A Surprising Safe Haven For Savings

An emerging story beneath the headlines

By Dave Jenks, Vice President of Research and Development and Jay Papasan, Vice President of Publishing and Executive Editor, Keller Williams Realty

Amidst fears of a financial market freefall, the real estate market is emerging as a bright spot. Indicators are pointing to an end to the bust; in fact, real estate may be poised for a bounce.

While consumers are scrambling to diversify their saving and investment accounts and retreating from paper assets (e.g. stocks) into hard assets (e.g. gold), the savviest among them are looking deeper than morning’s headlines and realizing that real estate is a solid investment option in the current market.

Home prices have corrected and fallen back into alignment with historic trends. The inventory of homes for sale is finally shrinking from the June 2008 peak. Also, based on year-over-year comparisons, housing affordability is now higher than it’s been for the past five years. All signs point to the real estate market turning the corner. So for investors seeking a safe haven in this financial storm, housing emerges as a surprisingly good choice—an undervalued hard asset with upside potential.

As the following chart illustrates, the unsustainably high run-up in home prices between 2001 and 2005 is coming back in to alignment with the historic 4 percent trajectory in home price appreciation. Indeed the market has corrected. While it is quite possible that the market will continue for a time to “over correct,” the important point to realize is that no one can ever predict or time the floor—until after the fact when opportunity has been lost.

Now is the time to buy and the reasons are many:

•Real estate remains one of the most stable long-term investments with relatively modest fluctuations in annual gains.

•The extensive housing inventory in most markets is providing great choices for investors.

•Mortgage money is available to financially stable buyers and interest rates remain attractively low.

•Real estate investments tend to bring a greater annual return on investment (ROI) than stocks, gold or commodities, because they are leveraged (buyers put 20 percent down, and receive appreciation on the entire value of the property).

•Just as the late 1980’s and early 1990’s provided a massive opportunity for real estate investors to make great buys and build wealth, the current market will do the same. Smart money is already back in the market buying up the distressed properties.

•There is a simple formula for investing in real estate – Criteria, Terms and Network. That formula and the step-by-step process for using it are clearly described in the best-selling book, The Millionaire Real Estate Investor.

Roswell - A Great Place to Bike

I love to bike on Roswell’s great trail systems along the Chattahoochee near my house. My husband takes a 20 mile bicycle ride nearly every morning, often before dawn, on streets that have wide bike lanes, for which I am thankful.

Now Roswell has gotten the recognition it deserves for it’s support of the Bicycling Community. From the City of Roswell’s website:

The City of Roswell has garnered the much coveted Bicycle Friendly Community designation from the League of American Bicyclists. This award is presented only to communities that show a remarkable commitment to bicycling.

Roswell is the only city in Georgia to hold the designation and one of only 63 across the United States.

Mayor Jere Wood said he is thrilled the City has earned the designation. “Bicyclists are always welcome on our City streets, on our bicycle trails, and in our parks. We celebrate the sport every year with the Nalley Historic Roswell Bicycle Criterium, my own ride the morning of the Criterium, and my annual Ride to the Capitol in support of Bicyling across Georgia. There is no better place for a cyclist to live in metro Atlanta than Roswell and this designation shows that.”

Andy Clarke, the chief executive director of the League of American Bicyclists, said Roswell has shown a tremendous commitment to improving conditions for bicyclists. “They are making the streets safer for bicyling, educating bicylists and motorists to share the road and promoting a wide range of bicyling activities.”

The Bicycle Friendly Community Award was initiated in 2003 and has recieved applications from more than 150 communities. Applicants must complete a detailed application with numerous questions in five key areas: engineering, education, encouragement, enforcement and evaluation/planning.

What In the World Is Going On In the World?

The economic situation is getting worse day by day… or is it? In this jumbled mess, where do we turn for good, honest information? The reality is the media dramatizes the information they disperse to make for a good story. Drama and trauma sells.I am a home owner, a working woman, an investor, a consumer, and a future retiree who, just like you, needs good information in order to make sound decisions about my finances. Luckily, as a realtor, I have access to factual information and knowledgeable contacts who let me know what is really going on – no over exaggerating, no sugar coating, just the good honest truth.

As your real estate expert, I pass this information along to my clients.  Every week for the next month or so, my weekly e-mail forum, Brenda’s HouseBlend will be dedicated to a question that I have gotten from one of my clients. The topic of the week may be mortgages, credit scores, banking, even ways to save money on home maintenance – just something someone was concerned about, and I wanted to pass the information along to others.  If you’d like to receive messages like the one below, post a comment to let us know!

Are Lenders “Out” of Loans?
I have gotten several calls and e-mails recently from many of you who are worried about what is going on with the lending industry. If you listen to the news you will hear phrases like, “…when loans are available again.” or “Now that you can’t get a loan…” This is just plain untrue. I have been writing contracts through this financial crisis and getting loans for my clients without a problem.

The truth about loans:

• Loans are available, but lenders are being more discriminating
• Interest rates are very good and hovering around 6% or lower in some cases
• Loans are being driven by good credit scores

Who has challenges getting a loan?

• Poor credit, low credit scores
• No money to put down
• More than four homes (investment funding is being limited to four homes)
• Self-employed individuals that have a hard time proving income

Down Payment Requirements:

• Less than $417,000 – 5% down (the days of the 100% loans are gone)
• $417,000 - $650,000 – 10% down
• $650,000 and above – 20% down
• Investors (more than one home) – 20% down

In fact, if you have been a renter, now is a great time to buy. We are undoubtedly in a full-fledged buyers market so houses are priced to move. Interest rates are low. It all depends on your particular situation and needs. We work with some great lenders who can answer any questions you may have about the current market as well as the options for your circumstances. 

Taste of Atlanta - October 11th & 12th

Looking for something fun and tasty to do this weekend? Look no further than Atlantic Station for the Taste Of Atlanta, a two-day outdoor festival featuring over 70 of the city’s best restaurants, live cooking demonstrations and more! There will be a kid’s section, an area showcasing the local and sustainable food movement, and even special events like a wine tasting and a bowling and beer sampling! The Taste of Atlanta benefits a few local charities, so you can satisfy the foodie in you while helping some great causes. You may even discover a few new restaurants that will become some of your faves. I know my family always does! For more information, go to: http:tasteofatlanta.net

Federal Tax Credit for First-Time Home Buyers

Did you know that part of the Housing and Economic Recovery Act of 2008 includes some special help for first-time home buyers?

We’ve listed some of the highlights of the program below, as well as some detailed Q&As!

The credit is available for homes purchased on or after April 9, 2008 and before July 1, 2009 

The maximum credit amount is $7,500

Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit

Partial credits are available for some taxpayers whose incomes exceed the above limits, depending on income

The tax credit works like an interest-free loan

A “first-time home buyer” is a buyer who has not owned a principal residence during the three-year period prior to the purchase

You claim the tax credit on your federal income tax return

Any home purchased as a principal residence by an eligible first-time home buyer will qualify

 
1. Who is eligible to claim the $7,500 tax credit?

First time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after April 9, 2008 and before July 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.

2. What is the definition of a first-time home buyer?

The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

3. How do I claim the tax credit? Do I need to complete a form or application?

Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. No other applications or forms are required. No pre-approval is necessary; however, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests.

4. What types of homes will qualify for the tax credit?

Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.

5. Instead of buying a new home from a home builder, I have hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?

Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after April 9, 2008 and before July 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

6. What is “modified adjusted gross income”?

Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

7. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit

Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.

8. Can you give me an example of how the partial tax credit is determined?

Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

9. Does the credit amount differ based on tax filing status?

No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as “married filing separately” (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.

10. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?

In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.

11. I heard that the tax credit is refundable. What does that mean?

The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

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 taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).

12. What is the difference between a tax credit and a tax deduction?

A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375.

13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?

No. The tax credit cannot be combined with the MRB home buyer program.

14. I live in the District of Columbia. Can I claim both the DC first-time home buyer credit and this new credit?

No. You can claim only one.

15. I am not a U.S. citizen. Can I claim the tax credit?

Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.

16. Does the credit have to be paid back to the government? If so, what are the payback provisions?

Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.

17. Why must the money be repaid?

Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.

18. Because the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?

Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.

19. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?

Yes. The law allows taxpayers to choose (”elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

20. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?

Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

21. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2008 tax return?

Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.