by Brett Arends
Thursday, September 16, 201

Brett Arends explains why owning a home is a good thing.

Enough with the doom and gloom about homeownership.

Sure, maybe there’s more pain to come in the housing market. But when Time magazine starts running covers that declare “Owning a home may no longer make economic sense,” it’s time to say: Enough is enough. This is what “capitulation” looks like. Everyone has given up.

After all, at the peak of the bubble five years ago, Time had a different take. “Home Sweet Home,” declared its cover then, as it celebrated the boom and asked: “Will your house make your rich?”

But it’s not enough just to be contrarian. So here are 10 reasons why it’s good to buy a home.

1. You can get a good deal. Especially if you play hardball. This is a buyer’s market. Most of the other buyers have now vanished, as the tax credits on purchases have just expired. We’re four to five years into the biggest housing bust in modern history. And prices have come down a long way— about 30% from their peak, according to Standard & Poor’s Case-Shiller Index, which tracks home prices in 20 big cities. Yes, it’s mixed. New York is only down 20%. Arizona has halved. Will prices fall further? Sure, they could. You’ll never catch the bottom. It doesn’t really matter so much in the long haul.

Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%.

2. Mortgages are cheap. You can get a 30-year loan for around 4.3%. What’s not to like? These are the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won’t see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can refi.

3. You’ll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you’ll get a tax break on capital gains—if any—when you sell. Sure, you’ll need to do your math. You’ll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting.

4. It’ll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension—zoning permitted—or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You’ll feel better about your own place if you own it than if you rent. Many years ago, when I was working for a political campaign in England, I toured a working-class northern town. Mrs. Thatcher had just begun selling off public housing to the tenants. “You can tell the ones that have been bought,” said my local guide. “They’ve painted the front door. It’s the first thing people do when they buy.” It was a small sign that said something big.

5. You’ll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami right now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you’re better off buying.

6. It offers some inflation protection. No, it’s not perfect. But studies by Professor Karl “Chip” Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That’s valuable inflation insurance, especially if you’re young and raising a family and thinking about the next 30 or 40 years. In the recent past, inflation-protected government bonds, or TIPS, offered an easier form of inflation insurance. But yields there have plummeted of late. That also makes homeownership look a little better by contrast.

7. It’s risk capital. No, your home isn’t the stock market and you shouldn’t view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities—for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy—if it happens—and still managing to sleep at night.

8. It’s forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won’t. Most, I dare say. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn’t a cost. You’re just paying yourself by building equity. As a forced monthly saving, it’s a good discipline.

9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That’s below last year’s peak, but well above typical levels, and enough for about a year’s worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices.

10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed—either deliberately, or by inaction. This is already happening. Even two years ago, when I toured the housing slump in western Florida, I saw bankrupt condo developments that were fast becoming derelict. And, finally, a lot of the “glut” simply won’t matter: It’s concentrated in a few areas, like Florida and Nevada. Unless you live there, the glut won’t have any long-term impact on housing supply in your town.

Write to Brett Arends at brett.arends@wsj.com

MAKING SENSE OF THE STORY FOR CONSUMERS

• There are three basic stages of foreclosure in California: Pre-foreclosure, trustee’s sale, and repossession, often called an REO or real estate owned by the bank.
• Pre-foreclosure homes are in the foreclosure process, but have not yet been auctioned.  Owners of pre-foreclosed homes often try to sell the properties because they are “underwater,” meaning they owe more on the mortgage than the home currently is worth.  Many homeowners attempt to sell via short sale, where the lender must agree to accept less than the amount owed on the mortgage.  Buying at this stage of foreclosure often is a complicated and slow process. However, buyers of pre-foreclosed properties often are given the opportunity to inspect the home prior to purchasing, whereas this is not always the case when buying at other stages of foreclosures.
• The second basic stage of foreclosure is the public auction at a trustee’s or foreclosure sale.  Homes in this stage often are well priced, but also come with challenges to buy.  These homes may not be available for inspection and buyers may later discover the property needs numerous repairs.  As a result, many of the homes at auction are purchased by investors and contractors who have experience working with homes needing numerous repairs, or taken back as REO by the foreclosing lenders.
• If a home does not sell to a third party at the trustee’s auction, the bank takes the property (REO Property)–the final stage of the foreclosure process. Although homes in this stage typically do not offer buyers the best prices, buyers generally can perform a thorough inspection of the property prior to closing.

To read the full story, please click here.

Homebuyer Tax Credit Chart 2010.

This chart was provided by CAR

“Qualified principal residence” indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence.  It includes both first and second trust deeds.  It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.

The tax breaks apply to debts discharged from 2009 through 2012.  Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.
 
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions.  Most notably, taxpayers who are bankrupt are exempt from debt relief income tax.  Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

For more information about mortgage forgiveness tax consequences, go to California Franchise Tax Board’s Mortgage Forgiveness Debt Relief Extended webpage and the Internal Revenue Service’s Mortgage Forgiveness Debt Relief Act and Debt Cancellation webpage.  The full text of Senate Bill 401 is available at www.leginfo.ca.gov.

This article was provided by CAR.

California is finally working towards needed State income tax relief for Californians who have received mortgage forgiveness through selling their homes in a short-sale process. The Sacramento Bee published an article on April 6, 2010 outlining this process. It appears that this tax relief could be in place by the April 15th tax filing deadline.

To quote the Sacramento Bee article as provided by CAR:

Relief appears imminent for thousands of Sacramento homeowners hit with state tax bills for mortgage debts forgiven in 2009.

State lawmakers said Monday they plan to cancel the state tax obligations with a vote Thursday.

Shannon Murphy, spokeswoman for Assembly Speaker John Pérez, D-Los Angeles, said legislation will go before the Assembly Revenue and Tax Committee today and the Appropriations Committee on Wednesday, and will receive a full vote Thursday.

A similar Senate floor vote planned Thursday would send the bill immediately to Gov. Arnold Schwarzenegger, who has repeatedly stated his support. The new bill is similar to one he vetoed March 25. But this time it omits a part he opposed – financial penalties for businesses that routinely seek state tax refunds. Democrats removed the section despite their contention that some firms “fish” for refunds whether or not they’re owed.

Monday, Schwarzenegger spokesman Mike Naple said the governor “hopes the Legislature fully addresses the concerns raised in previous versions of this bill.”

The new movement means that Californians who got unexpected tax bills of $10,000 or more in recent weeks could soon be off the hook. Most are borrowers who received loan modifications last year or lost their houses in short sales, in which banks accept prices below what they’re owed. In both cases, lenders forgave some of the debts owed them, a process that exposes borrowers afterward to taxes.

“We want to get it done before the (April 15) tax deadline,” said Alicia Trost, spokeswoman for Sen. President Pro Tem Darrell Steinberg, D-Sacramento. “We don’t want to have people jump through hoops.”

Many across the state have anxiously waited for the state to resolve the issue before the tax filing deadline – or have filed extensions.

Typically the state and federal governments view forgiven home loan debt as additional income and tax it. But both have backed off amid the housing crash. The federal government has suspended taxes on forgiven mortgage debt from 2007 through 2012. California suspended it for the 2007 and 2008 tax years. But disagreements over the business tax refunds stalled a bill extending it to 2009.

The bill being considered this week, Senate Bill 401, would cancel state tax obligations for forgiven mortgage debt through the 2012 tax year. The Assembly planned Monday to rewrite SB 401 from a bill regarding tax shelters to one that aligns much of California’s tax law with that of the IRS. That includes canceling taxes on forgiven mortgage debt and on recipients of federal renewable energy grants.

“We haven’t done a tax- conforming bill for four years, so it’s important to get that done,” Trost said Monday.

This article was provided by CAR as written by Jim Wasserman of  The Sacramento Bee.

The survey revealed that homeowners and renters alike are taking a more cautious approach to homeownership. Nearly a quarter of renters polled (23 percent) said they will buy a home later than once planned. In addition, Americans with traditional, fixed-rate mortgages with predictable payments are significantly more satisfied than those with other types of mortgages. Respondents cited non-financial reasons such as safety (43 percent) and quality of local schools (33 percent) as driving factors in wanting to own a home, ahead of financial considerations.

A majority of consumers (60 percent) believe that buying a home today is harder than it was for their parents, and nearly seven in 10 (68 percent) think it will be even more difficult for their children. Most respondents (88 percent) also believe that walking away from an underwater mortgage is not acceptable, but those who know someone who has defaulted are more than twice as likely to have seriously considered stopping payments on their mortgage.

More info

This article was provide by CAR.

Eligible taxpayers who close escrow on qualified principal residences between May 1, 2010 and December, 31, 2010, or who close escrow on a qualified principal residence on and after December 31, 2010 and before August 1, 2011, pursuant to an enforceable contract executed on or before December 31, 2010, will be able to take the allowed tax credit.
This credit is equal to the lesser of 5 percent of the purchase price or $10,000, taken in equal installments over three consecutive years. Under the bill, purchasers will be required to live in the home as their principal residence for at least two years or forfeit the credit (i.e. repay it to the state).  Buyers also must be at least 18 years old and be unrelated to the seller.  First-time buyers are defined as those who have not owned a home in the past three years.
To learn more about the California Home Buyer Tax Credit, click here.

This Article was provided by CAR. As I am not a tax professional, please confer with your CPA or other tax advisor about how this California tax credit may affect your next home purchase.

A great way to obtain your Amateur Radio License, many times referred to as HAM Radio, is by visiting the following site: http://baears.com/info.php  We attended a  Baers license class and in one Saturday were able to obtain our Technician Class License. After obtaining our license we were mentored by many helpful and friendly local “HAM’s”.

1. Close on your home purchase between November 7, 2009 and April 30, 2010, or have a binding written contract in place by April 30, 2010 with a closing date no later than June 30, 2010.
2.  Decide whether to: 

• apply the credit to your 2009 tax return, filed on or before April 15, 2010;
•  file an amended 2009 return; or, 
• apply the credit on your 2010 return, filed on or before April 15, 2011.

      3.   Attach documentation of purchase to your return.

When to Apply the Credit

Buyers purchasing in 2010 will have the option to:

•  Claim the credit on their 2009 return, even if the purchase is completed after December 31, 2009;
•  File an amended return for 2009 if their purchase is completed after April 15, 2010; or,
•  Claim the credit on their 2010 tax returns.

Applying the Credit to Your 2009 Taxes

You will need to do three things to claim the credit on your 2009 tax return:

1. Fill out Form 5405 to determine the amount of your available credit;
2. Apply the credit when you file your 2009 tax return or file an amended return;
3. Attach documentation of purchase to your return or amended return.

How do I obtain an IRS Form 5405?

Go to: http://www.irs.gov/pub/irs-pdf/f5405.pdf

How to Apply the Home Buyer Tax Credit to your 2009 Return

To claim the credit as part of your 2009 return, you will need: The standard Form 1040 and Form 5405 for the home buyer tax credit.

1. First begin Form 1040.
2. Be sure to take note of your adjusted gross income, which you enter on lines 37 of the form. Form 5405 actually requires you to note your modified adjusted gross income, but that affects few people, so most will just use their adjusted gross income.
3. When you come to Line 69 you’ll be asked to enter your tax credit amount. To do that, you’ll need to first complete Form 5405. 
4. Once you complete Form 5405, enter the amount on Line 69, then complete your return.
5. Attach Form 5405 to your return.

Collecting Your Refund

Any refund for which you qualify will be sent to you.

Determining Your First-Time Buyer Credit Amount: Form 5405

Regardless of whether you’re applying the first-time home buyer tax credit on your 2009 return or your 2010 return, you’ll need to visit the IRS Web site and download  Form 5405:  http://www.irs.gov/pub/irs-pdf/f5405.pdf . This form has just six lines and takes only a minute to complete. 

1. On the first line enter either $8,000 or 10 percent of the home purchase price, whichever is smaller. Since the national median home price is around $175,200 (March 2009), in most cases the $8,000 will be the smaller of the two. In order for 10 percent of the home price to be smaller, the home purchase price would have to be $79,999 or less. 
2. On the second line enter your adjusted gross income. You will find your gross adjusted income on line 37 of Form 1040, which you submitted when you filed your 2008 return. The tax credit form actually requires you to note your modified adjusted gross income, but that affects few people, so most will just use their adjusted gross income.
3. If your adjusted gross income is more than $75,000 (individual) or your income is more than $150,000 (joint) you’ll have to complete some additional calculations to determine the credit amount for which you qualify.
   Everyone else will simply enter the tax credit amount on Line 6.

The information in this Blog was condensed from a recent NAR article. Please do not consider this article as income tax counsel and please verify the above information with your CPA or other Tax Advisor.