Help for Homeowners – Understanding the Making Home Affordable Program

Michelle had lived in her southeast Wichita home for 15 years, but when she emerged from a bankruptcy in January, her bank informed her that she had missed $9,000 in house payments in recent years.

Michelle, who didn’t want her last name used, was terrified she would lose her home. She considered going back to bankruptcy, but the prospect upset her. Her bank told her there might be another way: the federal government’s Making Home Affordable program.

“It’s where my kids grew up and where I have a room for my grandkids,” she said. “I don’t know why I fought and struggled so hard to keep it, but I didn’t have anywhere else to go.”

Making Home Affordable pushes the nation’s largest lenders and loan servicers to lower interest rates for existing or refinanced mortgages. Few local banks are involved in the program—typically, because they no longer own or service the mortgages they originated—but many in Wichita’s banking and real estate industries are following the effort to cushion the shock of foreclosures on the housing market.

As of October 2009, about 650,000 households nationwide enrolled in the program on a trial basis and only about 1,400 nationwide had made it to permanent status. But the government is accelerating that, announcing plans to convert 375,000 homes into permanent status by the end of the year. The mortgage banking industry added that it also has modified nearly 1 million mortgages in 2009.

Even so, the number of foreclosures continues to rise here and in the nation.

In the Wichita area there were 2,823 foreclosures scheduled through November 2009, up 46% from the first 11 months in 2008. And nationally, the industry said that 2.4 million homes entered foreclosure during 2009 and 782,000 of those homes were sold off through foreclosure. Those don’t include homes sold in distressed sales such as short sales or when deeds are just handed back to the bank.

The program has garnered plenty of criticism over the last six months for not doing enough to halt the foreclosure epidemic. The program is inherently limited. It is voluntary for the banks and helps only the moderately troubled, particularly those with subprime loans. It is best suited for those who are working but whose payments are just too high for their income.

Those who are truly desperate, such as those who are laid off and have no savings, do not qualify.

Making Home Affordable has two pieces: lowering interest rates on an existing mortgage and refinancing with a new mortgage. A key point is that the program does not lower the principal, only the interest rate.

Here are some guidelines on who may be eligible:

-The loan is owned or guaranteed by Fannie Mae or Freddie Mac. Links to check on this can be found at http://tinyurl.com/yhfkjrv.
-Not more than 30 days late on a mortgage payment in the last 12 months.
-The amount owed on the first mortgage does not exceed 125% of the property’s current market value.
-A reasonable ability to pay the new mortgage.
-The refinance improves the long-term affordability or stability of the loan.

Applicants need to bring, at a minimum, proof of income, two years of tax returns, and information on other debt, including credit cards, although many applicants have complained of lengthy and often frustrating demands for more information.

Banks are also modifying loans outside of the government program. Capitol Federal Savings, one of the few banks to hold onto its loans, said it has modified some mortgages. “We’ve had some requests for an abatement,” said Jack Huey, the bank’s chief lending officer, “but there has to be some possibility of repayment. We don’t mind helping out, but if they have no ability to repay, that doesn’t help anyone.”

Sources: Dan Voorhis and Getty Images

Move-Down Buyers Can Be Eligible For Tax Credit Too

Move up, move down, move sideways; it just doesn’t matter. Whichever direction you move, financially, you may still qualify for the new tax credit available to current homeowners. It is unfortunate that the credit has too often been characterized as a credit for “move-up” homeowners. The phrase carries the implication that the new home must cost more than the sale price of the former one. Indeed, even the November 6 White House Press Release said that the credit would be available to qualified homeowners who “wish to step up to a new home.” Same implication.

So, it is worth emphasizing that the credit is equally available to homeowners who are moving down, cost-wise.

The move-down homebuyer is not an unusual phenomenon. For years retirees have been known to move from a larger home to one that is smaller and often less expensive. Moreover, it is reasonable to think that current economic conditions may lead to even more move-down buyers. Just as thousands of families have found it necessary or desirable to downsize with respect to their cars and their general lifestyle, so it may be when it comes to considering the costs of owning and maintaining a larger house than they really need.

The same requirements apply to both move-down and move-up buyers.

First of all, the previous home must have been occupied as the buyer’s principal residence for at least five consecutive years out of the past eight years. Two examples: (1) Suppose that during the past eight years you occupied the property for three years, then rented it out for two years (perhaps because of a job transfer or temporary assignment), and then occupied it again for three years up until now.

Even though you had occupied the property as your principal residence for six of the past eight years, you would not be eligible because you had not occupied it for five consecutive years. (I’m not saying this makes sense; I’m just reporting on the requirements.) (2) Suppose you bought a home eight (or more) years ago, you occupied it as a principal residence until two years ago when you sold it. Would you qualify? Yes, because you had occupied it as a principal residence for at least five consecutive years of the past eight.

There are important issues of timing as well. You must have purchased (that is closed on) the replacement home sometime after 11/6/2009 and before 4/30/2010. With one exception: the new home will also qualify if you had entered into a binding contract no later than April 30, 2010 and you closed no later than June 30, 2010.

The time the previous home sold doesn’t matter. Indeed, it doesn’t even have to be sold. You might, for example, keep it as a rental.

The tax credit is for 10% of the purchase price up to a maximum credit of $6,500 for joint filers and $3,250 for those filing separately. There is a full credit for singles whose income does not exceed $125,000 and for couples whose income is no more than $225,000. A phase-out applies to higher incomes up to $145,000 and $245,000 respectively.

The cost of the new home may not exceed $800,000. The new home must be used as a principal residence for a three year period subsequent to closing, or else the credit must be repaid. This program won’t help everyone, of course; but it’s pretty nice for those to whom it applies.

Sources: Bob Hunt and Getty Images

Finally a Real Mortgage Analyst Testifies Before Congress

Laurie Goodman, veteran MBS analyst and now a senior managing director at Amherst Securities, served up painful facts about mortgage defaults at a House Financial Services Committee hearing last week concerning “The Private Sector and Government Response to the Mortgage Foreclosure Crisis,” Available here.

An ace HousingWire reporter already scooped this story, but I’ve been itching to comment since I watched the hearing. Goodman brought facts and a spirit of inquiry to the policy discussion that bear celebrating. As a matter of fact, when the Committee released the names of witnesses the night before the Hearing, I’d felt the kind of hope for Congress I hadn’t felt in months. Someone without a political or corporate agenda, having detailed data on mortgages and years of professional experience interpreting it, was going to testify. Psych!

Goodman is a real mortgage analyst. Not an staff economist for a regulator justifying its performance (or existence) or a university professor opining from 30,000 feet (typically with an ideological predilection for the right or the left side of the issue), but someone who had their arms up to the elbow in actual loan level performance, who knew how to look in the weeds for evidence of borrower motives, servicer performance, the determinants of trends.

There’s a number of other disciplined and creative analysts on both the buy and sell sides of the MBS and ABS markets that the Congress and the Administration ought to have been listening to while dreaming up their schemes to heal the mortgage and housing markets, save financial markets from themselves, and put financial institutions back on the straight and narrow. So indulge my enthusiasm and let me highlight some key points in her testimony.

First, Goodman demonstrates how strong a driver of defaults negative equity is. Her testimony is based on a study of loans that were 30 days delinquent 6 months earlier. Then, Goodman looked forward 6 months, for loans that had gone on to be at least 60 days delinquent. Out of prime borrowers originally 30 days delinquent with 20% equity, 38% were 60 or more days delinquent. Borrowers with less equity performed worse. For example, a full 75% of the prime borrowers originally 30 days delinquent with significant negative equity (141% – 150% loan to value) were 60+ days delinquent.

Why does Goodman study borrowers 30 days delinquent (rather than currrent, for instance)? To demonstrate how important a factor negative equity is in the borrower’s decision to default. In addition, this approach keys on the fact that cure rates are much lower and transition rates into successively worse delinquency rates are much higher than in previous credit downturns.

Here’s how Goodman narrates current events: “Most borrowers do not default because of negative equity alone. Generally a borrower experiences a change in financial circumstances, misses a payment on their mortgage and then re-evaluates … If the home has substantial negative equity, they chose to walk.”

By focusing on the transition from 30 days delinquent to seriously delinquent, the testimony underscores something else Goodman and her fellow MBS analysts have pointed out for a while: time is on the side of defaults, and waiting for a delinquent mortgage to self cure in this housing market is a losing game.

Goodman also took on the widespread, but mistaken notion that unemployment is the primary driver of delinquency, default and home loss. (Indeed, a committee member set her up for a dunk ball, by stating “there is no better foreclosure mitigation plan than a job.” I should clarify, he was using his three minutes to grandstand against the Administration’s stimulus, spending and tax programs as “job crushing” disincentives to job providers, not demonstrating his – or even his staff’s – understanding of the dimensions of the foreclosure crisis.)

Drawing on her recent report, “Negative Equity Trumps Unemployment in Predicting Defaults,” (covered by HousingWire.com at publication: Read here), Goodman made three key points:

1. The total ratio of mortgage debt to home value (CLTV) is critical. In areas with low unemployment, defaults rates of Prime and Alt-A loans were at least 4 times greater for borrowers underwater by 20% than for borrowers with at least 20% equity in their homes.
2. Comparing loan performance and unemployment rates at the local level (as can be done with loan level data), Goodman found all borrowers with positive equity performed similarly regardless of the local rate of unemployment.
3. When borrowers have negative equity – as measured by CLTV, to include second mortgages – unemployment plays a role, but a minor one compared to negative equity. For example, borrowers with CLTV greater than 120%, default rates were 50% to 100% higher in a high unemployment area than in a low unemployment area.

Summing it up, unemployment may be a catalyst, but it is not a driver of defaults.

Based on this research and a lot more like it, Goodman is comfortable telling the government that if they want to improve the success of HAMP, they need to move principal reduction higher in the modification waterfall and relax the focus on payment reduction.

Furthermore, to design a successful principal reduction program, “the Administration has to address the second lien problem head on” and provide for extinguishing the second lien. A couple of approaches could work, including “paying an extinguishment fee” or allowing banks holding second liens to take the loss over time rather than all at once.

Let me explain. The second lien is an obstacle to modification because it jumps to first position when the first mortgage is modified. This is a disincentive for the second lien holder to cooperate with the first lien holder in a modification and agree to re-subordinate their loan or reduce the principal amount and re-subordinate. The HAMP second lien program, 2MP, introduced in August, addresses some of these problems but does not yet seem to be operational. Unfortunately, as Goodman pointed out in her testimony, when it does come online, “it will merely make the second lien pari passu to the first lien.”

This obstacle is not reduced by the fact that the four largest servicers (BofA, Wells Fargo, Chase and Citi) are also the largest holders of second lien residential loans. According to data compiled by Goodman last March, they own $94 billion closed-end seconds, $397 billion home equity lines of credit, and about $653 billion in first lien loans.

At first glance, these concentrations seem to raise the odds that the first lien servicer is owned by the bank that holds the second lien. However, in March Goodman calculated that, even if every first lien was accompanied by a 25% second lien, only about $163 billion of the top servicing banks’ second liens would be accounted for.

Last Word

Goodman acknowledged that her testimony had been focused exclusively on mortgage modifications. But she offered to return to work with the committee on mortgage modification as well as the broader set of measures that must be taken if the capital markets are to function efficiently again.

That was a good offer, one other congressional committees noodling the financial markets debacle should take up as well. And if they do, they should invite investment analysts and strategists from other investment firms. Having come up through the ranks of mortgage research myself, I am willing to vouch they are far less likely than the usual suspects at hearings to serve up a dish of cant and self-justification.

Sources:Linda lowell and Getty Images

Turn on the home-equity tap again

As credit starts up at a trickle, getting a home-equity line can be a smart move – as long as you use it the right way.

The home-equity line of credit fueled thousands of extreme kitchen makeovers during the real estate boom. But the housing bust and the credit crisis stopped the HELOC party with a vengeance: Tens of thousands of homeowners had their lines cut or frozen, and most lenders stopped issuing new ones altogether.

But don’t give up on the HELOC yet.

As housing prices and the economy begin to stabilize, it’s coming back. Many lenders are writing lines again, says MortgageBot, a company that processes real estate loans, albeit half as many as it did during the boom days. True, HELOCs are no longer the screaming deal they once were. Lenders used to offer the lines for half a percentage point below the prime rate (currently 3.25%), but now the cheapest you’re likely to find is prime plus a point or so. Most lines also have a floor, or the lowest possible rate they can go, of about 4%.

That said, if you have more than 20% equity in your home, a line of credit can still be a relatively cheap way to borrow — and it’s a far better source of emergency cash than your credit card. “Think of a HELOC as a belt and suspenders,” says Oakland money manager Marjorie Bennett. To make sure you get the most out of it, follow the rules below.

Don’t borrow the max

The days when banks would lend you 100% or more of the value of your home are long gone, of course. Most lenders won’t approve a line that brings your total housing debt to more than 80% of your home’s value, and you’ll need a minimum 740 credit score to get that much.

But there are good reasons to borrow less. Depending where you live, you probably can’t rely on a rising real estate market to knock down your housing debt. You should aim to keep your total monthly debt payments at no more than a third of your take-home pay. Keep in mind that as the economy recovers, HELOC rates will rise too, so borrow only what you could keep up with if rates jump, says financial adviser Don Whalen of Alpharetta, Ga. If you were to take out a $75,000 HELOC today, for example, you’d owe $344 a month in interest; if rates rise a couple of percentage points the monthly tab will jump to $469.

Use it the right way

By now you almost certainly know that using your home-equity line for frivolities like vacation packages and plasma screens is asking for trouble. Other traditional uses may or may not still make sense:

Home improvements.

Tapping your HELOC to fund necessary projects like a roof replacement is still worthwhile: You can deduct interest on up to $1 million when you use HELOC funds to improve a first or second home, which in turn sharply lowers the real cost of the loan. Renovations that won’t necessarily pay for themselves, like a media room or a deluxe kitchen? Take a pass.

Car loans.

At a 7.3% rate, a three-year new-car loan costs a lot more than a line of credit. A HELOC can be a good substitute — as long as you expect to pay it back within a few years. You may be able to write off the interest. Though the rules are complicated, in general you can deduct interest on a HELOC for up to $100,000 of non-home-related uses.

Student loans.

Max out government-backed Stafford and PLUS loans first. The interest on these loans is usually tax deductible, and they often offer flexible repayment plans. But if you have to take a private loan, a HELOC can be a cheaper alternative.

Small business.

Entrepreneurs have long used HELOCs as easy business lines of credit to smooth out bumpy income. Steer clear of that unless you’re confident the business is solid, says Newtown, Pa., financial adviser Jonathan Heller.

Make sure you keep it

If you’re going to use a HELOC as an emergency fund, you have to make sure your line isn’t pulled out from under you. Most banks have stopped freezing existing HELOCs, but that could happen if real estate values drop in your neighborhood. Your best defense is to use your line regularly, even if you take out just $500 at a time. Even during the worst of the credit crisis, issuers weren’t freezing or closing HELOCs that were in use as long as the homeowners weren’t underwater, says financial adviser Kevin Reardon of Brookfield, Wis.

If you think you’ll need to use your HELOC in a few months and are concerned that it could get chopped, borrow the funds now and park them in an FDIC-insured account to keep them safe. Then start paying the loan back ASAP.

Sources:Linda Stern, Money Magazine and Getty Images

Cement Industry Facing Weak 2010

Although recent economic news and activity may suggest a technical end to the “Great Recession,” the conditions facing the construction industry are likely to remain weak for another year or more, causing a drag on cement consumption, according to the most recent economic forecast from the Portland Cement Association (PCA).

“Given this weak outlook for private sector construction, any near-term turn in overall construction activity will be dictated by public construction,” Edward Sullivan, PCA chief economist said. “Unfortunately here state deficits are sterilizing the spending impacts of the federal economic stimulus plan.”

According to the Center on Budget and Policy Priorities, 33 states are in severe deficit positions for fiscal 2010, compared to 21 for fiscal 2009. More than 90 percent of all highway and street spending is put-in-place by state and local governments. State fiscal conditions influence discretionary public construction spending and the harsh economic environment facing state and local governments may result in a double-digit decline in discretionary highway/street spending during 2009, Sullivan said.

“Reductions in state spending coupled by the slow release of stimulus funds suggest the cement industry will see very little second half stimulatory impact during 2009. However, more than five million tons of ARRA highway cement consumption should materialize in 2010 and 2011.” The cement industry troubles come on the heels of other disconcerting construction cost news. According to Turner Construction Company’s Turner Building Cost Index, which measures non-residential building construction in the United States, costs have decreased 2.07% from the Third Quarter, continuing the decline that began in the First Quarter of this year. Construction costs have decreased by 12.62% since the beginning of the year.

The decrease in construction costs is reflective of decreased private sector development and investment, said Karl F. Almstead, the Turner vice president responsible for the Turner Building Cost Index. “Commodity prices have slightly increased due to global demand, but have not resulted in upward pressure on construction pricing.” Approximately 90% of Turner’s business is performed under contract arrangements where Turner provides extensive preconstruction planning services before the contract price is fixed and before construction starts. By providing preconstruction services and utilizing enhanced procurement strategies, Turner effectively manages the market risks associated with cost-related issues.

“The competitive condition in the building construction industry is driving labor to increase productivity, therefore, reducing labor costs,” said Almstead.

Turner has prepared the construction cost forecast for more than 80 years. Used widely by the construction industry and Federal and State governments, the building costs and price trends tracked by The Turner Building Cost Index may or may not reflect regional conditions in any given quarter.

The Cost Index is determined by several factors considered on a nationwide basis, including labor rates and productivity, material prices and the competitive condition of the marketplace. This index does not necessarily conform to other published indices because others do not generally take all of these factors into account.

Sources: Peter L. Mosca and Getty Images

Has the Housing Industry Hit Bottom?

Despite significantly lower traffic and sales this month, Southern California retained pricing strength and the majority of surveyed builders expect revenues to increase in 2010, according to John Burns Real Estate Consulting’s December survey of home builders.

“At this point, it’s clear that the extension and expansion of the tax credit weren’t enough to drive demand through the seasonally slow time of the year,” said Jody Kahn, a vice president with the firm. “This month’s survey results, backed by numerous channel checks and our Consulting team’s work in the market, confirm that buyers feel little urgency to buy homes today, and probably won’t until the tax credit expiration nears next Spring.”

This month’s survey consists of 264 home building industry executives from public and private companies. In total, their insight is reflective of on-the-ground conditions in 93 MSAs and 2,000+ communities.

Also of interest, 57% of respondents reported that they are planning for more revenue in 2010 than 2009, driven by increased community count, better orders and slightly higher prices. The most optimism came from the Northeast, Southwest, Texas and Southern California.

“If they are correct, and we believe they are, the trough for this cycle was 2009 for single-family starts, new home sales and new home prices,” said CEO John Burns. “That being said, the continued shift to smaller, simpler homes may drive the headline new home price down a bit, and the recovery will be slowed by rising distressed sales.

Conditions are likely to vary dramatically by submarket and price point, which we have addressed in our Land Acquisition and New Home Strategy report for 23 MSAs.”

Additional survey highlights include:

-Average net sales per community declined to 1.4 nationally from 1.6 last month, and from a recent high of 2.0 in September. Only the Southern Florida and Southeast regions reported increased net sales per community, while the Southern California, Midwest and Northern Florida regions reported flat net sales rates.

-The average unsold, finished inventory per community increased to 3.3 units, rising from a recent low of 2.8 units. We believe the rise is explained by aggressive speculative starts by a few builders who are betting on strong sales in the Spring. In addition, higher cancellations during November from sales that did not close within the original tax credit deadline were reported.

Sources: Realty Times and Getty Images

New Home Energy-Efficiency Incentives Could Boost Recovery

The National Association of Home Builders (NAHB) recently commended President Barack Obama as he proposed a new initiative to create jobs and make today’s homes more energy efficient.

In a recent speech that took place at a Home Depot in the suburban Washington, D.C. area, the president called on Congress to extend energy-efficiency tax credits for home owners as part of an $8 billion effort to reduce energy use.

“This is the kind of thinking that is going to get America back to work–and make a big difference in many home owners’ monthly utility bills,” said NAHB Chairman Joe Robson, a builder and developer in Tulsa, Okla.

NAHB estimates that 11,000 jobs, $527 million in wages and salaries, and $300 million in business income are generated by every $1 billion in new remodeling and home improvement activity. “That’s a huge impact just in the short run. And in the long run, the energy savings for participating home owners can be quite significant,” Robson said. “This also bolsters a very important message and something we have been saying for years: If we really want to make an impact on the nation’s energy use, we need to take significant steps to make the existing housing stock more efficient,” Robson said.

He pointed out that state and local home builder associations affiliated with NAHB can be instrumental in the effort to weatherize older homes and make them more energy efficient.

For example, the Builders Association of Minnesota served as the conduit for federal stimulus program funds provided to the state for its energy-efficiency programs. The association trained nearly 1,000 remodelers and other residential contractors and funneled the money to 1,300 Minnesota home owners to help them make needed improvements. Minnesota home owners got extra incentives for choosing projects like attic insulation, which some consumers don’t do because it’s something that’s not immediately visible, but when combined with incentives can bring a payback on utility bills within a year or two, depending on the climate.

“President Obama is right that that saving money is very attractive, and so is providing jobs,” Robson said. “These are efforts that the Administration should consider on a much larger scale,” he continued. “They provide employment, stimulate the economy and help us reduce our dependence on fossil fuels–that’s three great outcomes. NAHB can help make this happen all over the country.”

Last month, the White House Council on Environmental Quality invited NAHB to explain how home builders, product manufacturers and remodelers can be part of the Administration’s “Recovery Through Retrofit” solution with programs like Minnesota’s. “We’re anxious to help with these efforts,” Robson said. “It’s what our members do, and do well–and they all want to get back to work.”

Sources:RISMEDIA and getty Images

How to Budget for Home Maintenance

While buying a home is a huge financial expenditure, homeowners need to keep in mind that the spending doesn’t stop once the home is purchased. Whether you are moving into a new or old home, homeowners need to be aware of the ongoing maintenance that any home requires. Here, Dan Steward, President, Pillar To Post discusses what homeowners need to know when it comes to ongoing home maintenance.

It’s important for Realtors to remind home buyers that all homes—old or new—need ongoing maintenance.

First, buyers should understand the 1% rule. This rule postulates that normal maintenance on a home is about 1% of the value of the home per year. For example, a $250,000 home would require $2,500 per year to maintain. This would be enough to replace the roof covering…and then, a few years later, to replace a failed hot water tank…and then a few years more until a new central air system is required.

Then there is the 3% rule. Some experts say that home buyers should plan on spending 3% of the value of the home in the first year of ownership. This is because new homeowners will most likely have to buy drapes, blinds, a washer and dryer, a stove, maybe even a new roof covering. Also, new homeowners often customize the environment to their taste, so they need to budget for repairs, replacements and maintenance.

In addition, most home components have fairly predictable life cycles. For example, the typical life cycle of a high-efficiency furnace is 15 to 20 years. What this means is that most high-efficiency furnaces last between 15 and 20 years.

One way to know the extent of the maintenance needed and the costs to repair and/or replace items is to have a home inspection conducted. Home inspectors are required to let the buyer know if a component is significantly deficient or if it is near the end of its life cycle (service life), and a reputable home inspection company may offer up-to-date repair-cost guides to help clients with their planning.

Home inspectors work with Realtors and buyers to help them understand the issues that are found in the home, regardless of age, offering the right perspective and objective information. Home buyers need to understand that it’s normal for items in a home to wear out. This should be regarded as normal “wear and tear” and not necessarily a defect.

A good home inspection determines the current condition of the house, offering a report of all the systems and components in need of maintenance, service, repair or replacement.

example, consider a home inspection that uncovers that the heating system is old and requires replacement. A home buyer may see this as a huge problem. However, this problem may be the only item in the home that requires attention. If a buyer were to look at this situation in perspective, this home could be well above average—a home merely requiring a new furnace.

A good home inspection provides objective information to help the buyer make an informed decision. Knowing what items need to be budgeted for repair or replacement will help home buyers plan or negotiate better and not be stuck with unexpected costs of hundreds, or even thousands of dollars in the long run. Also, fixing these items will make a marked improvement on the performance of a home and minimize issues that could affect its future integrity…and value.

Sources: Dan Steward and Getty Images

Remodeling adds less to home resale values than it used to

Home remodelers are getting less bang for their bucks. For the fourth straight year, renovation jobs have added less to resale values relative to their costs, according to an annual Remodeling Cost vs. Value Report released this week by the National Association of Realtors.

The average remodeling job cost $50,908 in 2009 and added $32,497 to the value of the home, a ratio of 63.8%. That was down from a cost-to-value ratio of 67.3% in 2008, when the average was $49,866 and the added value was $33,568.

One common renovation, a mid-priced bath remodel, for example, runs an average of $16,142 and adds only $11,454 to the resale value of a house — recouping just 71% of its cost. In 2008, the same job cost less — $15,899 — and typically added $11,857 to the home’s value, recouping 74.6%.

The most financially successful jobs are smaller-scale, lower-cost renovations that improve the exterior appearance of homes. In this down real estate market, curb appeal is king.

“Once again, this year’s report highlights the importance of a home’s first impression,” said NAR President Vicki Cox Golder, owner of Vicki L. Cox & Associates in Tucson, Ariz.

Ron Phipps, a real estate broker in Rhode Island, said how the house looks from the outside is more important than ever.

“If you’re driving down the street and the house doesn’t have great appeal, it doesn’t matter how nice it is inside,” he said.

But here’s the kicker: Clients are savvier than ever in their shopping. Even though the costs of home improvements are less likely to be returned on resale than they have been in prior years, sellers may still have to bite the bullet and do the remodeling if they want their house to sell at all, he said.

“It’s kind of intriguing,” said Phipps. “Buyers are using the unimproved houses to negotiate lower prices, but they wind up buying the remodeled homes.”

So, if there are two similar houses in the area, buyers will use the listing price of the one that has not gone through a metamorphosis to get the seller of the renovated house to slash their price. Buyers want to pay for the caterpillar but get the butterfly.

Seller must play along if they want to make deals. “You get to sell the house more quickly if you do the renovations,” Phipps said.

Biggest pay-offs

The major job that returns most in resale value is an upscale replacement of siding using fiber-cement. The job costs an average of $13,287 but increases home value by $11,112, or 83.6%. A vinyl siding replacement returns 79.9% of costs.

Adding a basement bedroom is also fairly cost effective, averaging $49,346 but adding $40,992 in value, an 83.1% return.

“Increasing livable square footage with a new deck or an attic bedroom is usually more valuable than just remodeling existing space,” Phipps said.

The return on investment for some jobs varies greatly by region.

In New England, where winter are long and cold, vinyl window replacements reap a better return than they do in the warm South Atlantic region, where poorly insulated windows don’t mean as much expensive heat leaking away.

So, although replacement windows cost more in New England — an average of $11,155 — they add $9,152 to home values there, recouping 82.3% of their cost. In the South Atlantic states, they cost $9,705 but add just $7,417 to home values, 76.4% of their cost.

On the other hand, buyers in the South Atlantic seem to reward sellers for adding living space more than they do in New England. Maybe thrifty Yankees hate having to heat those extra rooms.

Finishing a basement returns 84.4% of its $55,357 cost in the South Atlantic and only 64% of the $65,715 New Englanders spend for the job.

Among the remodeling jobs faring the worst in return on investment were large, upscale kitchen remodels. They cost an average of $111,794 in 2009 and added $70,641 in recoupable value, just 63.2%.

That was down a whopping 7.5 percentage points from their 70.7% return on investment in 2008 . At the height of the housing boom, in 2005, upscale kitchen renovations returned more than 80% of their costs.

“A lot of the things that, historically, had huge value, don’t have as much today,” said Phipps. “If you want to redo a kitchen, it may no longer make as much sense to use upscale appliances — Viking ranges, Sub-Zero refrigerator. Buyers may not pay any more than they would for a home with GE appliances instead.“

Of course, most remodeling jobs are done to please homeowners. Any increase in home value is a bonus, not an end in itself. But for anyone thinking of selling in the near term, keeping an eye on the bottom line is always a good idea.

Sources: Les Christie and Getty Images

Home Price Expectations—Will They Rise?

According to a recent fourth quarter survey by HomeGain.com, 72 percent of Realtors believe that home prices will either stay the same (48 percent) or increase (24 percent) in the next six months. Despite that news, the study found that an increasing number of homeowners (41 percent) think that their homes should be listed 10 to 20 percent higher than what is being recommended by Realtors. In the third quarter of this year that figure was down to 38 percent and in the second quarter it was at 36 percent.
But the flip side of the coin shows that 62 percent of buyers think homes are still overpriced. According to the survey, that figure is slightly down from 64 percent in the third quarter but up from first quarter statistics (59 percent).

The national study surveys 1,000 current and former HomeGain Realtor members and was conducted between December 1 to 6. According to the study, 21 percent of those surveyed say that half of their transactions involved a first-time homebuyer. The extension of the tax incentives for buying homes is being credited. (Read my column: Extended Tax Credit for Homebuyers and Homeowners.)

In a statement issued by HomeGain’s Louis Cammarosano, the company’s general manager, said, “The fourth quarter HomeGain Home Prices Survey of Realtors shows that Realtors believe that the first-time homebuyers tax credit has driven sales and stabilized home prices, for now. Realtors, however, expressed concerns about the cost of the credit to taxpayers and whether sales will continue once the credit expires later next year and additional inventory hits the market.” The study also asked respondents “whether they approved or disapproved of President Obama’s performance so far—42 percent approved and 58 percent disapproved, unchanged from the third quarter and down from the second quarter when the President’s approval rating stood at 57 percent.

Another poll, the Rasmussen Daily Presidential Approval Rating Tracking Poll, published on December 11, 2009, stated that, “Overall, 47 percent of voters say they at least somewhat approve of the President’s performance. Fifty-one percent (51 percent) disapprove.” Still, respondents remain optimistic about the housing industry, “The vast majority of Realtors expect prices to remain the same or increase in the first six months of 2010,” said Cammarosano.

With more first-time buyers searching the market for homes, everything from short sales to foreclosures is being considered. And for sellers, estimates that as high as one in five of homeowners is underwater are causing them to take a hard look at their financial situation. Some are turning to an informational Web site called PayorGo.com. It offers a calculation service to help make the decision but doesn’t offer financial or legal advice on the site. The site aims to address this question, “Is it in my economic interest to walk away? You decide.

This calculator is just a tool to help. Numerous variables are involved but the biggest is probably your assessment of the future of housing pricing.” Interestingly, buyers may not be capitalizing on all of the available incentives and resources. In an article published in the San Francisco Chronicle in early December, Walter Zhovreboff, the administrative director of the Bay Area Home Buyer Agency (that promotes homeownership) said, Many cities have adequate funding to assist families here (with down payments) and we’re not running out of money. It’s phenomenally frustrating.

Some cities still offer down payment assistance for low-to-moderate income levels. Many of these loans are known as “sleeper loans” which provide a period where no money is initially needed to be paid toward repayment, then a moderate interest rate is applied and the loan is paid back over many years.

Sources: Phoebe Chongchua and Getty Images