March 2008      

In this issue of Home Base:

Housing Market Continues Decline as Foreclosures Grow, Prices Drop

The rate of foreclosures continues to rise and home values continue to fall despite a number of initiatives to restrain both.

The rate of foreclosures rose 57% in January, 2008 compared to January 2007, real estate research company RealtyTrac reported. There were 233,001 U.S. foreclosure filings this past January. Hardest hit were Nevada, California, Florida, Rhode Island, Massachusetts, and Arizona, which saw their rates double over the last year. Foreclosures in Virginia, Maryland and Connecticut were also ahead of the 57% national average increase. In most cases there was much variance within the state and even within local markets. There were also large one month spikes in foreclosures from December 07 to January 08 in Rhode Island, Connecticut, Washington, D.C., and Massachusetts. Only two of the top ten hardest hit metro areas were outside of California and Florida – Las Vegas and Greely Colorado. The other eight were Cape Coral-Fort Myers, FL, followed by Stockton, CA.; Riverside-San Bernardino, CA.; Modesto, CA.; Merced, CA.; Vallejo-Fairfield, CA; Bakersfield, CA; and Port St. Lucie-Port Pierce, FL.

On the positive side, foreclosure filings dropped by half or more in Pennsylvania, West Virginia, and Vermont during the last 12 months. The rate of foreclosures also dropped in Kentucky and New Mexico over the last year. Most recently, monthly drops from December to January were experienced in Vermont, Alaska, Nebraska, Nevada, Montana, and Pennsylvania.

Along with the overall bad foreclosure news, home values continue to decline in most parts of the U.S. According to the S&P/Case-Shiller national home-price index, overall U.S. home prices dropped 8.9% for the fourth quarter of 2007 compared to a year earlier. The National Association of Realtors (NAR) reported slightly less dismal data for the same period. According to NAR studies, the median home resale price declined 5.8% during the last quarter of 2007 compared to the last quarter 2006.

Some more specifics from the NAR study: Declines in the number of existing homes sold (not including new home sales) were down 20.9% in the fourth quarter compared to the last quarter of 2006. Every state except South Dakota experienced actual drops in the number of homes sold. Hard hit were areas that have been experiencing high foreclosure rates as well as other areas. Drops of 12% or more in the median prices of existing homes were experienced in Lansing, MI, Sacramento, CA; Riverside, CA; Jackson, MS; Decatur, IL; Detroit, MI; Los Angeles, CA; Palm Bay and Cape Coral, FL: and Las Vegas, NV.

There was also some good news regarding home prices. The National Association of Realtors report also noted that fourth quarter 07 median single-family resale home prices remained steady or grew versus the fourth-quarter 2006 in 73 of 150, or almost half of the metro areas it tracked. Heading the list was the Cumberland, Md.-W.V., metro area where median prices rose 19% over the previous fourth quarter. Also appreciating nicely over the same period was the median price of homes in many other areas, 18 % in Yakima, WA; 14.8 % in Binghamton, N.Y.; 14.4 % in Springfield, IL.; 14 % in Kennewick, WA.; 13.5 % in Bismarck, N.D.; 12.1 % in Waterloo, IA; 11.2 % in San Jose, CA.; 11.1 % in Topeka, KA.; and 11 % in Amarillo, TX. Nevertheless there were 50% more metro areas hit with double digit price drops than double digit price increases from the fourth quarter 06 to fourth quarter, 2007.

Does this mean that the efforts that Congress and the Administration have taken to stem the tide of foreclosures have not been effective? “Not at all,” according to American Homeowners Foundation Bruce Hahn. “Its clear that most, if not all are helping, and some that haven’t yet taken effect will help more, including the higher loan limits for FHA loans and higher loan limits for conventional loans purchased by Freddie Mac and Fannie Mae,” Hahn added. According to the Foundation President “The real problem is that marketplace is dynamic. Had the problems remained the same as they were when some of the earlier solutions were conceived, they may have been sufficient. However the housing market has continued to deteriorate and the problem has grown so large that all of these worthy efforts, even when fully implemented, are going to prove inadequate to stop the bleeding. It is becoming clear that Congress will need to do some more surgery in order to bring both reduce foreclosure rates and stop the declines in home values in most of the nation.”

Though the outlook seems gloomy, it isn’t as bad as it may seem. Some markets are doing very well, and we are beginning to slow the decline in home values in many others. Policy measures that are yet to be implemented will help more, and Congress is preparing additional legislation. The silver lining to the huge (10 month) current nationwide housing inventory is that home buyers in many areas have an unprecedented choice. Buyers in those areas will be unlikely to ever again find a home as close to their ideal, and they currently have tremendous negotiating leverage.

All of those factors, combined with mortgage rates that remain low, are good arguments for acting before the market hits rock bottom. You’ll never know when that point is until the data comes out several months after the fact. By then the home selection will have been drawn down, and mortgage rates and home prices may have headed back up. Even if there are still some price reductions to come, it will make sense for smart buyers to make their move when the predominant indicators in their area suggest that we are close to the bottom of the market.

Congress, Administration, and Candidates Respond to Deteriorating Housing Market

Policymakers have recognized that more efforts are needed to bolster the housing market.

The ideas include applying bankruptcy rules to foreclosures, providing government assistance to homeowners facing foreclosure, and more. The three main Presidential candidates have endorsed some of them and suggested others as well. All will face more hurdles than the recent economic stimulus package because of budget and political realities.

A proposed change to the bankruptcy code would enable judges to reduce interest rates and reduce mortgage balances, just as courts may presently do in business bankruptcies. Judges currently have no authority to alter mortgage terms or balances on primary residences, although they may do so on second homes or rental properties. Congress excluded mortgage loans from the oversight of bankruptcy judges in 1978, but at that time lenders used tighter underwriting measures. Most mortgages required down payments, were at fixed rates, and were rarely themselves the primary source of a homeowner’s financial problems. The mortgage “cram down” measure has passed a committee in the House of Representatives and is pending before the Senate Judiciary Committee. Mortgage lenders and many Republicans oppose the Democrat-sponsored measures. Mortgage lenders claim that it will lead to higher interest rates and down payments as they adjust lending policies to accommodate the increased risk.

The American Homeowners Grassroots Alliance supports the measure, believing that the overall benefits of reducing foreclosures more than offsets such risks. Homeowners, mortgage lenders and the economy are likely to be injured far more if we simply stand by and watch the growing number of foreclosures drive home values down further.

The Senate legislation would double the current $100 million funding for foreclosure-prevention counseling services and would enable states to issue more housing agency tax-exempt bonds to help homeowners refinance high-interest mortgages. To encourage more lenders to show flexibility in adjusting loan terms to homeowners facing financial duress, some lawmakers are considering protecting banks from lawsuits by investors opposing the practice.
Senate Banking Committee Chairman Christopher Dodd (D-CT), has proposed the creation of a federal entity, which would be funded with up to $20 billion, to help underwrite part of the costs of enabling homeowners to refinance into affordable loans. Bank of America is proposing a similar concept – the creation of a new federal agency that would buy delinquent mortgages from lenders at a deep discount and replace them with fixed-rate Federally guaranteed loans.

House Financial Services Committee Chairman Barney Frank (D - MA) is discussing a proposal intended to help up to one million homeowners with unaffordable high cost mortgages. The concept would require the Federal government to buy distressed mortgages at a deep discount and refinance them into lower rate mortgages backed by the Federal Housing Administration. The program could cost as much as $15 billion over five years.

Mr. Frank is also working legislation similar to the Senate proposal to enable states to issue more housing agency tax-exempt bonds to help homeowners refinance high-interest mortgages. It would allow states and municipalities to buy foreclosed or abandoned homes at discounted prices, allocating up to $20 billion in federal funding for grants and loans for that purpose.

The Treasury Department’s Office of Thrift Supervision, is preparing a program to help borrowers whose mortgages exceed the market value of their homes. This proposal is intended to enable approximately 8 million homeowners to refinance into government-backed loans based on the home's current market value. Participating lenders would receive payment of that part of the mortgage debt, but would potentially have to absorb all or part of the loss of the balance. Lenders would receive a special certificate equivalent to the remainder of the balance owed and if the home were eventually sold at a higher price they would receive all or part of the remaining amount. Those certificates could be traded as well. Though their initial value would be very low, the value would likely increase when home values begin to appreciate.

The three major Presidential candidates have also been outspoken on housing issues. Senator Clinton and Senator Obama support proposals similar to Senator Dodd’s. Senator Obama’s solution is a new $10 billion federal “Foreclosure Prevention Fund” to enable homeowners to renegotiate their loans or sell their homes. Senator Clinton would devote $30 billion to same task, which is also $10 billion more than the $20 billion Senator Dodd has proposed for essentially the same purpose.

Senator Clinton has also called for a five year freeze on interest rate adjustments on subprime loans and a three month foreclosure moratorium. Senator Obama supports the proposed legislation to change in federal bankruptcy laws and a new tax credit for lower and middle-income homeowners who don't itemize on their federal taxes. Senator Obama’s proposal would create a “universal tax credit” that he claims would save 10 million borrowers that an estimated average of $500 a year.

Senator John McCain has supported Administration efforts to expand FHA loans and the Hope Now Alliance which many lenders have already joined. Senator McCain is also supporting the Project Lifeline concept that would provide a 30 day timeout on individual foreclosure actions to provide threatened buyers a little more time.

It is clear that the situation is worsening. Last year about 4 million homeowners had mortgages larger than the market value of their home. According to Moody’s Economy.com today nearly 8.8 million homeowners, or 10.3 percent of the total, are under water. On February 27 Fannie Mae reported a $3.5 billion fourth quarter loss and revised downward its prediction of overall home price declines in 2008. It was earlier predicting drops of 4% - 5%, but now expects the range to be 5% 7% this year.

All of these proposals face uphill battles, particularly the more expensive ones. The budget deficit is so great that it is unclear if Congress could muster a veto proof majority to support any of them. Treasury Secretary Paulson dismissed many of them as industry bailouts on February 28, perhaps not surprising in this election year since most of the legislation and concepts were introduced or conceived by Democrats. In addition, we are already into the second term of this Congress and there are a limited number of legislative days left to develop and pass new legislation. However, if the housing data continues to show no signs of a recovery, we predict that Congress will respond in some fashion, even if the funding for the final package is more modest than some of the numbers that have recently been suggested.

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New Tax Breaks for Homeowners

The new Economic Stimulus Plan has provisions that will help homeowners and help slow dropping home prices.

President Bush signed a $152 -168 billion bill to help homeowners and revive the economy. The legislation will enable 130 million households to receive rebate checks of $600 or more and will also lower interest rates on many new and refinanced larger mortgages. Some components sought by the American Homeowners Grassroots Alliance were dropped, but the bill will still benefit millions of American homeowners.

Most individual taxpayers will receive checks of up to $600, and married couples will receive $1,200 plus $300 for each child. These amounts would be reduced for taxpayers with incomes above $75,000 for individuals and $150,000 for married couples, and would disappear if an individual makes more than $87,000 or a couple makes more than $174,000 (assuming no dependant children). Millions of Social Security recipients and military veterans receiving disability payments, their surviving spouses, and others who have incomes of at least $3,000 but don't pay income taxes would receive rebates of $300, and $600 for married couples.

Since the IRS printed the 2007 tax forms before the bill was passed there is no place on them to claim the rebates. For that reason the IRS is going to do the calculations automatically, adding the appropriate amount to the refund you claim or reducing your additional amount owed by the same amount. Even though many social security recipients do not owe federal tax and don’t have to file federal tax returns, they will have to file returns anyway in order to get their rebates. The rebates themselves won’t be taxable as part of your 2008 income. Check www.IRS.gov for questions and updates.

Some home based businesses may benefit from provisions that will allow businesses to expense more office equipment and other capital purchases made this year faster. The economic stimulus package would raise loan limits to as much as $729,750 for Fannie Mae and Freddie Mac, effective March 1, and will lower the rates on larger “jumbo” loans by up to 1%. The Federal Housing Administration will also be able to raise its lending limits to $271,050. The new larger mortgages will become more attractive to investors, who have become wary of loans that aren't guaranteed by Fannie, Freddie or FHA.
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Homeowners Call for End to Internet Taxes

American homeowners have urged Congress to stop taxing Internet commerce entirely. 

In testimony submitted to the House Small Business Committee on February 14, the American Homeowners Grassroots Alliance (AHGA) asked for sweeping changes to help home based business owners and employees who work from home offices. According to AHGA, one of the biggest shifts in the small business marketplace is in workplace locations, which are rapidly moving to American homes. According to IDC, a national research firm, there are between 34.3 million and 36.6 million home office households in the United States alone.
At least 18 million are home-based businesses, according to U.S. Census figures. They include millions of service businesses such as website designers and other consultants, as well as Internet-centric businesses, such as the millions of eBay Power Sellers who derive all or most of their income from Internet commerce. The balance are telecommuting employees of businesses of all sizes or federal, state, or local governments at all levels. One measure of the growing popularity of teleworking is a recent survey of members of the American Institute of Architects, which revealed that home offices are the most popular special function room of home buyers for the third year in a row.
 
The primary focus of the hearing was on the use of economic “nexus” theories to justify imposing income and/or franchise taxes on non-resident businesses. What it boils down to is that more than a dozen states have enacted laws or regulations requiring home based businesses to provide gratis sales tax collection services for the other 49 state governments and thousands of local taxing authorities in those 49 states. Under current law a home based business, for example an EBay seller, does not have to collect sales tax on an item sold to someone in another state unless it has a business presence in that state. In such cases the buyer is responsible for paying on all appropriate sales taxes to both their state and local taxing authorities. The “nexus” theories attempt to override this current law. It is obviously beyond the physical capability of home-based micro-businesses to keep up with and comply with such laws.

AHGA also pointed to how the growing expansion of ill-considered business activity taxes will undermine substantial social benefits resulting from the growth of home-based businesses:
 
1. The slowdown in the growth of home-based businesses and telecommuting resulting from the expansion of BAT/Nexus would undermine the environmental and economic benefits of teleworking. Because they do not drive to work, these homeowners are helping to reduce rush hour traffic jams and defer the need for state and federal transportation infrastructure investments, both for expansion and maintenance. The shift to home-based teleworking is helping reduce environmental pollution and global warming. A recent study by TIAX LLC determined that a full time telecommuter who lives 22 miles from his business would save 320 gallons of gasoline and reduce CO2 emissions by 4.5 to 6 tons per year. At $3.00 per gallon gasoline prices they would also save homeowners about $1,000 in cash, not including savings in automobile maintenance costs and depreciation resulting from the extra 10,000+ miles they run up annually commuting in the vehicle.

2. Similar benefits result when smart homeowners shop online. A click of the mouse uses a lot less gas than a trip to the mall, and the mail carrier and FedEx/UPS trucks delivering the goods will be coming down your street anyway. Americans work more hours than any other society. Both online shopping and teleworking save a lot of time, a precious commodity for all of us in our society where long working hours leaves too little time for personal relationships and other interests.

3. Since home based business owners and telecommuters are heavy broadband consumers, they provide a revenue base that facilitates broadband expansion to rural areas and underserved markets. The collective additional costs of unfair business activity taxes on Internet commerce would discourage the deployment of broadband access, which is a prerequisite in most circumstances for most teleworkers and home-based businesses.
 
For those reasons, AHGA urged Congress to protect the Commerce Clause of the Constitution and support the Business Activity Tax Simplification Act, H.R. 5627. The Act prohibits states from taxing home-based businesses that have no presence in the state.
 
The Alliance believes that enacting this legislation is the first step among a number of policies needed to help home-based businesses and protect the environment. Because of all the benefits of Internet use, it is important that all federal, state and local government policies contribute to the expansion of its use in our society. While the Federal government has adopted worthy policies to encourage teleworking (7% of federal workers now telecommute), the few proposals to encourage the same thing in the private sector are receiving scant attention. Even worse, some proposals are discouraging both teleworking and Internet commerce.

Associations representing state government interests have been promoting federal legislation that would require Internet sellers to collect and remit sales taxes for state and local governments in other states. “There are thousands of local governments, all with different tax rates and this would be a burdensome on the huge number of small home-based Internet vendors” according to AHGA President Bruce Hahn. “It would also be an impossible task for the millions more homeowners who hold their yard sales on eBay and craigslist.” he added.  

AHGA also supports a permanent Internet Sales Tax Holiday. Many state and local governments already offer sales tax holidays for back-to-school expenses. They also exempt from taxation some types of purchases, such as prescription drugs, and tax other goods and services at lower rates. In light of the aforementioned benefits of Internet commerce, an appropriate next step would be for the federal government and/or the states to enact a permanent Internet sales tax holidays. Savings on the maintenance and expansion of state transportation infrastructure and lower healthcare costs resulting from a cleaner environment would offset the reduction in sales tax revenues. Such legislation would also reflect the sentiments of most constituent homeowners and other consumers, who in public opinion surveys consistently oppose Internet taxes.
 
States are also discouraging teleworking as a result of the state tax rule known as the "convenience of the employer" rule - a rule that unfairly punishes Americans who work for out-of-state employers and sometimes work from home.  This rule is on the books in a number of states. Under New York's convenience of the employer rule, for example, nonresidents who sometimes telecommute to their New York employers may be forced to pay New York taxes on 100% of their income, even though they earn part of that income at home, in a different state.  Because the telecommuter's state of residence can also tax the income earned at home, the telecommuter may be taxed twice on that income. The Telecommuter Tax Fairness Act (H.R. 1360; S. 785) has been introduced to eliminate the "convenience of the employer" rule. AHGA urged members of the Small Business committee to support this measure, either separately or as a worthy amendment to any energy legislation Congress considers in the future. 

The Federal government has offered tax credits for the purchase of energy efficient hybrid vehicles, for energy efficient new homes and for spending to make existing homes more energy efficient. Many states offer similar incentives. Congress could further help the environment and accelerate the other benefits of teleworking by enacting legislation to encourage the creation of more Internet-centric home-based businesses and more telecommuting by employees of both small and large businesses. Tax credits provided to employers and workers for such things as broadband expenses and computer/telecom hardware and software would encourage the creation of more home-based businesses and defray the costs of establishing teleworking programs. Incentives and subsidies to expand broadband access to unserved rural and underserved urban communities would also accelerate that process. They would also open up educational and telemedicine opportunities to many of those homeowners and other consumers.

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State Antirebate Bill Likely Stalled

The Illinois legislature has thus far deferred consideration of a bill outlawing commission rebates, a wise move since they are becoming critical to growing numbers of home sales.

Pending Illinois state legislation would prevent real estate agents or brokers from giving cash rebates to home buyers to help them with down payments. Mortgage lenders have tightened lending standards, and down payments are now required in most cases. As a result, buyer’s agents are increasingly helping cash poor first time buyers and low or moderate income buyers come up with the remaining funds so that the sale can proceed. Fortunately there are hopeful signs that the bill will not make it out of committee.

This practice is growing rapidly. A recent Google search for “Illinois real estate commission rebates” returned 69,100 separate results, including thousands of real estate brokers offering buyers rebates of as much as 2% of a home’s purchase price. As the housing market continues to worsen, these rebates are an increasingly important factor in preventing a real estate driven recession from turning into a full scale housing depression, which would have a devastating effect on both the national and state economies and budgets.

In conversations with and letters to the cosponsors and the Committee Chairman, the American Homeowners Grassroots Alliance and the Consumer Federation of America expressed their concerns that the bill's passage would cause a dramatic decline in Illinois home values by greatly reducing the pool of qualified Illinois home buyers. Like many other states, Illinois has been hard hit by the mortgage meltdown. Lenders and mortgage insurers are demanding much larger down payments from Illinois home buyers today, shutting many otherwise qualified buyers out of the market.

In early February, commission rebates became even more important. On Feb. 6, MGIC, the nation’s largest private insurer of home loans, announced that it would no longer provide mortgage insurance coverage on mortgages with down payments of less than 5 percent in many U.S. markets, including Chicago. Mortgage lenders require mortgage insurance on loans with less than a 20% down payment. As a result even the most qualified buyers will have to put at least 5% down in almost all cases, and those with less than stellar credit or job histories will either be unable to get mortgages or will have to make larger down payments.

Very few low and moderate income home buyers and first time buyers in Illinois have saved enough money for a 20% down payment, and many don’t have 5%. Recognizing that the home sale cannot be consummated without outside financial assistance, a rapidly growing number of buyers real estate agents are voluntarily chipping in up to 2% of the homes selling price out of their commission towards the buyer’s down payment when necessary. If the lender requires a 5% down payment, this amounts to 40% of the cash needed ($5,000 on a typical $250,000 Chicago home), and is the only way that thousands of Illinois consumers are able to buy homes today.

Another plus for real estate commission rebates is that they have worked out well for all concerned. Consumer organizations, Better Business Bureaus, and the National Association of Realtors (NAR) typically get many thousands of complaints about other practices of real estate agents and brokers every year, but commission rebates have not been a problem area.

Some proponents of rebate bans have argued that rebates encourage tax fraud, because home buyers would not report that money as income when they filed their personal tax returns. Their premise is wrong because real estate commission rebates aren’t taxable. The IRS stated in a February 9, 2007 Private Letter Ruling that such cash rebates are not income, but rather represent an adjustment to the purchase price of the home (PLR 200721013).

Backers of the bill have suggested that real estate commission rebates raise prices. They do not. The commission rate to be paid both to the seller’s agent/broker and the buyer’s agent/broker is determined at the time the home is listed. A buyer’s agent/broker can’t increase the amount reserved for them, and if the buyers agent/broker wants to share part of his/her commission it doesn’t affect the total commission paid by the seller or the amount received by the seller’s agent/broker. A sale has been made possible, everybody has received what they expected, and everyone is happy.

Opponents of commission rebates to home buyers have also argued that a rebate prohibition would somehow protect consumers from backroom deals between real estate agents and outside parties, such as referral services and mortgage lenders. While such illegal and/or unethical practices are all too common in the real estate services sector, the record does not show that such nefarious practices are more common among real estate brokers and agents who offer rebates than among those who refuse to provide them.

For these reasons, there is no need for protectionist legislation like HB 4313 which would serve mainly to assure that those real estate brokers and agents, unwilling to offer commission rebates to home buyers, will not lose even more business to thousands of other brokers and agents who are increasingly willing to help out their clients. The bill has been opposed by the U.S. Department of Justice, the Consumer Federation of America, the American Homeowners Grassroots Alliance, the Illinois Association of Realtors, the National Association of Exclusive Buyers Agents and the American Real Estate Broker Alliance.

The opposition by the Illinois Association of Realtors was especially welcome, since in the past state Realtor associations have been the major proponents of antirebate legislation in other states. "We believe that it is very significant and absolutely wonderful that a state real estate trade association is standing up for consumer rights on this issue," said AHGA President Bruce Hahn. "We believe that siding with homeowners in opposition to protectionist legislation such as this will greatly improve the image of Realtors in the eyes of Illinois consumers," he added. AHGA hopes that other state real estate associations will follow the fine example of the Illinois Association of Realtors and oppose antirebate laws in the future, as well as other anticompetitive and protectionist state initiatives that would force home buyers to pay for services they either want nor need.