Happy Lunar New Year!
I wanted to wish you and your family a Happy Lunar New Year and a great 2013! Here is my 2012 year in review and my outlook for this coming 2013 and beyond.
2012 was a great year if you were a selling a home and a challenging year if you were buying a home. Sellers were able to get into contract in less than a week and close within a month. Cash buyers (overseas investors, investors, real estate funds, flippers and some Buyers from recent IPO's) have been abundant, outbidding and attracting homeowners to the low risk of a cash deal. The reasons for this sudden increase in buyers are the following; in a low interest environment investors are looking for a positive return on investment in hard assets, increased confidence in local and domestic economies, pent up demand from Buyers that held off during the recession and an influx of workers from out of state recruited by local technology companies which drove up rents and forced more Buyers in the market. The market completely shifted in February of 2012 and accelerated steadily from that point onward. Here are the variation in winning bids; for single family homes I am seeing overbids take on $100,000 increments and upward, Townhomes $50,000 to $75,000 and Condominiums $25,000 to $50,000 over comparable/list values. This varies by neighborhood and how a low the list price is set at. The market is moving so fast the home will not appraise for your winning bid, which will mean you have to have cash to pay the difference.
Looking forward to 2013, if you are planning to sell your home, contact me for an analysis to see if your home has recovered from the time you purchased the home. I expect listings to continue to move quickly as inventory remains at very low levels there is simply more demand than supply can provide. If you are a home buyer, my advice is that this market is not for the faint of heart and you have to be prepared to overbid over list and comparable prices to win homes and have very strong terms. I am recommending that Buyers have AT LEAST 30% down and be prepared that 10% will be to cover the difference in the price you pay and the appraisal differences. You will have to bid on homes against 10 to 20 people on average and will often run into cash buyers. If you don't have 30% down, we can discuss other possible options, though they are limited. My outlook for 2013 (barring unforeseen surprises) is that inventory will remain low and multiple buyers will remain continue into 2013. 2013 will be extremely challenging as competition appears to be accelerating beyond the levels I saw in 2012. What I predict is that Buyers that have learned what it takes to win and are frustrated, they will go extra aggressive to win. Prices will continue to push upwards. The only silver lining is that interest rates will hold steady throughout the year. If you are a first time home buyer this it going to be a tough market to compete in. I always ask my clients to really consider this market and if you really want to play or sit this one out.
Post-2013 and Beyond
This is an Economics 101 exercise of very low supply creating excessively high demand and thereby increasing prices. What is different here is that the investors/cash buyers are flooding the market with external cash further restricting supply, which is why you see the prices jumping so heavily as the bidding shifts the demand curve upwards. They are in effect disrupting our regular supply and demand curves further restricting supply for local buyers. If inventory levels continue to hold at these levels, this behavior will continue until prices go beyond Buyer's willingness to pay. Having practiced real estate through 2 busts and 2 rises in the last 10 years, this environment is not sustainable as Buyers cannot sustain bidding from $50,000 to over $100,000 over comparable prices to win homes. What goes up must come down. I do not have a crystal ball, but most likely 2013 will continue in this manner but in the years onward this cannot be sustained.
Recent Fiscal Cliff Impact on Real Estate
The Fiscal Cliff was a hot topic last year and the here is the following summary by the California Association of Realtors:
"As you know, the bill includes a provision to extend the Mortgage Forgiveness Debt Relief Act, which will for one more year exempt the taxation of mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale or loan modification (including any principal reduction). While debt relief has been extended at the federal level, the California exemption expired at the end of 2012, so forgiven mortgage debt is considered taxable state income for now.
We’re aware of your concerns this could have on short sales, and that’s why C.A.R. is sponsoring SB 30 (Calderon, D-Montebello). SB 30 will conform state law to the federal law passed last week. Upon passage of SB 30, the measure will be effective retroactive to Jan. 1, 2013.
Here are other housing-related provisions included in the federal law:
- The “Pease Limitations” that reduced the value of itemized deductions, including the mortgage interest deduction, are permanently repealed for most taxpayers but will be reinstituted for high income filers. This provision reduces a taxpayer's itemized deductions by 3 percent of the amount of his or her adjusted gross income (AGI) that exceeds the threshold amount. Under the new law, the Pease thresholds are $300,000 for married taxpayers filing jointly and $250,000 for single taxpayers (i.e., a married couple with an AGI of $400,000 would be $100,000 over the threshold; the couple’s deductions would be reduced by $3,000 which is 3% of $100,000). No matter how high a taxpayer's AGI, the Pease reduction cannot exceed 20 percent of the amount of itemized deductions otherwise allowable for the year.
- The restoration of a tax deduction for mortgage-insurance premiums, including premiums paid to the Federal Housing Administration and private mortgage insurers. This provision expired at the end of 2011 but has now been retroactively extended for all of 2012 as well as 2013.
- 10 percent tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012.
- Capital gains rates will remain at 15 percent for those earning less than $400,000 (individual) and $450,000 (joint). Gains above those income levels will be taxed at 20 percent. Gains on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 taxpayers filing jointly."
I do advise that you contact a CPA or lawyer for more details on how these impact your specific financials.
Real Estate Evaluation
Wherever you are with your real estate needs, I am more than happy to sit down and advise on what strategy fits your family needs the most. It is critical to sit down and come up with a plan and what is realistic and what is not. Each of you have variable circumstances and you can always count on me to have a realistic advise and strategy that will serve you and your family the best.
Wishing you a happy 2013!