Let's Not Get Carried Away with Home Price Increases

There has been a lot of excitement about home prices over the last few months. Though we agree that the housing industry is in a full out recovery, we also believe that there will still be price volatility over the next several months. We must realize home sales are seasonal and that fact impacts prices.

Lawrence Yun, Chief Economist for National Association of Realtors, explains that the inventory of lower priced homes has been constrained leading to the rise in median home prices:

“Fewer sales in the lower price ranges are contributing to stronger increases in the median price, but all of the home price measures now are showing positive movement and that is building confidence in the market.”

Celia Chen, housing analyst at Moody’s Analytics projects that this positive price movement may not be sustained over the next few months as more distressed properties enter the market:

“Housing is about to turn from being a drag on the broader economy to being a driver…House prices will remain the laggard, perhaps dipping a little before hitting a sustained and solid pace of appreciation next year…The distress pipeline casts a shadow over the outlook. Indeed, the CoreLogic price index gained strongly between late 2009 and the second quarter of 2010, when foreclosure moratoriums were in place, before losing nearly all of the gains once the distress share of sales picked up again.”

The RPX Report suggests that price declines in the next few months could erase any gains we have seen this year:

“The gains of the first half of 2012 could be short lived. They were the result of seasonal factors and REO disposition strategies that could reverse in the fall. The unusually rapid price appreciation could give way to equally rapid declines in the second half of the year.”

Calculated Risk probably did the best job of explaining the situation reporting:

“Home price indexes will show month-to-month declines later this year. This should come as no surprise and will not be a sign of impending doom… There is a clear seasonal pattern. In recent years the seasonal pattern has been exaggerated by the large number of foreclosures – foreclosures tend to be fairly steady all year, but conventional sales are stronger in the spring and early summer and weaker in the fall and winter. This leads to more downward pressure from foreclosures in the fall and winter.”

Again, Calculated Risk explains that this “will not be a sign of impending doom”. It is instead the normal seasonality we have seen in home prices over the last several years.

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Is There a 3.8% House Seller Tax in the Health Care Bill?

We have received many questions about a possible 3.8% tax which will be put on home sales beginning in 2013. We want to do our best to clarify this situation for everyone. We are not accountants and give you this information just as a simple answer to the misconception. Understand that, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.
A little history on the confusion

Fact Check.org explains it this way:

The truth is that only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on profits from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home.

We can understand how this misconception got started. The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. (This provision begins on page 33 of the reconciliation bill that was passed and signed into law.) And it does say the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code. And the fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn’t apply to vacation homes or rental properties.)

The Joint Committee on Taxation, the group of nonpartisan tax experts that Congress relies on to analyze tax proposals, underscores this in a footnote on page 135 of its report on the bill. The note states: “Gross income does not include … excluded gain from the sale of a principal residence.”

And just to be sure, we checked with William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation. “Some home sales would see a tax increase under this bill,” Ahern told us, “but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple).”

Simple Explanation:

The following simple explanation comes from midiShaw:

The tax will affect those sellers of real property who will be otherwise taxed on capital gains under current tax laws. Under current laws, if you sell your primary residence and meet the ‘time ‘ criteria, you are exempt up to $250,000 or $500,000 (filing individually or jointly). Any amount realized OVER that amount is taxable under current tax schedules based on income. As such, this new tax will apparently be added to the current capital gains tax burden IF your income is over $200,000/$250,000 (filing individually or jointly). For those selling second homes and investment properties, the tax, once again, will be applied to the amount of gain realized.

Detailed Explanation:

The following also comes from midiShaw in a comment to the above answer.

Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income.

We offer this just as an explanation. Remember, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.

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Should I Wait to Sell My House?

There have been more and more reports showing that the housing market is beginning to recover. This has caused angst among some homeowners who are considering whether or not to sell their house in the next several months. With the market showing signs of life, the question becomes should they wait to sell because prices may be about to increase.

The data proves that sales are increasing nicely. However, there is no consensus on home prices yet. At the National Association of Real Estate Editors conference in Denver at the end of June, Lawrence Yun, chief economist of the National Association of Realtors (NAR) said:

“This time next year, there could be a 10% price appreciation. I would not be surprised to see that.”

During the same week, Morgan Stanley came out with a housing report that stated where they believed housing values were headed over the next eighteen months:

“We estimate a drop of 5-10% more.”

Which direction are prices headed? As we previously stated, there are opinions on both ends of the argument.

However, if we look at the Home Expectation Survey, which asks a distinguished panel of over 100 economists, investment strategists, and housing market experts to give their 5-year expectations for future home prices in the United States, we see the average cumulative appreciation expected by the end of next year (2013) is only .9%.

Should you sell now or wait? Does it make sense to delay your move for 18 months in order to get less than a 1% increase in your selling price? Only you can answer that question.

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Rising New Home Sales Point to Strengthening Housing Market

Sales of newly built single-family homes rose to their highest level in more than two years last month, adding to evidence that the U.S. housing market is on the mend and no longer dragging down the broader national recovery.

Real estate helped bring the U.S. out of past recessions as interest rates dropped, home sales increased and construction jobs jumped. But perhaps one of the most significant repercussions of the industry's collapse has been that housing hasn't been available to play its traditional role in the recovery.

That appears to be turning. Sales of new single-family houses in May rose 7.6% compared with April and 19.8% from May 2011, the Commerce Department reported Monday. The seasonally adjusted annual rate of sales was 369,000 last month, the highest level since April 2010, when a federal tax incentive for buyers that had been juicing the market expired, sending sales and prices into a renewed decline.

"This is the first time I have heard any kind of pulse in the home building business in the last five years, and I think it is legitimate," said Stuart Hoffman, chief economist for PNC Financial Services Group. "The housing market will be a source of strength to the economy for the first time in years."

Last year, new home sales were so weak they set a record for the most dismal performance on the books. Sales have now rebounded 35% since hitting a low in February 2011. The widely read economics blog Calculated Risk has argued for months that a recovery in housing is underway.

"It might be hard to believe, but earlier this year there was a debate on whether housing had bottomed," the blog's chief author, Bill McBride, wrote Monday, following the release of the new home sales statistics. "That debate is over — clearly new home sales have bottomed — and the debate is now about the strength of the recovery."

New home sales statistics are often unreliable, and many economists caution about placing too much weight on one month's report. IHS Global Insight economists Patrick Newport and Michele Valverde wrote in an analysis that a three-month moving average of new home sales data shows the numbers are "inching up nationally."

Real estate investment has contributed to economic growth, albeit meagerly, for the last four quarters, according to real gross domestic product data from the Commerce Department's Bureau of Economic Analysis. With the steady rate of improvement in sales, housing will probably continue to be a moderate boost to the shaky economic recovery rather than a drag.

Although sales of newly built homes account for only a slice of the overall housing market, economists keep a close watch on them to get a read on consumer sentiment and job creation, particularly in the construction industry.

The new data add another layer to the ongoing debate over the strength of the recovery. Last week, research showed builders breaking ground on fewer homes in May but requesting the most permits in nearly four years. Home-builder confidence is still weak but home prices are turning around. Mortgage rates are at record lows.

Michael D. Larson, a housing and interest rate analyst for Weiss Research, said he was skeptical that recent improvements in housing data would translate into a strong rebound. The turnaround, Larson said, probably reflects low interest rates making housing relatively affordable and increased confidence following the moderate jobs recovery this year. Those steps forward could be easily threatened by another economic downturn or even sluggish growth, he said.

"The question is whether we are going to be able to sustain this," Larson said. "You have to be a little concerned about the economy."

The housing market this year has been squeezed by tight supply, helping stabilize prices. The data on new home sales released Monday showed inventory of new homes rising for the first time in more than a year, to 145,000. That works out to about 4.7 months of supply, well below the six months that economists consider a healthy inventory.

The median sales price of new houses also improved last month, up 5.6% from the same month last year, to $234,500. That median price was also substantially higher than May's $182,900 median sales price for previously owned homes, as published by the National Assn. of Realtors.

"The implication appears to be that Americans are becoming more willing to splash out on the extra cost of a new home," Paul Diggle, an economist with Capital Economics, wrote in a report.

Christopher Low, chief economist for FTN Financial, said the recovery for new home sales and construction remains isolated to regions where there was no major boom during the go-go years. The suburbs of cities such as New York, Los Angeles and Chicago continue to see little growth.

"We are seeing quite a bit of demand in housing in North Dakota, Montana and Pennsylvania, where thousands of new oil and gas industry jobs have been created," Low said. "We are seeing demand in part of the old industrial Midwest, in Ohio and Michigan, outside of Detroit, where manufacturing jobs are making a comeback."

Throughout Southern California, sales of newly built homes and condominiums have improved slightly over the last year, according to real estate research firm DataQuick of San Diego. Sales increased 5.5% in May from the same month last year, and the median price rose 3.2% to $373,000.

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Yet Another Housing Bear Turns Bull

Every day there seems to be more positive news about the real estate recovery. We attempt to give you two things in this blog:

1. The actual data that indicates where the housing market is headed
2. Quotes from analysts who have scrutinized this data

Today, we want to give you a quote by Ivy Zelman which appeared last week in a Wall Street Journal article Stunned Home Buyers Find the Bidding Wars Are Back.

“We very much believe we’ve hit bottom.”


Why is the quote from Zelman important? She is an industry expert consistently recognized by Institutional Investor, Greenwich Associates, StarMine and The Wall Street Journal as an industry-leading analyst. She has been nicknamed ‘Poison Ivy’ for her harsh positions on housing over the last several years. Now, Zelman is calling a bottom and projecting prices to moderately increase in the next twelve months.

Again, another expert on housing is calling a bottom; another bear turns bull.

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