BluefoxToday blog : John Mulkey, Housing Guru (TheHousingGuru.com)

In a POST I did last September I explained how the increase in sales directly attributed to the First Time Buyer Tax Credit showed the cost of the program to be as much as $43,000 per additional sale. New information reported by CalculatedRisk.com shows that a tepid response to the program’s extension may leave us with a cost that is more than double that of the original credit, and could equal as much as $100,000 per additional home sold.

Not only does the cost far exceed any benefit from such an artificial stimulation, but the increase in sales appears to be only “stealing” those sales from the future. I reported the same result for the original tax credit in a POST I did last November. Regarding the current credit, Mark Vitner, a senior economist at Wells Fargo Securities, stated, “We clearly pushed demand forward. . . .” Additionally, according to government reports, the original tax credit experienced as much as $500 million in fraud, including fraudulent requests from as many as 53 IRS agents.

Whether we’re talking of stimulating the auto industry with Cash for Clunkers, increasing jobs as in Cash for Caulkers, or boosting the housing industry with the Tax Credit, such programs appear to be ill conceived, fraught with problems, and ultimately cost far more than originally intended. Those of us in the housing industry as well as our political leaders must acknowledge that the recovery will be slow, and that attempts to speed it up only result in wasted money and the potential for future bubbles.

The Housing Guru: The one source for all your housing questions

An article on Yahoo Finance provides yet another example of why artificial attempts to stimulate the housing market are a bad idea. When offered on a grand scale, as in the easy money of the last decade, they only serve to create bubble markets which at some point must collapse. And we’ve all experienced the disasters created by the bursting of such bubbles. And when the offer is more limited, as in the First Time Buyer Tax Credit or Cash for Clunkers, they do little more than “steal” future sales.

According to the article, Realtors® around the country are reporting a tepid response to the present $6,500 credit for existing home owners. The author outlined several reasons, some of which I discussed in a recent POST; and all point to the improbability that large numbers of existing home owners will be seeking new digs in the near term. Many are either underwater or have lost so much equity that a sale would fail to generate sufficient cash for a new purchase, commission, closing costs, and moving expenses. And, of course, millions are currently unemployed.

While the spring market may experience some growth, it now appears that a dramatic increase in sales is unlikely.

The Housing Guru: The one source for all your housing questions

Recent conflicting reports about the housing market and whether or not it is truly in recovery have left consumers as well as those in the real estate business more than a bit confused; those whose business plan is dependent upon a full or quick recovery should proceed with caution. I believe the housing market is far from recovered, and, in fact, will not return to the levels of the past decade for many years—if ever. I see six reasons why the housing market peaks can not return, that it will never regain its past “glory days.”

● Robust home sales are dependent upon consumer confidence in the economy. Consumers must feel that both their personal economy as well as that of the nation is on sound footing before committing to such a major, long-term purchase, especially on the heels of the longest recession in more than half a century. Thus far, consumers are far from confident.

● A vigorous recovery of the housing market cannot occur as long as we have unusually high unemployment. While there is much disagreement on when and how our recovery will occur, the financial experts all agree that unemployment will remain at higher than normal levels for several years, and some projections do not indicate a recovery to “full” employment for as much as ten years. With at least 20 million unemployed or underemployed, and with awareness that many of the jobs lost will never return, a high rate of joblessness could possibly become the norm.

● The dramatic loss of home equity will significantly limit the pool of available move-up buyers. In the past, move-up buyers used the equity from their former home to help them purchase a larger/more expensive one; however, declining home values with the associated loss of trillions in equity means fewer sellers will have the resources to purchase another home.

● A continued high rate of foreclosures will depress both the housing market and the hopes of many potential buyers. The millions who have experienced foreclosure will be automatically ousted from the buying pool. For some, several years of damage to their credit rating will be the defining factor; and others will become permanent renters, avoiding the potential for further pain and the trauma associated with foreclosure.

● A slow increase in mortgage rates will reduce the number of qualified buyers. As we experience the higher mortgage payments associated with rising interest rates, many will fail to qualify for loans on the homes of their choice. Others, having been “spoiled” by the low rates of the past decade, will stay out of the market hoping for a return to those rates.

● Tighter lending restrictions will also result in fewer buyers qualifying for home loans. And the restrictions, combined with the declines in credit scores experienced by millions of consumers will only further reduce the number of buyers.

Additionally, there are other factors such as: high levels of consumer debt, changing demographics, and a diminishing of the appeal of home ownership as a result of experiences during the current recession, will only serve to dramatically alter the housing market for the foreseeable future. While there will always be a group committed to home ownership and will always be homes available for them to purchase, an expectation that the housing market will soon recoup its losses and regain its momentum, for me, seems extremely unlikely.

The Housing Guru: The one source for all your housing questions

Following its most recent meeting, the Federal Open Market Committee (FOMC) has issued a statement of its projections about the economy, but instead of “sugar coating” or garbling the message, let’s call it like it is—it’s not a recovery. Chairman Bernanke had already warned us to expect a “jobless recovery,” but exactly what is that? Isn’t that just another way of saying, no recovery? Those without jobs or who are bringing home smaller paychecks or whose employment remains precarious, would have difficulty agreeing that their financial picture is recovering.

For those of us in real estate related businesses, the FOMC said little about their expectations for the housing market; and since housing is a major component of the economy, the omission seems a bit strange. While the November and December reports both mentioned improvement in the housing sector, the January report continued to focus upon last year.

What the report did point out, however, is that the jobs market will remain tenuous at best, and continued high unemployment means no housing recovery. Conversely, the lack of a robust housing market only serves to keep unemployment at higher than normal levels.

Regarding the labor market the report stated:

Participants anticipated that labor market conditions would improve only slowly over the next several years. Their projections for the average unemployment rate in the fourth quarter of 2010 had a central tendency of 9.5 to 9.7 percent, only a little below the levels of about 10 percent that prevailed late last year. Consistent with their outlook for moderate output growth, participants generally expected that the unemployment rate would decline only about 2.5 percentage points by the end of 2012 and would still be well above its longer-run sustainable rate. Some participants also noted that considerable uncertainty surrounded their estimates of the productive potential of the economy and the sustainable rate of employment, owing partly to substantial ongoing structural adjustments in product and labor markets.

The report further states: The weakness in labor markets continued to be an important concern for the FOMC; moreover, the prospects for job growth remained an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending.

To translate the above: Unemployment to remain high for several years, and Americans should be prepared for a prolonged period of anemic economic growth. Those whose plans have been based upon a “V” shaped recovery must alter their course or have it altered for them.

Finally, our Fed wizards said: Because current conditions may differ from those that prevailed, on average, over history, participants provide judgments as to whether the uncertainty attached to their projections of each variable is greater than, smaller than, or broadly similar to typical levels of forecast uncertainty in the past . . . (Translated: Everything we’ve said could be wrong, but we’ve stated it well.)

Let’s call it like it is—It’s not a recovery yet; and won’t be one for a long time.

The Housing Guru: The one source for all your housing questions

There seems to be a lot of confusion among consumers regarding credit scores, credit reports, where to get them, which ones are accurate, and how to access your credit report and score without getting scammed. With the economy in the doldrums and with mortgage lenders and credit card issuers having tightened lending guidelines, awareness of credit status is more important to consumers than ever. And the numbers of companies offering “free” credit reports along with credit protection services has grown dramatically within the past few years.

The catchy jingles playing nightly on TV tout the advantages of knowing your credit score, and many succumb to their clever marketing and offers of a “free” credit report. And while many are aware that the offers do come with strings attached, they may not realize that some of those strings will entangle unsuspecting users in a costly web from which it is sometimes difficult to escape.

Then there is the issue of credit scores, some of which are offered for free. Consumers will find scores offered by the three credit bureaus as well as multiple websites, but be aware that there is one main score used by lenders (FICO), and the number reported will vary from the other providers. Below I have listed the simple facts about credit reports and scores:

The three major credit reporting agencies are:

Experian, 475 Anton Blvd.,Costa Mesa, CA 92626 888.397-3742,  www.experian.com

Equifax, P.O. Box 740123,  Atlanta, GA 30374, www.credit.equifax.com

TransUnion. P.O. Box 7000, North Olmstead, OH 44070. www.truecredit.com

The best way for consumers to view their CREDIT REPORT is to visit, AnnualCreditReport.com. This is the site that offers the government mandated free credit reports which can be downloaded without cost once per year. And while the site doesn’t try to sell anything, the individual credit bureaus, once accessed, will; and, unless you are interested in credit protection services, ignore their offers with one exception. If you would like to know your FICO credit score, the one lenders use when considering your credit worthiness, you can purchase it for $7.95 from Equifax, the originator of the FICO scoring system. Don’t be fooled by other offers of credit scores, they’re not the ones used by lenders, and while they may provide you with an approximation of your real credit score, they’re worthless if you need to know precisely where you stand.

Finally, there are some free sites that do offer credit scores, but here again, they’re not the FICO score and will only give you an idea of your standing. Unless you’re planning on applying for credit, however, you may not need the FICO score. If you’re only satisfying your curiosity, get one of the free scores at: Credit.com; Quizzle.com; or CreditKarma.com.

The Housing Guru: The one source for all your housing questions

As Treasury copes with mounting foreclosures and the ineffectiveness of its modifications programs, many attempt to ignore how declining home prices impact all of us. Some assume or hope the problem will “self cure” over time. It won’t.

The current foreclosure crisis demands our attention; to ignore it is to deny the potential impact that millions of foreclosures would have upon both the housing market and the overall economy. While it’s impossible to know the precise number, some experts have predicted that we’ll suffer more than 15 million foreclosures over the next five years; and only half that number would pose a serious problem.

While some are busy placing blame upon irresponsible home owners, others point to Realtors® or bankers as the villains; but what most seem to overlook is that regardless of who may be at fault—in reality there is shared responsibility—pointing fingers only distracts from the problem at hand. And that problem is the undeniable fact that continued foreclosures pull down home prices for everyone, shrink the values of lenders’ portfolios, and keep an economic recovery out of reach.

It has been estimated that homeowners have lost as much as $5 trillion in equity in just the past two years; and when values decline below their mortgage amount, responsible homeowners lose a critical economic tool. Unable to borrow against their home, they have no equity “cushion” that might have pulled them through problems with medical expenses, job loss, or other unforeseen financial disasters. And, with their home worth less than they owe, they are unable to sell and rid themselves of a burdensome mortgage.

With about 4 million either in default or foreclosure at the end of 2009, and with unemployment expected to remain high for several years, the number of foreclosures seems likely to rise as both borrowers and lenders exhaust their options. Experts now predict a record 3 million foreclosures for 2010 alone;  and as they occur,  more will become aware of how declining home prices impact all of us. Unless the administration can develop a realistic and workable plan to help struggling homeowners—a Band-Aid will do little against this gushing wound—the housing crisis and accompanying economic doldrums is likely to persist well into this decade.

The Housing Guru: The one source for all your housing questions

All the confusing information about the economy and housing market has left potential home buyers scratching their heads and wondering, if this is the best of times or the worst of times to buy a home? Recent news reports have shown charts that demonstrate how renting may be significantly less expensive than buying. Others may point to the dangers of further declines in home prices. What’s a buyer to do?

The answer, may seem complicated as a whole, but is actually quite simple for the individual. If you find the home you need at a attractive price that you can afford, buy if you need to buy. What does that mean? It means that those considering the purchase of a new home must make the decision on whether or not buying is a prudent choice for them; and that’s pretty easy to determine. The following questions will help to guide you in the right direction:

● Do you really need to purchase? Is it possible that renting would be a better choice because of job instability or the prospect that you’ll need to move within a short time? Look at the rentals available and compare the costs of renting to that of owning. With apartment vacancies the highest in decades, and with a large number of rental homes in great locations, renting can be a great option for some; and rents are currently extremely attractive.

● Is your employment secure/income stable? Unless you’re relatively certain of your employment prospects in the foreseeable future, buying a home can be a risky endeavor. With downsizing, layoffs, business closures, and a weak economy, many potential buyers have elected to remain out of the market until the recovery begins in earnest.

● Are you reasonably certain you won’t need more space or that you won’t relocate within the next 3 – 5 years? If you anticipate an increase in the size of your family or if there are other reasons you might need to upgrade to a larger home in the near future, you should purchase for that likelihood. If your financial situation doesn’t allow for the larger purchase, postponing may be the better choice.

● Are your finances in order? Do you have a good credit rating (Click HERE for the real sources of FREE credit reports)? Do you have a regular savings program? Lenders will love you if you do, and the savings may help you to qualify for a better rate. And you may need some of those savings for the down payment or other expenses associated with loan closing and moving.

● Can you afford the home you want? Don’t get caught in the trap of straining your budget. Buy what you can comfortably afford (Click HERE for an easy calculation to help you determine how much you should allocate to a home purchase).

● Are you familiar with the local housing market? It’s imperative that you become familiar with the area in which you plan to live. Look at homes on the market; get an understanding of pricing and value; and evaluate drive times to work, schools, and shopping. You should also research the statistics of neighborhoods in which you’re interested (For links to helpful websites, click HERE).

There are some great bargains available for those who would like to purchase a home, but sorting through the maze of inventory and negotiating the best deal requires the help of a professional. I’d recommend recruiting an experienced real estate agent to guide you in your search. They’re familiar with the market, with pricing, with short sales and foreclosures; and can help you avoid making a costly mistake.

Finally, if you have determined that buying is your best choice, the government wants to help you make that purchase with a tax credit that can be as much as $8,000 for qualified buyers (Click HERE for more information).

For more great home buying or selling tips, visit: The Housing Guru

It now appears that the recession may compel more homeowners to downsize. With a growing number having difficulty paying for and maintaining their McMansions, some are looking for smaller more energy efficient homes in an attempt to reduce both their monthly housing expenses and the physical effort required in taking care of larger homes.

Recent studies seem to indicate that both young and old are willing to give up the prestige associated with large, expensive homes in order to gain financial security and personal time. In just the past two years the median home size has decreased by almost 10%. With home sizes having grown by about 50% since the 1970s, many consumers now realize that they really don’t need the extra space; but what they are demanding is a more efficient use of the space they purchase.

And while the increase in first-time buyers and the scarcity of move-ups has skewed the house size numbers, the reality is that the change is likely to remain. Rising interest rates and tightened lending rules will force many buyers to spend less; and the continued concern about rising energy and maintenance costs will result in the production of homes with fewer rooms, less wasted space, more dual function areas, and the elimination of rarely used “formal” areas. Buyers will demand efficiency and practicality, but will also expect imaginative use of space that emphasizes both style and comfort.

Click HERE to view several appealing and efficient home plans and more news on downsizing.  The plan shown includes 3 spacious bedrooms in less than 1900 sq. ft.

The Housing Guru: The one source for all your housing questions

If you are planning the purchase of a resale home, you may be considering the purchase of a home warranty. While home warranties offer peace of mind, the important issue is whether or not you’ll have coverage when you need it. It’s important to understand the home warranty coverage you are buying and its limitations or exclusions.

If having a home warranty is important to you, you should read the policy or brochure carefully. While one company may offer coverage for serious structural defects and mechanical systems, another may cover mechanical systems and appliances, but eliminate coverage for the structure. Make certain that the warranty you purchase or receive covers the items that are important to you.

You should also be aware that what you interpret to be a serious structural defect may not be covered under the terms of your policy. Read the information carefully and understand what is covered. It can be both frustrating and expensive to discover that the coverage you received does not apply to your specific issue.

Home warranties, like coverage on other purchases, vary widely in what is covered, the terms of coverage, and the actual value to a purchaser. The following list should help you compare home warranty policies.

The name of the company providing the coverage

The name of the person to whom coverage applies

The length of the warranty

An explanation of all items covered by the warranty and which items are excluded

Whether or not the warranty is transferrable

Whether or not there is a deductible or base fee for warranty claims

The procedure for filing claims for service

The company responsible for making the actual repairs

The time allotted for responses to claim service

A clear explanation of how coverage disputes are to be resolved

Having a home warranty can be reassuring; and the right coverage can be a godsend if covered problems arise during the warranty period. Also, since the price of a home warranty is small—usually only a few hundred dollars—it’s often possible to have the seller pick up some or all of the cost.

The Housing Guru: The one source for all your housing questions

While news stories, articles, and blogs continue to be written about “Strategic Default” and how those facing foreclosure shouldn’t be allowed to walk away or have their mortgage balance reduced, punishing foreclosure victims only continues the pain for all of us. The problem we face isn’t one of a few hundred or even a few thousand who carelessly spent beyond their means; this issue touches tens of millions of U. S. homeowners, the majority of whom acted responsibly, and with the knowledge available to them at the time. Most thought they were making wise choices.

How can we blame the homebuyer for not seeing the fallacy of never-ending home price escalation? In their recent testimony before Congress, the heads of the big banks said they didn’t see it. Jamie Dimon, Chairman and CEO of JP Morgan Chase said, “Somehow we just missed that home prices don’t go up forever,” an erroneous assumption shared by the U. S. Treasury. And if the “brilliant” minds on Wall Street didn’t see the crash coming, who could expect those on Main Street to have superior knowledge?

Regardless of what Mr. Dimon may have known, few anticipated the intensity of the housing crash or the scope of its reach. It’s time to stop blaming the home purchaser and to accept the only workable solution for both them and for the housing market in general. It’s time to see beyond what we perceive as the “morality” of the solutions for those facing foreclosure, and to look to what solution best serves the country as a whole. And that is to reduce the principal of homes underwater to their current value. Such an action would immediately help to stabilize a large portion of the market, and would protect neighboring homes from further declines in value. It would not affect the bank’s or investor’s equity, for the homes are only worth what they’re worth; and foreclosure sometimes results in below market returns.

Those who speak of the inherent unfairness of such a solution fail to consider the ultimate damage of continued foreclosures, the consequences of which will depress home prices for years. If we’re serious about solving the foreclosure crisis, let’s address the underlying cause—homes worth less than their mortgage.

I’ve recently seen comments from some who said, “I don’t care if my home declines in value, I don’t want to save those who acted stupidly.” And while I doubt that those making such statements really aren’t concerned about future decreases in the value of their own home, I do think they want to punish those who they perceive as taking advantage of the situation. However, the problem extends beyond housing, and millions will continue to suffer until we begin to restore economic order and sanity. We must do something; and the palliative measures of government have demonstrated their inadequacy to bring solutions. What is needed is bold action, from leaders unafraid of the political consequences. Whether it’s legislation to allow for “cram-downs” or forcing banks to lower principal balances on homes underwater, to fail to enact a workable solution is to allow the morass to continue; indeed to perpetuate it.

Finally, in an effort to inject a bit of humor into this otherwise depressing topic, watch the Stephen Colbert video on this topic.

The Housing Guru: The one source for all your housing questions