What Will Get Better Next Year, and What Still Needs to Change

Every year at this time, I try to look into the two crystal balls on my desk to determine the future of housing -- at least for the next year.

This year's financial crisis has been called a once-in-a-century phenomenon. There is, of course, lots of finger-pointing that we can do -- at Congress, mortgage lenders, governments at all levels and consumers -- but I don't want to go that route.

Instead, I want to stay on the optimistic side. In part, that's because I am not sure that we can sink much lower next year.

So, what's positive today? For one thing, gas and oil prices have dramatically fallen in the past few months. That's good news for those of us who heat our homes with oil.

And interest rates are perhaps at an all-time low. A friend just obtained a loan commitment for a 30-year, fixed rate at -- believe it or not -- 4.875 percent. And a mortgage broker told me that for a brief time last week, rates dipped down to 4.5 percent.

These rates mean it is time to refinance, especially for those of you who have adjustable-rate mortgages. The loan requirements have been dramatically tightened, though. You will need a good FICO credit score, and you may need to have at least 40 percent equity in your house. Still, it makes sense to ask your lender if you can qualify for a lower interest rate.

And if you can obtain a loan, it is also a good time to buy. In all my years in real estate, I cannot recall a better, stronger buyers' market.

It's also a good time to consider renting out your house -- and not only for the Obama inauguration. A lot of new people will be coming to Washington to join the new administration, and the old guard usually stick around as lobbyists or publicists. And many people are either unable to qualify for a loan or just plain afraid to jump into the real estate market. Accordingly, I believe that the rental market will remain strong in the Washington area in 2009.

Investors are concerned that Congress may increase the capital gains tax from its current 15 percent, and thus I predict we will see more Section 1031 (Starker) exchanges this coming year. While many people mistakenly call these "tax-free" exchanges, because you generally do not have to pay any tax if you conduct a successful exchange, in reality it is a "tax-deferred" process. But call it what you will, such an exchange is a good way to rid yourself of investment property that you feel may no longer be productive and obtain in exchange a piece of property with more potential.

Additionally, for those investors who plan to retire in a couple of years and move, the exchange process is just right. They obtain the replacement property in the area where they plan to live, rent it out for a couple of years, and then move into the house and treat it as their principal residence. There are significant tax savings if the process is done right.

What are some of my other predictions for 2009? First, in my opinion, interest rates will continue to stay about where they are now. This could stimulate home buying.

Mortgages themselves will change. We will begin to see 40-year loans, which have lower monthly payments.

Reverse mortgages will become more popular, especially as more and more baby boomers -- who did not bother to save money in the past -- are reaching age 62 and realize that their only asset is the house where they live.

There is a disturbing trend that Congress, state legislatures and governments at all levels must address. Many mortgage and homeowner scams and fraud continue to be aimed at people at all economic levels. Home buyers have been "sold" property that the seller never really owned. Homeowners facing foreclosure are being persuaded to work with unscrupulous people who promise to take care of their loan, but in reality take possession of their home.

And while there are many legitimate reverse mortgage lenders out there, I have begun to see the dark side -- lenders that extort huge sums of money upfront using the guise of attempting to assist the elderly.

Investors are also being preyed upon. We have all heard about how Bernard Madoff made off with billions of dollars from gullible people. But what about the intermediaries involved in Section 1031 exchanges that went belly-up, thereby not only losing money for potential exchangers, but also depriving them of the opportunity to complete a successful tax-deferred exchange? Those have received less attention. The IRS has made it very clear that the exchanger is out of luck if the intermediary cannot meet the strict deadlines imposed by law.

The Department of Housing and Urban Development is about to institute new rules regarding the Real Estate Settlement Procedures Act, commonly known as RESPA. Only time will tell if these rules will have effect of making home buying easier and less expensive.

But it appears that no one who rewrote those rules has heard my annual plea, so I will repeat it: Please reduce the number of documents that home buyers and sellers are required to sign when they go to closing.

Because of the volume of paperwork, people often just sign all those pages without fully understanding the impact the documents may have on them.

When I first started in the real estate business, when you obtained a mortgage you signed two or three papers and that was all. Now, in addition to the mortgage documents, you have to sign such miscellaneous documents as a name affidavit, clerical error affidavit, affidavit of debts and liens, disclosure statements, flood hazard insurance statement and much more.

While relief in this area is desperately needed, unfortunately I do not think that the mortgage industry will rise to the call this year. Nevertheless, we can remain optimistic.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.