Monday, July 18, 2011

Mixed Messages?

You may find that the information I provide is sometimes contradictory.  As I always try to remind everyone, "the market" is very location specific.  Reading news about national statistics or even state or county statistics may not be (and in most cases isn't) relevant to a local market.  Here in the greater Phoenix metro area, the range is HUGE.  For example, stats for the Paradise Valley luxury market have pretty much no relationship to the metro market, except that when you see stats for the metro market they include all areas and, as noted recently by Michael Orr, author of the Cromford Report, when there are less sales in the luxury market, the numbers can change drastically for the rest of the market.

Also, included in today's topics is an article about the rumored "Real Estate SalesTax" that has been flying around the Internet for some time now.  Contrary to what you may have read in such an email regarding a real estate sales tax (also being called a transfer tax) that is tied to the new healthcare bill, please note that the tax is not a real estate tax, but a tax on investments and it won't affect everyone... only those showing a profit over the capital gains threshold.  BTW, there are other tax rules for sale of a primary residence.  Anyone considering selling a home should certainly consult their tax advisor.

Below you'll find a link to the explanation about the so-called "sales tax" by SNOPES and an article from the National Association of Realtors® about the same issue.

 http://www.snopes.com/politics/taxes/realestate.asp

The 3.8% Tax Is Not a Real Estate Transfer Tax

Courtesy of the National Association of REALTORS®
November 24, 2010


By Robert Freedman, Senior Editor, REALTOR® Magazine

Shortly after the federal government enacted sweeping healthcare reform earlier this year, there was considerable concern over a last-minute addition to the legislation: a 3.8 percent tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013.

Among the concerns expressed among consumers and business people, including real estate professionals, both then and today, is that the tax amounts to a transfer tax on real estate. Not true, NAR Director of Tax Policy Linda Goold says.

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.


Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house.

This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they’re receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000.

For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.

Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples).  Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 – $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8%  = $950.

So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950.

This is a simplification. Other tax issues could come into play. But it shows that the tax applies to just a portion of investment income for certain upper-income households and that the capital gains exclusion remains untouched.

Nobody likes taxes, and this tax was inserted into the legislation at the 11th hour as a “pay-for,” that is, as a revenue generator to help offset some of the costs of the reform. It’s expected to generate $325 billion over eight years.

NAR has prepared a brochure that looks at how the tax might apply under eight income scenarios: 1) sale of principal residence (which we just looked at), 2) sale of a non-real estate asset, 3) gain, interest, and dividend from securities, 4) real estate investment income, 5) rental income as sole source of earnings, 6) sale of second home with no rental use, 7)  sale of inherited investment property, and 8. purchase and sale of investment property.

Please contact me if you'd like to receive a copy of this brochure.

Are Prices Going Up or Down?

Article Courtesy of Michael Orr
The Cromford Report

July 16, 2011

I don't think we have ever had such a confusing set of pricing data so it's not surprising that opinions on price direction are all over the map. Even the facts are all over the map, which is a much rarer condition.

I'm going to wade into the issue and try to explain what I see going on. Hopefully it will shed light rather than adding to the confusion.

Before I start, let me make it clear that market direction and price direction are not the same thing. Sometimes the market gets worse while prices rise. This happened between April 2005 and August 2007. Throughout this period the market deteriorated - supply was increasing and demand falling and although prices reached a peak in June 2006 they did not start to decline significantly until September 2007 (see here). In contrast, since November 2010, when the market was in poor shape, supply has been falling while demand has been rising, but prices have shown little to no interest in responding by moving higher. 

Nevertheless the improvement in market conditions is very substantial. Let's look at some key indicators for all areas & types:
  1. The Cromford Market Index™ is higher now than at any time since October 2005.
  2. The inventory of active listings is lower now than during the buoyant market of July 2003 and a far larger proportion of the current inventory has a contingent contract than was the case in 2003.
  3. Monthly sales rates are setting new record highs.
  4. Recent contract ratios are in the low to mid 90's, the highest we have seen since September 2005.
  5. Listing success rates are approaching 75%, the highest recorded since October 2005.
  6. Pending foreclosures and REO inventories are declining faster than at any time since 2005.
  7. Foreclosures are off to a very slow start in the first week of July.
I could go on...
But let's get back to prices. The first thing to point out is that much depends how you measure them. First we have to choose between averages and medians. Why do we have two different measures? Because neither is entirely satisfactory. Average price, which you obtain by adding all the money spent on homes and dividing by the number of homes sold, can sometimes be unduly influenced by a relatively small number of large and expensive luxury homes. So instead, analysts often refer to the median sales price which is hardly affected by luxury homes at all. The median sales price is the price of the home that sits half-way between the lowest and the highest priced homes when you arrange them in an ordered list by price. You can add fifty multi-million dollar luxury homes and the median sales price won't move much, and possibly not at all. The disadvantage of the median sales price is that if you have a huge number of extremely cheap homes being snapped up by bargain hunters, it can drop to alarmingly low levels completely unrelated to the value of the bulk of the houses in the area. This is what happened in the first half of 2009 when investors were snapping up low-priced REOs in West Phoenix so fast that the median sales price for the City of Phoenix fell to $60,000 in March 2009 from $95,000 in January. By October 2009 it had recovered to $100,000. So while the median is insensitive to the high end it is sometimes over-sensitive to bargain buying at the bottom of the market.

It follows that we have to treat both average and median sales prices with a good deal of caution. At the Cromford Report we tend to focus on average sales price per sq. ft. which dilutes the disproportionate effect of luxury homes a little, but certainly not completely. It also goes a long way to avoid the problems associated with medians when REOs are selling like hot cakes. However $/SF is still highly susceptible to changes in the market mix, or "blend" as Tom Ruff likes to call it. This is especially true of changes in the blend at the high end of the market.

Today the average $/SF for monthly sales across all areas & types fell to a new extreme low of $80.32. We know it was $84.11 on June 9, so that's a big drop of 4.5% in a single month. Yet the monthly median sales price went up by 1.8% over the same period.   

Apparently prices are going up and down at the same time. Hitting a new bottom, at the same time as rising. Can this be true? You see what I mean about the facts being all over the map?

The facts are not really to blame. We must remember that averages and medians are not only different, they are not even closely related and often move in different directions, especially over short periods like months. It is only over the long term that they tend to follow similar trends. 
 
To find out what has really happened, let's break down sales into 5 broad price ranges to see if we can detect what changed in the 30 days between June 9 and July 9.

List Price Range Sales per Month June 9 Sales per Month July 9 % Change in Sales per month Monthly Avg $/SF June 9 Monthly Avg $/SF July 9 % Change Monthly Avg $/SF
Under $100K 4,488 4,539 +1.1% $43.48 $42.88 -1.4%
$100K to $200K 3,325 3,560 +7.1% $71.48 $71.14 -0.5%
$200K to $400K 1,547 1,607 +3.9% $104.28 $102.63 -1.6%
$400K to $800K 406 446 +9.8% $154.00 $154.39 +0.2%
Over $800K 154 121 -22.4% $279.92 $238.51 -14.8%

Voila! The problem jumps out at us. It's in the range over $800,000.
The average $/SF in the price range above $800,000 fell nearly 15%. This is very unusual. Sales volume also fell over 22%. The average sales price for homes listed over $800,000 fell nearly 20%. This drop in volume and price from the luxury home sector had a huge effect on the overall average sales price and the average price per sq. ft, but it had no effect on the median sales price. Remember that the median sales price is essentially immune to any changes in the luxury sector. In fact the median sales price improved because of the growth in the price ranges between $100K and $800K.
Let's home in on the price ranges over $800,000 and see if we can identify more detail about the price changes.

List Price Range Sales per Month June 9 Sales per Month July 9 % Change in Sales per month Monthly Avg $/SF June 9 Monthly Avg $/SF July 9 % Change Monthly Avg $/SF
$800K to $1M 44 49 +11.4% $192.30 $184.16 -4.2%
$1M to $1.5M 51 37 -27.4% $231.18 $236.26 +2.2%
$1.5M to $2M 25 24 -4.0% $281.38 $243.26 -13.5%
$2M to $3M 18 8 -55.4% $356.33 $365.48 +2.6%
Over $3M 16 3 -81.2% $428.08 $451.17 +5.4%

Now we can see that average pricing for luxury homes did NOT really fall by 15%. In fact the monthly average $/SF in 3 of the 5 sectors went up. The main cause of the large fall in average $/SF was the huge drop off in sales volumes over $2M - down from 34 to 11. Buyers of high end luxury homes had been active during the spring and seemed to have stopped buying as soon as the hot weather set in. The sudden absence of 23 sales over $2 million has a huge effect on average price and $/SF measurements, not just on the luxury sector, but on the market as a whole. 

So where are we really?

Well from my perspective, prices aren't really going up or down much at all. They are still bumping along in essentially the same price range they have been in since October 2010. In situations like this, changes in the blend can make all the difference in whether the average or median goes up, down or stays flat. Our advice is not to pay too much attention to these movements. They will gain their rightful insignificance over time.

When a real price trend forms, we will know about it for sure, because all the price indicators will then be moving in the same direction with obvious momentum.  And when that happens you will hear about it here first.


Note: By the way, you may have noticed that we did not use median sales prices in reviewing price ranges. You may also be wondering why. It's because median sales prices offer no useful information at all when applied to a price range. The price range has already been limited by definition so all you will discover is that the median sales price is pretty much in the middle of each selected price range. It will stay in roughly the same spot no matter what happens to the market. Hence our advice is: don't waste any time calculating medians when dealing with price ranges. Averages are not much better. You really need to study the average price per sq. ft. (or median price per sq. ft.) if you want to derive useful pricing information about price ranges. An alternative approach is to create ranges by living space sq. ft. instead - if you do this then median price and average price become meaningful measures again.

Selling Your home? Waiting May Not Make Sense.

Courtesy of Keeping Current Matters/The KMC Blog
Posted: 18 July 2011


There have been some bright spots in the residential real estate market over the last couple of months. Several price indices have reported a stabilization of prices and some regions have even shown small levels of appreciation. This has led some to believe that we may have reached a bottom for home values. We must realize that what we are actually experiencing is a ‘window of opportunity’ as the banks are delayed in bringing certain inventories of distressed properties to the market. Let’s look at what others are reporting:

Bloomberg Businessweek

“The crux of Simon’s analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners, and that the market is in the protracted process of evicting this group. He believes housing prices will decline 6 percent to 8 percent nationally, with 6 million to 7 million more foreclosures yet to come.”

Yahoo Finance

“The problem with the real estate market remains excess inventory. Based on Shilling’s research, there are 2 million to 2.5 million excess homes in the country — a supply that will take 4-5 years to work-off. The result: Housing prices will fall another 20% and underwater mortgages will balloon from 23% to 40%, he says.”

Housing Wire

Both warmer weather and the drop in distressed sales percentage have contributed to recent home price improvements. However, given the disappointing pace in housing demand recovery, both factors may turn against us in the coming winter and push home prices lower again…
This supply-demand imbalance affirmed JPMorgan analysts’ estimate of a further 4% drop in home prices from the first quarter of 2011 to a new bottom next year.”

DS News

“Home prices have gotten a little bit of a boost in recent months thanks to a seasonal uptick in market activity. Most analysts, however, expect further declines to characterize the later part of the year and possibly extend into next year, largely because of the huge supply of foreclosures on the market.”

Bottom Line

If you are thinking of selling in the next twelve months, you would probably do much better if you sold your house sooner rather than later.