Bill McCord's Blog

If you live in Silicon Valley and are thinking about buying your 1^st house this is probably the best ever time to do so. 

1. Santa Clara County has a new 1st time buyer program which gives a 30 year, $40,000, Down Payment Assistance loan at 2% interest, with no payments required for the 1st 4 years. After 5 years the interest rate becomes ZERO. The maximum total interest over the life of the loan can never exceed $3,200. THIS IS FANTASTIC. 

2. 90% of the Cities in Santa Clara County have one or more special 1^st First Time Buyer programs to help get a foot on the Home Ownership ladder. 

3. Federal Government and the State of California have several different 1^st Time Buyer programs. 

4. Many of these programs can be combined to provide affordable ways for the majority of people who at present believe they can’t afford to buy. 

5. The Santa Clara County Association of Realtors has a new program which will provide 6 monthly payments of up to $1,500 per month for a Home Buyer who loses their job. 

6. The IRS is giving an $8,000 Tax Credit to any 1st time Buyer who buys before Nov 31st this year. This is a CREDIT not an allowance. It means that even if total Fed Tax was $6,000, not only would that be wiped out but you would get an additional $2,000 rebate. That’s an $8,000 gift from Uncle Sam. 

In addition to all this Mortgage Interest Rates remain at historically low levels, while home prices have come down substantially from the peaks of 2007. 

There will never be a better time than this for that 1^st purchase.

Government is often criticized for putting all its efforts into helping business and nothing for the ordinary citizen. However, when they do put programs in place we have a tendency to ignore them.

Here’s just one example:

A 401-K plan usually involves an employee putting up to 6% of their salary into a company sponsored program. Typically the employer increases that contribution by adding in up to 50% of what the employee puts in. (this is increasingly being reduced but is still at least 25% in most cases). This means the employee is getting between 25% and 50% interest on their savings, plus their contribution is exempted from Income Tax for the year it is made.

So how come only 7% of people eligible for this benefit actually use it up to the max allowed? (Source Putnam Investments).

How come 20% of participants in these plans have actually reduced the level of contribution during the past 2 years?

My guess is that a large number of these people would like to maximize the use of these plans but don’t know how it could be done.

I also suspect that a large percentage of them could solve the problem with a mortgage better suited to their circumstances.

It’s all about meeting new people and helping them realize their dreams.

From the 1st meeting to the close of escrow, maybe 3-6 months, you go through the equivalent of 20 years of getting to know people well, and developing the ability to work toward a common goal.

 Then you may do nothing more than exchange xmas cards and sending out occasional marketting info. However, if the result of your initial business experience was positive, you will be hearing from their friends and family.

 Then, about 5 years later you will be renewing close aquaintance helping them with their next move.

There is nothing more gratifying than that phone call regarding new business coming from a past client or a referral from them. That is a FUN call.

I’ve lost count of the number of times I’ve been asked “I see the Fed lowered it’s rate(s) today, www.federalreserve.gov/ how much have mortgage rates dropped by”?

When I answer, as is most often the case, “they’ve not gone down, they’ve gone up”, the response is “how can that be.

So let’s try to explain it once and for all.

First the basics.

There are 3 actors in this story.

1.The Federal Reserve Bank.

2. Mortgage Backed Bonds/Securities.

3. Inflation.

FACT: There is no direct relationship between the Federal Reserve and Mortgage Interest Rates.

FACT: Despite the continued repetition from the Talking Heads in the mainstream media, there is also no direct connection between the 10 year Note and Mortgage Interest Rates. In fact the two will often go in opposite directions after a Fed action.

SUPER FACT: Mortgage Interest Rates are directly affected ONLY by the prices of Mortgage Backed Bonds, commonly referred to as Mortgage Backed Securities. For the most part these are Long Term Bonds issued by FANNIE MAE and FREDDYMAC, and it is their price going up or down which drives Mortgage Interest Rates.

As with all Long Term investments, Bonds are most directly affected by the outlook for Inflation, which makes it likely they will be paid back in the future with inflated dollars. Inflation reduces the current value of all Fixed Investments such as Bonds.

The Golden Rules:

1. Prospects of higher Inflation drive down prices of all Bonds.

2. When Bond prices go down, Mortgage Interest Rates go up, and vice versa.

Here is where the Fed comes in. Drastic lowering of rates by the Federal Reserve Bank will always lead to fears of Inflation and put downward pressure on all Bonds. This is precisely what we have seen since the start of this current lowering cycle.

The sole exception to this is your Home Equity Line of Credit (HELOC) which is usually tied to the Prime Rate. The Prime rate is historically 3% more than  the Fed Funds rate; so in today’s topsy-turvy world you will often  find your Equity Line loan having a lower interest rate than your 1st. Mortgage.

For all Home owners in California above 62 years old, or those with parents in that age group, the State Controllers Office has a program which allows long term postponement of Property Taxes. Go to www.sco.ca.gov and select “Public and Gov, Services” tab, then select “Property Tax Postponement”.

Consider a 68 year old Grandmother living alone in the old family home in North San Jose. All her children and grand children are living in Pleasanton, about 30 minutes freeway driving away. She would love to sell up and move closer to the family, and could afford a suitable house using her sale proceeds. However, the price of the house in Pleasanton would be higher than the sales price of the San Jose house, so thanks to California’s Proposition 13 www.hjta.org/node/320 and the incomplete Propositions 60 and 90, www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm she would not be able to carry her existing Property Tax payment over to the new house. This would increase her Property Taxes by $600 per month. This makes the whole thing impracticable as she cannot afford this extra expense. and her children are unable to subsidize her, even if she would accept it.

Here’s how the numbers work:

Grandma’s house, bought in 1980 for $50,000, is now worth $600,000 and has no mortgage.

Thanks to Prop 13 her property taxes are only $90/month.

The replacement house in Pleasanton will cost $750,000 and she can easilly handle the small mortgage needed.

However, thanks again to Prop 13, her new property taxes will be $781/month. This she cannot manage.

Using the Property Tax Postponement program she is able to make the move and simply allow the accrued Property Taxes to reduce her final estate. A result with which the whole family can be happy.

Despite the doom and gloom pouring out from the talking heads and empty suits of the mainstream media we here in Silicon Valley do not inhabit a wasteland of short sales and REO’s. Yes, we do have some in a few pockets of the Valley, but they are not having much affect on the big picture.

The Pending to Listing ratios for Santa Clara Valley continues to get more favourable each month. This is the most credible statistic available for tracking market trends and is currently better than it was 12 months ago. I have seen nothing in the Murky News, or heard it mentioned on the TV or Radio.

The truth is that the current problems are concentrated geographically and have not wiped out Real Estate values all over the State.

Have prices in Silicon Valley gone down. Yes in general, but only to the extent of correcting for a out of control boom.

Is now a good time to buy. Yes, in my part of the world.

NOTE: I’ll follow up shortly with info on some super 1st time buyer programs for the Counties and Cities of Silicon Valley.  These are NOT low income programs. More to follow.

Many Californians who bought their home since late 2006 now find themselves facing mortgage payment shock, and are unable to refinance due to a drop in the value of their home.

This double whammy is the major cause of the increased number of foreclosures and short sales.

While there is no easy answer for many in this situation there is one thing they can do to at least reduce the cost of owning their home.

California Proposition 8 allows for a reduction in Property Taxes when the current value of the house is now lower than the assessed value (usually the purchase price in this scenario.)

For example. You paid $450,000 in December 2006 for a beautiful 4 bed 3 bath home in Elk Grove.

The Builder is now selling the same house in phase 3 of the development for $380,000.

Your property taxes are $5,628 per year.

The buyer at $380,000 is paying $4,752 per year. That’s $868 per year less than you.

Prop 8 allows you to file for a “reduction in assessed value” in the County where you live. Example: www.acgov.org/forms/assessor/decline_market.pdf for Alameda County. There is some paperwork required but nothing you cannot handle yourself.

There is no need to fall for the flyer in the mail offering to take care of this for you at at a  price.

Simply call the County Assessors office and explain you want to apply for a “Reduction in Assessed Value” for your home. They will send you the required forms which you complete and send back. It may take a couple of months before they respond but respond they must.

PROBLEM.

I”m finding an increasing number of my clients are buying or refinancing homes on the basis of tax advice from a previous Realtor or Mortgage Broker, rather than the law as defined by the IRS in Pub 936.

They are told that they can claim tax relief on all mortgage interest up to $1,000,000, even when the loans are on 2 different properties.

WRONG!

There are 3 categories of debt involved here:

1. Home Acquisition Debt. This is defined as “the total amount of all mortgages, up to a maximum of $1,000,000, used to purchase the property. This can be spread across your Principal Residence and a 2nd home. (This does not mean a Rental House). The amount which is deductible will be reduced by any paying off of principal. Therefore, if you bought a home using a $400,000 mortgage, and have since paid it down to $250,000, your Home Acquisition debt is now $250,000. The interest on this is the amount eligible for a tax deduction. Even if you re-finance for a higher amount only the $250,000 is Home Acquisition Debt.

NOTE: This item is exempted from the Alternative Minimum Tax (A.M.T.). calculation

2. Home Equity Debt. This is a fixed amount of up to $100,000 which can possibly be added to the Current  Acquisition Debt to increase the amount allowed for tax deduction.

NOTE: This item can be paid down and re-used to the max $100,000 repeatedly. However, it IS included in A.M.T. calculations.

3. Home Improvement Debt. If incurred in order to make improvements in the house, the new debt can effectively increase the Current Home Acquisition Debt.

BEWARE. Improvements must either:

Add to the value of the home.

Prolong the useful life of the home,

Adapt the home to new uses.

Ongoing maintenance does not qualify.

Any time I have a client who plans to pay cash, or put down a large deposit we have an interesting review of these issues before proceeding.

I am not formally qualified as a tax advisor or accountant. For advice on this issue and with exceptions to the guidelines please consult a licensed professional.

An FHA mortgage has not typically been the first thing that came to mind when buying in the Silicon Valley area during the past 25 years or so.

Guess what; with the chaos in the Mortgage Banking industry FHA is now the best program in the market for anyone with less than a 20% down payment looking to buy up to the new conforming limit of $729,500.

With 30 year Fixed and Adjustable programs, as little as 3% down, and generous Seller credit provisions, this is definitely not your Grandfathers FHA Mortgage.

In addition the interest rates are typically better than those offered by the standard Banks, and qualifying parameters are stable and consistent. This can certainly not be said of the rest of the industry.

The following is a question posted recently by an individual on Trulia Voices

“CAN SOMEONE GIVE ME CONTACTS OF REALTORS WHO ARE WILLING TO TAKE $4,000 AND DO MY PAPERWORK. I HAVE A HOUSE IN

Which i am interested . I have decided and know what i want to offer. I just want a realtor to make my offer and do the paper work. I want the total commission back ( 2.5% – 3%) and I’ll pay the realtor $4000.”

(Unedited for grammar)

This has stirred up a in increasingly strident series of answers from agents, and responses from the originator.

The originator is a rather opinionated, ethically dubious, and extremely ill informed person, but is perfectly entitled to ask the question without being subject to the level of vitriol which has come back.

The question of negotiable Real Estate Commisions continues to haunt our industry. I can’t claim to know the best way to resolve the question. However, I can reliably predict that we are going to have to develop a system which supports and regulates a structured Service Model to allow Buyers and Sellers to choose from a Bundle of Services offered on a sliding scale fee system.

The best Realtors have already left the 20th Century behind and are working co-operatively with a new generation of technology savvy consumers who know that Norman Rockwell is dead.

The $4,000 question is just a request for someone to perform a finite task for a fixed fee.

Is that really such a strange concept.