By Brad Reagan and Elizabeth O’Brien

Oct 20th, 2008

When the headlines about the housing market are apocalyptic, the last thing a homeowner wants to do is sell. But a funny thing happened to Jeff and Jennifer Boyd when they put their three-bedroom house in Philadelphia’s Graduate Hospital district on the market this summer: They turned a profit. Just 45 days after the listing went up, a buyer snapped up the property for $555,000-$29,000 more than the Boyds paid in 2006. “We were pretty hesitant, knowing what the market is like,” says Jeff. “But a few weeks later, it was gone.”

Here’s a surefire way to start an argument: Suggest that the housing market has reached bottom. To be sure, the near-term outlook is still grim, and nobody is forecasting a rapid nationwide rebound. But there are signs that the overbuilding and speculative pricing that inflated the bubble are working their way through the system. In October 2005, near the peak of the boom, the median sales price for a U.S. home reached 7.3 times per capita income; by this May it had fallen to 5.7, in line with historical norms. Nationally, the rate of decline in sales is slowing, and in some regions sales numbers have actually perked up. “The indicators are starting to look better,” says Adam York, an economic analyst with Wachovia.

Why the disconnect? For starters, the national sales figures that get so much attention-and remain depressing-are brought down by boom-and-bust markets like Las Vegas, Miami and Phoenix. David Berson, chief economist with mortgage insurance firm The PMI Group, says that if hard-hit states like California, Arizona, Nevada and Florida are taken out of the statistical mix, the picture is much more promising. According to PMI’s “risk index,” which estimates the odds of prices falling in a given market, at least 65 percent of the nation’s 386 metro areas have less than a 10 percent chance of seeing lower prices two years from now. What’s more, the government’s sweeping bailout of the financial sector could boost the housing market by making borthe rowing easier for buyers.

We dug into those numbers as well as other forecasts and analysis to determine which markets are in the best shape for a rebound. We also talked with housing experts to learn which kinds of neighborhoods and suburbs are thriving. Our search led us to 25 metropolitan areas that look particularly promising, and there are more than a few surprises. Here, we profile seven of the best-looking markets; for the full list of 25, see November’s issue of SmartMoney magazine.

Seattle

The Emerald City is that rare major metro area near the coast that is not on a nausea-inducing roller-coaster ride. While home prices in Florida and Southern California are in a free fall, homeowners here are experiencing a gentler landing. Of course, that’s partly because the ride up was not as euphoric-home prices here peaked at 65 percent above January 2003 levels, compared with more than 95 percent in Los Angeles. Thanks to well-paying mega-employers like Microsoft, Amazon.com and Boeing, unemployment remains under 4 percent. That, in turn, has kept median sales prices from falling far. Just as encouraging: Only 11.5 percent of local homeowners who bought within the past five years have negative equity on their property, well below the national average of 29 percent, according to the real estate services firm Zillow. That indicates there won’t be a flood of foreclosures and short sales around the corner.

Among Seattle’s neighborhoods and suburbs, yesteryear’s star performers-affluent areas like the Victorian-studded Queen Anne district or Redmond, home of Microsoft-are beginning to slide back a bit. The most resilient part of the region lies across the Duwamish River from downtown, in West Seattle. The small community is directly accessible by only one bridge. That can lead to traffic snarls, but many residents simply bike 20 minutes to jobs downtown. On weekends the relative seclusion means the 2.5-mile Alki Beach promenade along Elliot Bay doesn’t get too crowded. As long as people like great views of water, mountains and city skylines, “those homes will always maintain their value,” says local broker Febe Cude. Dave and Alison Keith recently sold their two-bedroom townhome in West Seattle for $289,000, up more than 25 percent from their purchase price four years ago. They plowed that windfall into a home in the same neighborhood with twice the living space and a fenced-in yard, for $429,000. “You’re always nervous, but I feel like things are holding up well here,” Alison says.

Last Updated: October 16, 2008: 8:47 AM ET

NEW YORK (CNNMoney.com) — Low mortgage rates, the one bright spot in a devastated housing market, are on the rise.

And while rates remain low by historical comparison, experts say they could continue to creep up.

The average interest rate on a 30-year, fixed rate mortgage jumped to 6.6% late Tuesday from 6.06% the Tuesday before, according to Keith Gumbinger of HSH Associates, a publisher of mortgage information.

A borrower with a $200,000 mortgage would pay about $1,207 a month at 6.06%, and $70 more at 6.6%.

Mike Larson, an analyst with Weiss Research who participates in Bankrate.com’s weekly mortgage rate surveys, expects to see rates top 7% in the next six months, and then turn back down.

That’s quite a bit higher than rates have been, but it’s no disaster.

Gumbinger blames the rate increase on the massive federal bailout. To fund the rescue and the new government guarantees, Treasury must sell a raft of new Treasury bills to raise money.

“Who even has the cash to buy them all?” said Gumbinger. “The Treasury has to offer higher interest rates to sell.”

Mortgage rates tend to move in conjunction with Treasurys.

But mortgage rates are higher than Treasury yields, because when mortgages are securitized and sold to investors, they’re a riskier proposition than government bonds.

“There’s any number of risks with mortgage securities,” said Gumbinger, “including the risk that borrowers may not pay the mortgages at all.”

So, with Treasury yields on the rise, mortgage rates should continue to be a more expensive for the next few months, he said.

Unintended consequences

There may be another factor at work sending rates skyward, according to FTN Financial Group analyst, Jim Vogel.

The cost of financing mortgages will grow for the biggest buyers of mortgage debt, Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500), thanks to the plan for the Federal Deposit Insurance Corp. to back the newly issued, unsecured debt of some banks.

By guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields – and to pay for that they’ll have to charge borrowers higher interest.

“In theory, I think that could be correct,” said Mark Zandi, chief economist for Moody’s Economy.com, who is also an adviser to John McCain’s presidential campaign. “But in practice, whether it means that rates will rise is an open question. There’s a strong demand for really safe assets these days and Fannie and Freddie bonds are just a step removed from Treasurys.”

If there’s enough demand for ultra-safe investments like Fannie and Freddie bonds, Zandi says, they may not have to boost their yields all that much to attract investors.

Zandi pointed out that the difference between Treasury yields and 30-year mortgage rates is very high right now, more than 2% compared with 1.5% normally. That’s because investors fled to risk-free Treasurys when the markets panicked.

But eventually, he says, the government rescue may send mortgage rates down and narrow that spread. “If that helps bring down the general angst, than mortgage rates should fall,” he said.

Gumbinger expects rates to stay higher for several more months, as financial markets and lending take some time to return to normal. But he doesn’t see the current spike as the beginning of the end of affordable mortgages.

“Rates should probably settle back down,” he said. “We should see an easing of credit availability and that should put downward pressure on rates.” 

The Emergency Economic Stabilization Act of 2008

On October 3, 2008, President Bush signed H.R. 1424, the Emergency Economic Stabilization Act of 2008 (the “Act”). The Act, often referred to in the media as the “bailout” or “rescue” bill, is a legislative package that is made up of the Troubled Assets Relief Program (TARP), the Energy Improvement and Extension Act, and the Tax Extenders and Alternative Minimum Tax Relief Act.

Key provisions of the Act include:

Financial Bailout Provisions

       Authorization of government to purchase troubled assets: The Act creates a new Troubled Assets Relief Program (TARP), which authorizes the federal government to purchase “troubled assets” (which includes residential and commercial mortgages, and securities, obligations, or other instruments that are based on or related to such mortgages) from financial institutions either directly or through auctions.

       Imposition of limits on executive compensation: In a case where the Treasury Department purchases troubled assets directly from a financial institution, the Act allows the Treasury to set compensation standards, prohibits golden parachutes, and allows the Treasury to recover “unearned” bonuses previously paid out. In cases where a financial institution sells more than $3 million through the TARP program, and participates in an auction purchase, the Act limits the annual deductible compensation to CEOs, CFOs, and other executives to $500,000, and limits golden parachutes.

       Allowance of ordinary income tax treatment for Fannie Mae and Freddie Mac preferred stock losses: The Act allows specified financial institutions to treat losses incurred in the sale or exchange of preferred stock in Fannie Mae or Freddie Mac as ordinary losses. This treatment generally applies to the sale of preferred stock held on September 6, 2008, or sales or exchanges of preferred stock on or after January 1, 2008, and before September 7, 2008.

       Extension of mortgage forgiveness exclusion: The tax code generally treats cancelled debt as taxable income. The Mortgage Forgiveness Debt Relief Act of 2007 excluded from gross income discharges of up to $2 million of indebtedness ($1 million if married filing separately) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The Act extends this exclusion from December 31, 2009, to December 31, 2012.

       Temporary increase in FDIC insurance amount: The Act increases the FDIC and Credit Union Share Insurance Fund deposit insurance limit applicable to depository institutions and credit unions from $100,000 to $250,000. The increase will be in effect only until December 31, 2009.

AMT Relief

       Another AMT “patch”: The Act includes another AMT patch for the 2008 tax year. Consequently, for 2008 only, the AMT exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household, and $34,975 for married couples filing separately. Further, for 2008, taxpayers can continue to apply nonrefundable personal tax credits to reduce AMT liability as well as regular federal tax liability. Additionally, the Act accelerates the application and refundability of unused long-term minimum tax credit, and provides specific relief for AMT liability that results from the exercise of incentive stock options (ISOs).

Extended Tax Breaks-Individuals

       Extension of additional standard deduction: The Act extends a provision allowing an additional standard deduction for real property taxes paid by taxpayers who do not itemize that was enacted earlier this year by the Housing and Economic Recovery Act of 2008. The amount of the deduction is the lesser of the amount allowable as a deduction of state and local real property taxes, or $500 ($1,000 for married persons filing a joint return). The provision was set to expire at the end of 2008, but is now extended through 2009.

       Extension of deduction for state and local taxes: The Act further extends a provision originally enacted as part of the American Jobs Creation Act of 2004, and extended through 2007 by the Tax Relief and Health Care Act of 2006, that allows individual taxpayers to elect to take an itemized deduction for state and local general sales taxes instead of the itemized deduction for state and local income taxes. The Act extends this provision through 2009.

       Extension of deduction for qualified higher education expenses: The Act extends the above-the-line deduction for qualified tuition and related expenses through 2009. The maximum deduction is $4,000 for taxpayers with an adjusted gross income (AGI) of $65,000 ($130,000 for married persons filing jointly) or below, and $2,000 for taxpayers with an AGI of $80,000 ($160,000 for married persons filing jointly) or less. Taxpayers whose AGI exceeds those amounts are not entitled to a deduction.

       Extension of deduction for teacher’s classroom expenses: There is an above-the-line deduction for up to $250 annually for classroom expenses paid for or incurred by an eligible educator for books, supplies, computer and other equipment, and other supplementary materials. The Act extends this deduction through 2009.

       Extension of tax-free distributions from IRAs for charitable purposes: The Act permits taxpayers to make tax-free distributions of up to $100,000 from IRAs for charitable purposes through December 31, 2009. This provision had previously expired December 31, 2007.

       Modification of refundable child tax credit: The Act lowers the 2008 earned income threshold for purposes of the refundable portion of the child tax credit to $8,500 (from $12,050).

Tax Provisions-Businesses

       Extension and modification of R & D tax credit: The Act extends the research and development tax credit to cover expenses paid or incurred on or before December 31, 2009, and increases the alternative simplified credit from 12 percent to 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years.

       Extension of renewable energy tax credit: The Act modifies the credit and extends the placed-in-service period through the end of 2009 for qualified wind facilities. The placed-in-service period for other energy sources such as geothermal, closed-loop biomass, hydropower, landfill gas, and trash combustion facilities is also extended through December 31, 2010. The Act also creates a new energy production category–marine renewable–which is energy derived from waves, tides, and currents.

       Extension of FUTA surtax: The bill extends the Federal Unemployment Tax Act (FUTA) surtax of 0.2 percent through 2009.

       Extensions of other business tax incentives: The Act extends though 2009 several business tax incentives including:

       Indian employment tax credit

       New market credit

       The 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant property

       Deduction for charitable contributions of food inventory

       Deduction for charitable contributions of book inventory to public schools

       Deduction for corporate contributions of computer equipment for education purposes

       Qualified Zone Academy Bonds

       Rehabilitation tax credit for Gulf Opportunity (GO) Zone buildings

       Work opportunity tax credit for employers who hire employees who were affected by Hurricane Katrina is extended through August 28, 2009

Energy Incentives

       Extension and modification of residential energy tax credits: The Act extends the tax credit for residential energy-efficient property from 2009 to 2016. The Act removes the $2,000 maximum limit on solar electric property. Further, the Act adds new types of equipment that qualify for the credit: (1) wind energy equipment, which qualifies for a tax credit of up to 30 percent of the cost, capped at $4,000, and (2) geothermal heat pumps, which qualify for a credit of up to 30 percent of the cost, capped at $2,000. Additionally, the residential energy conservation property credit, which provides a credit of up to $500 for purchasing energy-saving products, such as windows, insulation, and HVAC systems is extended through 2009. The Act adds two new types of improvements that qualify for the credit: (1) biomass fuel stoves with a thermal efficiency rating of 75 percent or more, and (2) asphalt roofs with cooling granules. The Act also clarifies that water heaters must have either an energy factor of at least 0.80 or a thermal efficiency rating of at least 90 percent to qualify for the credit. Note, however, that while the credit is worth up to $500 for various improvements, the credit is limited to $200 for windows and to $300 for biomass fuel stoves.

       Creation of tax credit for electric vehicles: The Act creates a new tax credit of $2,500 to $7,500 for plug-in electric vehicles. The credit will start to phase-out after 250,000 qualifying electric vehicles are sold. Vehicles that qualify will need to be certified under the Clean Air Act and meet the California low-emission standards. Higher tax credits are also available for electric vehicles with gross vehicle weight ratings of more than 10,000 pounds.

       Creation of tax-free fringe benefits for bicyclists: The Act provides a new tax break for people who commute by bicycle. Employers can provide a tax-free fringe benefit of up to $20 per month to cover “reasonable expenses incurred by the employee” for the purchase, improvement, repair, and storage of a bicycle that is regularly used to commute between the employee’s home and office. This bicycle fringe benefit will begin in 2009.

Disaster relief

       Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and floods: The Act applies and modifies certain GO Zone and Hurricane Katrina tax relief measures to the “Midwestern disaster area.” The term “Midwestern disaster area” means: (1) an area declared a major disaster area by the President on or after May 20, 2008, and before August 1, 2008, by reason of severe storms, tornados, or flooding occurring in any of the States of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin, and (2) determined by the President to warrant individual or individual and public assistance from the federal government for damages attributable to such severe storms, tornados, or flooding. 

KIRKLAND, Wash. (Oct. 6, 2008) – Home sales around Western Washington during September rose 4.1 percent from a year ago, reversing a 19-month pattern of declines. Members of Northwest Multiple Listing Service reported 5,982 pending sales (offers made and accepted, but not yet closed), a gain of 234 transactions from a year ago. The totals cover 19 counties in the MLS service area.

NWMLS data show the last system-wide uptick in pending sales was February 2007 when members reported a 4.8 percent gain from the previous year.

In other key indicators of housing activity, Northwest MLS reported tightening inventory with a double-digit drop in the number of new listings added during September compared to 12 months ago, and total inventory at month end that matched year-ago numbers. Figures also show area-wide softening of prices compared to a year ago,

The median price for last month’s closed sales of single family homes and condominiums (combined) was $295,000, a drop of 8.3 percent from a year-ago when the median price was $321,600. King County prices fell about 3.7 percent from a year ago, from $395,000 to $380,315. For the four-county Puget Sound region (King, Snohomish, Pierce and Kitsap), the median price for last month’s closed sales dropped from $349,950 to $324,000, a decline of 7.4 percent.

Brokers and lenders say the recent economic turmoil is taking a toll on activity, but also suggest negative news reports are keeping buyers on the fence and creating misunderstandings about the availability of home loans.

“Forget the news. Mortgage loans are readily available, at excellent rates and you can still get 97 percent loan to value,” said Mike Welty of Liberty Financial Group in Bellevue. “There is a lot of flexibility in programs, qualification and opportunity,” he emphasized, while acknowledging (with a chuckle), “Underwriting is tougher – you need a down payment and you need a job!”

REALTOR Dennis Brown, a residential and investment specialist at Windermere’s Fauntleroy office, echoed Welty. “I’m loving FHA,” he exclaimed, calling the largest mortgage insurer in the world “the answer to a lot of people’s credit problems.” Brown has used the program for first-home and move-up buyers, as well as with investors. “Investors use the program to buy everything from fixer-uppers to 4-unit buildings,” he said. Among features Brown said his clients find to be most appealing about FHA loans are easy credit qualifications (typically one year of “clean credit”), low closing costs and low down payment requirements (as low as 3 percent of the purchase price).

In today’s market the vast majority of buyers are first time buyers, move-up buyers, and investors, according to J. Lennox Scott, chairman and CEO of John L. Scott Real Estate. “These three groups of buyers are moving forward with the opportunities that exist thanks to low interest rates, increased affordability, and a strong selection of homes to choose from.”

Buyers still have plenty of choices, according to NWMLS data. Members added 10,889 new listings of single family homes and condominiums to inventory during September – about 1,500 fewer than a year ago for a 12 percent drop. When added to existing inventory, the number of active listings at month end totaled 48,665, slightly fewer than the year-ago number of 48,969 listings.

“We are definitely starting to see more buyers that have been waiting months to get off the fence,” said NWMLS director Mike Skahen, owner/broker of Lake & Company Real Estate, Inc. in Seattle. As for the dip in prices, he attributes that in part to limited availability of jumbo loans for high-end homes, “Not surprisingly, with fewer high priced homes selling, the median price would be lower,” he noted. “I’m convinced that as the national financial crisis subsides and with Seattle’s good economy, buyers who have been waiting for the bottom will return and wish they had bought now.” Commenting on the relatively low sales numbers over the past year, he remarked, “There must be substantial pent-up demand.”

“The latest NWMLS numbers validate what our agents report from the field — sellers that are truly motivated to move are dropping their prices, and many buyers are recognizing the opportunity this creates,” said Ron Sparks, managing vice president at Coldwell Banker Bain in Bellevue. Increases in pending sales are a “good indication that our market is adjusting to current buyer attitude and demand.”

Sparks acknowledged price declines aren’t particularly good news for sellers, but said most sellers can be thankful the drops are really quite modest compared to other markets, where prices have recently dropped 30 percent or more. “It’s apparent that home prices, both locally and nationally, are becoming irresistible in some instances,” he remarked. As a result, he noted markets such as San Diego, Los Angeles and Las Vegas are seeing the same increased buyer activity as our local market.

Erik Hand, president of Response Mortgage Services (John L. Scott’s in-house lender) expects some improvement in financing options, but cautioned consumers about the potential cost of procrastinating.

“With the passage of the bailout bill, I expect we will gradually see an improvement to the conditions in the Non-Conforming market in the form of a narrowing of the spreads between Conforming and Non-Conforming loan products, and in some cases, an easing of guidelines that will open up financing options to a larger pool of buyers,” Hand stated.

“As for interest rates, they are expected to remain low, but like every other aspect of the economy they’re subject to the volatility of the market,” Hand commented, adding, “It’s important for homebuyers to understand that interest rates are currently at historic lows and there’s no guarantee they’ll fall further with the passage of the bailout bill.”

“While things in the real estate world may not be perfect right now, things are, and will continue to get better and better. The medicine tastes terrible but the cure will be worth it,” NWMLS director Dick Beeson believes. Beeson, the broker/owner of Windermere/Commencement Associates in Tacoma saw a 21.8 percent surge of pending sales in Pierce County last month compared to a year ago and a notable shrinkage in inventory (down 11.2 percent from twelve months ago).

“We’re moving toward a market place with fewer properties for sale — and fewer and fewer choices for buyers. What a time to buy, low rates, low prices, low costs, and decreasing inventory — all ready for those smart buyers who act now,” he noted.

NWMLS director Kathy Estey, managing broker at the Bellevue Downtown office of John L. Scott said “September felt like we were gathering steam and back on track,” but as economic news worsened during the month buyer confidence tumbled. “The news made it sound as if buyers need 20 percent down to get a loan — and fear become our worst enemy again,” she remarked.

On a more optimistic note she added, “The Puget Sound remains a great place to own property and there are opportunities to buy low and ride the rising prices that are around the corner in a year or two.”

Northwest Multiple Listing Service, owned by its member brokers, is the largest full-service MLS in the Northwest. Its membership includes approximately 31,000 brokers and agents. The organization, based in Kirkland, currently serves 19 counties, mostly in western Washington, plus Grant, Kittitas and Okanogan counties in the central part of the state.