Market Conditions

Holman W. Jenkins penned a masterpiece editorial in the Wall Street Journal today.

Titled “The Fed Can’t Fix Home Prices” Holman lays it out…

To get to a real solution, speculators and investors need to believe that home prices are hitting bottom, that any mortgage debt they might buy today for 80 cents on the dollar today won’t be worth 30 cents tomorrow. Then the vultures will pile in: The transfer of wealth from the overleveraged banks and hedge funds to those who kept cash handy will be shocking, ugly and cathartic — but it will also be relatively quick. Credit markets will begin to function again. The economy will grow. (my emphasis)

Jenkins discusses some ramifications of a declining economy in a Presidential election year, and provides a sound argument that taxpayers shouldn’t be bailing out the mortgage lenders or those borrowers that bit off more than they could chew.

This afternoon I had the pleasure of meeting up with Adam Klawonn, Adjunct Professor of Journalism at ASU, Associate Editor of Phoenix Magazine, and President of Forrest Media, which produces The Zonie Report. (That Adam had time to spend a couple of hours chatting about blogging, online media and real estate is pretty remarkable. The guy has a full plate…)

We touched on whether or not the government should intervene in the real estate market.

Adam asked pointed questions: Is the “credit crisis” the fault of the lenders, investors, or borrowers? Should we (as in you, me and every other Joe Taxpayer) pay for the folks that used their homes like a ATM machine? (my choice of words, not Adam’s)

As I’ve said before, I think the government needs to leave the market alone and let market dynamics and fundamental economic laws play out — basically allowing the market to correct itself.

Jenkins summed it up well in the WSJ piece:

Millions of Americans have negative equity in their homes, but did not bite off more mortgage than their incomes could support. These people are still paying their mortgages and never imagined doing anything else. Millions of others have positive equity in their homes despite seeing painful declines in their home value. Now all these homeowners are to be taxed to benefit more irresponsible borrowers?

I may take a little grief from some fellow real estate professionals and I’ll likely piss off some folks when I say that I agree with Jenkins.

Oh well.

Forestalling foreclosures is simply putting off the inevitable. The fed needs to back off and let the market and economic forces play out naturally. Yes, it will take time, and yes, it will get bloody. But it’s the only viable solution.

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Hat tip to Scott Brunner, VARBuzz.

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Technorati Tags: Fed mortgage bail out, real estate economy

Dave Girtsman, former musician turned real estate appraiser turned web development project manager has penned a little ditty on the housing bubble.

I bet you sing the chorus more than once today…

Hat tip to Jonathan Miller (via the Wall Street Journal Developments bog)

Technorati Tags: housing bubble, real estate video

One of yesterday’s posts referenced Phoenix homes listed under $200,000. As promised, here are the actual numbers of homes currently listed in the Phoenix area MLS for under $200K.

Of note:

Data is for single-family detached homes only. No condos, town homes, or manufactured homes (other than erroneously entered data, of which there is certainly some). 

“Total ARMLS” covers all of Maricopa County and the vast majority of Pinal County. As such, it includes many small outlying areas (where approximately 1/3 of the homes under $200K can be found).

Note the percentage of inventory under $200K for the ‘burbs that are somewhat distant from Phoenix proper — Queen Creek, Maricopa, and Apache Junction. They are showing significantly higher percentages than areas closer in. This should not be surprising to anyone familiar with real estate in these areas.

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Technorati Tags: Phoenix real estate listings data, Phoenix homes under 0K

My Google Alerts have begun lighting up as reports are coming in that the Senate has approved the Mortgage Cancellation Relief Act of 2007.

This would relieve homeowners of the tax liability incurred on “forgiven” mortgage debt.

Currently IRS Code 108 classifies forgiven mortgage debt as “imputed income”, meaning the homeowner is required to pay taxes at their ordinary income rate on forgiven mortgage debt.

This usually rear its ugly head in short sale situations. An example is the best way to explain:

Say Joe Homeowner owes $300,000 on his mortgage. His lender approves a “short sale” that will net the lender $250,000. But Joe owes $300,000. The lender “forgives” this $50,000, but is required to report that to the IRS. Our buddies at the IRS then say, “Hey Joe, you owe taxes on that $50K, pay up!”.

Depending on Joe’s tax bracket, the taxes owed on that $50,000 in forgiven debt could run into the thousands (potentially many thousands).

This Mortgage Cancellation Relief Act would end that tax liability. According to reports, it also extends the deductibility of mortgage insurance premiums for three more years.

The National Association of Home Builders reports the debt forgiveness limit is $2 million and applies only to principal residences (in other words, those with investment/rental homes and second homes need not apply).

The Center for Tax Studies also adds this:

In addition to tax relief for debt forgiveness and mortgage insurance payments, the bill includes: tax relief for volunteer firefighters and emergency medical technicians; protection of tax relief for homeowners after the death of a spouse; and flexibility to help co-op tenant/owners deduct real estate taxes and mortgage insurance. The bill is fully offset by increased penalties for failure to file S corporation or partnership returns and new requirements corporate estimated tax payments. It is now necessary for the House to pass the updated legislation and send it to the president for signature. (added emphasis. Everthing I’ve read indicates the President will sign).

I need to read up a little more on all the nuances of this tax legislation, but all signs point to it being a good thing for those forced into short sale situations. I’m sure Shailesh will weigh in soon!

Updated:
Note: there are two versions of this bill, the Senate bill is S. 1394 - Mortgage Cancellation Relief Act of 2007, and the House bill is H.R. 3648 - Mortgage Forgiveness Debt Relief Act of 2007. GovTrack.US shows HR3648 has passed both the House and Senate. It shows S1394 as introduced but not even scheduled for debate.

I suspects reports are confusing the two variations of the bill. It looks like the Senate amended HR 3648, which if my memory of Civics classes serves me right, means the bill will return to the House for them to review and vote on the changes before submitting it to the President to sign into law.

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Technorati Tags: Mortgage Cancellation Relief Act, short sale