Lenders have been pulling back on their willingness to loan money around the fringes:
Any loan that’s not right down the middle of the conventional spectrum raises questions about how it will impact lenders as they navigate what is easily the largest and fastest surge of forbearances the mortgage market has ever seen. Every loan raises questions. Due to their servicing rules or risk profiles, some loans raise more questions than others. Those loans have been absolutely demolished by an absence of investor demand. To reiterate, lower demand among investors = higher rates.
In essence, despite extraordinarily high prices on the bonds that underlie the top tier mortgage debt, much of the mortgage market is broken by the volatility and uncertainty surrounding COVID-19. Some parts will heal quickly as bondholders better understand their forbearance protections. Other parts will face a tougher road due to the impending recession (high LTVs especially). In all cases, TIME and STABILITY (in markets, the economy, and epidemiology) will be required before rates and product offerings return to where they were.
In just the last 2-3 weeks, many loan programs have been cut back or eliminated. The biggest impact on our market will be jumbo loans (>$701,500) which now need at least a 20% down payment in almost all cases – especially those loan amounts over $1,000,000.
As recently as three weeks ago, you could have bought a house for $2,500,000 with a 10% down payment.
My guess is that NSDCC sales will drop by at least 60% in 2Q20, and our price gauges fall 5% – sellers won’t tolerate any more than that, and they will wait it out instead.
“As has been the case since mid-2019, after a long period of decelerating price increases, the National, 10-City, and 20-City Composites all rose at a faster rate in January than they had done in December,” Craig J. Lazzara, managing director and global head of Index Investment Strategy at S&P Dow Jones Indices, wrote in a release. “Housing prices were particularly strong in the West and South, and comparatively weak in the Midwest and Northeast.”
Lazzara did make a point to note that all of this data is pre-coronavirus impacts and does not reflect any of the slowdown in both the economy and the housing market. While he did not make any predictions, others say home prices could fall nationally for the first time since the recession.
“We expect a peak-to-trough fall in prices of around 4% by early 2021, with values then flattening out for the rest of the year,” wrote Matthew Pointon, an economist with Capital Economics. “Housing demand will see a sharp decline as unemployment hits record highs, and households are prevented from buying a home due to the shut down of large parts of the economy.”
Pointon says the risk to housing will rise, so buyers’ willingness to pay for a home will fall, and house price expectations will take a hit.
There is no reason to transfer your house to your kids – use a family trust instead. If you need dough, then get a reverse mortgage. Hat tip to just some guy!
Adding an adult child to your house deed, or giving them the home outright, might seem like a smart thing to do. It usually isn’t.
Transferring your house to your kids while you’re alive may avoid probate, the court process that otherwise follows death. But gifting a home also can result in a big, unnecessary tax bill and put your house at risk if your kids get sued or file for bankruptcy. You also could be making a big mistake if you hope it will help keep the house from being consumed by nursing home bills.
There are better ways to transfer a house to your kids, as well as a little-known potential fix that may help even if the giver has since died.
WHY YOU SHOULDN’T GIFT A HOUSE
If you bequeath a house to your kids — which means they get it after your death — they also get what’s known as a “step-up in tax basis.” All the appreciation that happened while you owned the house is never taxed.
Certified financial planner Kenneth Robinson of Rocky River, Ohio, says last year he advised a client not to let his mom give him her house. The mother paid $16,000 for her home in 1976, while the current market value is close to $200,000. None of that gain would be taxable if the son inherited the house, Robinson told his client.
The mother signed a quit claim to give her son the house anyway and died shortly afterward. That potentially meant a tax bill of about $32,000 for Robinson’s client.
Families who realize the mistake in time can undo the damage by gifting the house back to the parent, says Jennifer Sawday, a partner at TLD Law in Long Beach, California.
“We do last-minute deeds to get that house back in place when we know someone is dying,” Sawday says.
OTHER REASONS NOT TO GIFT A HOUSE
Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the indigent. But gifts or transfers made within five years of applying for Medicaid can lead to a penalty period, when seniors are disqualified from receiving benefits.
Transferring your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be divided.
A POTENTIAL ‘HAIL MARY’ FIX
Robinson consulted a certified public accountant and an estate planning attorney. Both said what Robinson feared was true: The client was stuck paying taxes on the $184,000 gain in value since his mother bought the property.
“They were as discouraged as I was,” Robinson says.
But then Robinson hired a tax research firm and learned of a workaround. Section 2036 of the Internal Revenue Code says that if the mother retained a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.
“Many people do not know about this and are therefore losing out on the step-up and the lower taxes they would be entitled to,” says Michael Eisenberg, CPA financial planner with the American Institute of CPAs’ Financial Literacy Commission.
There are specific rules for what constitutes a life interest, including the power to determine what happens to the property and liability for its bills. To ensure that outcome, the son, as executor of his mother’s estate, filed a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death, Robinson says.
THERE ARE BETTER WAYS TO TRANSFER A HOUSE
There are other ways around probate. Many states and the District of Columbia allow “transfer on death” deeds that allow people to leave their beneficiaries their houses without having to go through probate. Another option is a living trust, which typically costs $1,500 to $3,000 to set up but can ensure all a person’s assets avoid probate.
And probate in many states is nothing to fear. Most states have simplified probate procedures for smaller estates. Only in a few, such as California and Florida, is probate so expensive and time-consuming that most people should try to avoid it.
“We see avoidance of probate as a big issue in people’s minds, sometimes bigger than it has to be,” Robinson says.
Buyers, sellers, and agents are closing out sales, but the total number of pendings (above) is plunging because new escrows are running about 50% of normal.
Last week we had 31 new pendings, and I thought we’d be lucky to have half that many this week. But we had the same 31 new pendings this week too, and now that realtors were declared essential workers, we can go back to work if we have serious clients to help.
Last week we had 59 new listings, and this week we had 63 when we should have been hitting 100 or more – so new listings are down about 40%.
Remember seeing the furniture in the garage at our new listing? It was from our stager, who has had 15 cancellations this month. The staging truck came straight from unloading a bigger house, and because their warehouse is so full, they had to leave the extra furniture there while she is scrambling to get additional storage space.
Sellers are as leery about the market as the buyers are, which could lead to the Big Stallout – though sales could be hampered by having to cope with our toilet-paper tragedy:
I’ve been convinced for years that we can sell homes by video, and the coronavirus will present that challenge to us now. If agents can be handy with their phone, a decent representation can be made that should be enough to get buyers to make offers – and we’ll figure out the rest: