Can you use the Obama 8000 tax credit for your FHA down payment?
Yes, No, Maybe So.

Last month on May 12th, Secretary of Housing and Urban Development Shaun Donovan created a fervor in real estate and mortgage industry when he announced in a speech to National Association of Realtors that FHA was working on an initiative to allow first time home buyers to use the 8000 tax credit created by the American Recovery and Reinvestment Act of 2009 (Obama 8000 tax credit) for their down payment on a new home. This was followed by a mortgagee letter related to the subject being posted on HUD’s website. Immediately real estate and mortgage professionals began to communicate this information to each other and to their clients. Unfortunately, within a couple of days, FHA retracted the announcement as there were a number of issues with the logistics and legality of the 8000 tax credit down payment plan.
In the weeks that followed, many articles were posted on the web with a variety of information regarding whether or not you could use the Obama 8000 tax credit as a first time home buyer down payment.

There was abounding speculation since FHA was quiet regarding clarification of whether or not a first time home buyer could use the Obama 8000 tax credit as a down payment. Finally, on May 29th, FHA re-issued Mortgagee Letter 2009-15 with details on how the Obama 8000 tax credit could be used by first time home buyers in conjunction with an FHA loan.
The following are highlights of the FHA program for the use of the Obama 8000 tax credit for first time home buyers:

Can the Obama 8000 tax credit be used for a first time home buyer’s down payment?
Yes, but only after the first time home buyer has provided the initial 3.5% FHA down payment. After that, additional down payment funds can come from the Obama 8000 tax credit. To be clear, a first time homebuyer can NOT use the Obama 8000 tax credit to meet the minimum FHA 3.5% down payment requirement.

Can the Obama 8000 tax credit be used to pay for the buyer’s closing costs?
Yes, a first time home buyer can use the Obama 8000 tax credit for closing costs that are normally associated with buying a home (e.g. lender fees, points, title fees, inspection fees, etc.).
How does the first time home buyer obtain upfront funds from the Obama 8000 tax credit to use to help buy a house?

FHA will permit FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local governmental agencies and instrumentalities to purchase the Obama 8000 tax credit anticipated by the first time home buyer. In other words, one of the aforementioned sources can loan the first time home buyer the money they expect to get resulting from the Obama 8000 tax credit for a regulated fee. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. The source of the loan can securitize the loan as a second lien on the house and may choose to require monthly payments or not. The IRS will not allow the second lien to have a balloon payment under 10 years.

How does the first time home buyer request the Obama 8000 tax credit from the IRS?
After the first time home buyer has bought the house …
the first time home buyer can wait until next year and file IRS form 5405 “First-Time Homebuyer” along with his or her 2009 tax return.
the first time home buyer can file IRS form 5405 with his or her amended 2008 tax return.
if the first time home buyer filed for an extension to the filing of their 2008 tax returs, they can submit IRS form 5405 along with his or her 2008 tax return.
Other resources regarding the Obama 8000 tax credit for first time home buyers.
Explanation of the original 7500 tax credit created by the Housing and Economic Recovery Act of 2008.

Summary of the new 2009 Obama 8000 tax credit created by the American Recovery and Reinvestment Act of 2009.

Answers to Frequently Asked Questions about the Obama 8000 tax credit for first time home buyers provided by the National Association of Home Builders.

Source: Best FHA Lender

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The Tax Benefits of Homeownership
Special Studies, March 27, 2009
By Robert D. Dietz, Ph.D.

Report available to the public as a courtesy of http://www.housingeconomics.com/

Purchasing a home is typically the largest purchase and among the most important financial decision a family makes. There are numerous factors that influence the home buying decision, and among the most important are the tax benefits that help offset some of the cost of homeownership1. Previous NAHB research has discussed the federal government’s (flawed) budget measurement and policy justifications for these housing tax law provisions. This article examines how these tax benefits reduce the cost of ho­meownership for individual homeowners and homebuyers for certain mortgage amounts and income levels.

Using the methods developed in the paper, a household, for example, with $80,000 in annual income who obtains a $200,000 mortgage will save on average $1,765 in the first year of homeownership. By the end of the fifth year of homeownership, the house­hold will save on average $8,607 on taxes, and this amount grows to $19,488 by the end of the average period ownership — twelve years. This stylized homeowner can ex­pect to save $21,650 in capital gains taxation, yielding a total benefit of $41,138 over the expected period of homeownership. Further, the paper provides variants of these calculations if the analysis allows the homeowner’s income to increase with their age and labor market experience. For example, the five-year tax savings for this homeowner increases to $9,723.

The paper also considers how these numbers are increased by the existence of the tem­porary $8,000 first-time home buyer tax credit. In the case illustrated above, the five-year tax savings estimate increases 82% from $9,723 to $17,723.

Homeownership Tax Benefits
There are three major tax benefits for homeowners: deductibility of mortgage interest, deductibility of real estate taxes, and the capital gain tax exclusion for principal resi­dences.2 Taken together, these benefits significantly reduce the cost of homeownership. Each represents a significant provision of law. According to the Congressional Joint Com­mittee on Taxation, for fiscal year 2008 the tax expenditure (approximately the size of the program in terms of tax savings) of the mortgage interest deduction totals $67.0 billion, the real estate tax deduction equals $24.6 billion, and the capital gain exclusion sums to $16.8 billion.

As seen in these estimates, the largest benefit for most homebuyers is the ability to deduct home mortgage interest. The tax code permits homeowners who itemize their
federal income tax deductions to reduce their taxable income by the annual amount of mortgage interest paid on a first (and second) home, up to $1 million in total home mortgage debt. Further, taxpayers may deduct interest allocable to up to $100,000 of home equity loans.4 For the purpose of the Alternative Minimum Tax [AMT], taxpayers may deduct non-home equity loan interest from AMT taxable income as well.5 Itemizing homeowners may also deduct state and local real estate taxes paid on an owner-occu­pied home.

Finally, taxpayers may exclude from capital gains taxation the proceeds from the sale of a principal residence. Taxpayers are limited in the amount of gains that may be excluded from tax: $500,000 of gain for married homeowners and $250,000 for single homeown­ers. Recent changes in tax law reduce these maximum exclusion amounts proportion­ally for the amount of time the home is actually used as a principal residence. Periods of ownership prior to January 1, 2009 are treated as periods of principal residence use under a grandfathering rule included in the law.

Measuring the Tax Benefits of the Mortgage Interest and Real Estate Tax De­ductions
Calculating the net benefits of the major homeownership benefits seems straightforward but can lead to overestimation if not done in the context of other income tax rules. At first glance, the monetary value of the deductions is equal to the sum of the deductions times the marginal tax rate. For example, a homeowner who deducts $10,000 of mort­gage interest and real estate tax deductions and who is in the 25% tax bracket would theoretically realize a tax savings of $2,500 on his/her income tax return.

However, this calculation overstates the benefit on average by failing to account for the fact that the taxpayer must itemize in order to receive a net benefit from these deduc­tions. Unless the sum of the taxpayer’s itemized deductions exceeds the standard deduc­tion (the deduction available in lieu of itemization), it is not to the taxpayer’s advantage to itemize.

This itemization decision implies that a certain amount of the summed itemized deduc­tions yields no net benefit to the taxpayer because of the standard deduction. For ex­ample, if a taxpayer in the 25% tax bracket has a standard deduction of $5,700 and a set of itemized deductions totaling $6,000, the net value of the deductions is not equal to $1,500 (25% times $6,000). Even with no itemized deductions available, the standard deduction is available to reduce tax payment by $1,425 (25% times $5,700). So the true, incremental value of the itemized deductions in this example is equal to the differ­ence between $1,500 and $1,425 or $75. Of course, the marginal value — the value of the next dollar of deductions — is equal to 25 cents, but it is the average net value that is important in determining the realized value of the homeownership tax benefits.

Calculating an Example
We can now estimate the true tax benefits of homeownership for examples of various taxpayers. Consider a homebuyer with gross income of $60,000 who purchases a prin­cipal residence in tax year 2009 with a mortgage of $180,000. Assuming a mortgage interest rate of 5.86%, the first year mortgage interest payment is approximately equal to $10,580.7 Conservatively, assume that the buyer uses a downpayment of 20%, so the purchase price of the home is $225,000. Further assume that property taxes are equal to 1.2% of the market price.8 Thus, this taxpayer also pays $2,700 in potentially deduct­ible state and local real estate taxes in the first year of ownership.

Assuming the taxpayer is married and files a joint return, the household could claim a standard deduction of $11,400 in 2009. Clearly, with $13,280 in itemized deductions from mortgage interest and real estate taxes alone, the taxpayer will not claim the stan­dard deduction, thus itemizing their deductions on Schedule A of their 1040 income tax return. However, to calculate the net benefit of the housing tax deductions, we need an estimate of all the other itemized deductions in order calculate the incremental value.

Using Internal Revenue Service Statistics of Income data for 2006, we estimate the average sum of all non-housing itemized deductions by income class. For this stylized taxpayer, the estimated total is equal to $6,936 in charitable, state and local income or sales taxes, personal property taxes, and all other itemized deductions. With this infor­mation, we can calculate the taxpayer’s taxable income (gross income minus itemized deductions) and marginal income tax rate of 15%.

Now we can estimate the net value of the housing benefits. The net value is equal to the sum of itemized deductions ($13,280) minus the difference of the standard deduction ($11,400) and sum of the non-housing itemized deductions ($6,936) times the marginal tax rate of 15%. This calculation yields a net benefit for the first year of homeownership equal to $1,322.
Using this approach and adjusting the declining annual mortgage interest payment con­sistent with a self-amortizing loan, we can calculate average tax savings for certain in­come classes and mortgage amounts.9 Table 1 provides these amounts for the first year of homeownership.

(Table 1)
The example calculated above is found in the row for $180,000 in mortgage and $60,000 in borrower income. As can be seen in this table, the benefits of the tax pro­visions increase in terms of borrower income and mortgage amount. Nonetheless, as demonstrated in a previous article most of these benefits are claimed by middle-income homeowners ($40,000 to $200,000 AGI).

Summing over the first five years of homeownership, and adjusting for the declining mortgage interest payment over time, yields the following estimates, shown in Table 2. (Table 2)

Previous NAHB research indicates that twelve years is a reasonable estimate for the av­erage duration of homeownership of a single dwelling. Correspondingly, the twelve-year estimates using the method in this paper are shown in Table 3. (Table 3)

Graphing three examples of these results yields the following year-by-year estimates of the tax savings of homeownership attributable to the mortgage interest and real estate tax deductions, as seen in Figure 1. (Figure 1)

Principle Residence Gain Exclusion
The final major housing tax incentive is the exclusion of capital gains for the sale of a principal residence. To calculate the benefit of this tax provision, we must forecast the average price appreciation over the average duration of homeownership. We use the av­erage housing price appreciation rate over the prior 20 years, which includes the historic price declines of 2007 and 2008 as well as the period of unprecedented price apprecia­tion that preceded it. This average is 4.23% according to the Case-Shiller National U.S. Home Price Index. We use a conservative estimate of the capital gains tax rate (15% under present law, despite the likelihood that it will increase to 20% in 2011) to calcu­late the tax benefit of the exclusion. With these parameters and assuming that the home is sold at the end of twelve years of homeownership, we can calculate the tax benefits realized by the capital gain exclusion, which are reported in Table 4. (Table 4)
Summing the benefits of the mortgage interest and real estate tax deductions with the capital gain exclusion yields the twelve-year benefit estimates shown in Table 5, which in most cases represent significant tax savings for the homeowner. (Table 5)

Lifetime Income Growth
One limitation of this approach for calculating the value of homeownership tax savings is that it assumes the homebuyer has a fixed income for the period in which they own the home. Clearly, this is not a reasonable assumption. This is important because while a homebuyer may have a relatively low income — and thus a relatively low marginal in­come tax rate — when purchasing a home, his/her income and tax rate is likely to grow as the homeowner ages and gains experience in his/her career. Assume the average an­nual income increase (at the taxpayer/homeowner level due to aging, as opposed to per capita increases for all workers) is 4%. (Table 6)
Using this approach, re-estimating the five-year table estimated according to initial bor­rower income yields the larger values reported in Table 6. For example, the tax savings are higher in the $80,000 column in Table 6 than they are in Table 2, reflecting hom­eowners who enter a higher tax bracket in the fifth year of homeownership. Consider the graph in Figure 2 which reports the tax savings for a borrower with an initial income of $80,000 who obtains a home with a $250,000 mortgage. In year five, the cumulative savings from homeownership begin to diverge because the value of the homeownership tax incentives increases as the homeowner’s income increases, which is presumably cor­related with the homeowner’s experience in the labor market. At the time of sale, the difference in this example is more than $11,000 in tax savings — all due to increases in the homeowner’s marginal tax rate. (Figure 2)

Conclusion
This article has presented estimates of the financial benefits of homeownership. These savings total thousands of dollars for the period of ownership and are due to the deduct­ibility of mortgage interest and real estate taxes, as well as the principal residence capi­tal gain exclusion. The estimates in this paper account for the lost standard deduction that results when a taxpayer itemizes and thus reflect the incremental or true value of the housing tax incentives.
An additional tax incentive that became available in 2009 is $8,000 first-time home buyer tax credit. Including the effects of this refundable credit increases the estimates in each of these tables on average by $8,000, which represents a significant increase in the tax savings of the first five years of homeownership. For example, for a homebuyer with an income of $70,000 who obtains a mortgage $200,000 the tax savings increase from $7,718 to $15,718 — an increase of 104%. Or as another example, a homebuyer with $80,000 in income and a $200,000 mortgage can expect his/her five-year tax savings estimate to increase 82% from $9,723 to $17,723.

The combination of the standard tax benefits of homeownership combined with the tem­porary tax credit makes 2009 an attractive time period to purchase a home.
For more information about this item, please contact: Robert Dietz at 800-368-5242 x8285 (rdietz@nahb.com)
_________________
Footnotes:
1It should be noted that in this article “benefit” does not equate with “subsidy.” There are tax benefits for owners of rental housing as well, including interest and deprecia­tion deductions, as well as the Low-Income Housing Tax Credit. Previous research on the home buying decision can be found here.
2There are other benefits not considered in this article, including the tax exemption for imputed-owner’s rent, the deduction for mortgage insurance, and the tax treatment of reverse mortgage proceeds.
3Joint Committee on Taxation. 2008. Estimates of Federal Tax Expenditures for Fiscal Years 2008-2012. JCS-2-08.
4 It is important to note that not all cash-out mortgage refinancing is classified as a home equity loan, in contrast to acquisition indebtedness that is subject to the larger $1 million cap. Provided the proceeds of a cash-out refinancing are used for home improve­ment or residential investment, such debt is not home equity debt but the more favor­ably treated acquisition indebtedness.
5 The calculations in this paper do not include interactions with the AMT. For more infor­mation on real estate tax statistics, consult the following article.
6 To the extent that these taxes are in fact fees assessed for a specific, targeted benefit to the home in question, such fees may not be deducted from taxable income.
7 5.86% is the 4th quarter average of 2008 from the Freddie Mac Primary Market Sur­vey.
8 2004 American Housing Survey reported a 1.17% estimated average annual state and local rate residential property taxation.
9 This analysis assumes real estate tax payments and all other itemized deductions in­crease with the rate of inflation.

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Business News- Your Taxes

Changes, Up and Down the Ladder
By EDMUND L. ANDREWS
President Obama’s tax breaks may put money directly into the hands of people at the middle and bottom rungs of the income ladder.


Tax Tips
A Batch of New Tax Breaks on Your Home
By JAN M. ROSEN
The first-time homeowner credit and residential energy credits are among the new provisions.


Suddenly, Retirees Need a Plan B
By J. ALEX TARQUINIO
Advice from retirement planning experts geared toward current retirees and investors of all ages.


Is More Relief Ahead for Small Business?
By CONRAD DE AENLLE
The tax code offers small business owners many tax breaks to choose from, including some recent additions, and others may be on the way.


Some Balm From the I.R.S. for Those 2008 Losses
By CHARLES DELAFUENTE
Some people who lost money in the financial turmoil last year may be able to get a measure of tax relief.


Does the Tax Code Look Grayer in a Downturn?
By ROBERT D. HERSHEY JR
In a severe recession, people may be looking for loopholes in the tax code to minimize the tax hit.

Trying to Help Financially Troubled Homeowners

http://www.nytimes.com/2009/02/06/business/06lend.html

By VIKAS BAJAJ and TARA SIEGEL BERNARD
Published: February 5, 2009

People seem to pass certain milestones on the road of financial desperation. First the unpaid bills pile up. Then the bank forecloses. Finally, they reach the end of the line: bankruptcy court.

Joseph A. Peiffer, a bankruptcy lawyer in Cedar Rapids, Iowa, who has represented both farmers and lenders, favors giving bankruptcy courts the power to modify home loans.
But now policy makers are talking about redrawing this map by putting the bankruptcy court before foreclosure to give people a chance to keep their homes.

It has been done before, on a relatively small scale and with some success. In the midst of the farm crisis during the 1980s, Congress gave bankruptcy judges the power to reduce onerous farm loans to reflect a steep drop in land prices.

The Obama administration and Congressional Democrats are pushing a similar idea to stem the swelling tide of home foreclosure. Yet a close look at the farm experience raises questions about how widespread any relief would be.

While the creation of a special bankruptcy workout for farmers, known as Chapter 12, helped resolve that earlier crisis, many farmers still lost their farms or had to scale them back, according to judges and lawyers who studied the effects.

If a similar allowance is provided today for Chapter 13 filings, which let homeowners keep their property while working out their debts, bankruptcy courts could help a few million homeowners. But millions more would still face foreclosure, especially if unemployment continued to rise. Credit Suisse, for example, estimates that about 20 percent of an expected eight million foreclosures could be avoided by letting judges alter the terms of home loans.

“We are making the best of a lousy situation,” said Joseph A. Peiffer, a bankruptcy lawyer in Cedar Rapids, Iowa, who has represented both farmers and lenders and favors giving bankruptcy courts power to modify home loans. But, he added, “there will still be people losing their homes.”

One of his clients, a farm family in eastern Iowa, sought Chapter 12 bankruptcy in late 1986. The family had borrowed when times were good to pay medical bills, but struggled to keep up with payments when interest rates jumped and crop prices fell. The day before the family filed its case, a lender seized half of its 350 cows. “It was sort of like a perfect storm of bad things,” Mr. Peiffer said.

The bankruptcy court eventually wrote down about 40 percent of the family’s $1.5 million debt, and today, they are still farming, according to Mr. Peiffer.

That type of resolution may help troubled homeowners avoid foreclosure, advocates say. Having a bankruptcy judge change loan terms can solve disputes that bankers and borrowers might be unable to tackle on their own, they say. And some loans could become more profitable for banks in bankruptcy than in foreclosure, where losses can be 50 percent or higher after legal and home repair costs, according to Rod Dubitsky, a Credit Suisse analyst.

Perhaps more important, a bankruptcy judge can also cut through a thicket of legal complications for mortgages packaged into securities and sold to investors, which some banks say they have no authority to modify. Some investors have threatened to sue banks if those mortgages are altered.

But the banking industry fiercely opposes the proposal to amend bankruptcy law. Officials warn that they would have to raise the price of credit to offset the cost of having to wait years to see whether borrowers successfully pay off modified loans — or slide back into default. Only a third to 40 percent of Chapter 13 personal bankruptcy filings are successful, experts say, often because people lose jobs again, become sick or get divorced.

Foreclosure might bring them less, but banks and investors would get some money right away if they seized homes.

In Chapter 12, judges could change interest rates and reduce, or “cram down,” debts secured by farmland, which suffered a boom-bust cycle in the 1970s and 1980s. The amount written down was added to other unsecured debts, like credit card balances, which are repaid cents on the dollar from money left over after living expenses and secured debt payments. Congress made Chapter 12 a permanent part of the Bankruptcy Code in 2005.

Neil E. Harl, an agriculture and economics professor at Iowa State University, found that 85 percent of the first 150 farmers in Iowa who filed bankruptcy under Chapter 12 were still farming in 1995.

But many farmers who encountered distress did not seek bankruptcy protection: from 1986 to 1997, farmers filed 19,216 Chapter 12 cases, according to the Agriculture Department — less than 1 percent of the two million family farms that existed in 1995. “As soon as everybody knew it was there,” Mr. Harl said about cram-downs, “they did the next best thing, which is to sit down and negotiate.”

Nonetheless, bankers say that Chapter 12 resulted in higher interest rates, as lenders passed on the costs of bankruptcy. The Agriculture Department estimated in 1997 that rates on farm loans increased by 0.25 of a percentage point to 1 percentage point as a result of the law.
The Financial Services Roundtable, an industry lobbying group, calculates that cram-downs may increase the cost of mortgages by up to 2 percentage points either through higher rates or bigger down payments. The restrictions on cram-downs “keeps the cost of homes low, and this bill will unravel that,” said Scott E. Talbott, its chief lobbyist.

But other experts say such estimates are inflated. Adam J. Levitin, an associate professor of law at Georgetown University who favors changing the law, said rates may only rise by 0.15 of a percentage point.

Lawmakers and lobbyists in Washington are deeply divided on cram-downs. The opposition includes Senator Charles E. Grassley, Republican of Iowa, who helped create Chapter 12. Banks, with the exception of Citigroup, have vowed to fight cram-downs, though some lobbyists have been pushing for amendments that would limit them to certain loans and would let lenders recoup losses if home prices rebound.

The Obama administration and Democrats, including Senator Richard J. Durbin of Illinois, hope to pass the measure either on its own or as part of another bill.

The measure is eagerly awaited by households like the Benitez family in Palm Coast, Fla., which hopes bankruptcy will help them keep their three-bedroom house.

Rosa Benitez, a real estate agent, and her husband, Carlos, who works in construction, have been unable to pay their mortgage since payments on their adjustable rate loan shot up in early 2008. At the same time, given the housing crash, they are making a lot less money.

“Everything started going down when the mortgage payments went up,” Ms. Benitez said. The couple owes $227,000 on their mortgage and $31,000 on a home equity line of credit, but their home is worth only $175,000. Ms. Benitez said the couple could catch up if their debt was reduced to the current value of the home.

Still, the couple, like many others, is vulnerable to falling behind again as home prices decline further. But Robert M. Lawless, a law professor at the University of Illinois who favors cram-downs, said success should not be viewed simply “in terms of dollars and cents.”

“We forget the human side of the bankruptcy case,” he said. “Sometimes bankruptcy is about the soft landing.”

A version of this article appeared in print on February 6, 2009, on page B1 of the New York edition.

Circuit City to Shut Down
http://www.nytimes.com/2009/01/17/technology/companies/17circuit.html'

By STEPHANIE ROSENBLOOM
Published: January 16, 2009

Circuit City Stores, a bellwether American retailer, said Friday that it would go out of business, stripping the nation of its second-largest consumer electronics chain.

The company, which filed for bankruptcy protection in November but had hoped to emerge in a slimmed-down form, said instead that it would liquidate all its stores and assets.
Most of the chain’s 34,000 store employees will be laid off. Closing sales will begin as early as Saturday and will last until the merchandise is gone or about the end of March.
Just last week, Circuit City, with 567 stores, was in talks with two potential buyers, but it was unable to reach an agreement with its creditors and lenders.

“We are extremely disappointed by this outcome,” said James A. Marcum, acting president and chief executive of Circuit City Stores. He called the liquidation “the only possible path” for the 60-year-old company.

The demise of Circuit City, while not surprising given its declining sales, is part of a radical shift taking place in retailing. Weak chains — unable to weather the freeze-up in consumer spending and choked by tight credit markets — are closing.

The downturn comes after years of growth, when retailers — responding to a flood of demand from consumers spending borrowed money — opened thousands of stores. Now that the housing downturn and economic crisis have turned off the credit spigot and sent frightened consumers into hiding, it is becoming evident that many of those stores are not needed.
“We are incredibly over-stored in many sectors,” said Stacey Widlitz, an analyst with Pali Research. “If you don’t have the balance sheet to really weather the storm for a couple of years, then that’s it.”

Last year, a raft of retailers, including Boscov’s, Sharper Image, Mervyns, Linens ’n Things, Whitehall Jewelers and Steve & Barry’s, filed for bankruptcy protection. This week, Goody’s Family Clothing and Gottschalks also filed.

Many more retailers are expected to follow suit as they run out of working capital or are unable to refinance their debt.

Emerging from bankruptcy is harder than ever because of changes in the bankruptcy code and trouble in the credit markets, which are largely refusing to put new money into troubled companies.

Wall Street analysts said in November that the prospects of long-term survival for Circuit City were bleak. Months of declining sales sent the company over the edge, although its problems go back a decade. They include buying cheap real estate leases in inferior locations and laying off the company’s most experienced sales staff. The latter saved money, but at the price of employee morale and countless customers.

“They basically destroyed all their customer loyalty among all their best customers in one fell swoop,” said Britt Beemer, chief executive and founder of America’s Research Group.
“That was really the beginning of the end.”

The disappearance of the national chain means that in many markets consumers are running out of places to buy electronics, though shoppers are not the only ones being affected. The loss of Circuit City will probably be felt throughout the supply line as electronics manufacturers find themselves less able to negotiate prices.

The biggest electronics retailer left is Best Buy. Circuit City’s liquidation sales are likely to put pressure on Best Buy in the short run, but retailing analysts say the company will ultimately emerge with more market share.

“Even accounting for a softer economy,” said David A. Schick, an analyst at Stifel Nicolaus, “the business will go to specialty players in the sector and it will also go to mass merchant discounters.”

Analysts say they believe the biggest winner will not be Best Buy, but Wal-Mart.
Ms. Widlitz said consumers who shopped at Circuit City were more likely to defect to Wal-Mart than to Best Buy, especially at a time when Wal-Mart has aggressively built up its stable of name-brand electronics at low prices.

“This is perfect timing for them,” Ms. Widlitz said.

More Articles in Technology » A version of this article appeared in print on January 17, 2009, on page B1 of the New York edition.

A rare peek at Homeland Security's files on travelers
Originally Posted by: Sean O'Neill, Monday, Dec 22, 2008, 12:12 PM

http://current.newsweek.com/budgettravel/2008/12/whats_in_your_government_trave.html?wpisrc=newsletter

The oversize white envelope bore the blue logo of the Department of Homeland Security. Inside, I found 20 photocopies of the government's records on my international travels. Every overseas trip I've taken since 2001 was noted.

I had requested the files after I had heard that the government tracks "passenger activity." Starting in the mid-1990s, many airlines handed over passenger records. Since 2002, the government has mandated that the commercial airlines deliver this information routinely and electronically.

A passenger record typically includes the name of the person traveling, the name of the person who submitted the information while arranging the trip, and details about how the ticket was bought, according to documents published by the Department of Homeland Security. Records are made for citizens and non-citizens who cross our borders. An agent from U.S. Customs and Border Protection can generate a travel history for any traveler with a few keystrokes on a computer. Officials use the information to prevent terrorism, acts of organized crime, and other illegal activity.

I had been curious about what's in my travel dossier, so I made a Freedom of Information Act (FOIA) request for a copy. I'm posting here a few sample pages of what officials sent me. My biggest surprise was that the Internet Protocol (I.P.) address of the computer used to buy my tickets via a Web agency was noted. On the first document image posted here, I've circled in red the I.P. address of the computer used to buy my pair of airline tickets.
[An I.P. address is assigned to every computer on the Internet. Each time that computer sends an e-mail—or is used to make a purchase via a Web browser—it has to reveal its I.P. address, which tells its geographic location.]

The rest of my file contained details about my ticketed itineraries, the amount I paid for tickets, and the airports I passed through overseas. My credit card number was not listed, nor were any hotels I've visited. In two cases, the basic identifying information about my traveling companion (whose ticket was part of the same purchase as mine) was included in the file. Perhaps that information was included by mistake.

Some sections of my documents were blacked out by an official. Presumably, this information contains material that is classified because it would reveal the inner workings of law enforcement.

I have grayed out other parts of the documents because they contain information, such as my passport number, that I'd rather not share. The parts I've blocked out are colored gray to distinguish from the government censor's black marker. Here's the lowdown on the records.
The commercial airlines send these passenger records to Customs and Border Protection, an agency within the Department of Homeland Security. Computers match the information with the databases of federal departments, such as Treasury, Agriculture, and Homeland Security. Computers uncover links between known and previously unidentified terrorists or terrorist suspects, as well as suspicious or irregular travel patterns. Some of this information comes from foreign governments and law enforcement agencies. The data is also crosschecked with American state and local law enforcement agencies, which are tracking persons who have warrants out for their arrest or who are under restraining orders. The data is used not only to fight terrorism but also to prevent and combat acts of organized crime and other illegal activity. Officials use the information to help decide if a passenger needs to have additional screening. Case in point: After overseas trips, I've stood in lines at U.S. border checkpoints and had my passport swiped and my electronic file examined. A few times, something in my record has prompted officers to pull me over to a side room, where I have been asked additional questions. Sometimes I've had to clarify a missing middle initial. Other times, I have been referred to a secondary examination. (I've blogged about this before.)

When did this electronic data collection start? In 1999, U.S. Customs and Border Protection (then known as the U.S. Customs Service) began receiving passenger identification information electronically from certain air carriers on a voluntary basis, though some paper records were shared prior to that. A mandatory, automated program began about 6 years ago. Congress funds this Automated Targeting System's Passenger Screening Program to the tune of about $30 million a year.

How safe is your information? Regulations prohibit officials from sharing the records of any traveler—or the government's risk assessment of any traveler—with airlines or private companies. A record is kept for 15 years—unless it is linked to an investigation, in which case it can be kept indefinitely. Agency computers do not encrypt the data, but officials insist that other measures—both physical and electronic—safeguard our records.

I wonder if the government's data collecting is relevant and necessary to accomplish the agency's purpose in protecting our borders. The volume of data collected, and the rate at which the records is growing and being shared with officials nationwide, suggests that the potential for misuse could soar out of hand. Others may wonder if the efforts are effective. For instance, I asked security expert Bruce Schneider about the Feds' efforts to track passenger activity, and he responded by e-mail:

"I think it's a waste of time. There's this myth that we can pick terrorists out of the crowd if we only knew more information."

On the other hand, some people may find it reassuring that the government is using technology to keep our borders safe. Oh, one more thing: Are your records worth seeing? Maybe not, unless you've been experiencing a problem crossing our nation's borders. For one thing, the records are a bit dull. In my file, for instance, officials had blacked out the (presumably) most fascinating parts, which were about how officials assessed my risk profile. What's more, the records are mainly limited to information that airline and passport control officials have collected, so you probably won't be surprised by anything you read in them. Lastly, there may be a cost. While there was no charge to me when I requested my records, you might charged a fee of up to $50 if there is difficulty in obtaining your records. Of course, there's a cost to taxpayers and to our nation's security resources whenever a request is filed, too.

However, if you are being detained at the border or if you suspect a problem with your records, then by all means request a copy. U.S. Customs and Border Protection is required by law to make your records available to you, with some exceptions. Your request must be made in writing on paper and be signed by you. Ask to see the "information relating to me in the Automated Targeting System." Say that your request is "made pursuant to the Freedom of Information Act, as amended (5 U.S.C. 552)." Add that you wish to have a copy of your records made and mailed to you without first inspecting them. Your letter should, obviously, give reasonably sufficient detail to enable an official to find your record. So supply your passport number and mailing address. Put a date on your letter and make a copy for your own records. On your envelope, you should conspicuously print the words “FOIA Request." It should be addressed to “Freedom of Information Act Request,” U.S. Customs Service, 1300 Pennsylvania Avenue, NW., Washington, DC 20229. Be patient. I had wait for up to a year to receive a copy of my records. Then if you believe there's an error in your record, ask for a correction by writing a letter to the Customer Satisfaction Unit, Office of Field Operations, U.S. Customs and Border Protection, Room 5.5C, 1300 Pennsylvania Avenue, N.W., Washington, D.C. 20229.

2009 to Arrive Not a Second Too Soon- Yahoo.com

http://news.yahoo.com/s/space/20081226/sc_space/2009toarrivenotasecondtoosoon

Joe Rao Skywatching Columnist Space.com – Fri Dec 26, 11:33 am ET

Wait a second. The start of next year will be delayed by circumstances beyond everyone's control. Time will stand still for one second on New Year's Eve, as we ring in the New Year on that Wednesday night. As a result, you'll have an extra second to celebrate because a "Leap Second" will be added to 2008 to let a lagging Earth catch up to super-accurate clocks.

By international agreement, the world's timekeepers, in order to keep their official atomic clocks in step with the world's irregular but gradually slowing rotation, have decreed that a Leap Second be inserted between 2008 and 2009. The extra second, ordered by the world's nominal timekeeper, the International Earth Rotation and Reference Systems Service, will be marked officially at the stroke of midnight on Wednesday in Greenwich, England, the home of what is popularly known as Greenwich Mean Time (GMT) – Coordinated Universal Time (UTC) to the more technically inclined – the standard time for the planet.

So at precisely 23:59:60 at Greenwich, England, on New Year's Eve, there will be a one-second void before the onset of midnight and the start of the New Year. Wednesday will see the 24th Leap Second that has been needed since the practice was initiated in 1972, and will be the first in three years.

Keeping the Earth on time
Around the world, to satisfy the requirements of navigators, communication organizations and scientific groups, about 200 atomic clocks in over 50 national laboratories worldwide will be adjusted at local times corresponding to midnight to local times at Greenwich. On New Year's Eve, the master clock at the United States Naval Observatory will be adjusted at 6:59:60 p.m. EST, or 23:59:60 GMT.

The extra second is needed to keep the world's clocks in time with the rotation of the planet. Time measured by the rotation of the Earth is not uniform when compared to time kept by atomic clocks. Today's atomic clocks have an inaccuracy of less than one second in 200 million years.

But for various reasons – the sloshing molten core, the rolling of the oceans, the melting of polar ice and the effects of solar and lunar gravity – our planet rotates on its axis at irregular rates, and on average has been falling behind atomic time at a rate of about two milliseconds per day. It now trails the official clock by about six-tenths of a second.

As a result of this difference, atomic clocks can get out of sync with the Earth and periodically have to be adjusted. Since it's the atomic clocks that are used to set all other clocks, a Leap Second has to be added from time to time to make up the difference.

Adding the extra second between 23:59:59 on Dec. 31 and midnight on Jan. 1 will put Mother Earth about four-tenths of a second ahead of the clock, giving her a bit of a head start as 2009 begins.

Who said chivalry is dead?

How to see and hear the extra second
Today many retailers market radio clocks as "atomic clocks"; though the radio signals they receive usually come from true atomic clocks, they are not atomic clocks themselves. Typical radio "atomic clocks" require placement in a location with a relatively unobstructed atmospheric path to the transmitter, perform synchronization once a day during the night-time, and need reasonably good atmospheric conditions to receive the time signals.

If you own such a device, you might want to watch what your clock displays just before 0 hours GMT, Jan. 1, which corresponds to 7 p.m. Eastern standard time on Dec. 31. The minute beginning at 6:59 p.m. EST will contain 61 seconds. When a Leap Second was added in 2005, I watched my own clock closely during that minute as the seconds ticked off. When the final second of that minute was reached, the number "59" flashed not once, but twice!If you don't have a radio clock, you can bring up a time display on your computer by going to: http://nist.time.gov/.

You can also listen for the Leap Second by tuning in to a shortwave time signal station. In North America, the "extra tick" can be heard by listening either to station WWV out of Fort Collins, CO (see:http://us.rd.yahoo.com/dailynews/space/sc_space/storytext/2009toarrivenotasecondtoosoon/30363607/SIG=116qvno87/*http:/tf.nist.gov/stations/wwv.html) at 2.5, 5, 10, 15 and 20 megahertz or CHU in Ottawa, Canada (see: http://us.rd.yahoo.com/dailynews/space/sc_space/storytext/2009toarrivenotasecondtoosoon/30363607/SIG=10rlfpbb7/*http:/tinyurl.com/y2wa2y) at 3330, 7335, and 14670 kilohertz.

A listing of shortwave time signal stations for other parts of the world can be found here.
Should you encounter poor reception, try preparing a seconds pendulum by hanging a small weight on a string about 39.1 inches (99.3 centimeters) in length. Adjust the string length beforehand until the swings exactly match the time signal ticks. If the beeps denoting the start of each minute occur at the left extreme of a swing before the final (GMT) minute of 2008, they will be heard at the right extremes thereafter. (Although the swing amplitude will be steadily dying down, this does not affect a free pendulum's oscillation period.)Ball Drop too early?By the time the transition from 2008 to 2009 arrives in North America the Leap Second will have already been inserted into the world's timescale.

But there was a bit of confusion about all this back in 1972 when the first Leap Second to be inserted on a New Year's Eve took place. An astronomer at New York's Hayden Planetarium took a phone call that day from the engineer who was assigned to drop the famous illuminated ball in Times Square (in those days, the ball was slowly lowered using an old fashioned rope and pulley). "This can affect my job," he reportedly said. "So I want to be sure I don't drop that thing one second too soon!"

Regardless of how you use your extra second, just keep this one indisputable fact in mind: Whenever you note the time on the clock, realize that it is now – right now – later than it has ever been.

Happy New Year!

Online Sky Maps and More

Sky Calendar & Moon Phases

Astrophotography 101

Joe Rao serves as an instructor and guest lecturer at New York's Hayden Planetarium. He writes about astronomy for The New York Times and other publications, and he is also an on-camera meteorologist for News 12 Westchester, New York.

Original Story: 2009 to Arrive Not a Second Too Soon

Curious about what impact a remodel project will have on your home’s value?

This article gives the 2008 report on Cost vs. Value for home repair and improvement projects as compiled by Remodeling magazine and summarized in Realtor magazine.

http://www.realtor.org/rmohome_and_design/articles/2008/0812_costvsvalue_2008?id=bcaa4b804bfb44b98fe18f66fe42bfc9&wcm_page.resetall=true&cache=none&contentcache=none&connectorcache=none&srv=page

A Rush Into Refinancing as Mortgage Rates Fall
http://www.nytimes.com/2008/12/04/business/04refi.html?_r=2&th&emc=th

By TARA SIEGEL BERNARD

Published: December 3, 2008 in www.nytimes.com


The housing market may finally be getting some relief, with lower mortgage rates already encouraging refinancing and Treasury officials considering ways to entice new buyers.

Last week, the Federal Reserve announced that it would buy $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Mortgage rates immediately dropped, and that led to a surge in mortgage refinancing activity for the week — even with the Thanksgiving holiday.

On Wednesday, people close to the discussions said that the Treasury had been talking with Fannie Mae and Freddie Mac about ways to drive down mortgage rates to as low as 4.5 percent. That rate is about a percentage point lower than the going rates for such loans.

Any government efforts to jump-start the housing market have a number of obstacles, the biggest being borrowers’ worries that the economic downturn will affect them. Meanwhile the best interest rates will go only to borrowers in sound financial shape. And even if the efforts go as planned, they may not help the most distressed homeowners.

Still, the jump in refinancing activity showed that there was an appetite that could be whetted by lower rates. The Mortgage Bankers Association said its refinance index, which measures refinancing activity, tripled to 3,802.8 last week from the week before. The index was also 37.7 percent higher than in the same week a year ago. It was the largest increase in refinance applications in the survey’s 18-year history, though it does not measure how many applications become loans.

Refinancing activity accounted for 69.1 percent of all mortgage applications submitted last week, up from 49.3 percent the week before.

“We did quadruple our normal volume last week,” said Bob Walters, chief economist of Quicken Loans. “We had loan officers staying past midnight to get back to all of the people that had been calling. There is still a silent majority of people who can refinance and qualify.”
Callers cited a variety of reasons for their new interest in refinancing, mortgage lenders said. But the main reason was that they wanted to lock in a lower mortgage rate and reduce their monthly costs in case they fell victim to the economic downturn. Others were looking to extract cash to pay down more expensive credit card debt, the lenders said, and some were trying to trade in their adjustable-rate mortgages for a fixed rate.

Annie Lu, 30, a nurse practitioner, said she called about refinancing when she heard that the economy was officially in a recession. She and her husband bought their house in Brooklyn about three years ago with a mortgage rate of 6.25 percent. She is hoping to qualify for a rate almost a percentage point lower. “It is good to prepare for the worst, and nobody minds saving as much as we can,” she said.

The Treasury’s consideration of additional efforts to breathe life into the housing market was first reported on The Wall Street Journal’s Web site. People familiar with the Treasury’s plans said that Treasury officials had met with top executives at Fannie and Freddie last week but that neither had been notified that any steps were taken toward putting such a plan into effect. By one account, the new program would be available only to home buyers, not to people who simply want to refinance their existing loan at a lower rate.

But those looking to refinance are already eyeing the lower rates. “Borrowers with reasonably good credit and a home that hasn’t lost too much value are going to find mortgage money plentiful and readily available,” said Brad Blackwell, national sales manager at Wells Fargo Home Mortgage.

As rates drop, more people, in theory, qualify for loans because their monthly principal and interest payments will be lower. But to qualify for the best rates, borrowers need to have impeccable credit — or a credit score of 720 or higher — as well as at least 10 to 20 percent of equity in their homes.

And while experts said they were heartened by the pickup in activity, the overall number of refinancings this year was expected to be only slightly more than a quarter of the volume at the height of the housing boom in 2003.

“It is not going to spike up rapidly or anywhere near as it has in the past because credit is still tight, the economy is still weak and there are fewer people that could refinance now than could before,” said Celia Chen, senior director of housing economics at Moody’s Economy.com. “But the decline in rates will help those that can.”

For all the renewed interest in refinancing, about 12 million households, or 15 percent of owners of single-family homes, are not eligible. Their mortgages exceed the value of their home, Ms. Chen said.

Meanwhile, entire categories of loan products have been eliminated. Subprime loans are not available along with stated income loans, where borrowers do not have to fully document their income. That has limited the options for many small-business owners and other self-employed individuals. People with inconsistent or unpredictable incomes, like those who rely on commissions, are also affected.

“You can imagine how many inquiries we get where we are done just as soon as we are done talking,” said Rick L. Dunham, vice president of Impact Mortgage Network in Mesa, Ariz., whose clients include small-business owners as well as individuals whose mortgages exceed the value of their home. “So we go to the next step and say, ‘O.K., your options are loan modification, short sale or nothing at all.’ ”

Credit standards have also tightened, which has made it more expensive — often prohibitively so — for many individuals to get a loan. Generally, individuals need a credit score of 620 to qualify for a loan, but they have to pay a fee equivalent to about 2.75 percent of the loan amount, which can translate into a rate of about 1 percentage point higher than the best rate available. In some cases, these individuals can get a better deal through the Federal Housing Administration.
“For borrowers on the fringe — low credit score, erratic documentation, high debt loads, et cetera — mortgage money may actually be available but the other terms and conditions that need to be jumped to have access to that financing make it prohibitive,” said Keith Gumbinger, vice president of the financial publisher HSH Associates.

Javier and Irina Lattanzio were motivated to refinance by the potential for monthly savings. Their strong credit history enabled them to refinance the $800,000 mortgage on their four-bedroom Manhattan apartment to a rate of about 5.6 percent. But the Lattanzios had to pay $70,000 so that their loan would qualify for conforming mortgage rates. Jumbo mortgages remain, on average, a full percentage point higher.

Edmund L. Andrews and Charles Duhigg contributed reporting.

More Articles in Business » A version of this article appeared in print on December 4, 2008, on page B1 of the New York edition.

Wall Street Journal
DECEMBER 2, 2008, 9:06 A.M. ET
Cover Story
http://online.wsj.com/article_email/SB122764977315457619lMyQjAxMDI4MjA3MjYwNDI5Wj.html

The Future for Home Prices
Americans still see real estate as their best shot at wealth. It may be wishful thinking.
By JAMES R. HAGERTY


Over the past few years, Americans have had a brutal lesson in the risks of real estate. House prices have crashed more than 35% in some parts of the country, millions of people are losing their homes to foreclosure, and banks are failing.
The takeaway? Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now.

Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years.


Down the Road
And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again -- but, on average, probably not nearly as much as they've averaged over the past decade. That isn't to say that some places won't experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.

Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.

Other experts make similarly modest predictions. William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody's Economy.com, a research firm, expects house prices to increase an average of around 4% a year over the next couple of decades.
Some experts say it's a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.

For all of those forecasts, many Americans are undaunted. Consider three surveys, all from October.

In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.

"I just believe in real estate," says Jason Schram, a lawyer in Chicago who has bought two rental properties this year at what he considers fire-sale prices. "I've seen over and over people I know build wealth through rental real estate, and that's the path I intend taking, even though it's a bit bumpy at the moment."


Location, Location
So, as homeowners and buyers look ahead, what factors will determine whether their homes are really likely to rise in value, rather than just in their dreams? What are some of the bullish signs -- and some of the bearish ones?

In the long term, house prices are driven by fundamentals that are hard to predict: immigration, birth rates, the size and nature of households, and incomes. The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live.
William Frey, a demographer and senior fellow at the Brookings Institution, a think tank in Washington, says young people and immigrants are likely to flow to Florida, Georgia, the Carolinas, Tennessee, Virginia, Nevada, Arizona and some of the more affordable interior parts of California.

These areas generally have lower housing costs than the Pacific Coast or Northeast and job growth from modern industries and leisure businesses, he says. Areas with little immigration and low growth or falling populations are likely to include Michigan, Ohio, the Dakotas, Iowa, western Pennsylvania and upstate New York, Mr. Frey says.


Hit Parade
Newland Communities LLC, a San Diego-based planner and developer of neighborhoods, employs a full-time researcher to study long-term housing demand and ranks metro areas in terms of their growth prospects. Among those near the top of Newland's hit parade are Washington, D.C., Raleigh and Charlotte, N.C., Atlanta, Dallas, Houston, Phoenix and Las Vegas, says Robert McLeod, the developer's chief executive.

All of them, Newland believes, will keep growing because they have well-diversified regional economies and other attractions, including mild climates. With the exception of Washington, they all have fairly affordable housing costs. Washington has a highly educated work force, high incomes, a stable source of government-related jobs and rapidly expanding technology firms, Newland says.

"The older industrial cities are going to suffer" from shrinking employment and forbidding weather, says Mr. Rosen of the University of California. Some Sun Belt cities, including Atlanta, also could languish if traffic jams and sprawl ruin their charms, he says.
Among metro areas that Mr. Rosen expects to do well in the long run are Albuquerque, N.M.; Boise, Idaho; Salt Lake City; Seattle; Portland, Ore.; Denver and Colorado Springs, Colo. He says those places generally offer "urban vitality" and "easy access to outdoor activities" combined with affordable housing and good job-growth prospects from modern industries, such as biotechnology.

Still, just looking at population trends isn't enough. Prices in the crowded coastal areas tend to be more volatile, rising and then falling much faster during booms and busts than do inland areas, Mr. Case notes. Shortages of land and building restrictions make it hard for builders to respond quickly when demand for housing rises in coveted neighborhoods near the coasts; further inland, it's usually much easier to find vacant homes or land, and so sudden movements in prices are less likely.

For instance, despite rapid growth, home prices in Texas cities have tended to climb only gradually. Those cities typically have plenty of room to sprawl, and Texas regulates land use less strictly than many other states. Supply swells to meet demand.
Stephen Webster / Wonderful Machine


The Wonder Years
What's more, no one can assess the outlook for housing without considering the effects of 78 million aging baby boomers. For instance, some housing experts believe the boomers will be much less likely than their parents to settle for sun and golf in their retirement; they may prefer urban settings with lots of cultural life or to live nearer friends and families. That could mean higher demand -- and increased prices -- for housing in urban neighborhoods.
Most of this is just guesswork, though. "A lot of people have theories about the baby boomers," says Mr. Frey, the Brookings demographer, but boomers always have tended to confound expectations.

Dowell Myers, a professor of urban planning and demography at the University of Southern California, warns that the retirement of boomers over the next two decades is likely to depress house prices in many areas. As boomers relocate to retirement homes and cemeteries, there will be a lot more sellers than buyers in parts of the country, he says.
"It's going to really mess up the housing market," says Mr. Myers. He predicts that this "generational correction" will be larger and longer-lasting than the current slump.
To get a sense of the effects of aging boomers, Mr. Myers looks at the number of Americans 65 and over per 1,000 working-age people. He sees that number soaring to 318 in the year 2020 and 411 in 2030 from 238 in 2000.

Many people over 65 buy homes, of course, but as they get older they become more likely to sell than buy. People aged 75 to 79 are more than three times as likely to be sellers than buyers, Mr. Myers says.

In some areas, younger people will be happy to buy (and probably renovate) those boomer nests. The problem, Mr. Myers says, will be in places where lots of older people are selling and few young people are settling down. He says the effects will be strongest in the "coldest, most congested and most expensive states rather than the high-growth states of the South or West." Among the states where Mr. Myers sees downward pressure on prices within the next decade: Connecticut, Pennsylvania, New York and Massachusetts.

Of course, applying demographic trends to house-price forecasts can be hazardous. Economists N. Gregory Mankiw and David Weil predicted in a paper in 1989 that demographic trends would lead to a "substantial" fall in real, or inflation-adjusted, home prices over the next two decades "if the historical relation between housing demand and housing prices continues." They reasoned that baby boomers were coming to the end of their prime house-buying years and that the smaller baby-bust generation would bring lower demand for housing.
That warning proved, at a minimum, premature. Despite the recent drop, the average U.S. home price is up about 35% in real terms since the end of 1989, according to the Ofheo index. Messrs. Mankiw and Weil both declined to comment.

Few people who invest in housing have time to follow these academic debates. For nearly four decades, Rich Sommer and his wife, Carolyn, have been investing in rental properties in and near Stevens Point, Wis. Mr. Sommer describes real estate as a good way "to get rich slowly." He and his wife, both former schoolteachers, gradually have built their net worth from zero to around $2.5 million through their rental properties. They have dealt with countless plumbing emergencies, evicted deadbeats and even once had to clean up after a suicide in one of their properties.

Still, he hasn't been hit very hard by the real-estate crash, in part because the Midwest is much less vulnerable to booms and busts than coastal areas. When asked what he would do if someone handed him $1 million today, Mr. Sommer doesn't hesitate: He would put it into real estate.—


Mr. Hagerty is a staff reporter for The Wall Street Journal in Pittsburgh.

Write to James R. Hagerty at bob.hagerty@wsj.com

Taxation of Foreclosures and Short Sales

--------------------------------------------------------------------------------
Copyright© 2008, CALIFORNIA ASSOCIATION OF REALTORS® Article Dated 11/12/08


Introduction

It has been some time since the real estate industry, on a large-scale basis, has had to deal with foreclosures, deeds in lieu of foreclosure, short sales and other distress sales of real property. Unfortunately, distress sales of real property, resulting from a convergence of tightening credit, falling property values, and the consequences of prior lending practices, are all too common currently and do not appear likely to end any time soon.

Seemingly adding insult to injury, owners of real property facing a distress sale, and generally already under financial strain, may be unpleasantly surprised to learn that two types of taxable income can result from a foreclosure, deed in lieu of foreclosure, or short sale: capital gains and forgiveness of debt (cancellation of debt) income. Both types of income can trigger unexpected taxes for the owner.

This legal article discusses the income tax consequences to the borrower in the event of foreclosure, the event the borrower simply transfers title to the lender (deed in lieu of foreclosure), and if the borrower sells the property to another in a short sale in which a lender accepts less than the balance due on the loan as payment in full.

Q 1. Are foreclosures, deeds in lieu of foreclosure, and short sales subject to federal tax income taxation?

A Yes. However, the income is taxed differently depending on several factors, including whether there was a foreclosure, a deed in lieu of foreclosure given to the lender, or a short sale (a sale where the lender agrees to reduce the amount owed in order to facilitate a sale), and whether the underlying debt is ?recourse? (the borrower is personally liable for the debt) or ?nonrecourse? (the borrower is not personally liable for the debt).
For federal income taxation as a result of foreclosure, see generally 26 U.S.C. §§ 1001 through 1016. For federal income taxation of short sales, see generally 26 U.S.C. §§ 61, 108 and 1001 through 1016.

TAXATION OF FORECLOSURES OR DEEDS IN LIEU OF FORECLOSURE

Q 2. What is the difference between a foreclosure and a deed in lieu of foreclosure?

A A foreclosure refers either to a trustee's sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding). A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property. A deed in lieu of foreclosure is not a special instrument. It is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property. In this way the lender can avoid the foreclosure process to regain title to the property.

However, a borrower cannot simply transfer title to the lender without the lender's permission. Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, some creative homeowners have quitclaimed the property to the lender anyway, and have recorded the instrument without the lender's permission.

In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender. The lender must record a "notice of nonacceptance of a recorded deed" in the county where the real property is located. Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title. (Cal. Civ. Code § 1058.5.)

A lender may not want to take a deed in lieu of foreclosure because taking title in this manner does not extinguish any junior liens. A foreclosure by a senior lienholder essentially wipes out all junior liens.

Q 3. How does the owner receive "income" from a foreclosure or a deed in lieu of foreclosure?

A A foreclosure proceeding, whether through a trustee sale or judicial foreclosure, and a deed in lieu of foreclosure given to the lender are treated the same as a sale for income tax purposes. The foreclosure or deed in lieu of foreclosure is reported on the taxpayer's tax return as a sale or exchange in the year the foreclosure is finalized or the deed in lieu of foreclosure is given to the lender.

In a foreclosure or deed in lieu of foreclosure, the owner can receive "capital gain or loss" as in any other sale of real property (i.e., be subject to capital gains taxation or receive a credit for a capital loss). Additionally, the owner can receive "forgiveness of debt" income. This is also referred to as "cancellation of debt" income. Whether the owner is subject to taxation on this income may depend on whether the debt is "recourse" or "nonrecourse." If the debt is a recourse debt, the owner may be deemed to have received taxable income in the amount of debt that is forgiven by the lender (except in certain situations discussed below where the owner will not be taxed). If the debt is nonrecourse debt, there is no taxable income from forgiveness (or cancellation) of debt, but the owner may be still be subject to capital gains taxation.

Q 4. What is "nonrecourse" debt?

A Under California law, a debt is considered "nonrecourse" when a loan is made under either one of the following two circumstances:

(1) When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or

(2) When the seller carries back financing for all or a portion of the purchase price of any real property.

(Cal. Code Civ. Proc. § 580b.)

In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency should the property be worth less than the loan amount.

Q 5. What is "recourse" debt?

A Under California law, a "recourse" debt is one in which neither of the two exemptions in Question 4 occurs.

Examples of recourse debt are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property. The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee's sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt. In order to go after a deficiency judgment, the lender must go through a judicial foreclosure process.

Q 6. How is the amount realized (taxable income) calculated for a "recourse" debt in a foreclosure?

A If the debt is recourse debt, meaning the owner may be personally liable for the debt, the amount realized is calculated in a two-step approach.

First, you take the difference between the Fair Market Value (FMV) of the property (usually the sales proceeds at the judicial foreclosure or trustee's sale) and the Adjusted Basis in the property. Generally, the Adjusted Basis consists of the purchase price of the property plus any capital improvements (less depreciation, if the property is investment property). This difference is the capital gain or loss. If the FMV exceeds the amount of the Adjusted Basis, then the borrower has realized a capital gain at the time of the transfer (foreclosure). If the Adjusted Basis exceeds the FMV, then the borrower has a capital loss.

Second, you take the difference between the amount of the cancelled debt (e.g., unpaid loan amount) and the sales proceeds at the foreclosure (FMV). This is the forgiveness of debt (cancellation of debt) income and it is treated by the IRS as ordinary income despite the fact that the borrower has received no cash at the time of the foreclosure.

However, if the cancelled debt amount is considered "qualified principal residence indebtedness" pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, there will be no taxation on this forgiveness of debt (cancellation of debt) income. See Question 9 for a definition of "qualified principal residence indebtedness."

RECOURSE DEBT

Example One:

1. The unpaid balance of the loan is $300,000;

2. The FMV of the property is $250,000;

3. The taxpayer's adjusted basis in the property is $200,000.

Assume the lender forecloses and will forgive the underlying debt.

Step one:

FMV ($250,000) less taxpayer?s adjusted basis ($200,000) results in capital gains for the taxpayer.

FMV
$250,000

Less Adjusted Basis
$200,000

Capital Gains
$ 50,000


Step two:

Amount of cancelled debt (amount owed on $300,000 loan) less FMV ($250,000) is ordinary income to the taxpayer.

Amount Owed
$300,000

Less FMV
$250,000

Ordinary Income
$50,000


Note: If a lender chooses to foreclose through a trustee's sale and is barred from obtaining a deficiency judgment by the one action rule under California Code of Civil Procedure Section 580d, it is likely the IRS will still consider that the underlying debt as a recourse debt and it will be subject to debt forgiveness income. (See Rev. Rul. 90-16.) However, there may be no taxation of this income under The Mortgage Forgiveness Debt Relief Act of 2007.

RECOURSE DEBT

Example Two:

If the FMV at the foreclosure sale is more than what the lender is owed, there will be no forgiveness of debt and, thus, no ordinary income to the taxpayer.

1. The unpaid balance of the recourse debt is $300,000;

2. The FMV of the property is $400,000;

3. The taxpayer's adjusted basis in the property is $200,000.

Step one:

FMV ($400,000) less taxpayer's adjusted basis ($200,000) results in capital gains for the taxpayer.

FMV
$400,000

Less Adjusted Basis
$200,000

Capital Gains
$200,000


Step two:

The debt is fully paid (since the FMV of $400,000 exceeds the unpaid loan amount of $300,000) resulting in no forgiveness of debt.

Q 7. How is the amount realized (taxable income) calculated for a "nonrecourse" debt in a foreclosure?

A If the debt is nonrecourse, meaning the owner is not personally liable for any deficiency (beyond the value of the property), the amount realized is the difference between

(a) the greater of: (i) the FMV or (ii) the entire outstanding debt; and

(b) the adjusted basis of the property.

This amount is treated as capital gains and there is no taxation for forgiveness of debt income.

Even though the adjusted basis might exceed the FMV and the outstanding debt, generally no capital loss would be allowed because nearly all nonrecourse debt is associated with a principal residence. (Capital losses are applicable only to investment property.)

NONRECOURSE DEBT

Example:

1. The unpaid balance of the loan is $300,000;

2. The FMV of the property is $250,000;

3. The taxpayer's adjusted basis in the property is $200,000.

Greater of FMV ($250,000) or entire unpaid debt ($300,000) minus taxpayer?s adjusted basis ($200,000) results in capital gains to the taxpayer.

Greater of
FMV ($250,000)
OR
Unpaid Debt ($300,000)

Greater of the above
$300,000

Less Adjusted Basis
$200,000

Capital Gains
$100,000




Q 8. How is a deed in lieu of foreclosure treated for tax purposes?

A A deed in lieu of foreclosure is treated as a sale and taxed just like a foreclosure.
See Questions 6 and 7 above.

TAXATION OF SHORT SALES

Q 9. What are the tax implications of a short sale?

A A short sale, where the lender agrees to reduce some or all of the outstanding debt, may give rise to forgiveness of debt income (also called "cancellation of debt" income). The amount of the debt that the lender agrees to write off is treated as "ordinary income" (as opposed to capital gains income which is taxed at a lower rate). Even though the lender may be taking this action to facilitate the sale by the owner who is under a notice of default and facing a foreclosure, the agreement between the owner and the lender is considered voluntary and the amount of the loan written off by the lender is treated as forgiveness of debt (cancellation of debt). The taxpayer will generally receive a 1099 tax form from the lender in the amount of the cancellation of debt.

This forgiveness or cancellation of debt which is treated as "ordinary income" under certain circumstances may or may not be subject to taxation. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code §108(a)(1)(E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:

. The property sold in the short sale is the taxpayer's principal residence, as that term is used in IRC §121.
. The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h)(3)(B).
. The indebtedness is discharged after January 1, 2007 and before January 1, 2013. (The end date was increased by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008).

**Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. The income relief provided is capped at $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others.

Any reduction of indebtedness excluded by IRC §108(a)(1)(E) will be applied to reduce the basis of the taxpayer's principal residence, but not below zero. This could result in a higher amount of capital gains tax owed by the taxpayer.

Recently passed California law, SB 1055, conforms California Revenue and Tax Code Section 17144.5 to federal law with the following exceptions:

(1) The maximum amount of acquisition indebtedness is reduced to $800,000 for couples filing jointly and $400,000 for individual filers;

(2) The maximum amount of debt relief income that can be forgiven is $250,000 for couples filing jointly and $125,000 for individual filers; and

(3) California’s debt relief statute applies to property sold on or after January 1, 2007 and before January 1, 2009.

Finally, if the owner has owned the property for some time and has refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well. For example, the borrower has a remaining loan on the property when the borrower refinances in order to buy an investment property (or to buy a car, to take a vacation, consolidate credit card debt, etc.) and now owes $300,000 to the lender. Thus, the taxpayer's adjusted basis may be lower than the outstanding balance on the loan (see the example below).

The tax calculation would look like step one in calculating a foreclosure sale of recourse debt.

SHORT SALE

Example:

1. The unpaid balance of the loan is $300,000;

2. The sales price (FMV) is $250,000;

3. The taxpayer's adjusted basis in the property is $50,000.

Sales price (FMV $250,000) less taxpayer's adjusted basis ($50,000) results in capital gains for the taxpayer.

Sales Price (FMV)
$250,000

Less Adjusted Basis
$50,000

Capital Gains
$200,000



Additionally, the taxpayer will have ordinary income from the lender's write off of any debt, which in this example would be $50,000 (** See the discussion above in this question to determine whether or not this would be taxable)

Loan Balance
$300,000

Less Sales Price
$250,000

Ordinary Income
$50,000




TAX EXEMPTIONS

Q 10. Are there any other exemptions from the taxation of cancellation of debt income?

A Yes. There are four other circumstances, in addition to what was discussed in Question 9 where the taxpayer can get relief from taxation on cancellation of debt income:

(1) The taxpayer is insolvent (the taxpayer's debts exceed their assets, but the cancellation of debt is forgiven only to the extent of the insolvency);

(2) The debt is discharged as part of a bankruptcy proceeding;

(3) The debt discharged is qualified farm indebtedness; or

(4) The debt discharged is qualified business indebtedness.

For all of the above, any reduction in indebtedness will be applied to reduce the taxpayer’s basis in the property.

(26 U.S.C. §§ 108(a), 108(b), 108(c) and IRS publication 908.)


Note, however, it is likely that many taxpayers currently subject to cancellation of debt income will qualify for the insolvency exemption from taxation. Taxpayers should be advised to speak with their own tax advisors as to whether they meet the insolvency exemption.

Q 11. Are there any exemptions from the capital gains taxation in a foreclosure, deed in lieu of foreclosure or short sale if the property is a principal residence?

A Yes. If the sale, whether through a foreclosure or deed in lieu or short sale, generates capital gains and if the property was the seller's principal residence, the seller may be able to use the capital gains exclusion of $250,000 if single and $500,000 if married filing a joint return. This exclusion does not apply to ordinary income from cancellation of debt.

MISCELLANEOUS

Q 12. Which is better for an owner facing a distress sale: a foreclosure, a deed in lieu of foreclosure or a short sale?

A Any of these situations will impact the owner's credit negatively. Additionally, the owner may have a significantly different tax liability depending on the disposition of the property. Consequently, this is a question that the owner needs to discuss with their own tax advisor.

Q 13. What is a quick summary of these taxation rules?


Recourse Foreclosure/
Deed in Lieu
Nonrecourse Foreclosure/
Deed in Lieu
Short Sale

Capital Gains
FMV Less Adjusted Basis
Greater of FMV or Outstanding Debt Less Adjusted Basis
FMV Less Adjusted Basis

Ordinary Income
Outstanding Debt Less FMV *
No Ordinary Income
Amount of Debt Forgiven*



*No Ordinary Income if "Qualified Principal Residence Indebtedness" (**See the discussion in Question 9)

Q 14. Does California follow the debt relief rules set forth above?

A Recently passed California law, SB 1055, conforms California Revenue and Tax Code Section 17144.5 to federal law with the following exceptions:

1. The maximum amount of acquisition indebtedness is reduced to $800,000 for couples filing jointly and $400,000 for individual filers;

2. The maximum amount of debt relief income that can be forgiven is $250,000 for couples filing jointly and $125,000 for individual filers; and

3. California’s debt relief statute applies to property sold on or after January 1, 2007 and before January 1, 2009.

Q 15. Where can readers obtain more information on the subjects covered above?

A Information is available from a variety of sources, including:

. The Internal Revenue Service (IRS) (http://www.irs.gov/), which has detailed publications available for free on many tax related subjects.
. The IRS Tele-Tax system, which is an automated voice message information system with recorded information on many commonly asked tax questions. Tele-Tax can be reached by calling 800.829.4477.
. A tax professional, such as a certified public accountant, tax attorney, or enrolled agent.



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