There is No 3.8% Real Estate Tax; All-cash Buyers Still Making News

March is
National Women’s History Month. Contrary to what some believe, it is not in
honor of this “classic” 30 second clip. (Sometimes I crack myself up.)
National Women’s History Month’s roots go back to March 8, 1857, when women
from New York City factories staged a protest over working conditions. A day
became a week, and then a week became a month in 1987 as decreed by Congress.
(Someone needs to let me know when “Caucasian Middle-Aged Male Month”
comes about.) Per the Census, there are
157 million females in the U.S, compared to 152 million males
(including
Chas Bono). (At 85 and older, there are more than twice as many women as men.)
There are about 85 million mothers, although the average number of children has
dropped from 3.4 in 1976 to 2.3 in 2008. Lastly, the median annual earnings of
women 15 or older who worked year-round, full time is about $37k.

Yesterday, for the “umpteenth” time, I received an e-mail which
included, “Due to Obamacare, did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? 
That’s $3,800 on a $100,000 home, etc.  When did this happen? 
It’s in the health care bill and goes into effect in 2013.  Why
2013?  Could it be to come to light AFTER the 2012 elections? So, this is ‘change
you can believe in’?  Under the new health care bill all real estate
transactions will be subject to a 3.8% Sales Tax.” As a fiscally
conservative, socially liberal Republican, I had to figure out if this was
true. It is not true – in 2013 there
will be no “sales tax” on real estate. Congress did approve, however,
and the president did sign, a bill authorizing
a 3.8% tax on the capital gains (unearned income) on real estate transactions
over the existing $500,000 exemption for married couples ($250,000 for singles)
.
Couples have to make more than $250,000 in adjusted gross income for the tax to
apply to them (singles more than $200,000). And it isn’t very common these days
to find married couples making more than $250,000 a year, who then also made
more than $500,000 in profits on their house sale. See for yourself on page
946: http://housedocs.house.gov/energycommerce/ppacacon.pdf.

Have you purchased your non-owner occupied house yet, and rented it out? The
Census Bureau reports the rental vacancy
rate fell to 9.4% in the 4Q of 2011 from 9.8% in the prior quarter
. The
rate hit a 9 year low of 9.2% in 2Q of 2011. Meanwhile, rental payments jumped
2.5% in 2011, the largest increase since 2008. Better yet, have you bought a
non-owner on some farmland? The Fed Chicago has released a report that shows prices of farmland in the Midwest jumped
22% in 2011
, the biggest annual gain in 35 years (1976)! I don’t hear John
Cougar Mellancamp singing about their plight now…

RealtyTrac is good with figures, and
it notes that sales of distressed real
estate
made up 24% of all single-family residential sales both in the fourth
quarter of 2011 and the entire year (up from 20% in Q3). These are homes
that were in some stage of foreclosure or lender-owned (REO). For good news, if
there is any, pre-foreclosure sales and sales of REO represented 23% of all
sales during the year compared to 25% in 2010. “Sales of foreclosures in
the fourth quarter continued to be slowed by questions surrounding proper
foreclosure paperwork and procedures,” said Brandon Moore, chief executive
officer of RealtyTrac.  Distressed
properties typically sold at a 29% discount compared to a sale of a
non-foreclosure related property during the quarter. “We continued to
see a shift toward pre-foreclosure sales, or short sales, and away from REO
sales in the fourth quarter.” Homes that sold pre-foreclosure in the
fourth quarter had been in the foreclosure process for an average of 308 days
compared to an average of 237 days in the fourth quarter of 2010.  REOs
that sold in the fourth quarter took an average of 175 days to sell after
completing the foreclosure process, compared to 171 days in the fourth quarter
of 2010.

Across the
“research & study street, Campbell Surveys and Inside Mortgage Finance
jointly released the HousingPulse Tracking Survey that showed more homebuyers
are scooping up properties with cash only
, even in an environment for
record-low mortgage rates. The survey used responses from 2,500 real estate
agents. All cash buying remain important
to the market, and is running in the 31-34% range of the homebuyer market for
nine months last year
. Not only are money-making alternatives few (“Why
should I earn nearly 0% on my money and pay 4% for a mortgage?”) but there are
discounts in offering all cash for a house, and as noted above a certain
percentage are distressed sales conducive to all-cash deals. Late appraisals
and lengthy loan processing times were also reasons given.

As the
commentary recently mentioned, “There is plenty of blame to go around for the
mess we’re in: borrowers, brokers, lenders, investors, appraisers, rating
agencies, investment banks, and so on.” Mike Winks with Lake Michigan
Credit Union writes, “I suspect I won’t be the first one to share another
party not mentioned in the blame for the mess we are in comments.  One cause you do not hear much about in the
popular media is Congress, and its approval of both the HUD goals imposed on
the GSEs and CRA requirements for investment and loan portfolios for banks
.
Sure, in 1999 the Gramm-Leach-Bliley Act repealed certain provisions of the
Glass-Steagall Act which took down the wall between investment banking and
commercial banks; one might argue that this unsupervised greed created the
footing.  The reality is this most likely is limited to a small few rather
than let’s say key top executives at Citigroup.  However, to allow for
that environment, many of us remember that the guise of doing any volume in
Alt-A and subprime loans was to promote affordable housing, put a nice family
in a home, a/k/a good guy loans.  The true desire from all players was to
have nice margin, make a nice profit, and offer a nice service… basically
capitalism at work.  That can be healthy if in check.  By the way,
the in-check counter-balance here in a small part is some type of watchdog
regulatory oversight (although mostly ineffective) and the remainder is self-regulation
via long-term survival… ‘Sure you can make money now but what about over the
next 10 years and will you be in business?’ Yes, it would be stating the
obvious that some Wall Street banks and rating agencies did not do this very
well.”

Mike continues,
“My point, however, is from the GSE perspective… aside from a couple of
opportunistic CEOs throughout their history, overall these companies were run
fairly well and certainly understood credit risk. But Congress required them to purchase at least 50% of their loans in
the affordable housing bucket
.  Not an easy feat during high refinance
years in which the vanilla credit borrower is getting a new loan.  That
puts a great deal of pressure to do things like purchase Wells Fargo’s entire
subprime origination book (Wells thought it was too risky to keep) or to offer
loans at 100% financing, etc.  It is interesting how some of the very
Congressional supporters of HUD goals are the ones demanding an immediate
termination of Fannie Mae and Freddie Mac to be rolled into a single government
agency.  That logic believes this new mega housing agency would not offer
expanded credit guidelines (Alt-A, sub-prime or good guy loans) that would risk
loan performance.  Even though Ginnie Mae’s market share is at record
levels and they securitize a great deal more of stronger credit loans, FHA’s
delinquency rate is at 18% or nearly 1 in 5 loans.  Understanding accurate
history helps us understand the proper decisions for the future.”

The
markets find themselves in a sustained period without Treasury supply/auctions,
with Europe being relatively quiet and mixed signals from our economy. No one
is complaining about mortgage rates, but remember
in the old days, when the Fed wasn’t buying $1.2 billion of MBS’s every day?

Two Federal Reserve officials (Bullard and Plosser) recently opposed additional
mortgage-bond purchases by the Fed, saying the measure isn’t needed and that
the U.S. central bank shouldn’t interfere in credit markets. But Fed officials
are keeping open the option of a third round of bond purchases in case the
economy weakens or inflation stays low.

So who is
going to buy the agency stuff that LO’s everywhere are originating? Overseas
investor holdings of agency MBS have declined from $773 billion to $583 billion
from June 2008 to December 2011, per TIC data. Estimates show that China’s
holdings of agency MBS alone have declined by $170-$180bn since hitting their
peak in 2008 – in terms of face value – which explains almost all of the
decline in overseas holdings of agency MBS since the middle of 2008. In fact, if one takes out China, overseas investors actually
increased their agency MBS holdings in 2011.

Thursday
was just another day in paradise. That is, as long as the Fed keeps buying its
$1.2 billion per day of agency MBS’s. Given the NY Fed’s figures, the purchases
covered just over 70% of the originator supply during this period. My
daughter’s high school economics class can tell you that if the Fed stops using
pay-down money to buy new mortgages, and supply remains constant, agency prices
will drop and rates will go up. By the time the sun went down Thursday, agency
MBS prices were worse than Wednesday by about .250 and the 10-yr T-note was
worse by .5 (2.04%). There is no news today of any substance, so although it is
still early don’t look for rates to do too much today, and may indeed follow
yesterday’s trend slightly higher.  See today’s MBS prices.

A guy goes into the confessional box after years being away from the Church. He
pulls aside the curtain, enters and sits himself down. There’s a fully equipped
bar with crystal glasses, the best vestry wine, Guinness on tap, cigars and
liqueur chocolates nearby, and on the wall a fine photographic display of buxom
ladies who appear to have mislaid their garments.
He hears a priest come in: “Father, forgive me for it’s been a very long
time since I’ve been to confession and I must admit that the confessional box
is much more inviting than it used to be”.
The priest replies,
 “Get out, you idiot. You’re on my side”.

If you’re interested, visit my twice-a-month blog at the STRATMOR Group web
site located at www.stratmorgroup.com. The current blog discusses the role
of rating agencies in the current environment. If you have both the time and
inclination, make a comment on what I have written, or on other comments
so that folks can learn what’s going on out there from the other readers.

…(read more)

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