Mary Towler

By Inman News
Inman News^TM

February 02, 2011

It may take more than four years to clear the "shadow inventory" of distressed homes lurking on the sidelines in the U.S., a factor that's likely to undermine real estate prices as the backlog clears, analysts at Standard & Poor's Ratings Services say.

At 49 months, the estimated time needed to clear shadow inventory at the end of the fourth quarter of 2010 was up 11 percent from the previous quarter and 40 percent from a year ago. With the lone exception of Miami, the months' supply of shadow inventory grew in almost all of the nation's 20 largest metro markets.

But much of the increase in the estimated months needed to clear shadow inventory is due to the fact that it's taking longer for lenders to liquidate distressed homes -- not because the number of distressed properties is growing, analysts said.

Standard & Poor's defines shadow inventory as properties with borrowers who are 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned (REOs).

Although shadow inventory peaked in the first quarter of 2008, loans that are 90-plus-days delinquent and foreclosed properties are taking longer to become REOs. That's once again lengthening the overall timeline for resolving troubled assets, Standard & Poor's analysts said.

Shadow Inventory: top 20 U.S. markets

Source: Standard & Poor's Ratings Services

At the current, slower rate of liquidation in the New York metro area, Standard & Poor's analysts estimate it will take 130 months to clear $116.7 billion in shadow inventory there -- 2.7 times longer than the average for the U.S. as a whole.

That's despite the fact that the Los Angeles metro area has a larger "overhang" of troubled mortgages -- $173.1 billion, or 31.5 percent of all outstanding mortgages.

The good news is that the overall level of distressed loans continues to decline, and loan-cure success rates -- often the result of loan modifications -- have been improving since the second half of 2008.

Although 45 to 50 percent of loans modified or cured in the fourth quarter of 2009 redefaulted within the first year of modification, that's an improvement from the nearly 80 percent redefault rate on loans modified or cured during the first quarter of 2008.

By Stephen Fishman
Inman News^TM

February 04, 2011

Q: How can real estate agents be a resource for buyers on tax issues, such as the tax benefits of buying vs. renting?

A: Unless a real estate broker or agent is a bona fide tax professional -- for example, has an MBA or other specialized training in taxation -- he or she should not give clients detailed tax advice. As a real estate professional, you are licensed to help your clients buy real estate -- not serve as their professional tax adviser.

If you give tax advice and it turns out to be wrong, it could cost the client a bundle of money, and leave you with a lawsuit for malpractice.

If a client does ask you for tax advice, and you give it, a good practice is to have the client sign a statement providing that he or she has not relied on your advice and that the transaction is contingent on the approval of the client's tax or legal counsel.

That said, the tax benefits of real estate ownership are something every buyer should understand. You need to understand them as well.

When it comes to the tax benefits of renting vs. buying, the benefits of buying are many, while there are few or no tax benefits for renting. This simple fact can help get renters motivated to take the plunge into homeownership.

The tax benefits of buying a home include:

Home mortgage interest deduction: The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and/or second home is deductible as an itemized deduction. In the early years of a home loan most of the payments consist of interest, so this deduction is particularly substantial during the first years of homeownership.

Depending on the state a buyer lives in and his or her tax bracket, this deduction can reduce the cost of borrowing by one-third or more.

Home equity loan deduction: Homeowners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction. The money can be used for any purpose, such as paying off high-interest credit card debt. In contract, the interest on credit card debt is not deductible.

Property tax deduction: Homeowners also get to deduct from their federal income taxes the state and local property taxes they pay on their home. This is another itemized deduction that renters don't get.

Deductible homebuying expenses: Various closing costs ordinarily involved in a home purchase are also deductible as itemized deductions, including loan origination fees (points), prorated interest on a new loan, and prorated property taxes paid at settlement.

$250,000/$500,000 home-sale exclusion: Perhaps the greatest tax benefit of owning a home comes when a person sells it at a profit. Homeowners who lived in their home for two of the prior five years prior to its sale need pay no income tax on a substantial amount of their profit -- $250,000 for single homeowners and $500,000 for married homeowners who file jointly. This exclusion can be used once every 24 months.

14 days of free rental income: Another little known tax benefit of owning a home is that the owner can rent it out for up to 14 days during the year and pay no tax at all on the rental income. In contrast, a renter who sublets his or her rental must pay income tax on all the rental income he or she earns.

Tax benefits of renting:

The only tax benefit that a renter can qualify for by virtue of being a renter is the home office deduction. This is a business deduction available to renters who own a business and have a home office they use regularly and exclusively for business purposes.

Some employees can qualify for this deduction as well. The deduction is limited to the amount of profit earned from the business each year. If a renter pays a lot of rent, this deduction can be substantial. Homeowners who are in business and have a home office can also qualify for the deduction.

Of course, the value of the tax benefits of buying a home depends on the state the buyer lives in and his or her tax bracket. Buyers who live in high tax states like New York or California get the most benefit.

This is why the blanket statement "it's always better to buy than rent" is not always true. It all depends on the buyer's individual circumstances.

You should encourage prospective buyers to run the numbers. There are some excellent websites you can refer clients to that have online calculators they can use to compare the costs of renting vs. buying a home.

A good rent vs. buy tool can be found on the Smart Money Magazine website: http://www.smartmoney.com/personal-finance/real-estate/to-rent-or-to-buy-9687/.

Freddie Mac also has a good online calculator: http://www.freddiemac.com/corporate/buyown/english/calcs_tools/.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.

In December 2010, the U.S. Census Bureau released the first results from the 2010 census. It showed there are 308.74 million Americans, an increase of 27 million or 9.7 percent since 2000. Nearly 80 percent of the population growth was among minority families, with Hispanics registering the biggest gains.
Most of the population growth is in the South and West. The 10 fastest-growing states had average population gains of 21 percent. The states were:
1. Nevada
2. Arizona
3. Utah
4. Idaho
5. Texas
6. North Carolina
7. Georgia
8. Florida
9. Colorado
10. South Carolina
States with slower growth included Ohio, New York, and Illinois. Michigan was the only state that actually lost population.
Source: The Wall Street Journal and Time, Stephen Gandel

Rents have surged as home prices have dropped, which have prompted some to ponder which offers the more dollar-wise option. Moody's Analytics data has suggested that it makes more financial sense to rent than buy in many U.S. cities, but Moody's chief economist Mark Zandi now says that is about to change:
"By mid 2011 and certainly by end of 2011, buying will be superior to renting in most parts of the country," Zandi says.
Home prices are expected to fall further, making more homes affordable, whereas rent prices are expected to continue to rise this year.
The following are a few of the top cities where it makes more sense to buy than rent, according to Moody data. Note Atlanta's place on the list! (Experts often recommend buying when the price-rent ratio is below 15 and rent when it's above 20.)
▪ Cleveland: 11.43
▪ Pittsburgh, Pa.: 11.71
▪ Detroit: 12.32
▪ Phoenix: 12.35
▪ Atlanta: 12.82
▪ Tampa, Fla.: 13.08
▪ Orlando, Fla.: 13.1
▪ Cincinnati: 13.74
▪ Las Vegas: 13.89
Source: Fortune Magazine (Jan. 4, 2011)

Despite what you may hear, it is a great time to buy a home.

• Interest rates are still low. Even though they are higher today than they were a month ago, they are still under 5%! Even if they went to 6%, that would still be a great rate.
• There are so many awesome home values out there right now, it is almost too good to pass up.
• Owning a home is still THE DREAM for may Americans.
• New Construction has never been more affordable.
• Not all but many of the homes on the market, have sellers who actually want to sell their home. This may sound like a no - brainer, but not all home sellers are motivated.
• Lastly, my personal belief is that real estate is a good investment right now if you are going to stay in your home for 5 or more years. I believe it is just crazy how much home you can buy for the money in West Cobb during 2011.

Mary