Maryland Real Estate Update

Although nobody truly knows where the bottom or top of anything is until after the fact, this is a compelling argument that the turn is not too far off in the distance.  Between the combination of built up demand, low interest rates, and the fact that we will know who will be the new President in about 6 months, this may be the best buying opportunity to come along in a long time. 

Even though the national housing outlook has continued to deteriorate this spring, which is normally the peak home buying season, housing is expected to start climbing into positive territory before the end of the year in some parts of the country, according to NAHB’s state and top 100 metro housing starts forecast for 2008-2009.
Continuing turmoil in the credit markets and a weakening economy guarantee that “housing markets will face another challenging year in 2008 before any meaningful recovery takes hold in 2009,” the NAHB forecast says.
The credit market crisis alone, which started with last summer’s subprime mortgage meltdown and has since resulted in a broad-based mortgage credit crunch for prospective home buyers, has depressed housing sector activity by an additional 30%, NAHB economists calculate. As a result, housing permits nationwide have plunged to only 37% of their levels at the height of the boom in 2005.
“Anticipation of further declines in house prices in many markets will keep demand soft and additions to supply minimal in the near term,” the forecast says. “Foreclosures threaten to dump additional houses back into markets with already bloated inventories of unsold homes.

“But the level of distress in local and regional housing markets is far from uniform. While the annual figures will be negative for most markets, our forecast is for recovery in a number of areas by the fourth quarter of 2008.”
The Northeast will be the first to emerge from the current housing correction, with several states turning the corner in the third quarter and most by the fourth, according to the forecast.
“While some of these markets experienced rapid price appreciation over the decade, the largest markets — New York, Boston and Philadelphia — avoided the extent of over-building that accompanied the price run-ups in other markets,” the study says. “The absence of large unsold inventories will help to mitigate the downward pressure on prices that will drag out the recovery process in markets that have similarly elevated housing prices but also have large inventories.”
A growth patch for single-family housing starts in the Northeast during this year’s fourth quarter encompasses all of the New England states and extends into New York, New Jersey and Maryland in the Mid-Atlantic region. “Moving away from the eastern seaboard, markets in the western and northern parts of these states experienced more moderate house price appreciation and so are less vulnerable to price corrections and inventory problems,” the report says.
Next in line for a regional housing recovery is the South, with the notable exception of Florida.
“Housing markets in Texas, Atlanta and parts of the Carolinas performed well during the housing boom,” the forecast says, “resisting the excesses that have come back to haunt other markets.” These markets weathered the onset of the cyclical correction in the industry in 2006 better than most, but they did feel the negative repercussions of 2007 and will experience a mild 2% decline in single-family construction in this year’s final quarter before returning to robust growth in the first quarter of 2009.
Most housing markets in Florida will continue to struggle through the middle of next year, NAHB predicts. “These markets have been the most volatile through the boom and bust of this housing cycle and will be the slowest to recover from the heights of speculative excess,” and they have also been hard hit by escalating foreclosure rates.
Pensacola, where prices and production stayed closer to historical norms during the boom years, and Jacksonville, where production surged but price appreciation was more restrained, will experience weakness this year but are expected to display more strength in 2009 compared to other Florida markets.
Although the Midwest on the whole is expected to move into a recovery mode next year, prospects are a bit divided between the region’s eastern industrial states, which are projected to experience further declines in the second half of 2008 as the result of ongoing economic weakness, and the western farm states, which will show signs of improvement earlier stemming from flourishing agricultural commodities.
The West will be the slowest to recover, according to the NAHB forecast.
“This should not be surprising since this region is dominated by Las Vegas, Phoenix and markets in California,” the forecast says. “These markets join the Florida markets as among the most troubled in the nation. Over-production, double-digit house price appreciation, heavy reliance on subprime mortgages and rapidly rising foreclosure rates were staples of these markets through this housing cycle and most of these markets are expected to decline through the end of 2009.”
Levels of excess in western markets where prices have been on the decline are an almost certain indicator of further price erosion, the study says.
Notable exceptions to the relatively gloomy outlook for the region include:

• New Mexico, where production and price growth have been moderate and subprime mortgages and foreclosures have remained below the national average
  
• Colorado, where production and prices remained restrained, subprime borrowing has been high but foreclosures have so far been low
  
• Idaho, where production spiked during the boom put price appreciation remained modest, and subprime mortgages and foreclosures have remained low
  

The IRS does recognize four situations in which cancellation of debt will not result in tax liability for the seller. A seller may avoid tax liability:

• When the borrower receives a bankruptcy discharge and the deficiency was included in the bankruptcy
• When the borrower is insolvent at the time of the cancellation of the debt. Insolvency would occur when a borrower’s liabilities exceed assets. Note that seller would have to prove this insolvency to the IRS when filing a tax return.
• When the debt was secured by a nonrecourse loan. Under a nonrecourse loan, the lender does not have the legal right to collect a deficiency judgment from any assets of the debtor not pledged to secure the loan. While most home mortgages are do not fall into this category, purchase money loans on a person’s residence are nonrecourse in some states.
• When the tax liability from the cancellation of debt on an investment property can be offset against other business liabilities and expenses. This exception does not apply to properties occupied as a residence by the mortgagor.

In many short sales, a seller would be able to qualify under the first two of these exemptions, especially since it was almost certainly necessary to show financial hardship in order to convince the lender to agree to a short sale. However, it is the seller’s responsibility to notify the IRS why the amount in the 1099-C should not be counted as ordinary income. Otherwise, the IRS will consider the forgiven debt as income and penalize the seller for unpaid taxes.