Taking Inventory of our Housing Supply

Inventory is still low. It has been for years now. Prices have risen, interest rates are low, a good time to sell, a good time to buy. 

Usually when inventory is low it’s a great time for sellers. With interest rates as low as they are it’s also a good time for buyers This could be called a balanced market, but the low inventory tips in favor of the seller just a little.

Fall is upon us and Winter is not far behind which signals the usual slow down for real estate. Inventory will decrease and there will be even less to choose from for buyers. This could cause greater demand such that by the time February rolls around the market will be sizzling with anxious buyers awaiting the arrival of new listings. 

But then there is the election… and who knows. Borrowing rates could become volatile which in turn could cause a less desirable lending environment. Even though prices have the potential to stay strong, assuming the prices will continue to climb could be a risky bet. 

The question left unanswered here is “why has the inventory been so low for so long?” There can be all kinds of reasons, but I read an interesting statistic lately from the National Associations of REALTORS Profile of Home Buyers and Sellers.  It shows that since 2011, the bottom of the housing downturn,  home owners have been staying in their homes longer. Where as from 2000 – 2008 the average period of keeping a home was 6 years, now it has climb to 9 years!

“In 1985, the median tenure for sellers remaining in their home was five years, the lowest since tracking the data in the 30-year period. From 1987 to 2008, the median tenure for sellers was a steady six years throughout the course of about a 20-year period. The only exception was in 1997 when the median tenure jumped up one year to seven years for sellers. As the U.S. housing market entered a recession, the median tenure for sellers began to rise—seven years in 2009, eight in 2010, and to nine years in 2011 where it has remained steady through 2015. The only exception is in 2014 when the median tenure for sellers reached an all-time high at 10 years, but came back down to nine last year. Thus market changes in the last decade have caused sellers to remain in their homes longer, increasing the median number of years in the home by 50 percent more than they did 20-30 years prior.”

This is the first piece of information I have come across that explains why the inventory of existing homes for sale has remained low for the past few years. If this is a leading factor, and unless builders are able to start producing more new homes for buyers to purchase, I believe we should expect inventory to remain low for a while.

Real Estate Trends of 2015; Lack of Inventory, Low Interest Rates and FOM (Fear of Moving)

All year long we have been bemoaning the fact that there has just not been enough inventory. Even though many markets have seen an increase and it’s been an attractive time to sell, many sellers are hesitant to sell for fear of not being able to find a new place to land. Purchasing their move up or downsized home may prove tougher than they thought – there’s not enough to choose from! Huh.

Lots of first time buyers are anxious to get in the market. The continued existence of low interest rates has made a good platform for affordable mortgages. The problem for these buyers is that they find themselves up against other buyers competing for the very few homes for sale. In walks the multiple offer situation.  The sense of urgency also keeps building as the Feds toy with the idea of raising interest rates. 

Analysts estimate that a full percentage point increase affects approximately 250,000 new buyers. With pickings slim at the current 4% rate for a 30 year mortgage, the scenario for a 5% rate would even further decrease the already pathetic inventory. Those sellers looking to move would be even more reluctant now that they could afford less. 

Another change this year was the Private Mortgage Insurance, or PMI. If a buyer is not able to put in 20% or more as a down payment, the lender charges them PMI – which was about 1.35% of the loan amount. That dropped to .85% in 2015 - making the mortgage payment less. This could save the borrower about $2500 per year on a $500,000 loan. Nothing to sneeze at!

Exchanges can have a lot to “like”

Like-kind exchanges, or in IRS talk “IRC Section 1031” is an investors dream come true. 

Whenever you have an investment that has gone up in value from the time you bought it to the time you sell it you pay a capital gain tax on the profit. Unless you choose to defer that gain by using the “1031 like-kind exchange rule” IRC Section 1031 allows you to defer the gain on an investment by using the money gained to buy another similar property. This is not a tax free exchange – but it does put off paying that tax until a later date.

Both personal and real property can qualify for an exchange. However, the rules for personal exchanges are far more strict.  To accomplish a Section 1031 exchange, there must be an exchange of properties.  The simplest type of Section 1031 exchange is a simultaneous swap of one property for another. This is usually done with the help of an intermediary who knows all the rules required by the IRS. Most importantly the timelines; From the time you sell the one property you have 45 days to identify an exchange property and 180 days to complete the purchase. Meanwhile, you cannot take any of the gain or it becomes a taxable event. It is possible to take some cash and invest the rest – just know that you will pay tax on whatever you take out of the exchange and don’t take that cash before the exchange is complete or the whole deal can be blown!

It may sound somewhat complicated but believe me, this has been one of the best investor vehicles for deferring the dreaded capital gains tax. I am not a tax consultant – thank goodness, but if this sounds interesting to you, I can put you in touch with a very experienced intermediary and/or tax consultant that together we can walk you through the whole process from beginning to end.

As the Weather Cools - the Market Slows Down

A good time to start hitting the real estate ads and searches on line is just as November nears. With the holidays on the minds of most people, those who have to still sell their house leave it on the market and carry on. The dedicated ones looking for a house to buy may just be able to find an opportunity in the cooler months ahead.

It's obvious from the graph that fewer sales occur in the winter months. There are fewer homes on the market and less to choose from, but it is precisely the time to keep looking and make a move if you are a  bargain hunter.

You may find yourself looking at houses over the Thanksgiving week-end, but you could still have that new house by Christmas!

The New Lending Process

A new set of lending rules have been put into place by the Consumer Financial Protection Bureau as of October 2015. The feds are trying to make it as clear as possible for the general public to read and understand what they are getting, and getting into, when taking out a loan to buy a house or other real estate.

There are now two main things for consumers to read and understand; 1) what the loan conditions are and 2) what it's going to cost you to borrow the money. These are called the Loan Estimate and the Closing Disclosure. These two documents replace the four documents consumers used to have to read and decipher - often having repetitive information that made you wonder if you had read it correctly or if you might be misunderstanding the whole thing. The "loan estimate" gives the consumer a better tool for comparison shopping - and that is an important thing to do before signing on the dotted line. This has to be given to the borrow within three days of receiving their application.

Other tools available are online here. Like the "Know Before You Owe" toolkit as well as the loan estimator and closing disclosure tools.

I always advise buyers to be prequalified for their loan before they step one foot in a potential house to buy. There is nothing worse than thinking you can afford "X" and finding out you really can only afford "X-$50,000."

The new mortgage rules should make things easier - though maybe not at first for lenders getting used to the new rules. Just as consumers are well informed on real estate, so too they should be well informed on lending.

The LIst Price vs. The Sale Price

This is a graph of the sales to list price ratio for houses over the last three years and to date for 2015. I thought it was interesting that the last time the majority of "over list price" sales was in 2013 and this year, 2015, is starting out with the almost identical trend.