Why is housing inventory so low?

I am often asked this question by my clients and the general public about why prices are up, particularly here in the Silicon Valley. The article below from Chris Trapani does a better job at explaining it than me. A worthy ready if you are truly interested in why it is a white hot market for sellers.


Why is housing inventory so low?

Parsing the reasons why fewer houses are on the market

There has been a great deal of discussion regarding the consistently low housing inventory levels throughout the nation. Very little, however, has been written about the reasons why inventory levels are so low, especially following the economic disruption of 2008-2011.

Understanding the why can be helpful in predicting how these factors might influence longer-term supply levels and future appreciation potential. This knowledge might also shed light on why inventory might remain constrained over the long run.

In the second half of 2011 we began to see an acceleration in the decline of inventory levels nationally, and since that time the available housing inventory has continued to remain historically low. The graph (figure 1) below highlights the continuous low-inventory environment.

Why is this so? There are numerous conditions that have contributed to this phenomenon and bundled together have created an inventory control dynamic that, as prices rise, only serves to limit the number of homes available for sale.

Capital gains exclusion on primary residence:

Prior to May 7, 1997, the only way you could avoid paying taxes on your home-sale gain was to use the funds to buy another, equal or more-expensive house within two years. I recall my father being motivated by a “move up” mentality. Every few years, he would sell our existing home for a bigger, more expensive property. He would explain to us that he was using tax-free money or “playing with the house’s chips” to leverage into a bigger home that only “someday” he would owe capital gains on. By leveraging his gains, he contributed to the health of the local real estate market. This dynamic created a steady supply and demand equilibrium not only in our local market, but in markets throughout the country.

When he turned 55, another option became available. He could take a once-in-a-lifetime tax exemption of up to $125,000 in capital gains. However, when the Taxpayer Relief Act of 1997 became law, the rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts.

The Taxpayer Relief Act allows homeowners to take a $250,000 (for singles) or a $500,000 (for married couples) capital gains/appreciation exclusion, which could be used under certain conditions every two years. While the Taxpayer Relief Act eased the home-sale tax burden for millions of homeowners, higher-priced real estate markets experienced an unintended outcome: fewer move-up buyers because their gains on their existing home exceeded the $250K/$500K maximum, thereby creating an unwanted tax burden.

This frozen segment of the real estate pipeline has upset the flow of buying and selling activity. The typical move-up buyer has caused a bottleneck by remaining in place thereby reducing available supply to new entrants. The current law does not create the compelling motivation for individuals to continually move up into “bigger and better” higher-priced properties.

In areas such as Silicon Valley, it is not uncommon for homeowners to exceed the $250K/$500K exclusion amounts if they have owned their primary residence for a period of time. Once a homeowner eclipses this threshold, their motivation to sell in order to move up diminishes as the possibility of a financial tax consequence looms. Many move-up buyers have begun their research only to discover they would be subject to capital gains tax on a portion of their gain — another sacrifice they are not willing to make in order to buy that bigger, better property.

Step-up in basis:

This factor is one of the least understood. Mainly because most people do not have large enough real estate gains to care or they are not old enough to begin pondering their longer-term estate plans and how the timing of their home sale might be impacted by capital gains tax exposure.

For couples, upon the death of one spouse the tax basis of the ownership interest that belonged to one spouse is stepped up, the tax basis of the entire asset might be stepped up to “Fair Market Value” (FMV).* This means a surviving spouse can potentially sell their property and owe only federal capital gains tax on the property’s appreciation after the death of the spouse, which might drastically reduce the tax consequence of the sale.

It is very likely that a good percentage of longtime married homeowners in the higher-priced areas of the U.S. understand this dynamic and will opt to stay and wait, surprisingly to some, for one or the other to pass away before a move makes practical financial sense.

If so, this would mean that potentially thousands of multimillion-dollar properties with swollen appreciation are being held off the market until an unfortunate family loss occurs at some point down the road.

Sustained low-rate environment:

Given the sustained low interest rate environment, many homeowners and investors have either purchased or have now refinanced and are locked into tremendously low interest rates over the past six years. It is highly unlikely that these homes will be coming up for sale anytime soon as a result of this favorable financing.

Value disruption/reset in 08/09:

In addition to the sustained low interest rate environment and its potential damper on those properties actually coming up for sale anytime during the life of their loans, we should mention the “value disruption” factor that occurred between 2007 and 2010.

A number of areas experienced a complete “reset” of values and in some cases to nearly half their peak values. Buyers purchased properties in these marketplaces at significant discounts from the high point, resulting in additional “frozen inventory.”

If you combine the sustained low interest rate climate with the thousands of homes purchased at up to 50 percent discounts or more, it’s unreasonable to expect that these homes will be coming up for sale anytime soon.

In addition, an unprecedented number of institutional investors entered the residential real estate market acquiring large pools and blocks of properties. This inventory is now also frozen and held.

Values not at peak levels across the country:

In some regional areas sales prices have reached or even surpassed the peak levels in 2007. However, this not a national phenomenon; some cities and regions across the U.S. are still below the historical highs of the mid-2000s. Until prices reach peak levels across the board these homeowners won’t be listing their homes for sale.

Sense that values will continue to climb:  

Additionally, there is the current mentality among some homeowners that home values will continue to rise. Very similar to the mindset of people holding on to a stock because they expect it to rise, people believe their properties will increase over time. Right or wrong, this mindset has become another factor in the tightening of inventory. What typically happens is that once homeowners realize the up cycle has turned, they electively decide or are forced to sell due to job loss or other negative economic pressures. This would result in a significant inventory increase.

Where would I go? Move up:

We have already mentioned a few of the constraints on the move-up buyer. The aforementioned forces feed on each other and further exacerbate the move-up opportunity. Lower inventory begets lower inventory; a downward pressure cycle continues. If one cannot find properties to move up to, they will not list or sell their current homes.

This same dilemma plagues retirees finding limited or no options for retirement communities in their local area. This also limits housing supply on the top end of the market since seniors are not motivated to sell unless they know exactly where they are going.

Stunted new development:  

Over the past seven years (since the beginning of 2008) there has been an unparalleled low level of new housing starts (figure 2). This prolonged decrease in new home development dramatically multiplies the low-inventory gap. To further the dilemma, the start-to-finish build cycle is lengthy, often requiring multiple years to plan, approve, build and market, which slows market momentum. Until the new housing development engine gets moving at an accelerated pace it will continue to have a lingering impact.

These major factors have created this extraordinary nationwide low-inventory environment we are currently experiencing. Given the factors above, inventory will remain low for an extended period of time, the natural solution of which remains unknown.



Source: inman, Chris Trapani
http://www.inman.com/2015/04/02/why-is-housing-inventory-so-low/

10 homeowner tax breaks you should be taking advantage of

Great tax advice for you homeowners out there or those of you that are thinking of becoming one. I always tell my clients that owning a home has numerous tax advantages, but I can't say too much because my real estate license doesn't allow me to give tax advice. Anyhow, here is a great article from MarketWatch that I hope you will enjoy.



If death and taxes are the two true givens in life, there probably should be a third: the bucketful of tax breaks Uncle Sam throws out every year to encourage more Americans to buy a home.

From being able to write off virtually all mortgage interest, not only for your primary home, but for a second home as well — up to $1.1 million of debt (when you include home-equity loans) in most cases, to being able to write off your property taxes, homeowners have opportunities for dozens more federal income tax deductions than renters.

In fact, only 21 states and the District of Columbia offer renters any kind of tax breaks or credits — generally credits for property taxes.

Americans took $68.5 billion in mortgage interest deductions (MID) alone in 2012, according to the Congressional Research Service (CRS), saving Americans who owned homes about $1,900 a year, on average. This is particularly beneficial to first-time home buyers whose early monthly payments in a 30-year loan are mostly only interest. About half of American homeowners took advantage of the MID in 2012, the CRS said. What about the other half? Well, according to the CRS, they already paid off their homes or the mortgage interest deduction was less than the standard tax deduction.

“If you have taken out a homeowner’s loan, consider these deductions as Uncle Sam’s gift to you. These tax breaks will surely alleviate the financial burden of many taxpayers, especially those who are paying their mortgage,” says John Gregory, founder of 1040Return.com, a Baltimore-based tax-prep company.

Some of the most significant tax breaks that only homeowners can claim are fairly well-known, such as the MID, but here are some others:

1. Points on home mortgage and refinancing: If you bought a home in 2014 with a mortgage, then in addition to the mortgage interest (which may not be a lot if you bought late in the calendar year), you can probably write off the points (both origination and discount points) on your tax return, says Jackie Perlman, principal tax research analyst at H&R Block (HRB). One point is equal to 1% of the principal loan amount. That’s because the IRS considers points to be prepaid interest. The challenge is whether you’re eligible to deduct the points all at once, or whether you have to spread the costs out over the life of the loan. Generally, if you bought your first home or got a loan on that first home, you can take the deduction all at once, the IRS says. For a second home, and often for a refinance on a first home, the IRS says you most likely have to spread it out. “You have to meet all the criteria in order to deduct them up front, otherwise you have to amortize them over the life of the loan,” she said. A good place to start, she says, is the IRS Tax Information for Homeowners guide.

2. Interest on home-improvement loan: The IRS considers the interest on a home-improvement loan fully deductible, up to $100,000 in debt. In addition, interest paid on a home equity line of credit (HELOC) is also tax-deductible. However, as Greg McBride, chief financial analyst with Bankrate.com, notes, any portion of a home loan that is over 100% loan-to-value (meaning the loan is worth more than the value of the property) isn’t deductible.

3. Property tax: Property taxes are almost always tax-deductible, but some things on your settlement document that might look like taxes really aren’t, says McBride. You can’t write off your attorney and appraisal fees, title insurance and credit report costs either, McBride notes. Transfer taxes however can be written off, says Gregory.

4. Energy-efficiency tax credit: If you made efforts in 2014 to make your home more energy efficient by installing equipment like storm doors, energy efficient windows, insulation, air-conditioning and heating systems, the IRS wants to give you a tax credit of $500, though only $200 of that can be used for the windows. The credit however is set to expire on Dec. 31, 2016.

5. Renewable-energy tax credit: If you’ve installed equipment that uses renewable sources of energy, such as the sun and wind, to help power your home, you may be eligible for the Renewable Energy Efficiency Property Credit. You are eligible for this tax credit up to a whopping 30% of the cost of the equipment, installation included, so long as the equipment is placed in service by the end of December 2016. About 600,000 American homeowners have added residential solar equipment since 2010, according to the Solar Energy Industries Association.

6. Ground rent: There are rare situations in the U.S. for homeowners where the original owner still owns the land under your house after you’ve bought it, and you own the aboveground property and “rent” the ground from the owner. The “ground rent” option reduces the cost of the home since you’re not buying the land. The IRS lets you get a break for this situation and thus “ground rent” amounts can be deducted if you have been paying the rent monthly or annually, so long as the lease is for more than 15 years. However, if you’re making a payment to capitalize the ground rent, to buy out the lessor’s interest to get out from under it every year, that payment isn’t deductible, the IRS says.

7. Income and interest on reverse mortgages: The IRS considers reverse mortgages as a loan advance not income, so the amount you receive isn't taxable. But the interest accrued on a reverse mortgage isn't deductible until the loan is paid off, so you can’t take a deduction each year for the interest as you might with the traditional mortgage interest you pay, says Gregory.

8. Private mortgage insurance: You may be eligible to claim the deduction for private mortgage insurance (PMI) or mortgage insurance premiums on your tax return, though the 2014 tax year is the last year the deduction can be taken. Keep in mind that the deduction for qualified mortgage insurance premiums is reduced if your adjusted gross income (AGI) is over $100,000, and if it’s over $109,000 you can’t take the deduction at all. And you won’t get around that limitation if you’re married and filing separately, as the deduction begins to be reduced at $50,000 in AGI and disappears at $54,500.

9. Home expenses and improvement: If you make improvements to your property, you cannot write off the cost of home improvement, such as the materials and the labor. (Though you can write off the interest of course if you took out a home loan to pay Joe Contractor and purchase the materials.) However, when you sell your home, you can add the cost into the asking price of your property, which should diminish the capital gain when you sell your home, says Gregory of 1040Return.com.

10. Buying a home: The IRS allows first-time home buyers to withdraw up to $10,000 from their traditional IRA (and even Roth IRAs) penalty-free to help with the purchase of the home. Your spouse or even a parent, child, or grandchild can kick in another $10,000 from their IRA accounts, for a total of up to $20,000. You can also borrow half of your 401(k) balance up to $50,000 for the purchase of a home. But, the interest you pay on that 401(k) loan, unlike a mortgage loan, isn’t tax-deductible, notes Perlman.



Source: MarketWatch, Daniel Goldstein
http://www.marketwatch.com/story/10-homeowner-tax-breaks-you-should-be-taking-advantage-of-2015-04-02?adbid=10153787261873484&adbpl=fb&adbpr=77713743483&cid=soc_20150402_43166766&utm_content=buffera6495&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

San Jose affordable housing law faces key legal test

The cost of housing here in the Silicon Valley is through the roof. It's great for homeowners looking to sell, and it's great for us Realtors, but not so much for low income buyers. Renters are fairing no better in trying to find affordable apartments to rent. This trend of ever escalating housing costs has not gone unnoticed by the powers that be here in the valley.

So, The City of San Jose has lead the way with it's push for affordable housing, much to the dismay of developers. So what that means for developers is that when they want to build a new condo complex, the city won't grant them the right to build unless that builder designates at least 15% of their unit units for affordable housing. So if you are a developer who wants to build a 100 unit luxury condo complex in the City of San Jose, before the city will grant you the permits to build, you have pledge 15 of those 100 units as below market properties for low income buyers. If you say, "screw that, I only want my luxury condo complex for high end buyers!" That's fine by city, it's your chose, you just have to pay fee to the tune of $100K+ per property.

So developers got fed up with this meddling by the city in the free market in the housing industry, in their view, and took the city to court. San Jose's affordable housing law has temporarily been put on hold until it can be reviewed by the California supreme court, which will make its ruling this week.

San Jose affordable housing law faces key legal test

A Guide to 3 Equity Loan Options

Determining which type of equity loan to take — second mortgage, HELOC, or cash-out refi — comes down to a number of factors, including why you need it.

Here’s how to start determining whether borrowing against your house in the form of a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC) makes sense for you. Which you choose depends on your circumstances, interest rates, and the purpose of the equity loan. In some cases you might even be better off choosing none of the above.

1. Cash-out refinance

In a cash-out refi, you pay off your old mortgage and take out a new one that includes the amount you wish to borrow plus settlement costs. Because it’s a first mortgage, the interest rate is often lower than you’d find on a second mortgage. Just make sure that the lender isn’t adding “junk fees” for things like courier services that are unusually high for your state.

A good rule of thumb: If the cash-out refi’s interest rate is lower than the rate on the existing mortgage, it’s likely to be cheaper to borrow this way than to take out a second mortgage. If it’s higher, retain the lower rate on the existing mortgage and explore other loan options. A typical refi takes two to four weeks once you give the lender the required paperwork.

2. Home equity loan

With a home equity loan, a second mortgage on top of your first mortgage, you borrow a lump sum of money that you pay back over a set number of years, either at a fixed rate or at one that adjusts after a certain period. If you fail to make your payments, the lender can foreclose on your house.
Rule of thumb: Consider this option when you have a good idea of exactly how much money you need to borrow. If you require the money for a new car, for instance, just be sure the terms are more favorable than those you’d get for an unsecured auto loan from a credit union. Settlement costs are similar to a first mortgage, though sometimes a lender will waive some fees if you are paying off an existing first mortgage that you already have with that company. The average closing costs on a $200,000 mortgage are $4,070.

3. Home equity line of credit

A HELOC has an adjustable interest rate that can go up or down when the prime rate moves. Banks use the prime rate as a base to set lending rates — prime plus 2%, for example. HELOCs are open-ended, like credit cards, so you can borrow money up to your credit limit as needed, say, to pay for stages of a home renovation.
Rule of thumb: Shop around for HELOCs that have no annual or cancellation fees and no mandatory average balances or withdrawal requirements. Annual fees can hit $100 or more; cancellation fees, $350 to $500. Like credit cards, HELOCs can be closed by the lenders at any point. If that happens, you lose access to your line of credit. Be prudent about what you borrow. Just because you can borrow up to your credit limit doesn’t mean you should. If you can’t make your payments, you could lose your house.

Is an equity loan right for you?

It’s not hard to calculate, at least roughly, the equity available in your home. Simply subtract the amount you owe from the home’s current market value, as determined by an appraisal or by sales prices of comparable homes. A real estate agent can give you an “opinion of value” to help you pinpoint the price; you might also want to check a website like realtor.com for an estimate of your home’s value.

But remember that as the market changes, so does your home’s equity. Lenders can restrict your borrowing power accordingly. As housing values fell in 2008 and 2009, many borrowers found their HELOCs suddenly frozen, even if they were in the middle of a home renovation.

Easy money was partly responsible for the housing bust, and lenders overcompensated in tightening credit in the aftermath. You can’t do much about either scenario. But you can be proactive about figuring which product is right for your situation.. Any decision should take into account not just how much equity is available, but also your ability to pay it back. Look at your spending habits, your emergency cash reserves (you should have at least six months’ worth), and your credit score. You should dedicate no more than 28% of your gross income toward repaying your home loans.

Unlike credit card debt, all three types of equity loans discussed here are secured by your home, which you may lose if you don’t pay up. Moreover, if you lose your home in a foreclosure or short sale (when a home is sold for less than is owed on the property), you may still be on the hook to the lender for any money that you owe from your second mortgage.

So before committing, be sure to explore other avenues for funding — like tapping savings, applying for a government-sponsored student loan, or borrowing from family or friends — to meet your particular needs.


Source: HouseLogic, June Fletcher
http://www.houselogic.com/home-advice/equity-loans/equity-loan-options/#ixzz3WSxX0kNA 

Santa Clara County Median Home Sales Prices Are UP!!!

Great market stats from RealtyTrac. For some of you homeowners sitting on the fence about whether or not to sell your home, how much more proof do you need to see that now truly is a GREAT TIME TO SELL!

Legal Tax Deductions For Rental Properties

Legal Tax Deductions For Rental Properties

Are you a rental property owner? If so, it’s great isn’t it?  You receive income from the rents, also known as other people’s money (OPM), and you realize capital appreciation from the equity gains in the value of the property – a rising tide raises all boats.  In fact using OPM is a great strategy for paying for your child’s college education, and providing a passive income stream for yourself in your retirement.  The key is buying and holding onto an investment property as soon as possible and taking full advantage of the IRC allowable deductions and expenses.  Becoming educated about this investment strategy is easy, fun, and should be taught to your children.

Deductions Are Your Friends In The Rental Property Business

I’m sure you also know that many of the expenses that you incur that are rationally related to your rental property are tax deductions against any income that you earn.  But did you know that you may qualify for a greater tax advantage than 95% of passive real estate investors?  If you spend more than one-half of your time working your rental property business, including development, construction, acquisition, or management, and spend 750 hours a year in the real estate operations you can qualify for the Internal Revenue Service “Real Estate Professional” status.  This is a big tax bonus that many people don’t realize exists.  If you have “Real Estate Professional” status your losses, including depreciation against your rental properties, can be deducted against your ordinary income, not just your rental income.  If you have multiple rental properties this can be a huge tax savings as rental properties are allowed to be depreciated over a 27-1/2 year period.  There are many people who are leaving a lot of money on the table each year because they are not familiar with this “Real Estate Professional” status.

Improvements Are Not Repairs

There is a world of difference between the term “improvement” and the term “repair.”  The IRS takes great exception to people who attempt to expense a kitchen remodel or a new roof on their rental property.  Both of these projects would be considered an “improvement” and would have to be deducted over the lifespan of the component.

Repairs on the other hand are small projects that keep the rental property operating smoothly – like a leaky kitchen faucet that gets replaced, or a broken toilet flange, or a failed smoke alarm.  These repairs are expenses which can be deducted in the tax year for which they were made.

Travel expenses can be expensible deductions as well if you are making a trip to maintain the property, or have a discussion with the tenant, or to collect a rent check.  However, if the transportation expense was borne due to some planned improvement like a bathroom remodel then the travel expense would not be expensible and would be allowed to be depreciated with the improvement.

Common Expenses That You Shouldn’t Forget

There are numerous legitimate expenses for rental property owners.  They include mortgage interest, insurance expense, property taxes, gardening maintenance, legal fees, property management fees, leasing expenses, advertising expenses, damages to the property, office supplies to run your property business (if applicable), and bank fees to name the common ones.

Professional Property Managers Keep Records And You Should To

If you hire a competent professional property manager to run your rental property business they will keep good records for you as they are required to by the law.  Professional property managers will provide you with timely monthly statements which include income, expenses, invoices, and notes.  Also, you should receive a detailed Profit and Loss statement in early January of the following year.  If you don’t receive detailed statements like this you should seek to hire another property manager.

If you manage the property by yourself you should be keeping these records (and copies or scanned files) of every document that is created related to the rental property business. This is crucial for two reasons: 1) tax audit preparation, and 2) litigation preparation.

Professional Property Management By Real Estate Attorney

If you are fortunate enough to find a professional property management group that has a real estate attorney on staff that would be a great value.  The legal expertise alone provides a value added service which 99% of property managers can’t match.   Silicon Valley Property Management Group (SVPMG) is a full service property management company that manages, develops, and sells real property on the Peninsula and specifically Palo Alto.  SVPMG has a full-time real estate attorney on staff and can provide risk mitigation along with typical property management services.

Source: Silicon Valley Property Management Group, Dave Roberson

http://siliconvalleypropertymanagementgroup.com/tax-deductions-palo-alto-property-management/

Where the hot house flipping markets are

I haven't dealt with too many house flippers in my real estate business. When it comes to buyers I mainly deal with first time home buyers, like the married couple that has a couple of kids, or are planning on having kids, and they are just looking for a home for their family. Now I don't mean to say I have a problem with house flippers, it's just that there are not too many of them here in the Silicon Valley. That is largely due to the high median home price in this area and the fact there aren't too many fixer uppers here. And a new report from RealtyTrac supports my claim that Santa Clara County is not the most popular place for flippers.

House Flipping Data

A year after its Spring 2014 report showed the ten most profitable U.S. markets for flipping houses, RealtyTrac® turns the data tables to find where the practice made up the largest proportion of sales in 2014.

They are not the same: Only the highest-ranking city this year is within a Metropolitan Statistical Region (MSR) on last year’s list.

Flipping a house is real estate jargon for buying, improving and then reselling a property within six months. Inkster, Michigan tops this year’s list with flipped houses accounting for 27 percent of its total 2014 home sales. The Detroit suburb showed up last year within the ninth-ranked Detroit-Warren-Livonia MSR.

The second ranked city on this year’s list is Opa Locka, Florida, with more than 21 percent. Though its surrounding Miami-Dade County was not included last year, three that did are right up the Atlantic coast.

The other eight cities on this year’s list, below, are all in Michigan, Georgia and California.

Source: RealtyTrac

http://www.realtytrac.com/news/data-lab/house-flipping-data/