By Bob Stahl, MyPhoenixMLS.com For REALTOR.com®

In my last post here on REALTOR.com® Blogs, I blogged about the value of homeownership – both the touchy-feely (like the pride that comes with having a place to call your own) and the financial (like how leverage can make an investment in a home more beneficial than a stock market investment).

But if homeownership is so great, why are an increasing number of people walking away from their homes? The answer is short-term economics, which have made homeownership a financial drag for some people. For homeowners who owe much more than their homes are worth (more than 50 percent of homeowners in the Phoenix real estate market), making that mortgage payment every month can feel like a waste.

Several economists and academics have made good cases for the economic logic behind what they call strategic mortgage defaults – walking away from the obligation to pay one’s mortgage. I see how defaulting can make economic sense for some homeowners in some cases.  But I say that with two huge caveats:

 1) Even homeowners who feel like it makes economic sense to default on their mortgage should only do so with eyes wide open to the potential consequences of a mortgage default. Those consequences almost always include:

• A significant decline in the homeowner’s credit score. A person with a foreclosure on his record should expect to wait at least 3-4 years to purchase a home again. If the homeowner can negotiate a short sale, the negative effects on his credit score are initially about the same, though his score will recover more quickly, and he might be able to buy a home again in 2-3 years.
• In some states, the mortgage lender can hold the homeowner liable for mortgage debt not covered by the sale of the home (the deficiency). Arizona is an anti-deficiency state, which means that lenders cannot hold homeowners liable for mortgage debt after a default as long as that debt was used to purchase the homeowner’s primary residence.  Homeowners considering default should consult a real estate attorney to learn about the laws in their state.
• Depending on how long the homeowner lived in the home and whether the mortgage was used exclusively as purchase money, a homeowner who defaults may owe taxes on any debt that the lender forgives (typically, the difference between what is owed on the mortgage and what the lender sells the home for). The Mortgage Forgiveness Debt Relief Act does exclude forgiven mortgage debt from taxable income in certain cases.

 2) The second caveat is that, while I understand U of A law professor, Brent White’s point that social norms impose guilt on people who default on their mortgages (but not, say, on businesses that do the same), I do think that there are important moral considerations at play here. Furthermore, mortgage defaults can depress housing values in a neighborhood, which imposes hardship on neighbors and on the real estate market as a whole (keeping real estate mired in the depressed-prices rut).

The bottom line is that of course I don’t advocate for deeply underwater homeowners to walk away from their mortgages. I do believe that there is a moral component to the issue. I also acknowledge that for some homeowners, in some situations, a strategic mortgage default is a smart financial decision. I just hope that the trend doesn’t spread – after all, homeownership has tremendous value, far beyond motherhood and apple pie.

 I have to mention that I’m neither an attorney nor a tax professional and nothing I’ve written here should be construed as advice.  If you’re considering mortgage default, please consult an attorney and a tax advisor.

Bob Stahl is a REALTOR® at Keller Williams Arizona Realty in Phoenix, AZ.

I’ve written before about the growing trend of what’s become known as “strategic defaults” – when a homeowner can afford to pay his mortgage, but decides to walk away (typically because of a huge gap between what he owes on the mortgage and what the home is worth).  Allan Glass wrote an incredibly detailed blog about the issue.

While every homeowner’s, seller’s, or buyer’s situation is different, the rise of strategic defaults – which, before last year had been practically unheard of in residential real estate – has got me thinking about the value of homeownership.  With an increasing number of people jumping ship (though still a very small percentage of homeowners), is it time to reevaluate the value of homeownership?

The short answer is yes, maybe.

First let’s look at what we typically consider to be the value of homeownership:

• Mortgage interest and property tax deductions.  Depending on the size and terms of your mortgage and the amount you pay in property taxes, you could end up deducting tens of thousands of dollars from your income at tax time – that could mean thousands of dollars in tax savings.
• Monthly payments build equity.  If market-rate rent payments are comparable to your mortgage payment (they should be, provided that you have good credit), then the money that you pay toward your mortgage (which you would otherwise use to pay rent) actually works for you – it helps you build equity in your home.
• Stability.  Most landlords won’t sign leases longer than 3 years (and some much shorter) because they want the flexibility of being able to raise rent, find new tenants, or sell. While it’s certainly possible that you could rent the same property for years and years, there’s no guarantee.  When you own a home, it’s your home forever.
• Pride of homeownership.  Paint the walls pink (or purple, or green, or any other crazy color that suits your fancy).  Build a tree house in the backyard.  Let your kids go crazy painting a “mural” in the hall.  When you own your home, you can do whatever you want – no frowning landlord to say “no.”
• Home value gains.  I know as well as anyone that home values have plummeted since the high-flying real estate boom busted.  But home values are still right around pre-boom levels (meaning that people who bought before the boom or after/during the bust should be just fine).  The chart below shows the trend in home price values nationwide – still clearly up.

The homeowners who are hurting most now are those who either bought at the peak of the real estate bubble or did cash-out refinances then to tap the equity that those rising prices had created.  These are the homeowners who are now underwater – owing more than their homes are worth. But as home values continue to rise, most underwater homeowners will eventually recoup their equity losses.

Last, but typically most important, is the investment value of your home.  The average annual rate of appreciation in the U.S. housing market – since the 1970s – is 5% (that includes booms and busts).  That may not sound like much, compared to the stock market, for example (which has yielded 10% per year on average) – until you consider the power of leverage.

For most of us, when we buy stocks, we only earn a return on the amount of cash we can put into the market. With a home, in contrast, you earn a return on a giant investment even if you only have a little cash to put forward. Let’s consider an example:

Say you make a 10 percent down payment on a $250,000 house. Assume an average annual rate of appreciation of 5 percent.  By the end of the second year your house is worth $275,625, for a gain of $25, 625.  You’ve already seen more than a full 100 percent return on your initial $25,000 cash investment, in only 2 years!  If your home continues to appreciate at 5 percent a year, at the end of five years your home will be worth $319,070 – $69,070 more than its value when you bought it. You’ll have nearly tripled your initial $25,000 investment.

If you had invested that same $25,000 in the stock market and it grew at a compound annual rate of 10 percent, at the end of five years your investment balance would be $40,263 – for a total gain of $15,263 – not even a quarter of the gain you’d see in your home investment.  That’s the power of leverage – and the value of homeownership.

So, I said that it may be time to reevaluate the value of homeownership.  A few years ago I went on a river rafting trip with some friends in Colorado.  We stayed at a KOA where they had a huge (like, three-story) slide.  You had to sit on a burlap sack to keep from sticking to the metal slide.  One of my friends had been having great fun, until she slipped off the sack.  She was wearing short shorts and the result was not pretty.  It was the “screech heard ‘round the KOA,” we joked.  She had, literally, second-degree burns.  I think that a lot of homeowners have felt that same way as they’ve been taken for a ride down, down, down the slide with no burlap sack to protect them.

In other words, homeownership hasn’t turned out so hot for some homeowners in the last three years or so.  But prices have already begun to rebound, and they will continue to rebound.  It will be a long haul back to boom levels, but we’ll get there.

And, once-in-a-lifetime boom and bust notwithstanding, anyone who bought a home before the boom or during/after the bust is still in great shape to reap all of the rewards of homeownership – not least of which is the incredible returns homeowners see because of the power of leverage.

Bob Stahl is a REALTOR® at Keller Williams Arizona Realty in Phoenix, AZ.

We made an offer on a foreclosure home, and our offer was accepted . We signed the contract for sale of the house and went ahead with the inspection within the period that was specified by the bank. The option period almost up and now we are told that the title is not clear because the prior owners have a federal tax lien and therefore have 120 days right of redemption, hence the property cannot be sold to us. Now we have spent money on the inspection, have taken out time of our busy schedules for all the formalities that are involved during buying the house and also the $8,000  tax credit, which would have been applicable to us as first-time home buyers. It seems like we are in a losing position at all fronts. Please advice as to who is liable for our loss and how do we recover our inspection costs and from whom?

 -Ameeta

 I am sorry to hear of your situation. As an agent who primarily lists and sells bank-owned properties, I appreciate your frustration. Unfortunately, I am unable to give you legal advice. However, I would suggest that the first person you contact is the listing agent and ask them about billing the bank (seller) for the inspection. It seems to me that the bank should have done at least preliminary title work and discovered the lien. Perhaps a better solution would be to contact an attorney.

Please don’t let this one bad experience keep you from purchasing a home. This is a great market for buyers right now and we just can’t say when it will be like this again.

Bob Stahl is a REALTOR® at Keller Williams Arizona Realty in Phoenix, Az.

Should a buyer deal directly with the seller’s agent or is it in the best interest of the buyer to use a MLS listing agent in the same area? Will the seller’s agent be helpful or hinder you from a great sale price?

–Judy

I would say that it is probably in your best interest to use a buyer’s agent, or as you put it, another listing agent in the same area.

As REALTORS®, we are held to a standard that says our fiduciary duties to buyers include loyalty, obedience, disclosure, confidentiality and accounting. The problem is that the same requirements face a Realtor who is representing a seller. So by using your new home’s selling agent to represent both you and the seller, there is an inherent conflict of interest.

In fact in my business, I prefer NOT to represent both sides just for this reason. Now, many others in my industry will say I am foolish because of the amount of money I could make on a transaction. But for me, it is really about the client and making sure that client gets the best deal possible. In this case, your best deal probably comes from using an agent who only represents you and not someone who is also representing the seller.

Bob Stahl is a REALTOR® at Keller Williams Arizona Realty in Phoenix, Az.

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By Bob Stahl, MyPhoenixMLS.com, for REALTOR.com®

The Dow recently closed above 10,000 – the first time the stock market’s biggest index closed that high since it tumbled from 11,000 last October. And while Bank of America posted a $1 billion quarterly loss last week, many of the country’s other major financial institutions posted healthy profits. Yet even amid that good news, lenders continue to hold tight to their money; borrowing is still far more difficult than it was several years ago (which, to a certain extent, is probably a good thing).

Gone are the days of the no-down loan

At the height of the real estate/mortgage-backed securities boom, demand for mortgage-backed securities was so ferocious that banks couldn’t lend money quickly enough. We’ve all heard of the irresponsible kinds of loans that banks made – $500,000 mortgages to people with $50,000 incomes, stated income loans for people with credit scores of 600, interest-only adjustable rate mortgages with initial interest rates of 1%, the list goes on.

When Wall Street collapsed a year ago, so did those kinds of crazy loans – which is a good thing. But banks went overboard. Afraid of waking up with too little collateral for their debt obligations, banks clamped down on lending – commercial paper markets, some of the safest around, even froze for a while last fall. Since then, lenders have eased up considerably, but credit is still tight. To qualify for a mortgage with a traditional lender these days, you’ll probably need a credit score of at least 680, if not 700, and at least a 10% ¬– if not 15 or 20% – down payment.

So what’s a homebuyer to do?

If you’re a first-time homebuyer, or you’re selling your current home but don’t have a lot of equity built up, thinking about saving 20% of the value of your next home can seem like a tall order – that’s $34,800 on the national average home price of $174,000. Even if you can save $500 a month on top of your rent payment, it could take you 5 or 6 years to save a down payment.

Fortunately, you may have another option.

“90% of loans originated now in Greater Phoenix are FHA loans,” a mortgage broker friend told me the other day. I imagine the percentage is similar in other parts of the country (where home prices fall within the FHA’s limits, at least).

FHA saves the day

That’s because FHA-backed mortgages still feature a 96.5% loan-to-value option, meaning that you can borrow as much as 96.5% of the value of the home you’re buying. And, your 3.5% down payment can come from a family member or your employer (“gifted” down payments are typically not allowed by conventional lenders).

The FHA’s 203(b) Mortgage Insurance program “provides mortgage insurance for a person to purchase or refinance a principal residence. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.” Generally, to qualify for an FHA loan you must:

• Meet standard FHA credit qualifications, which are often more relaxed than conventional mortgage qualifications. Qualifications include not having a bankruptcy or foreclosure on your record within the last three years.
• Purchase a home priced within the FHA loan limits (to find out the limit in your area, visit https://entp.hud.gov/idapp/html/hicostlook.cfm).

Other down payment options

Doug Hill wrote a great post earlier this month about the disappearance of down payment assistance programs, which were outlawed by Congress on October 1, 2008. But many cities, counties, and states have other down payment assistance options available – including stimulus money for purchases in neighborhoods heavily affected by foreclosures. Visit http://www.hud.gov/buying/localbuying.cfm for a list of down payment assistance programs in your area.

The upshot

The bottom line is that you don’t need to squirrel away10, 15, or 20% of your next home’s value in cash. With an FHA-backed mortgage, you can buy a home with 3.5% down, and the sources of that 3.5% are flexible. Combined with the first-time homebuyer’s tax credit, set to expire on November 30, and prices that are still relatively affordable, now may well be a great time to buy.