 15-year mortgages. The fee averaged 0.5 point for five-year and one-year loans.

Source: The Associated Press

U.S. Net Worth Grows for First Time Since '07

The Federal Reserve reports that Americans actually got a little wealthier for the first time since 2007. Household wealth grew by $2 trillion, or about 4 percent, this spring, ending the longest stretch of quarterly declines on records dating back to 1952.

Net worth – the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards – came to $53.1 trillion for the second quarter.

Stock portfolios came back to life this spring after the market hit its lows for the year in March, and home prices have stabilized. But the collective American wallet is still almost 20 percent thinner than it was when net worth peaked two years ago.

Some analysts say it could take as long as four years for households to recoup trillions in losses and get back to where they were before the downturn struck in December 2007.

The Associated Press has the following article on Friday:

“Households saw $14 trillion of wealth get blown away by the recession, and they recouped $2 trillion of that in the second quarter. That’s good news,” said Brian Bethune, economist at IHS Global Insight. “But they still have another $12 trillion to go to get back to where they were.”

Many analysts expect the economic recovery to be lethargic, limiting further gains in the stock and housing markets. That’s why Scott Hoyt, senior director of consumer economics at Moody’s Economy.com, thinks household wealth won’t rise back to pre-recession levels until 2012 or 2013.

“It is going to take a while for Americans to regain lost ground and become as comfortable as they were before all this started,” Hoyt said.

Even if the economy continues to improve, analysts say the erosion of wealth will keep Americans thrifty for years. In fact, even as wealth grew, Americans trimmed their spending slightly in the spring.

The increase in wealth in the second quarter was led by stock portfolios, the Fed report said. The value of Americans’ stock holdings rose almost 22 percent from the first quarter – the first increase in two years.

Higher home prices helped, too. The value of real-estate holdings rose 1.8 percent, the first gain since the end of 2006. Home prices are still about 30 percent below their 2006 peak.

Home equity, the market value of a home minus what’s still owed on the mortgage, has been dropping in recent years – first because more Americans used their homes to get loans and now because of falling home prices.

Collectively, U.S. homeowners had just over 43 percent equity in their homes in the second quarter, up only slightly from a record low in the first quarter. Moody’s Economy.com estimates nearly a quarter of all U.S. homeowners owe more on their mortgages then their homes are worth.

This week, Fed Chairman Ben Bernanke said the worst recession since the 1930s is probably over. He warned that the pace of recovery probably won’t be brisk enough to generate solid job growth and keep the unemployment rate – now at a 26-year high of 9.7 percent – from rising further.

Retail sales jumped in August by the most in more than three years. But rising unemployment, the reduced wealth and still hard-to-get credit are expected to keep people cautious about spending in the months ahead.

Households are trimming their debt loads, too. Total household debt – including mortgages, credit cards, autos and other consumer loans – stood at $13.7 trillion in the second quarter, the Fed report said. That’s down slightly from $13.8 trillion in the first three months of this year.

Debt peaked at $13.9 trillion in the spring of last year.

Americans’ savings rate – savings as a percentage of after-tax income – rose to 5 percent in the second quarter, according to Commerce Department figures. Analysts believe households are using that money to whittle down their debt.

Source: Federal Reserve, The Associated Press

Government Helps Keep Loans Cheap – If You Can Get One

It’s a good time to borrow money for a home, car or small business. A year after a global freeze in the credit markets prompted massive government intervention to prevent the financial system from collapsing, interest rates remain at historic lows. But banks are demanding more collateral, bigger downpayments and detailed financial histories from borrowers.

And that’s for people with good credit. Everyone else need not apply.

The stingy lending is likely to last.

The Associated Press published the following article on Friday:

“Banks are going to be in a defensive posture for several years. Most borrowers can’t meet their criteria,” says Christopher Whalen, managing director at research firm Institutional Risk Analytics.

No segment of borrowers has been spared:

• Nearly seven of 10 mortgage applications were approved and financed during the housing boom five years ago. At the end of 2008, the number was down to five.

• Revolving credit, which is primarily made up of credit card debt, declined by $6.1 billion, or 8 percent on an annualized basis, in July. That’s a sign consumers are having difficulty obtaining credit and are cutting back on spending.

To be sure, it is cheaper for businesses and consumers to take out a loan today than it was at the height of the crisis last fall.

The average 30-year mortgage rate stands at 5.04 percent after falling to a record low of 4.78 percent in April. The overnight rate that banks charge each other to borrow money – a key indicator of the credit markets’ overall health – has plummeted. The London Interbank Offered Rate, or LIBOR, stands at 0.29 percent today. It soared above 6 percent last September when fear threatened to choke off lending throughout the financial system.

But those improvements are somewhat misleading. Lending – especially for homes – is being greased by trillions of dollars the federal government has made available to banks.

The Federal Reserve has provided nearly $340 billion in low-cost loans for banks. It has purchased $625 billion worth of mortgage-backed securities to drive down interest rates on home loans. The Federal Deposit Insurance Corp. is guaranteeing about $300 billion in bank debt, which enables banks to borrow at lower rates.

No one wants to see a return to the easy credit that led to the financial crisis. The question is when will credit return to normal – not too loose, not too tight and not propped up by the government?

Not soon, financial analysts and government officials say.

“We will not make the mistake of prematurely declaring victory or prematurely withdrawing public support for the flow of credit,” says Lawrence Summers, the White House’s top economic adviser.

Some analysts think it could take four or five years for the Fed to withdraw the money entirely and shrink a balance sheet that is now about $2 trillion, more than double what it was when the financial crisis struck.

The government’s role in steadying the housing market is huge. Home sales are rising, but more than two-thirds of U.S. mortgages made in the first half of this year were later sold to Fannie Mae and Freddie Mac, which are 80 percent owned by the federal government. Three years ago, Fannie and Freddie’s combined share was 33 percent, according to Inside Mortgage Finance, a trade publication.

Some financial analysts fear what will happen as the government winds down its lending programs. These analysts say banks have become so hooked on federal aid that they may become even more reluctant to lend once it is gone.

The mortgage industry is particularly worried. It has been pressuring the government to extend an $8,000 tax credit for first-time homebuyers, fearing a recent increase in homes sales could prove fleeting without the tax break. The White House said Wednesday that it’s considering extending the tax credit, which is scheduled to expire in November.

“It’s the No. 1 question in the market: Can we wean ourselves off our addiction to cheap government-supplied credit?” says Mitch Stapley, chief fixed income officer at Fifth Third Asset Management in Grand Rapids, Mich.

If not, the nascent economic recovery could be cut short. Weak lending and borrowing would limit corporate and consumer spending, which accounts for 70 percent of economic activity.

The incentives are especially important these days, lenders say, because the habits of borrowers have changed.

In a sign that the recession and rising unemployment have made people leery about taking on more debt, the national savings rate was 4.2 percent in July. It dipped to a low of 0.8 percent in April 2008.

Big banks are not risk averse. Rather, their reluctance to lend reflects the fact that they must conserve cash to absorb billions in losses still expected to occur from bad loans that were made before the crisis. FDIC-insured banks cumulatively lost $3.7 billion in the second quarter, dragged down by growing numbers of bad loans. These banks set aside nearly $67 billion in the quarter in anticipation of future losses from soured loans.

Another factor sapping their appetite for lending is their diminished ability to pool loans into securities for sale to investors, a process known as securitization. This secondary market allows banks to reap fees when they sell the securities, as well as get cash to make more loans.

At its zenith, the securitization market funded $9 trillion in loans. The collapse of Lehman Brothers led panicked investors to pull their money out of the marketplace virtually overnight, wrecking the securitization business.

“The assembly line for loans is broken,” says Whalen of Institutional Risk Analytics.

Federal Reserve Chairman Ben Bernanke predicted this week the market “will come back” but probably not at the size it was.

For consumers, that’s made qualifying for credit a challenge.

Germaine Code, of Grand Rapids, Mich., was turned down last month for a mortgage on a $135,000, three-bedroom home because of delinquencies dating back more than 10 years that he says should have been removed from his credit history.

“The bank said my credit score was good but that I needed to get those (delinquencies) taken off and that my wife needed more time in her job,” says Code, who was able to get a lease-to-own option on the house.

During the boom years, homebuyers needed a credit score of 660 or above to qualify for the cheapest interest rates, says Greg McBride, senior financial analyst at BankRate.com. Today, they need a score of 740 or above.

Home lenders are also demanding proof of income and downpayments of at least 20 percent. Before the bust, first-time homebuyers often got mortgages with no money down and without proving they could afford payments.

The tough climate has forced many would-be borrowers to give up.

Consumers ratcheted back borrowing by $21.6 billion from June to July, the biggest drop since the Federal Reserve began keeping records in 1943. That left consumer debt at $2.47 trillion – slightly less than where it stood at the height of the crisis.

“Lots of people are fearful for their jobs. Even if you have good income, you’re probably cutting back on borrowing,” says longtime banking analyst Bert Ely.

The drop in borrowing could slow the economy’s recovery. That’s why it’s critical for the government to continue stimulating lending, especially in the crucial housing market, says David Olson, president of Access Mortgage Research & Consulting.

“If they cut back it would be catastrophic,” Olson says. “We could have a second downturn.”

Source: The Associated Press

U.S. Senators Push for Homebuyer Tax Credit Extension

A handful of lawmakers are pushing for a six-month extension of the $8,000 first-time homebuyers tax credit.

The credit, set to expire Dec. 1., was introduced last year as a way to spark a rebound of the sluggish housing market. Sen. John Ensign, R-Nev.; Sen. Harry Reid, D-Nev.; Sen. Benjamin L. Cardin, D-Md., ; and Sen. Debbie Stabenow, D-Mich., introduced a bill Wednesday evening pushing the extension.

To date, nearly 530,000 Americans have applied for the tax credit to purchase their first home, according to data from the U.S. Treasury. Around 40 percent of all home buyers in 2009 are eligible for the credit.

Personally, I think the bill may or may not pass. Our government has spent billions of dollars in the past few months trying to stabilize the economy and creating new jobs. The banks bailout, cash for clunkers program and tax credits burn a big hole in the fiscal budget. Do we have more money to spend? Hard to guess...

Housing Construction and Permits Rise

Housing starts and building permits rose to their highest levels in nine months in August, but the gains were led by multifamily and apartment construction.

Housing starts for single-family homes fell 3 percent. Total housing starts rose 1.5 percent to an annual rate of 598,000. Building permits rose 2.7 percent in August.

The Commerce Department report comes a day after the National Association of Homebuilders reported its homebuilder confidence index rose for the third consecutive month in September and reached its highest level in 18 months.

New home sales rose 9.6 percent in July, the biggest monthly increase in sales in more than four years.

Source: Jacksonville Business Journal