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#1
08-17-2007, 08:41 AM
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Alot of what you said is true, however some is not. The Fed did not drop the Fed Funds rate, which it has raised 17 times, it dropped the discount rate .5%today temporarily which allows banks to borrower $, not consumers. This will have no direct affect on the consumer yet, however the stock market will like this today Non-conforming or Jumbo loans(over $417k) are sold separately and Fannie and Freddie do not buy these types of loans. The biggest problem in the industry is companies that offered option ARMs or negative amortization loans. These loans people did not pay the all of the interest on the loan, they actually add principal to the loan. Many companies like Countrywide and WAMU offered these loans and when home prices slipped or fell, consumers are finding themselves owing more than the home is worth. The home they bought 1 year ago for $500k, is now worth $450k and they owe $510-525k. Imagine that a lot of customers will just let the house go into foreclosure. I personally work in the mortgage industry for another more reputable company and we never offered these types of loans and have not been affected by these problems. The other issue with Non-conforming or Jumbo loans is that investors currently are scared to buy these loans due to uncertainty of their performance. This has driven the price/interest rates up. Working with a educated mortgage professional you can still find great advice and low interest rates. Currently I am structuring blended Jumbo loans with 2 mortgages and both mortgages on 30 year fixed rates around 6.75%, this is a way around the increases in Jumbo loan pricing. I hope that helps clarify things 
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#2
08-17-2007, 10:14 AM
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I think all of this is a lesson in how volatile the stock market can be. We have put in all sorts of controls and still we get pretty big swings. The housing market was driving a lot of the highs, and now it turns.
Fundamentally I feel with all the innovation that occurs in this country the long term will be good. Lots of drugs, electronic consumer products, new types of cars, etc... yet to come that will be wildly different, innovative and highly sought. Just my feeling. Even with China and India becoming energy gulpers just like we are.
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#3
08-17-2007, 03:06 PM
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#4
08-17-2007, 03:14 PM
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#5
08-17-2007, 03:42 PM
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#6
08-17-2007, 04:00 PM
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#7
08-17-2007, 04:56 PM
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#8
08-17-2007, 09:29 PM
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Pgardn, I can tell you why i went with a 30 year fixed. First we are locked into a very nice interest rate with no prepayment penalties. We always planned on a 15(to pay off in about 10), but we recieved a nearly identical interest rate on the 30 as we did the 15. So we went with the 30 which offers more flexibility in case of some unforeseen economic issues. Typically we just double our mortage payment every and send that in paying the principal off quicker. But in case of a crunch, we have a lower payment at a very nice interest if we need it.
__________________
Inveniemus viam aut faciemus
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#9
08-18-2007, 01:27 AM
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suffolkgirl and wiphon obviously understand this better than the other posters in this thread, but still made a couple mistakes. the appraised value of homes, at the present, isn't the problem. it's the financial markets ANTICIPATING that they will be problems in the coming months. the actual problem, at this very moment, is that there is no money to lend due to the fact investors in mortgage backed securities have divested to secure their funds in ANTICIPATION of future foreclosures. the foreclosure rates haven't increased as we sit here, but investors are anticipating that they will. it is very much due to the negative amortization loans that wiphon mentioned. particularly countrywide has a huge chunk of them coming up to key adjustment periods. these loans were written with pre-payment penalties, so the borrower was locked in to the loan, with no escape, until this key time. underlying lenders and funders are very concerned with the potential of home values being unable to support the new amounts needed to re-finance, and also very concerned that the borrowers themselves have not done the necessary credit cleanup or income improvements to qualify for better paper.
the disaster in the home market hasn't actually occurred, it is being anticipated, which could become a self-fulfilling prophecy. fortunately, the fed has done a remarkable job in keeping their cool and putting in just enough money, and not touching consumer interest rates. there is no good in making money cheaper if there is no money to lend in the first place.
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#10
08-18-2007, 10:48 AM
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Aha. Understood. But if you double your payment you are making, you are still paying much more than you would on a 15 year, but you have the flexibility of paying a much smaller amount if you get bonked on the head or something. I must say all of this house stuff is very interesting as I have not been into this in a long time.So thank you to the people who work in these areas who have posted. I think the Fed has signaled that interest rates are going to change. When T-bills and the current lending rate are so far apart something is out of whack. Almost a bit of deflation it seems based on what I have been hearing/ reading. It apparently means bring the lending rate down, inflation is not a problem. I have no background in economics so corrections are appreciated (never had to take a class in anything dealing with money, a hole in the old educational system). Most of the general stuff makes sense to me, but all the little particulars are a bit confusing. And the guys/gals that write on this all seem to have their own little views. One fella is suggesting a complete disaster based on the dollar losing value compared to other currency. Seems the economic people have their own little pet disaster theories. very interesting, and confusing at times.
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#11
08-20-2007, 12:37 PM
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Federal Taxes Weekly Alert, 08/23/2007, Volume 53, No. 34
After the bubble bursts: tax strategies for homeowners selling at a loss While real estate generally appreciates in value over time, homeowners who are forced to precipitously liquidate their investment—particularly if they bought at the height of the market—may have to sell at a financial loss. To compound the misery, a loss is generally not available for tax purposes on the sale of a personal residence. A tax loss is only available if the taxpayer is treated as having converted his home into business or income-producing property. This Practice Alert provides some tips on accomplishing this goal and explains the other tax consequences of a successful conversion. Generally, when a real estate bubble bursts, property buyers are suddenly scarce and housing inventory builds up, and property prices (and values) crash downward. The best strategy for a homeowner who had been planning to sell may be to wait until the market readjusts to a more normal condition. But many homeowners may not be able to wait and, for a variety of reasons, may have to sell even though it means taking a financial loss. Borrowers with “sub prime” mortgages may have little choice but to sell when faced with rising property taxes and interest rates. Similarly, executives with new jobs hundreds of miles away may assume they have no other realistic choice but to sell at a loss. The tax law is not particularly helpful to a taxpayer in this situation. However, there are certain options available that may provide some tax relief. Background. A taxpayer can deduct an ordinary and necessary expense in carrying on a trade or business. ( Code Sec. 162(a) ) Similarly, taxpayers can deduct a loss if it is from a trade or business or a transaction entered into for profit. An exception to this rule also allows an individual to deduct a loss from a casualty or theft. ( Code Sec. 165(c) ) But a loss on the sale of a residential property bought or built by an individual for use as his personal residence and so used by him up to the time of the sale isn't a loss that can be deducted. ( Reg. § 1.165-9(a) ) Taking a tax loss. The solution for an owner who needs to sell his home at a loss seems obvious: first convert it from personal use property into an income-producing use (e.g., renting it out) before it's sold. The loss would then be deductible so that some benefit could be salvaged from a bad situation. ( Reg. § 1.165-9(b)(1) ) But this is easier said than done. IRS is not overly inclined to recognize such a purported transformation. Whether a former personal residence has been converted to income producing property qualifying for a loss deduction is a question of fact. The Supreme Court has said that a conversion to income producing purposes at the time of sale must be shown by acts which specifically devote the property to business purposes. This may include any business act or operation which devotes the property exclusively to the production of taxable income, such as renting the property. (Heiner v. Tindle, (S Ct 1928) 6 AFTR 7366 ) While no factor is determinative and all the facts and circumstances must be considered, five factors often considered by IRS and the courts are: (1) the length of time the house was occupied by the individual as his residence before placing it on the market for sale; (2) whether the individual permanently abandoned all further use of the house; (3) the character of the property (recreational or otherwise); (4) offers to rent; and (5) offers to sell. Thus, courts have found that a personal residence was converted to income producing property in situations where a lease was signed (Cullman, Joseph Jr., (1929) 16 BTA 991 ); it was rented without a lease on a month to month basis (Sweet v. U.S., (DC CA 1968) 23 AFTR 2d 69-448 ); and it was rented for only 3 months before sale at an extremely small net profit (after depreciation). (Rechnitzer, (1967) TC Memo 1967-55 ) A court even found that a residence was converted into rental property where the leased residence remained on the market during the lease term, and the one-year lease allowed any unused rents to be credited as a downpayment if the lessee bought the residence before the lease term ended. (Abrams, James, (2002) TC Summary Opinion 2002-155 ) Courts have also held against the taxpayer. Perhaps most disconcerting to a homeseller in a conversion situation, a court found that a temporary rental (12 months) following failed attempts to sell a residence didn't show that the property was converted to an income producing use. The court reasoned that to hold otherwise would mean that real property held for sale could be deemed converted to property held for the production of income anytime the property was temporarily rented. (Saunders, Philip, (2002) TC Memo 2002-143 , affd (CA 6 2003) 92 AFTR 2d 2003-6172 (unpublished) ) Other courts have held that an unsuccessful attempt to rent one's home isn't enough. (Grohse, Edward, (1968) TC Memo 1968-47 ) Nor does no longer using a home as a residence and listing it with a broker accomplish a conversion. (Cottrell, Richard, (1970) TC Memo 1970-218 ) Where individuals rented their residence to their building contractor on a month-to-month basis for less than fair rental value and he was required to maintain it and show it to prospective buyers, the “lease” was held to be only a caretaking arrangement pending a sale. (Murphy, Michael, (1993) TC Memo 1993-292 ) RIA observation: While it's sometimes hard to extract basic principles from cases that seem to reach contradictory results, the above cases seem to suggest a few guidelines that should be followed to improve a taxpayer's chances of being able to show a successful conversion: • discontinue any and all personal use of the residence; • treat the rental of the property as any other serious business enterprise (e.g., keep proper records, have a business plan that projects income and expenses, etc.); • actively attempt to rent the property (e.g., list it with a real estate broker, advertise, etc.); • rent the property at its fair market value to unrelated third parties, if possible; • employ a straightforward lease (don't include other provisions which could cause it to be treated as a caretaker or another type of agreement); • rent for a set term if possible (preferably what's standard for other rental property in your area); and • treat as income producing property on your tax return, reporting income and claiming appropriate deductions. Limit on tax loss that can be taken. The tax loss available to an individual converting his home into investment property may be smaller than he expects even if he successfully converts the property. That's because basis (cost for tax purposes) is equal to the lesser of the actual cost or the property's fair market value when it's converted to rental property. So he can only recognize the amount of loss that occurs after the property becomes business or investment property. ( Reg. § 1.165-9(b)(2) ) RIA observation: Individual A buys a home for $500,000. He eventually converts it to rental property when it's worth $450,000. He ultimately sells the property for $425,000. Although the financial loss on the sale would be $75,000, the loss that he can recognized for tax purposes would only be $25,000. Tax implications of becoming a landlord. An individual who converts his home into rental property must report the rental income on his return (Schedule E, Form 1040). But he is also entitled to offsetting deductions for utilities, operating expenses, and incidental repairs and maintenance (e.g., fixing a leak in the roof). In addition, he can claim depreciation deductions for his home. However, under the tax law passive activity loss (PAL) rules, he may not be able to currently deduct the rent-related deductions that exceed his rental income unless an exception applies. If rental deductions exceed rental income, the loss generally can only offset other passive income until the property is disposed of. Under the most widely applicable exception, the PAL rules won't affect an individual's converted property for a tax year in which his adjusted gross income doesn't exceed $100,000, he actively participate in running the home-rental business, and his losses from all rental real estate activities in which he actively participate don't exceed $25,000. ( Code Sec. 469(i)(3)(A) ). Impact on homesale exclusion. An individual who's renting out a home he had been using as a principal residence may forfeit an important tax break for homesellers if the market changes and he finally sells it at a profit. In general, the homesale exclusion under Code Sec. 121 allows an individual to escape tax on up to $250,000 ($500,000 for married couples filing joint returns) of gain on the sale of his home. However, to qualify, generally an individual must have used the home as his principal residence for at least 2 of the 5 years preceding the sale. (There are important exceptions for sales as a result of a change in place of employment, health or unforeseen circumstances.) So renting a residence out for an extended time could jeopardize this tax break. Even if an individual doesn't rent out his home for such a lengthy period that he jeopardizes his principal residence exclusion, the tax break he would have gotten on the sale (i.e., exclusion of gain up to the $250,000/$500,000 limits) will not apply to the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997. A maximum tax rate of 25% applies to this gain (attributable to depreciation deductions). RIA observation: For a client letter describing the consequences of converting a home into rental property, see FTC Client Letters ¶ 2350 . © 2007 Thomson/RIA. All rights reserved.
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#12
08-20-2007, 08:33 AM
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