2004 was the year of home buying
By Tom Kelly
Columnist
The story of the year in real estate?
Let's get beyond the slippery accounting practices of Fannie Mae in 2004, or for that matter Freddie Mac in 2003. Both mortgage giants are shareholder-owned, yet chartered by Congress to maintain a constant flow of loan funds for the nation's housing market. You would expect a higher standard of performance.
Instead, let's dwell on the amazing impact of the family home on the general economy. Single-family homes, while viewed as a solid investment for years by financial advisers, have begun to shed their "ill-liquid" moniker and become a flexible, versatile asset that has evolved into an enormous instrument of wealth in this country.
In fact, a new study produced by the Joint Center for Housing Studies at Harvard University and Macroeconomic Advisers shows that housing wealth has a more immediate impact on consumer spending than stock wealth. Low interest rates the past five years, coupled with steady home appreciation, have provided a more reliable pot of funds than the staccato financial markets.
"Aggressive cuts in short-term interest rates at the beginning of the decade forestalled economic problems and led to record home sales and home equity borrowing," said David Lereah, chief economist for the National Association of Realtors.
"Without the stimulus, housing's contribution to consumer spending would have been about half as great, the recession much worse and the recovery less robust."
Despite what you might have heard, Mortgage interest rates still have not returned to more normal levels. Home-loan rates, which had been expected to rise considerably by the fourth quarter of this year, were bouncing lower at the end of November than at the end of April.
And what we have finally learned is that consumers were using those low mortgage rates to buy furniture, automobiles, tuition and boats via home equity loans.
According to the Harvard study, housing contributed more than 25 percent to consumer spending from 2001 to 2003. About half of that boost was attributable to gains in housing wealth through equity withdrawals and realized capital gains.
In fourth quarter 2003, home equity accounted for 19 percent of household wealth - slightly higher than the combination of stocks and mutual funds, according to the study. Home equity exceeded the value of stock owned directly by households by $2.6 trillion.
Home appreciation and low interest rates also provided a cushion to help a record number of seniors age in place via reverse mortgages, which allow senior citizens to draw cash out of the equity built up in their homes without risking the loss of those homes.
The Department of Housing and Urban Development, through the Federal Housing Administration, insured more than 36,000 home equity conversion mortgages in fiscal 2004. This type of loan accounts for approximately 90 percent of all reverse loans nationally. The agency, which anticipates huge reverse mortgage numbers in 2005, had insured a previous record 18,097 conversion mortgages in fiscal 2003.
"When you close more than 36,000 of these loans in one year in excess of $6 billion, you stop considering it a little something on the side," said John Weicher, assistant secretary of housing who oversees FHA programs.
The loan limit for FHA home equity conversion mortgages is pegged to the Fannie Mae limit. The highest of the loan limits --applicable generally to major metropolitan areas - will increase to $312,896 (equal to 87 percent of the Fannie Mae limit) in 2005, up from $290,319. The lowest loan limit, which generally applies to rural and nonmetropolitan areas, will rise to $172,632 (equal to 48 percent of the Fannie Mae limit), up from $160,176.
Rob Keasal, a real estate tax specialist in the Seattle-based accounting firm of Anderson ZurMuehlen & Co., said one of his top stories this year was the clarity given to homeowners who did not meet the requirement of living in their home two of the previous five years to take advantage of the $500,000 capital gains exclusion ($250,000 for single people) on the sale of a primary residence.
"The home sales rules were finalized in 2004 so that if someone fails to meet the ownership rules, they can qualify for partial exclusion based on a change of place of employment, health or unforeseen circumstances," Keasal said.
"And there are also recent law changes that provide relief to military and foreign service personnel that allow them to suspend the running of the five-year period for up to 10 years while on active duty."
While we're at it, let's thank all those folks in the military. Many of them are not home for the holidays. Let's hope they will be in 2005.
Tom Kelly's new book "How a Second Home Can Be Your Best Investment" (McGraw-Hill) was written with John Tuccillo, former chief economist for the National Association of Realtors and is available in local bookstores.
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