Archive for December, 2010


Mortgage Market Trends for week ending December 17, 2010

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Much ado was made about a CoreLogic report on foreclosures this past week. The headline went something like this: “The number of U.S. homes worth less than the debt owed on them dropped in the third quarter.” That would seem to get the spirits rising, until you read past the first paragraph and discover the improvement was largely due to mounting foreclosures rather than rising property values.

Still, the report offered some hope, noting that 22.5 percent of homes with mortgages, or roughly 10.8 million units, were underwater at the end of the third quarter, which is better than the 23 percent, or 11 million homes, reported to be underwater at the end of the second quarter.

We’ll offer our usual caveat with national numbers: they rarely pertain to any particular local market. Indeed, the usual suspects – Nevada , Arizona , Florida , Michigan and California – heavily skew the numbers on negative equity. CoreLogic reports that 67 percent of Nevada homes with mortgages are underwater – an incomprehensible amount to those who reside in cooler, damper environs.

We have two options for reducing negative equity: price appreciation or disposition. The aforementioned five states will likely rely more on the latter. However, that doesn’t mean that everyone is doomed to the same fate. At the least, price inflation – one of the Federal Reserve’s stated economic goals – will eventually seep into the housing market to stabilize prices.

Homebuilders will continue to suffer with foreclosures and negative equity, which is why sentiment among this group continues to dwell in the basement, and will likely continue to dwell there for the foreseeable future. This despite the Commerce Department reporting that housing starts rose 3.9 percent, to a seasonally adjusted annual rate of 555,000 units, in November. Unfortunately, permits decreased by 4 percent.

Homebuilders are also less than thrilled with mortgages rates. reported that rates on the 30-year fixed-rate loan hit 5 percent nationally – the highest in seven months. With all due respect to homebuilders, we don’t view rate increases as being all bad. Yes, it has increased teeth gnashing by those borrowers waiting for 3.5 percent mortgages, but rate increases are a sign of economic improvement. A stronger economy makes business investment more attractive, thus drawing funds away from bond markets. The result is lower demand for bonds, which translates to a drop in bond prices and a rise in yields and interest rates (which is good for savers, by the way).

The best advice we can offer at this point is to lock in today’s rate. Admittedly, we could see a pullback, but we wouldn’t anticipate it being much of one. Too many indicators point to a higher-rate environment.


Staying Ahead of the Trend

People are naturally attracted to trends: the longer a trend has been sustained, the more likely they believe that trend will be sustained into the future. It can be a misleading way of perceiving markets, for often it is the exact opposite: the longer a trend has been sustained, the more likely it will reverse.

The problem is that impending change is often imperceptible, though it is there. Simply vet the data over the past few months, and you can sense a change. Retail sales are rising; economic activity continues to build, evinced by Federal Express’ bullish outlook; and more businesses are planning to hire, evinced by a Business Round Table survey that finds that 45 percent of CEOs plan to hire within six months — the highest percentage for that group in eight years.

That said, this remains a favorable environment for homebuyers, investors, and borrowers. We all prefer to buy low and sell high, but we can buy low only when things are on sale; things are on sale when pessimism rules, as is still the case today. However, when economic indicators have trended higher and optimism rules, nothing is on sale. Sure, it feels better to buy when everyone is optimistically inclined, but doing so is rarely profitable over the long run.

Graph Courtesy from NY Times in an article by Lynnley Browning  December 19, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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In The News

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12/10/11:  Storage Enters Stratosphere:  “For buyers willing to pay far more than the median sales price for a one-family home in the U.S., modest bins can be had at a new condominium tower under construction on West 57th Street in Manhattan.”  Read  more about it in the Wall Street Journal 

12/11/11:  Luxury homes hard to come by, easy to sell:  “Three years into real estate market recovery, pricey new units finally catch fire”  Read more about it at Crain’s New York

Categories : In The News
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Recently with the devaluation of the dollar and the uncertainty of investments elsewhere around the world, many more foreign nationals have been interested in purchasing Manhattan residential real estate as an investment.

It is no more difficult for a foreign national to obtain a mortgage than for an American citizens buying in New York City if the residence is to be a primary residence (or at least a pied-à-terre). However,  an investor who is not prepared to pay in cash and wants to obtain a mortgage for a property that will be used as an investment (i.e. with rental income), will find it difficult or impossible to find a mortgage with low rates.

The foreign national buyer, in addition to putting together a search team including a real estate broker and a mortgage lender (if necessary), should search out a New York City attorney who may be able to help save thousands of dollars in taxes or at least alert you to the tax consequences of the purchase.

For just such an investor, I recently had the pleasure of working with Michael C. Xylas of Abrams Garfinkel Margolis Bergson, LLP. One of the partners, Neil Garfinkel, recently published an extremely informative discussion, very helpful to foreign buyers, summarized below and found in its entirety here.

Foreign investors are lured to US real estate by the stability and security of the US Real Estate market.  Generally they can enjoy a steady appreciation of US real property and without the volatility of financial markets, making the prospect of economic gain through rental income and capital growth the strongest attraction.  With relative political and economic stability in the US, there are fewer barriers to foreign purchase of US real property.  The weaker dollar and lower property prices make these investments even more attractive for foreign investors.

While easy to purchase as a foreigner, real property comes with reporting and tax consequences that must be considered.

“For the purpose of US Income Tax, a Foreigner or non resident alien (NRA) is an individual who is neither a US Citizen, a green card holder nor US Tax resident.  The test to determine if an NRA qualifies for the same status as a US citizen or resident individual is based on ‘substantial presence’.  This is defined by the number of days that one must reside in the US to achieve such status.   For the purpose of US Estate and Gift Tax, the test is more subjective, based on one’s intent of permanency in a particular country.  Importantly NRA’s are nevertheless subject to estate and gift taxes on any asset that are actually situated in the US.”

It is extremely important for foreign investors to work with a qualified team of legal, accounting and brokerage/valuation advisors who understand the rules in the foreigner’s home country as they correlate with the laws of the United States; if handled correctly, the transaction will be most suitably structured with consideration for investment, accounting and tax purposes.

Consider the Structure used to purchase the asset while planning your purchase:

  • Individual owner (Direct Ownership) and Single Member LLC
    • Real property used as a residence for personal use
    • Least complex
    • Required to file US Income Tax return
    • Estate Tax issues, Federal and possibly State
  • Shareholder in a domestic or foreign corporation
    • Domestic Corporation
      • Provides a liability shield
      • The Corporation is the taxpayer, eliminating the need for individual annual tax returns
      • Does not avoid US Federal estate tax liability
      • Two levels of tax imposed on corporation income:
        • Corporate level tax imposed
        • 30% withholding tax on dividends paid to individual owner/imposed (this could be lower based on a favorable tax treaty between the foreign investor’s country of residence and the US)
    • Foreign Corporation
      • Limits tax liability, mostly used to avoid US income tax as well as US estate tax.
      • Pass on US real property to estate beneficiaries without paying US  taxes
      • No individual US Tax return, however
        • 30% branch profits tax against the foreign corporation ‘dividend equivalent amount’ (regardless of any current distributions to the shareholders, the tax is imposed on corporation’s taxable income that is effectively connected to a US trade or business.
    • Foreign corporation which owns a US corporation
      • More complex structure, both foreign corporation and domestic US corporation are formed
      • Foreign Corporation owns the Domestic US corporation which owns the real estate asset.
      • more costly and complicated
        • Investor is provided a limited liability shield and does not file any US tax return
        • Federal estate and gift tax are not applicable
        • Branch Profits tax not applicable
        • Ultimate investor would be transparent
        • Income tax would be taxed at a less favorable rate compared to individual ownership