Many Torontonians remember the Toronto real estate market crash of the late 80’s - early 90’s and fear the current market may be due for a similar fate.  Some fundamental differences do exist:

1) The current home prices in Toronto are far more affordable than in the late 80’s and is inline with-in a normal range

2) The overall trend line for prices has been consistent over the last 15 years and the current market prices are inline with the trend

Realty Times explores what happened with the recent American housing crisis and what needs to be done to prevent such a meltdown. David Fletcher’s interviews Harold Green of Central Showplace in a article that sheds light on the America Need for A Trust-Based Mortgage System.

Here are some experts from that interview:

RT: What caused this recession?

There is always going to be a reason that people point to when the economy slows down. I believe that most people would agree that a credit crunch caused this. The credit crunch was caused by too much easy credit inflating the price of everything including housing. It ended when lenders, for all practical purposes, quit lending.

RT: When do you think it will turn around?

It will turn around when liquidity returns. Many of the funds that were the tried and true sources of liquidity were virtually put out of business when the bubble burst. These funds took years to create and they will not suddenly re-appear.

RT: How long do you think it will take to rebuild the funds?

It will take years for these funds to rebuild. Until then, we will have to rely upon the sources that are available and they are going to be limited to banks that are solid and programs that are sponsored by the government.

RT: What can we expect from banks in the near term?

You should expect banks to move to more secure business models where taking risk is removed and replaced with more banking fees. Qualifications will tighten and the cost of borrowing will be significant. This will relax and get back to a normal market when the alternative sources of capital become healthy again.

RT: What does a ‘normal’ market look like?

A properly balanced money supply will enable reasonable people acting reasonably to acquire assets for reasonable prices and obtain reasonable financing from reasonable lenders. Right now the source of funds to create liquidity in the markets is pretty much going to be provided by the FED, the government and foreign investors.

RT: How did we get where are today?

From what we see from the sidelines, the lenders created this situation. Traditionally the people that are on the front line writing the paper, approving the loans and the lender’s themselves, are compensated based on their ability to write good loans, build and maintain profitable loan portfolios and make some money servicing those accounts. There is nothing wrong with that. It is a well established, proven business model. This model changed.

RT: How did the lender model change?

Simply put, the primary focus on how to make money in the mortgage market changed for some big lenders. While there were a number of factors involved, the sudden and significant demand for mortgages that came from the Wall Street was the straw that broke the camel’s back.

RT: How so?

Lenders saw this demand and rushed to fill it. Some of these lenders created programs that never existed before to get the paper to satisfy the hunger that arose for the mortgage-backed securities. These investments secured by first mortgages, sounded like a safe place to invest.

RT: The demand for mortgage-backed securities caused the problem?

This demand created an opportunity for companies to potentially generate huge profits by simply writing and selling loans. If they really wanted to be in the business, they could also build and keep a large loan servicing business that in normal times would not have been possible.

RT: It sounds like the new products helped no one but the lenders.

Lenders created new mortgage products that put a lot of investor’s money into the mortgage market and that money simply should not have been available. People that did not have the ability to repay were getting mortgages that they could not afford.

RT: The Lender, Not The Homebuyer, Created The Market?

You might say that. The ever increasing need for more and more paper to satisfy the appetite of the mortgage-backed securities that Wall Street was selling so quickly meant that the lenders that participated in this program needed to create a market.

RT: How did they do this?

They did this by marketing new mortgage products that were outside of the norm. They effectively relaxed lending rules to accommodate higher risk mortgages.

RT: The government did not have the authority to regulate this, true?

This unregulated transactional-based profit center was one of the primary factors fueling the housing bubble. They transferred the entire risk for the loan to the investors that bought the mortgage back securities and kept the profit center for servicing.

RT: How could this risk be minimized?

The incentive to take unreasonable risks would be greatly reduced if the pay check of the people writing and approving the loan was based on the quality and performance of the loan. For instance, fees should be earned and paid out over the term based on performance. Compensation should be reduced if the loan defaulted or if it was terminated.

Visit Realty Times for the complete article.

With the Canadian Looney almost at par again with the US dollar, the flock of snowbirds chasing the sun just keeps on growing. The National Post reports on some of tax implications to watch for when looking to buy a US home.

“Business owners who may be weighing the costs and benefits of purchasing a condo or home, or other U.S. property such as shares, must remember to factor in any applicable U.S. taxes.”

Read more: http://www.nationalpost.com/homes/story.html?id=2645811#ixzz0iD16ElED

More Related Articles:

• Taxation on Sale of US Real Estate
• Taxation for Rental of US Real Estate

NAR mailed an eight-page questionnaire in July 2009 to a national sample of 120,038 home buyers and sellers who purchased their homes between July 2008 and June 2009, according to county records. It generated 9,138 usable responses.

“Tax incentives, record high affordability conditions and a pent-up demand brought a record share of first-time home buyers into the market,” he said. “These buyers are critical to housing and a general economic recovery because the market always heals from the bottom up – they absorb inventory, free existing owners to make a trade and stimulate related goods and services.”

“It’s interesting to note the last cyclical peak of first-time home buyers was during the last noteworthy economic downturn, with first-time buyers starting the chain reaction that led the nation out of recession,” according to Paul Bishop, NAR vice president of research.

The number of first-time home buyers rose to 47 percent of all home sales from 41 percent of transactions in last year’s study, and was the highest on record dating back to 1981. The previous high was 44 percent in 1991.

The profile shows the median age of first-time buyers was 30 and the median income was $61,600. The typical first-time buyer purchased a home costing $156,000, down from $165,000 in the 2008 study, and plans to stay in that home for 10 years.

The Pending Home Sales Index based on contracts signed in September, rose 6.1 percent to 110.1 from a reading of 103.8 in August, and is 21.2 percent higher than September 2008 when it stood at 90.9. The gain from a year ago is the largest annual increase on record, and the index is at the highest level since December 2006 when it was 112.8.

“What we’re witnessing is a rush of first-time buyers trying to beat the expiration of the tax credit at the end of this month,” he said. “Home values will stabilize sooner rather than over-correcting. That, in turn, will mean wealth stabilization for the vast number of middle-class families and lay the foundation for a durable economic recovery.” according to Lawrence Yun, NAR chief economist.

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.

A forecast for housing and the economy will be released November 13. Existing-home sales for October will be reported November 23 and the next Pending Home Sales Index will be on December 1.

Here are a few pointers to select a property that is desirable to potential short term renters and long term tenants.

• Speak to local rental agents. Real Estate agents who specialize in rental properties have a clear understanding of what home renters look for in both long term and short term vacation home rentals. Agents who focus on buy and sell of properties often consider rental transactions too time consuming and may not provide investors with the most relevant information.
• Compare prices and levels of services offered by property management companies in the area if you do not live in the same city. Investigate if the agents or companies that specializes in short-term rentals in the area. Making contact with local handyman is essential as rental properties experiences more wear and tear then your own home.
• Conduct you own research to find out where the demand is. Read local newspaper classified Ads, visit short-term rental websites, and drive around local tourist attractions. This will give investors solid information on what is the most popular, in which area and for what prices. Try to locate a property with at least two attractive attributes such as “view”, “proximity to theme parks, golf course”, “beach side”, “Lake front”, “fitness facilities”, etc.
• Do not judge a property based on peak season rental income alone. Collect information on off-season rental as well. Investors must balance the potential income gaps between full price peak season fees, off-season discounted rate, and non-income months during vacancies and owner’s self -enjoyments.
• Talk to an accountant to verify that the income you can realistically expect to receive is appropriate for the home’s purchase price. More importantly, evaluate your financial position carefully to see if you can afford the investment property after all taxes, agent’s fees, maintenance fees, regular property upkeeping and unexpected expenses.
• If the targeted area attracts lots of senior citizens, one-level living may be the best choice. Avoid homes where renters must climb a flight of stairs to reach the entrance.
• Look for a property within a reasonable distance of shopping and area attractions. Check to see if it is accessible by public transit system and if parking is available.
• Find a well maintained home, or at least one that does not need a major renovation. Investors must bear in mind that a Non-attractive vacation property may not generate the desired occupancy rate and level of income.
• Before buying a home in developments, make sure the restrictive covenants allow rentals.
• Purchase home insurance and do disclose that it will be used as a vacation rental home. Insurance companies can refuse to compensate the property owner if the purpose of use was misrepresented. Investors must protect themselves against possible damages and accident claims.

Rental properties can be a good investment, taking these simples steps can ensure this process go more smoothly and the return more profitable.

Foreclosures and short sales in US Real Estate seem to be great deals, but let the buyer beware: You could be buying a money pit.

A foreclosed home is bought as is and will not have the history available that a seller would be able to give you. This means you will buy the home and accept the flaws it may have; in many cases the former owner will have ceased taking care of it before the home went into foreclosure. Remember you’re dealing with people with big financial problems and you don’t really know what you’re getting.

Buying a foreclosed home will often result in additional waiting time as well as work. Also remember you need to have cash on hand because of the short time frames involved in closing.

Do your homework:

• Title searches
• Hidden leans and claims
• Damage from disgruntled homeowners
• Hidden maintenance issues
• Unpaid taxes

The US Real Estate market has been in decline for almost 3 years. Despite what many analysis believe will be a slow recovery, there are signs that 3 years of pent up demand and current low interest rates can start a very fast recovery.

The economic environment is going to get better based on the stimulus packages and the Fed easing. This will intern provide the fuel needed to propel the depressed US real estate market forward very quickly.

An example can be seen in Canada, while in the middle of a recession, Canada is also experiencing a major housing boom. Low borrowing costs, more affordable prices in many markets and some pent up demand after the fall and winter sales freeze provided heavy-duty support for housing. The Canadian national residential average price in May reached the highest monthly level on record.

The major factor holding down the US real estate is liquidity; preventing many would be homebuyers from getting the financing they need. Once liquidity is available to the US market, the homes sales will have all the ingredients needed to propel the US real estate market higher much like the Canadian market.

Signs are already starting, the National Association of Realtors said that sales jumped 7.2 percent to an annual rate of 5.24 million units, the highest since August 2007, beating market expectations for a 5 million unit pace. Sales were at a 4.89 million pace in June.

July’s percentage increase was the largest monthly gain since the series started in 1999 and marked the fourth straight monthly advance. The last time sales rose for four consecutive months was in June 2004, the NAR said.

The release of housing start data on June 17 has sparked a furry of responses on the Internet. Some commentators are horrified by the increased number of housing start while others are seeing the data as a sign of real estate market bottom.

One side argues that the market is currently over-supplied with months of existing inventory to consume as well as hundreds of thousands of homes under foreclosure. Adding more supply to the market would only drive prices down further and create more chaos.

In the West, housing starts jumped and incredible 28.6%, followed by the South with a 16.8% increase and the Midwest with a 11% increase. In absolute terms, overall starts were at a seasonally adjusted annual rate of 432,000 in May vs 454,000 in April. However, reader of this data must bear in mind that April suffered a significant drop from March data.

Most of the national wide increase came from multi-unit structures (Condos and Apartments) which is a very volatile number. Comparing year over year data,multi-unit homes are still down 54.6% and single family start are down 40.9%. Hence it is difficult to call this short term rise in housing start a “rebound”.

“Residential real estate has finally found a floor”, Jim Cramer told CNBC viewers on Tuesday.

The cheering camp argues in addition of the jump in housing start, the Building Permits also showed encouraging increases.. The South and the West jumped 17% and 29% respectively. They believe the Building permits is a more accurate indicator to the market’s future. This camp is confidant that the government’s stimulus package, inflow of immigrants and capital from foreign bargain hunters will ease current condition and results could be seen as soon as the end of 2009.

Has the US real estate market turned around?

Despite the different reasoning of each camp, both sides agree that the housing start data alone may not imply a bottom in housing prices. But both sides agree the downward spiral of the US real estate market have eased in the near term and further data is needed to see if this temporary stabilization can be sustained.