Home Buyer Tax Credit - Extend or Not To Extend Part #4

Of course, no one can be sure of exactly what will happen if the Home Buyer Tax credit is not extended.

Let's think about the factors affecting a decision by Washington:
a - Spring IS the best time of year NOT to extend the home buyer tax credit because the market naturally gets busy this time of year. If the spring/summer demand can replace the home buyer tax credit demand, then NOT extending may be the logical choice.

b - The economy is still very fragile with unemployment hovering around ten percent. The uptick we are seeing in real estate may just be a bear market bump in an overall downward trend. Traditionally, bear market waives is the place when most of the wealth gets wiped out. Everyone thinks "it’s over" and it’s like getting run over by a Mac truck you never saw coming. There is not enough data yet to determine which way this is going mid-term and the fragile economy might point to extending.

c - The news is reporting that there will be another wave of home foreclosures as a result of people losing their jobs. This next foreclosure wave is reported to be larger than the last peak. Logic would tell you, that this larger foreclosure wave could drive prices down further and could very easily reverse the tentative confidence that is out there and this support extending.

d - Elections are coming this fall. Keeping positive momentum is a prime importance to getting reelected. Need I say more…extend if you want to have any chance of being reelected.

e - Local banks are still hurting and have not yet worked through the next wave of commercial loans coming due over the next 24 months. While these loans are not directly connected to residential housing, having "for lease" and "for sale" signs on every other commercial and retail building is not a confidence builder. The owners of these buildings also own homes and could trigger a third, but smaller foreclosure wave. Seems like the answer is extend, doesn’t it?

f - If interest rates are not held down, home buyer tax credit will lose its affect. Experts tell us that the unprecedented government borrowing will either force rates higher or drive up inflation. It seems both if these things are in check for the time being, but the home buyer tax credits will not have much affect if rates move higher.

Home Buyer Tax Credit - Extend or Not To Extend Part #3

The way I see it there are three possibilities with regards to the home buyer tax credits; two are neutral or positive and one not neutral or negative in terms of impact to the real estate market.

First, there is the possibility that the home buyer tax credit motivated undecided home buyers off the sidelines who would have already purchased in a normalized market. The fact these buyers have been moved from inaction to action means that demand has been generated where there was none. These home buyers being moved off the sidelines into the real estate market can be part of creating a positive real estate environment for which other home buyers are motivated to move off the sidelines too.

Second, there is the possibility that people are going about their normal daily lives and just taking advantage of the tax credits that are available. Young adults graduate college, get married, have babies and buy houses. People are transferred to different locations. People situations change and cause the need for housing changes. All of this is a natural occurrence in the American culture regardless of the economy. These home buyers coming into the market would indicate that the home buyer tax credit did not generate any new demand, but did not necessarily hurt the real estate market either.

Third, there is the possibility that the home buyer tax credits have pulled in future home buyer demand to the present. This is problematic because it means that once the tax credits go away, we will see a drop off in activity. The past loose credit and lending practices and low mortgage rates had the affect of pulling future home buyers into the present (at that time) and is in part the reason for the real estate downturn. Everyone who wanted a house had one and even many people who should not have been in a house found themselves owning one.

The problem with free markets being manipulated by the government is it has unintended consequences. Those consequences can be negative or positive. If the news of housing prices moving up, listings being sold and real estate activity is normalized creates confidence and induces other home buyers into the real estate market that is a good thing. Conversely, if the government intervention creates a "bubble" of sorts that bursts when the intervention stops, then the unintended consequence could be far worse than had the intervention not occurred. The main question is, where are we now?

Home Buyer Tax Credit - Extend or Not To Extend? Part #2

Let's take a little quiz. Who really benefited the most from the federal tax credits anyway?

A. First Time Home Buyers
B. Existing Home Buyers
B. Realtors
C. "To Big To Fail" Banks
D. All of the Above

HINT: Who gets the $6,500 or $8,000?

It doesn't take rocket science to figure out that the tax credits were created to help those "to big to fail" banks. If you think it was to help us little people on "Main Street" you are watching too much TV. The Fed and those in Washington bailed out the "to big to fail" banks and continues to do so. It is called the Home Buyer Tax Credits.

The nations largest mortgage lenders are still awash in foreclosures that need to get moved on down the road (e.g. "sold"). In all but rare circumstances those tax rebates are being used in the purchase of a new home and part of the purchase proceeds (e.g. goes to the seller). Who is the primary seller of real estate these days...you got it "The to big to fail" banks. Yes, it benefited some home buyers and the local real estate communities; and therein lies the question. Washinngton is focused on helping the "to big to fail" banks, but there have been some unintended consequences; people on Main Street are actually being benefited too.

I am starting to sound a little bitter (read disclaimer Part#1), but the question remains extend or not to extend? Is it better for the health of the real estate market to continue with credits through the end of the year or cut it off April 30th?

Home Buyer Tax Credit - Extend or Not To Extend? Part #1

Home buyer tax credit; extend or not to extend? That is the $6,500/$8,000 question.  What do you think? Should there be another extension of the first and existing home buyer tax credits?

First of all, let me first disclaim that I am not a big believer in government intervention into free markets. Secondly, I have been affected by the policies of the last two administrations, so I am not sure I can be completely objective, but with that in mind here goes.

Ask anyone in the real estate business about how severe the real estate down turn was and is. A debtor attorney friend of mine refers to it as a "real estate depression". As one who has lived through the last three years of real estate hell, I have seen real estate values plummet and lots of real estate friends of mine loose everything. Thousands of builders, realtors, mortgage brokers, title companies, material suppliers, hard goods suppliers and sub-contractors have either been wiped out or are barely hanging on, and this is just in the Twin Cities area. Multiply this scenerio across the country and you start to get the picture of the severity of what happened.

I was told recently by a farily reliable source that a certain major bank is sitting on nearly a thousand of foreclosures in the Twin Cities market for fear it will just drive prices down further. I can verify that this is true in my small sampling of lisitngs I have been tracking. I have seen a number of bank foreclosure listings expire that are still sitting vacant for six months or more. During meetings with various local banks I learned many local banks are sitting on a ton of real estate related assets they don't have a clue what to do with. Much of the damage has been done...or has it?

Build a New Home or Buy Existing Part #5

When you buy a non-bank foreclosure home, the pricing is going to be much closer to that of new construction, especially when you take into consideration the deferred maintenance, energy costs and amenities you might add over the next few years.

Since most existing homes have been built at a time when lots, material and labor was much higher, normal sellers don't have as much flexibility to drop prices. The bank foreclosure market has been driving the real estate market over the last 18 months and primarily at a price point below 200K. When you get more into the suburban second time home buyer market, the foreclosure activity is much less and you are less likely to find what you want at a steal of a deal.

One last thing to think about is the financing. When you buy a new home, you have in essence amortized the future maintenance costs into the mortgage. If you buy a used home and place a mortgage on it, you will have to come up with cash out of pocket for the deferred maintenance costs and future improvements. This could put a strain on the finances when that time comes. If you decide to refinance, don't forget to consider the extra refinancing costs you wrap into the new mortgage.

Is it better to build a new home or buy existing? Answer - it depends.

The truth is, it is a very good time to buy new or used. From there you need to decide the priorities as a family. If a new home exactly the way you want it, with everything being absolutely new with no deferred maintenance appeals to you, you might pay a few dollars to go this route. If you buy from a competitive green builder like Amaris, I am not so sure!

Build a New Home or Buy Existing Part #4

In terms of buying anything used, there is always the issue of deferred maintenance which we talked about yesterday. On bank foreclosures the costs will typically be much higher but all used homes have ongoing maintenance costs. Even if you buying a home in a normalized sale, your maintenance costs will be higher than a new home. For example if the roof is seven years old, it will need to be replaced in seven more years. On a new home you gain the full use of the materials before any maintenance is required.

Also, new homes, especially those built by Amaris Company, are more energy efficient compared to even homes built just ten years ago. If you are buying a home built before 1990, the yearly energy costs per square foot are significantly higher. An Amaris built home will be heated and cooled for less than $100.00 per month for an average sized home. For every $100.00 per month saved on utility costs it translates into 17K in extra purchasing power. In other words, if your energy bills will be lower by $100.00, you can spend 17K more on the house and be in the exact same monthly financial position. When has anyone ever analyzed the energy bills of a used house before making a buying decision? Answer; almost never.

The other thing to think through is the amenities of the home. Does it have a deck? Is the kitchen the way you want it? Does it have the fireplace you can't live without? Does it have a deck or three season porch? If you are going to add an addition or remodel in a year, you might not have made the best decision.

Build a New Home or Buy Existing Part #3

We looked at the option of building new. What about buying used? Unfortunately, this is not a straight forward easy answer, but I will begin to unwrap buying used over the next few days.


If you can find a bank foreclosure that is in the area you want and is the type of home you are looking for, it might be worth taking a hard look at. Be very careful though. On the surface, many of the bank foreclosures are listed for much less than you could build them for even in today’s depressed market. However, you need to think about the total cost of ownership. When you build new, you get a one year bumper to bumper warranty, a two year mechanical warranty and a ten year structural warranty. The home is move-in ready and if there is one scratch anywhere the builder is responsible.

When you buy a bank foreclosure, you are buying the home "as-is" with no warranties whatsoever. This means what you see is what you get. It is called "caveat emptor" or more commonly "buyer beware". If there are broken pipes, cracked foundations, or mold in the walls, it is 100% your problem. Even things like the landscaping being overgrown or in a state of disrepair add to cost of the total cost of ownership.

A new house built by a good builder will have nearly zero maintenance costs in the first ten years. Most bank foreclosure properties have a ton of deferred maintenance. The older it is, the higher the maintenance costs will be. A new roof will cost 7-10,000; a leaking basement 10-20,000; a new furnace and A/C 6-8,000; redo a bathroom 3-5000 and the list goes on. That fence falling down, even if you do it yourself it will cost 2,000 in materials. The landscaping has been let go? Doing it yourself will cost thousands to restore.

I am not discouraging the purchasing of a bank foreclosure and I have bought many myself over the years. I am just making the case that if you do not do your homework you may end paying more for a rundown bank foreclosure in the long run once you add back the deferred maintenance costs.

Build a New Home or Buy Existing part #2

Material and labor costs have been steadily falling too. Because the industry has been decimated, so has the support industry. Material suppliers of all types have gone out of business with companies like Home Valu closing after more than 40 years in business.


Lumber yards are closing and consolidating left and right. 84 Lumber departed the Twin Cities market under the cover of darkness of night shutting down all outlets over one weekend. Pro-Build a nationwide company is consolidating lumber yards and the list goes on. Really no material supplier has been unaffected.

Small business sub-contractors now work for daily wages and the idea of having a team of employees and making a profit on them is almost nonexistent in the residential construction business.

The only thing that has gone up over the last few years is some City permit fees and other related assessments. You would think Cities would lower fees just like everyone else, but when you have taxing authority you don't have to adjust to market conditions.

So yes, it is VERY good time to build. Prices for new construction are about as low as they will go.... but wait, what about buying a used home instead? Tune in tomorrow.

Build a New Home or Buy Existing Part #1

New home construction has been down nationally each year starting about 2006. Certainly the Minneapolis / St. Paul (Twin Cities) marketplace has been decimated. At the peak the building community was building more than 20,000 houses per year. Last year that number was something like 2,500.

I have seen many quality builders get wiped out and have totally left the building business. Some have moved to the remodeling business, others are now carpenters and handy men.

Since the peak, prices have fallen dramatically on lots and in most cases are down 50% or more. Some lots can be purchased for less than it cost in city fees/assessments and the basic infrastructure costs. What this means it that once these lots are gone; prices will have to go up. Trouble is there are seemingly thousands of inactive lots sitting out there, but that is because building is down 90%. If building starts start to show any signs of life, desirable lots will get absorbed very quickly. On the other hand, there are many thousands of lots in outlying areas and less desirable areas that could take many years to absorb.

Land of course is a very localized supply and demand issue. It is not only a community by community issue; it is a subdivision by subdivision issue. For example, people wanting to live in Woodbury will not live in Oakdale or Lake Elmo or Maplewood. People who want to live in White Bear Lake will not live in Hugo, Mahtomedi, Lino Lakes, etc. Further, people wanting to live in Woodbury are going to zero in on one or two of the nicest subdivisions. Problem is, you are not the only thinking you want to live in the best subdivision for the cheapest price.

If you want to live in Jordan, New Prague, Watertown or Monticello or Otsego or Wyoming, Stacy etc. those lots may sit for many years depending on the pricing and amenities of the neighborhood. The higher priced lots with the least amenities will sit the longest and vice versa.

No matter where you want to live, the best inventory gets purchased first and the worst inventory gets absorbed at the end of the cycle. The longer you wait the less there is to choose from.

To build a subdivision from a land developer perspective takes 1-2 years (minimum) to get through the approvals and then actually build the infrastructure. I believe it will be many years before investors and banks will forget the pain and losses of the 2007 real estate depression. With that being said, we could actually wake up in the not too distant future with a shortage of desirable lots in desirable locations