Financial Sector in Crisis

In a matter of days, Lehman Brothers Holdings Inc., the fourth largest investment firm in the country, went bankrupt, Bank of America bought financially-ailing Merrill Lynch, and the government stepped in to save American International Group (AIG), one of the world’s largest insurers, with an $85-billion dollar bridge loan. 

What brought some of the Titans of the financial world to the breaking point?

As Martin Crutsinger, AP economics writer put it, “…steep declines in home prices in much of the country…(have) helped trigger record levels of mortgage defaults, dumping more homes on an already glutted market and further depressing prices.  The billions of dollars of losses on mortgage investments have sent shockwaves through the country’s financial sector, triggering the biggest restructuring on Wall Street since the Great Depression.”

True.  But was it not the lax business practices of some of the nation’s mortgage lenders that put many of these American home buyers into subprime loans and homes they could not afford? And investment firms chasing higher profits, sinking way too much into risky MBS that put them on shaky ground?

With the financial sector in crisis, we could see the economy weaken further. Home buyers and businesses alike will face stricter underwriting guidelines for mortgages and business loans, as banks curb lending.

The housing decline has pulled down the economy in more ways than one.  With new home construction at its slowest pace since 1991, thousands of people lost their jobs in construction and other related industries.  As home values dropped, many American homeowners lost all equity in their homes and found themselves “upside-down,” owing more on their homes than they were worth.

When homeowners began walking away from their homes, the wave of foreclosures grew and the financial sector faced huge losses in mortgage write-downs.

And so here we are.  Watching and waiting to see what will happen next.

As it stands, the housing market, financial sector and economy are caught in a perpetual cycle of sorts.  We know for every action, there is a reaction.  At this point, we need to hope for some good news and positive events to turn this ship around.

Good News? Mortgage Rates Fall

The glint of hope in all this…many financial experts predicted that the Fed takeover of Fannie and Freddie would result in lower mortgage rates.   The 30-year fixed rate did drop almost overnight from about 6.5 percent to almost 5.7 percent. Next month, the Treasury will buy back $5 billion of MBS, infusing more money into the mortgage market.  With the government essentially guaranteeing Fannie and Freddie MBS, investors will buy up mortgage bonds, pushing treasuries higher and mortgage rates lower.  By year end, we just might see historically-low interest rates.

Who could be the heroes in this mess?  More than likely, it will be the home buyers, who slowly but surely buy up excess housing inventory and stabilize home values in real estate markets across the country.  But to pull it off, we need qualified home buyers.  To get a mortgage in this climate, home buyers will need SUPER BUYING POWER.  Remember…times are tough, but banks are still in the business of loaning money!

Stay tuned for some posts on how you can get lenders to loosen their purse strings and loan you the money to buy a new home.

“Global real estate transactions can be complex, and international buyers need the support and advice of professionals who are well-versed and know all the ins and outs,” advises Brian Meyerowitz, a buyer’s agent with Florida New Homes Realty.  

Meyerowitz earned designations as a Certified International Property Specialist (CIPS) and Transnational Referral Certification (TRC) - specifically to help him handle the special needs and circumstances of international buyers.   Through a network of well-connected associates, Meyerowitz insures his clients receive the expert advice of tax and real estate attorneys, mortgage brokers, currency brokers, and title and escrow specialists.  Together, they can evaluate the individual needs of foreign buyers and determine the best course of action.  Without such support, foreign nationals put themselves at risk to make mistakes that carry significant financial consequences, when they buy or eventually sell their U.S. real estate.

“Our goal is to see that your real estate transaction is planned and executed to work to your best advantage and to maximize your return, whether you’re buying a vacation home or an investment property,” says Meyerowitz.  “When we work with international buyers, we must consider their visa classifications, the type of properties they’re interested in purchasing, their long-term goals and their financing needs.”

Securing Financing for International Buyers

Depending on an international buyer’s visa classification, lenders may have more stringent underwriting guidelines. Mortgage lenders are more cautious about financing second homes and investment properties for foreign nationals for a very practical reason.  If a non-U.S. citizen were to leave the country and default on a mortgage loan, the lender would have little or no recourse.  To hedge their risk, lenders often require that international buyers make substantially larger down payments and submit to certain requirements in order to meet underwriting guidelines.

“With the additional requirements from lenders, international buyers need to be patient with the financing process.  It’s not unreasonable to expect that it may take considerably longer than it would for U.S. residents to get a loan,” Meyerowitz adds.

One of the challenges many non-permanent residents (foreigners with working visas) face is a lack of an established credit history in the U.S.  Even when mortgage lenders allow for alternative credit documentation, ”non-perms” sometimes must settle for less than optimal financing terms, then refinance later for better rates and terms once they establish a positive credit history here in the states.

Visas for foreign nationals do not allow them to work or reside in the U.S.  This category includes Canadians, Europeans (or any other non-U.S. residents) who want to buy second homes for investment or vacation purposes.  Before the home financing crisis, international buyers had more mortgage options available.  Some lenders still offer loan programs for foreign nationals, but they carry stringent documentation requirements.  Without a credit history to consider, mortgage lenders focus on documented income and other assets.  To underwrite a loan for foreign nationals, lenders typically require a substantial down payment of 35% or more, in addition to closing costs.  Foreign nationals can expect to pay higher interest rates and possibly upfront charges for these loans.

Requirements will vary from lender to lender, but here are some tips Meyerowitz offers international buyers to help them prepare for financing a property in the U.S.  Following these steps can help foreign nationals secure a mortgage.

Financing Tips for International Buyers

1. Establish credit in the U.S. if possible.
2. Open up an account with a U.S.-based bank at least two months before you seek financing.
3. Start an account in your home country with a large, international bank with branches in the U.S. close to where you want to purchase a home.
4. Get three reference letters declaring you are in good standing from three financial institutions in your home country if you can’t accomplish #1 or 3.
5. Obtain verification of your gainful employment and line of work.  A simple letter from a CPA or some other third-party in your resident country will suffice.
6. Apply to extend your visa or passport if it’s due to expire in six months or less.

Tax Implications for Foreign Nationals Selling U.S. Properties

Selling real estate may also involve some considerations specific to foreign nationals.  “International buyers should have an understanding of how FIRPTA,” (which stands for the Foreign Investment in Real Property Tax Act of 1980), “can impact their profit at resale,” Meyerowitz says.  “Because tax laws and codes can be both complicated and convoluted, there’s no substitute for the advice of a good real estate/tax attorney.”

Before FIRPTA became law, non-U.S. citizens could purchase U.S. real estate and sell it at a profit, without paying a dime in taxes.  Under FIRPTA, buyers who purchase property from foreign nationals are required to withhold 10% of the sales price in a real estate transaction as a deposit for the seller’s potential tax liability.

There are exceptions to the law, as well as situations that can result in a reduced withholding amount.  One such exception is if a buyer purchases a home from a foreign national for less than $300,000, and the home will serve as the primary residence for the buyer’s family, then there is no FIRPTA withholding requirement.

For more information on these topics, as well as direct assistance and support throughout the entire home buying process, international buyers can contact:

Brian Meyerowitz, MBA, ABR, C-CREC, CIPS, E-PRO, GRI, RFC, TRC
Buyer’s Agent - Broker Associate
Florida New Homes Realty, Inc.
1-800-251-9595
brian.meyerowitz@newhomes.com

Amy Stier, ABR, RSPS, CIPS Candidate
Florida Managing Broker
Florida New Homes Realty, Inc.
1-800-251-9595
astier@newhomes.com

First-time Home Buyer Tax Credit in a Nutshell

Part of the “Housing and Economic Recovery Act of 2008″ passed last month, creates a temporary, federal tax credit to provide incentive for first-time home buyers to purchase a home.  By including the credit, Congress hopes first-time home buyers will stimulate home sales, reduce the current backlog of home inventory and help to stabilize falling home prices.  As Rob Dietz, economist for the National Association of Home Builders (NAHB) points out, the effects of the credit may extend far beyond the first-time home buyer; as first-time home buyers purchase homes, many home sellers will be able to move up and invest their sales profits into new homes as well.

Since the money must eventually be paid back, the tax credit essentially acts as a no-interest loan that reduces your tax liability for the year it is claimed.  For instance, home buyers who close on a new home purchase in 2008 (after April 9) can claim the credit on their 2008 tax return.   If their tax liability for the year is $5,000, applying the $7,500 tax credit would cover their tax bill and provide a $2,500 refund.  Any taxpayers already due a refund would still receive the full amount, plus the $7,500 tax credit for buying a home.

First-time home buyers who claim the tax credit are expected to begin repayment starting in the second tax year after they close on their home and continue the pro-rata payback on their federal taxes for a 15-year period.  For home buyers who claim the full $7,500 credit, the payments would amount to $500 a year.

If the buyer sells the home before the 15-year period, the remaining credit would be due from whatever profit was made on the sale.  In cases where profits from the sale were less than what was owed for the credit repayment, the remainder would be forgiven.

Paying closing costs, taxes, insurance and all the other expenses required to move into a new home can leave the first time home buyer strapped for cash.  A zero-interest loan can help with renovations, improvements, furnishings - or replenishing your savings for any future expenses.  To have access to a no-interest loan, especially now when credit is tight, is a great benefit.

Consider this illustration given by the NAHB: at 7% interest, a $7,500 loan would cost the borrower about $4,200 in interest over a 15-year period.  To finance the $7,500 through your 30-year mortgage at a 7% interest rate, a homeowner would pay $8,100 in interest over the life of the loan.  If you have already closed on a new home since April 9, 2008, the tax credit is retroactive back to that date, so you may be eligible to take the tax credit this year.

Here are some quick facts to determine if you qualify for the first-time homebuyers tax credit:

First Time Home Buyers – to be eligible, an individual must not have owned a primary home for the past three years, but may have owned a home prior to that.

Taypayers - U.S. citizens and resident aliens who file income taxes qualify for the tax credit.  Non-resident aliens are not eligible.

Income Range – to qualify for a full tax credit of $7,500 (or 10% of the cost of the home), someone filing their taxes as single or head of household can earn no more than $75,000.  Couples who file a joint return must earn $150,000 or less.

Individuals whose incomes fall between $75,001 and $94,999, or married couples who file jointly with incomes from $150,001 and $169,999, are still eligible for partial credit.

Taypayers earning more than $95,000 (single) or $170,000 (joint) are not eligible for this credit.

What do you have to do to claim the tax credit? If you meet the criteria, all you have to do is request the credit on either your 2008 or 2009 federal tax return that will be amended for that purpose.  Home buyers who close in 2008 can take the credit on their 2008 return.  First-time homebuyers who purchase a new home in 2009 before the July 1 cut-off can choose to file an amended 2008 return or request the credit on their 2009 tax return.

What International Buyers Need to Know About Investing in U.S. Real Estate

While foreign nationals are not restricted from investing in U.S. real estate, there are some practical issues international investors need to know about before they begin buying or selling property here.

“The best advice I can give international buyers,” says Brian Meyerowitz, a buyer’s agent for Florida New Homes Realty, “is to go into it with your eyes wide open and seek expert help from the start.  Proper planning will help ensure your interests are served now - and down the line should you wish to sell the property.” Meyerowitz helps international buyers navigate through the process of buying real estate in the U.S. 

As a buyer’s agent, Meyerowitz exclusively represents the buyer in real estate transactions, first finding the best property to suit the buyer’s needs, then negotiating the best price and terms, assisting with financing, and managing the closing transaction.  Meyerowitz holds two special designations - Certified International Property Specialist (CIPS) and Transnational Referral Certification (TRC) - to help him handle the special needs and circumstances of international buyers. 

Here are some common issues he says international buyers must often address when they purchase real estate in the U.S.

Home Buying Process

The home buying process may be different from that in your resident country.  “International buyers sometimes have a preconceived notion of what they expect to happen when they buy a home, and often that’s not how it is here,” Meyerowitz says.  Enlisting the help of international real estate professionals is a critical first step when you’re planning to buy property in a foreign country.

Meyerowitz explains that international buyers from many countries are unfamiliar with how our Multiple Listing Service (MLS) and cooperative compensation work (which means agents involved in a real estate transaction split the commission).  “They may contact all the listing agents for every property they’re interested in,” he says.

Meyerowitz advises international buyers to find one buyer’s agent they trust and establish a good rapport; that agent can then coordinate your search for a second home or investment property based on your needs and budget and provide whatever support and resources you need to handle the transaction.

As experts in their local markets, buyer’s agents can identify which areas and properties will make the best real estate investment opportunities for international buyers, based on their individual needs.  And, buyer’s agents experienced in working with international clientele are well-connected with attorneys, tax professionals, title agents and mortgage brokers who understand the special needs of international buyers and the intricacies of global real estate transactions.

Immigration Law

Travel and Length of Stay

Home ownership does not in itself give foreign nationals the right to travel in and out of the country at will, or to stay indefinitely in their second home.   Permanent residents (green card holders) can buy and sell real estate without limitation. Non immigrants in the U.S. on work visas should not encounter any major hurdles if they wish to purchase a new home in this country.  But foreign nationals who come as students or visitors may face a different situation and need to consider how their status will impact the frequency and length of time they can stay in their vacation home or investment property in the U.S.  That’s why working with an attorney who has expertise dealing with immigration issues, visas and real estate transactions is critical, Meyerowitz notes.

E-2 Visas

One option available to foreign nationals that your attorney may suggest is to invest in a U.S. business. Investing in a U.S. business can qualify a foreign national and his family for a visa that will allow them to live and work in the U.S. on a long-term basis.  With strategic planning, an international buyer may meet the requirements to qualify for an E-2 visa by investing funds to manage a group of rental properties. 

To qualify, an international buyer must:

• be a citizen of a treaty country
• make a substantial investment (at least $200,000)
• invest in an active business
• employ U.S. citizens in the business within a maximum of five years time

“An immigration/real estate attorney will ensure the property qualifies and the transaction is handled properly to apply for an E-2 visa.  It’s something that must be planned out and carefully executed,” stresses Meyerowitz.

Financing a real estate purchase can pose a challenge for international buyers.  Foreign nationals can also face tax implications when they decide to sell property in the U.S.

Check back for our next post with more great tips and valuable info for international buyers who invest in U.S. real estate.

For direct assistance and support, international buyers can contact:

Brian Meyerowitz, MBA, ABR, C-CREC, CIPS, E-PRO, GRI, RFC, TRC
Buyer’s Agent - Broker Associate
Florida New Homes Realty, Inc.
1-800-251-9595
brian.meyerowitz@newhomes.com

Amy Stier, ABR, RSPS, CIPS Candidate
Florida Managing Broker
Florida New Homes Realty, Inc.
1-800-251-9595
astier@newhomes.com

Top Design Trends in New Home Construction

Here are some of the latest design trends in new homes:

• Open plans for entertaining - with the kitchen as the “heart of the home,” open to other spaces where hosts can entertain guests including dining areas, great rooms and outdoor rooms.

• Flexible floor plans - new home buyers look to the future and appreciate optional guest suites for out-of-town guests, adult children or aging parents.

• Master bath retreats - new home buyers, especially women, need a place to retreat, relax and soothe the soul after a stressful day. The master bath retreat has become the sanctuary of choice for many couples.

• High-end kitchens - today’s kitchens feature restaurant-quality, stainless steel appliances, custom cabinetry with the finest craftsmanship and high-end materials. We spend more time in our kitchens, not necessarily cooking, but congregating and entertaining.

• Organized storage - new home buyers look for built-in custom storage - everywhere. That means walk-in pantries, butler’s pantries, built-in cabinetry and entertainment centers, closet organization systems and smart shelving.

• Huge, decked-out garages- in the day of the SUV, buyers wanted wider garages with taller doors and more space all the way around. Only time will tell if this will remain a priority for home buyers now that mammoth vehicles are falling out of favor. Going green means making room for recycling centers. Families need garage storage systems to keep their sports and recreation gear, lawn and garden equipment and home improvement and maintenance tools organized and at-the-ready.

• Universal design features - many of today’s new home buyers are aging baby boomers who look for features that will allow them to age graciously and enjoy their new homes well into the future (and for as long as possible). Universal design features like master suites on the main floor, extra-wide entry and interior doorways, no threshold showers and lever door handles are in high demand.

• Quality over quantity - in the past, many new home buyers looked to buy the most square footage they could afford. Now, many are choosing to cut back on the size of home and spend their money on upgrades and amenities like architectural detailing, generous moldings, high-end finishes and specialty products and materials.

What will the next trends in new home construction bring? You can bet builders will be listening closely to consumers and incorporating the features and design elements that will meet the wants and needs of future new home buyers.

Price, Selection and Security Motivate International Investors to Buy Homes in America

NAR research revealed that nearly one out of every five REALTORS sold a home to an international buyer within the last year.  Another interesting statistic from the 2007 NAR Profile on International Buying Activity shows the median sale price of homes bought by international buyers was $299,500 - a full $77,600 more than the U.S. median sales price of $221,900 over the same period.   More than 20 percent of homes sold to foreign buyers were priced from $200,001 to $300,000, and 14 percent of international home buyers paid in excess of $750,000 for their piece of U.S. real estate.

Besides the fact that their money buys more home in the U.S. right now, foreign investors cite reasons for buying American homes that go beyond bargain hunting.  International investors see our country as a “safe haven” and are comfortable investing in real estate in the U.S. due to the stability of our political and economic climate.  The U.S. does not place restrictions on home purchases by foreign investors as some countries do, and international home owners enjoy the same property rights as American citizens.

Which parts of the world do these foreign investors call home?  A third of the international home buyers come from Europe, a fourth from Asia and another fourth from Mexico and Canada collectively.  Latin American buyers make up 16 percent of the total international home buying market.  Examining individual countries, the most foreign investors are from Mexico (13 percent), with the United Kingdom and Canada placing a close second and third with 12 percent and 11 percent respectively.

Where are international investors buying property?  A majority of international investors, 52 percent to be exact, bought their second homes in Florida (26 percent), California (16 percent) or Texas (10 percent).  Forty-seven percent of non-U.S. buyers said they purchased second homes as vacation properties.  Twenty-two percent made the purchase solely for investment purposes.  About a third of all international buyers said they bought a second home to be used both for vacation and as an investment.

In the next post, we’ll drill down and address why so many foreign investors buy vacation homes and investment properties in Florida.

Points to Consider Before You Buy a New House

Local Market Conditions:

• Are real estate prices in your neighborhood(s) of interest fairly stable? If home values are increasing, holding steady or coming back significantly after a decline, you shouldn’t hesitate to search for suitable houses for sale in that area - especially if you plan to stay in the home at least five years.

• Has there been a rise in foreclosed properties or a marked drop in home prices? If you have to sell a home in these conditions, unless you have an urgent need to move, you would be wise to ride it out until the local real estate market improves.

• Is your rent almost equal to a mortgage payment? In many areas, it makes sense to take the plunge and own your own home.  The benefits are numerous, but one major plus is you can write off the mortgage interest and property taxes on your personal income taxes each year.

Personal Finances:

• Did you move into your new house less than two years ago? Chances are, you haven’t accumulated much equity in your home, and if home values have fallen in your area, you may be “upside down” and owe more on your mortgage than the home is worth.  Hang tight and wait until the real estate market recovers.

• Do you have solid credit, and can you document your income and make a decent-sized down payment on a new home? Mortgage lenders have tightened up on their standards, so you’ll have to document that you’re a good risk to get a home loan at a low interest rate.

• Are you concerned about job security? If you think your company or business may hit a rough spot, hold off.  Buying a home is a huge, long-term commitment.

If your personal finances are in good standing, your job situation is secure, and the local real estate market is stable, you are in the perfect position to take advantage of this buyer’s market.  So what are you waiting for?  Carpe diem!  Go ahead and buy a new home!

Timing the Market Bottom May Not Be Wise Home Buying Strategy

The fact is, even the economists have a hard time agreeing on when the U.S. real estate market will hit its low point.  Many financial analysts think we could experience at least two more years of depreciating home values.

Trying to time the market, be it the stock market or the housing market, is a difficult task - and depending on your local environment, it may be an unnecessary gamble. 

“Real estate is local,” says Delores Conway, director of Casden Forecast at University of Southern California’s Lusk Center for Real Estate.  She points out that for those looking to sell or buy new homes in their neighborhoods, what signifies the bottom for the country may be inconsequential.

Some communities across the country have not experienced a downturn in their local real estate markets; while sales have slowed considerably, home values have held stable or even increased.  Home prices in other markets may not be at their lowest point yet, but they may not drop too much further.

With mortgage interest rates historically low, a large inventory of both new homes for sale and resale properties to choose from, and less of a chance you’ll end up in a bidding war over a sought-after property, the time just may be right to buy a new home.  Still, buyers need to be informed about what’s happening in their local communities and evaluate their personal financial circumstances. 

In its home design trend survey released last week, the American Institute of Architects indicates that the depressed U.S. housing market, affordability and rising home costs are causing many Americans to rethink the size issue.   How much living space do we really need?

Home Buyers Put New Home Amenities Ahead of Size

In past years, more people buying a new home would focus on getting the most square footage for the money, according to Gopal Ahluwalia, National Association of Home Builders vice president of research.  But that’s not the case anymore. In an NAHB survey released in February, a majority of potential home buyers revealed that if they had to choose, they would rather build a smaller home with more amenities than the other way around. 

Our changing demographics may have a lot to do with that.  With the eldest members of the baby boomer generation celebrating their 62nd birthdays this year, more of the population has moved into the empty-nest demographic.  With all the chicks out of the nest, they need less space…not more.  And they want the space they do have to incorporate universal design features to insure they can live gracefully in their homes for many years to come.  If you factor in the gradual decline over time in the number of children per family in the U.S. with the delay in age for first time marriages, you can see why the majority of home buyers may no longer want to super size their new homes.

If smaller homes will be the new norm, how will new homes evolve to meet our lifestyle needs?  Many builders and architects predict these changes:

• Nix the formal spaces.  Homes of the not-so-distant future may be smaller in square footage, but they’ll live larger since all the space will be designed to use on a daily basis- not just on special occasions.

• Functional foyers. Buyers will expect spaces to add value.  Who wants to waste square footage on a space that people walk through?  No more three-story, gargantuan foyers.

• Multi-functional spaces.  Not only will all the rooms in new homes be used daily, many will serve more than one purpose.

• Built-in storage.  No home functions well without well-planned storage.  Look for new homes to have efficient storage systems incorporated into every space to keep the smaller home well-organized and orderly.

• Outdoor living areas.  Buyers understand the importance of maximizing the potential of their space.  They want a home design that extends living and entertaining areas through blended indoor/outdoor rooms.

• One-story living.  Baby boomers looking to the future want homes that will accommodate their needs as they age.  No more stair climbing or upkeep on a multi-story home.  And with the heightened concern about energy efficiency and rising fuel costs, single-story homes are less expensive to heat and cool as well.