McKinney Buyers Saying Home Prices Right

By Jonna Fernandez, Special contributor

February saw an improvement in the real estate market of Collin County and surrounding areas, reports the Collin County Association of Realtors.

Closed sales increased by more than 34 percent over January, and the median sales price was 7 percent higher in February ($167,250), than in January ($156,200).

The CCAR Pulse, which delves into the real estate markets of 36 local communities, reports that the average time a house was on the market in February was 111 days, down from 113 days a year ago.

"The good news isn't just for sellers," said Steve Haid, CCAR member services director. "Local buyers have a great opportunity right now. Because interest rates are at historic lows and the median family income is 158 percent of what is needed to qualify for the median priced house, the average buyer will be able to find a nice home at an affordable price."

The overall inventory of available homes on the local market remains balanced at 5.9 months. However, there is an undersupply of houses priced below $200,000 and an oversupply of homes priced above $500,000.

"The North Texas real estate market is much healthier than in most other parts of the country," Haid said. "It is encouraging to see that real estate activity improved in February and we anticipate continued improvement in March."

The Lowdown On FHA Mortgages.

The importance of the FHA (Federal Housing Administration) in the home mortgage market has changed markedly over the years. This has been due less to changes in the FHA itself than to changes in the broader market in which it operates.

In the early 1990s, FHA had about 15 percent of the home-purchase market. In subsequent years through 2006, FHA lost business to the growing subprime market, which took many borrowers who could have gone FHA. In addition, FHA lost business to the prime conventional market, which developed and aggressively merchandised option ARMs and interest-only products, as well as reduced documentation underwriting, none of which FHA offered. In 2006, FHA's share of the purchase market had fallen to less than 4 percent.

Then came the financial crisis. With home prices declining and defaults rising, the subprime market largely disappeared, option ARMs declined to a trickle, and documentation requirements on prime conventional loans were substantially tightened. In addition, FHA loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA's market share of new purchases was back to about 15 percent, and its share of refinances was substantially higher.

The FHA Market Niche: An FHA borrower in early 2009 1) Doesn't need a loan larger than the FHA maximum in the borrower's county; 2) Can't put more than 3.5 percent down, which is the FHA requirement; 3) Is not eligible for a VA loan, which allows zero down; and 4) Can't be approved for a conventional loan but can be approved under FHA's more liberal underwriting rules.

A borrower who can put 10 percent down on a loan smaller than the FHA maximum and can be approved for a conventional loan will usually do better with the conventional loan, but there can be exceptions -- see below.

FHA Loan Limits: The loan limits on FHAs effective until year-end 2009, established on a county basis, were the same as those applicable to Freddie Mac and Fannie Mae. On a one-family house, they ranged from $271,050 to $729,750 in 76 higher-price counties. Loan limits on 2-4 family houses are higher. On HECMs (reverse mortgages), the maximum was raised to $625,500 for the balance of 2009. You can find the limit applicable to any particular county here.

Down Payment Requirements: FHA borrowers in some cities, counties, or states have access to special programs that eliminate the need for a down payment by offering second mortgages at favorable terms. Usually no payments are required on the second mortgage until the house is sold. The public agencies offering these programs have their own eligibility rules that are independent of FHA. The only generally available zero-down loans are VAs and USDA loans in rural counties.

Underwriting Requirements: FHA will accept lower credit scores than are acceptable on prime conventional loans, and are more forgiving of past mistakes. FHA will forgive a bankruptcy after only two years, and a foreclosure after three years.

Mortgage Insurance: FHA borrowers pay a monthly mortgage insurance premium of ½ percent per year (.55 percent on loans with less than 5 percent down), and an upfront premium of 1.75 percent, which is almost always included in the loan amount. In contrast, most conventional loans have only a monthly premium which is higher than the FHA monthly premium but disappears at 20 percent down. Because of the higher mortgage insurance premiums, an FHA will be more costly to a borrower when the rate and points are the same.

Differences in Rate and Points Between FHAs and Conventionals: In shopping lenders who offer both FHA and conventional loans, I have found that, in many cases, the rate and points quoted on FHAs are higher. Lenders often charge larger markups on FHAs, partly because they are more costly to originate, and also because "they can." There isn't as much competition for FHAs because a large proportion of brokers and smaller lenders don't offer them.

On the other hand, I found that some lenders quote the same or even lower rates and points on FHAs. This kind of market fragmentation, which surprised me, appears to be a consequence of the financial crisis. It places an added burden on borrowers shopping for the best deal, as if that weren't already difficult enough.

Comparing Prices: Borrowers should be able to compare the all-in costs of an FHA and a conventional by comparing their APRs. The APR takes account of the rate, points, other lender fees, and all mortgage insurance premiums. Unfortunately, the APR assumes that all loans run to term, which makes it deceptive for any borrower who expects to have the loan for less than 10 years.

Furthermore, most of the lenders I checked are not calculating the APR on FHAs correctly. The most common mistake is ignoring the upfront mortgage insurance premium, which their software was never programmed to accommodate. If you want to make an all-in price comparison over the period you expect to have the loan, you can use my calculator 9c.

Dallas home prices drop in one survey, rise in another

The latest research on Dallas-area home prices will cause a lot of head scratching.

One report released Tuesday says local home prices were down at the end of the year, while a second benchmark national survey found they were still rising.

"Which one do you believe?" asked Texas A&M University economist James Gaines. "We researchers are confused, too."

According to the monthly S&P/Case-Shiller home price index, Dallas-area home prices fell 2.4 percent in December from a year earlier – the biggest drop yet in this closely watched housing study.

The Dallas numbers were still much better than the almost 9 percent nationwide decline in Case-Shiller's report.

But another respected home-price survey came up with the exact opposite conclusion about the Dallas-area housing market.

The Office of Federal Housing Enterprise Oversight's numbers say that home prices here in the fourth quarter were 2.95 percent higher than a year earlier.

And nationwide, the federal agency estimates that prices inched up 0.84 percent.

Disagreement among analysts is nothing new, and most housing studies have subtle differences in their conclusions, depending upon how the research is done.

But rarely do two such important home price gauges released on the same day provide such dramatically different data.

"I track four or five of these things, and most of the time, they are not that far apart," said Dr. Gaines, who is in Texas A&M's Real Estate Center.

The volatility of many housing markets caused by falling sales and rising foreclosures is making it harder for analysts, he said.

"These indexes have trouble when things are changing," Dr. Gaines said. "When things are nice and smooth and steady, they are consistent.

"But when the market is going up or down, they can get the data off."

Case-Shiller and the federal housing office take different routes to formulate their home price indexes.

Case-Shiller says it tracks the prices of typical single-family homes in 20 metropolitan areas. The survey does not include condominiums and townhouses. It only covers pre-owned properties – no new construction.

The Case-Shiller researchers say they compare "arms-length sales" of specific single-family homes.

The agency's index, on the other hand, is a weighted, seasonally adjusted measure of home prices based on data received from Freddie Mac and Fannie Mae, the government-sponsored mortgage investors. It doesn't include any information on homes priced above $417,000. And it includes information from all home purchases and refinancings.

Another commonly quoted home price gauge – the National Association of Realtors' quarterly home price report – just looks at changes in median sales prices on the Realtors' multiple listing services.

That survey found that Dallas-Fort Worth home prices were up 0.5 percent in the fourth quarter and fell more than 5 percent nationwide.

"That doesn't mean every house in America just went down 5 percent," Dr. Gaines said.

But the broad conclusion should be that home prices are flat to declining in North Texas.

"I don't think there is any doubt that the market is slowing down."

But not every neighborhood is acting the same, Dr. Gaines said.

"Dallas is a huge market," he said. "Within Dallas there are some submarkets which are doing very well and some areas which are doing very poorly."

The best way to use home price studies is to look at the overall trends, said William B. Brueggeman, chairman of Southern Methodist University's Real Estate Department.

Getting the surveys to agree "has been a problem for some time," said Dr. Brueggeman.

"In a perfect world if you had a constant stream of information on every transaction you could do it.

"But reality is not that way."

He said that the Case-Shiller index is more mathematical and statistical while reports such as the Realtors' survey just combine all the sales data and pick a median.

Even though their numbers are different, both Case-Shiller and the federal housing office have more somber takes on nationwide housing.

"Home prices across the nation and in most metro areas are significantly lower than where they were a year ago," Robert J. Shiller, professor at Yale University and one of the developers of the index, said in a statement. "Wherever you look, things look bleak."

Office of Federal Housing Enterprise Oversight Director James B. Lockhart said in his report that "prices for home purchases in the quarter fell in every state except Maine."

"While the market weakness is most significant in areas that saw the greatest price run-ups during the boom, other states have clearly not been immune to recent declines," he said.

METRO-AREA HOME PRICES

Area	4Q Index Level	1-Year Change
Atlanta	129.43	-3.4%
Boston	164.59	-3.4%
Charlotte	131.90	2.3%
Chicago	160.03	-4.5%
Cleveland	112.07	-6.3%
Dallas	120.77	-2.4%
Denver	130.98	-4.5%
Detroit	103.30	-13.6%
Las Vegas	196.05	-15.3%
Los Angeles	233.03	-13.7%
Miami	231.71	-17.5%
Minneapolis	155.37	-8.0%
New York	201.80	-5.6%
Phoenix	187.67	-15.3%
Portland	182.47	1.2%
San Diego	202.45	-15.0%
San Francisco	189.23	-10.8%
Seattle	184.88	0.5%
Tampa	200.13	-13.3%
Washington	217.78	-9.4%
Composite-10	200.55	-9.8%
Composite-20	184.86	-9.1%
SOURCE: Standard & Poor's

Fannie and Freddie increase fees.

Effective April 1, Fannie Mae and Freddie Mac will increase the "delivery" fees they charge lenders based on FICO scores, down payment amounts and other loan characteristics.

Under the new guidelines, even applicants who assumed that their FICO credit scores would get them favorable rates will be charged more unless they can come up with down payments of 30 percent or more.

For example, a buyer with a 699 FICO score who brings a down payment of about 25 percent to the table will be hit with a 1.5 percent delivery fee at closing under the new guidelines. A buyer with a FICO score between 700 and 720 will pay an extra three-quarters of a point. Someone with a 739 FICO — once considered a platinum guarantee of the best rates available — will get dinged with a quarter-point add-on.

Condominium buyers who cannot come up with a 25 percent down payment will be hit with a three-quarter point add-on penalty, no matter how high their credit score.

First-time Tax Credit Increase to 8K And Doesn't Have To Be Repaid

Actually, I may have spoken too soon on the Democrats killing the $15,000 tax credit for first-time home buyers. Although it surely would have provided incentive to help remove the oversupply of homes for sale and foreclosures in some areas, at least they managed to sweeten the existing tax credit.

For starters, the tax credit doesn't have to be repaid back to the government as long as you stay in your new home for three years. Also, the maximum credit ceiling has been increased to $8,000 from $7,500. And, it really will put more after-tax money in your pocket. Big time! Check out the example below.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed). That's a pretty sweet incentive.

Dems Kill Increased Home Buyer Tax Deduction.

As the democrats continue to bemoan the state of the economy and falling home prices, it seems incredulous that they voted out the $15,000 first-time home buyer tax deduction that had been proposed in the $800 Billion stimulus package. They also killed the tax credit for buying new American cars from our nations' struggling automakers. Seems to me like those 2 tax credits could have gone a long way to help right our ship. I just don't get it. The American people need to unite and demand term limits for U.S. senators and congressmen. Washington indeed is broken. Let's just hope they don't financially break the country.

How To Get A $7,500 Tax Break

First-time homebuyers could be eligible for what is essentially an interest-free loan. The first-time homebuyer credit is available for purchases before July 1. The credit is equal to 10 percent of the home purchase price but can not exceed $7,500. The loan must be paid back to Uncle Sam at $500 per year, up to 15 years.

The home must be your primary residence, and it must be the first home a tax payer has purchased, although some can quality who have owned a home before but have not lived in their primary residence during the three years prior to the purchase.

Income limitations do apply. The tax deduction decreases for single tax filers whose modified adjusted gross income exceeds $75,000 annually. The tax deduction is not available for single filers with annual incomes exceeding $95,000. For married couples, it decreases with AGI above $150,000 and disappears completely for couples above $170,000.

The credit is not available if you buy your home from a close relative - like your spouse, parents, grandparents, child or grandchild.