Waiting can be costly

With all the talk of softening markets, many buyers have moved to the sidelines to wait out high prices, believing that soon to comer lower prices will help them along the path to homeownership or to move up into the house they really want. Instead of prices, buyers should really keep their eyes on interest rates.
Waiting for prices to level and drop while interest rates increase, won’t help with your monthly payment. In fact a lower priced home but at a higher rate will increase your monthly payment.
An information sheet came to my desk from a national mortgage company comparing buying power on a household annual income of $100,000 to demonstrate this point and it was quite telling. Now, I know the national median household income is about half that amount, however, the principles are the same of how powerful interest rates affect purchase power.
For instance, in this example, if you’re waiting for prices to drop $50,000 before you buy, hoping to get a better deal – well, quit waiting. If interest rates increase as the Mortgage Bankers Association of America forecasts, your payment won’t come down with the lower prices. In fact, you may still sit on the sidelines.
MBAA is predicting 6.7 percent rates into next year. Even with that level of increase, historically, that rate is some of the lowest rates you’ll ever see. However, at that amount, the above buyer will only be able to buy about $399,411 worth of house. Last June (just 5 months ago) that same borrower could have borrowed $450,000 at 5.63 percent on a 30-year fixed mortgage. Neither the buyer’s income nor the home price decreased the buyer’s buying power -- just the interest rate.
The 30-year fixed rate mortgage for $450,000 at 5.63 percent would cost a borrower $2,591.87 per month. For that same borrower waiting for prices to drop, but watching interest rates jump to 6.7 percent, that same $2591.87 will only fund a mortgage of $401,667.91.
Two words of advice. To those who are thinking about buying -- look at all your options and run your personal numbers. How long can you wait for prices to reduce while interest rates are on the march upward before you’re priced out of your favorite home again? Since housing inventory has been on the rise, move sooner than later. Smart sellers are willing to negotiate. You may be able to get that lower price just by asking for it.
Secondly, if you know you’re going to buy -- lock in early and move in on the contract. By locking in you could save money by having a lower rate for your mortgage.
Average interest rates have risen by more than half a percentage point in just the last 6 months from 5.62 percent to 6.28 percent, according to Mortgage-x.com’s rate calendar. Depending where rates go, even one month delay in locking in your rate could make a difference of several hundred dollars on your monthly payment.

There they go again

I think most of us lean either positive or negative. We either see the glass as half full or half empty. We expect the best in people or the worst. We are trusting or skeptical. There is a force for the greater good or everything is a conspiracy. We either believe in Santa Clause or we don’t. The folks the UCLA Anderson Forecast don’t believe. They lean way left of center. Each quarter they issue an economic report forecasting the direction of the state’s economy and the housing sector. Each quarter they make headlines because the report always forecasts the collapse of real estate. This week and their most recent report was no different.
The report released Monday said that the downshift in real estate will lead to job losses and erase the “wealth effect” generated by rising home prices. The report goes on to say that the housing boom is over and it will cause inevitable weakness in the U.S. economy resulting in job layoffs.
So the soft landing that we are currently experiencing in the real estate market, is going to weaken an economy and lead to massive job layoffs? Weaken an economy that war and nature has attempted to dismantle without any success? The physiological babble about destroying the “wealth effect” which will stop millions of us from buying anything isn’t based on any historical or factual standard. Who pays these people?
The people at the Anderson Forecast must think that just because our homes don’t appreciate 20 percent each year that life as we know it will stop. We will not build or buy any new homes, we will not do any home remodeling, will not send our kids to collage, take vacations and buy stuff. Do they really think that homeowners are so naive? That we don’t understand the dynamics of the market place? That we are so dependant upon and addicted to this so called wealth effect that we can’t live without it?
Homes aren’t commodities like gasoline or orange juice. They are not primary investment vehicles like your 401K or an IRA. It doesn’t need to appreciate 20 percent a year for us to enjoy the “wealth effect.” The appreciation rate on a home, like the tax benefits are contributing factors to owning one but I suspect the many other benefits are more important if by circumstance we had neither appreciation nor tax deductions. Home owners will continue to feel this so called “wealth effect” because they own their own home not because it has recently become an ATM machine. The glass is still more than half full when it comes to owning a home in California and should be pointed out to the folks who study such.

Good economic news for real estate

The local real estate market may have cooled along with the weather in the Capital Region but a recent report by the Commerce Department shows that our booming economy is doing better than expected.
With all the daily negative news headlines from the mainstream media it was easy to miss the economic report released by the Commerce Department last week. The Gross domestic product (GDP) increased 4.3 percent from July through September. This third quarter fraction was the best since the first three months of 2004 and despite a war, hurricanes, fuel cost and rising interest rates. Economists believe that the GDP would have topped 5 percent had Katrina bypassed the Southeast.
The output of products and services is a reason that Wall Street has been so positive recently and could send the Dow Jones into new territory next year.
So how does all this good economic news affect housing? As long as we are creating jobs and the economy is expanding, the housing sector will expand along with it. If companies are not selling products and services (GDP) and making money they will not hire employees. The unemployed do not buy houses.

What to do with mother?

A reader writes……My mother is a 75-year old widow. She owns her home free and clear and it is worth approximately $310,000. Her income from retirement pensions is $22,000 a year. She had a heart attack several years ago and suffers from high blood pressure and diabetes.
She would like to move to be closer to her family, especially her grandchildren. We suggested that she sell her house, and rent an apartment. However, the thought of renting is not acceptable to her.
What tax consequences would she have to face if she sold her house? If she does not purchase another house, can she put the sales proceeds into a money market fund? Do you have any advice on whether to rent or buy?
Answer: Many senior citizens do not want to live in an apartment -- or in a senior citizen home -- and would prefer to live in their own home. If her desires are not met, this could cause depression and anxiety, which obviously is not in your mother's best interest.
Let's first look at the tax consequences when she sells her current home. In order to determine the profit (called capital gain), we first have to determine the tax basis of the property. Let us assume that your mother and father bought it many years ago for $30,000. Let us further assume that when your father died, the house was appraised at $100,000.
Your mother's initial basis was $15,000 (half of the initial purchase price). When your father died, your mother received what is known as the "stepped up" basis in the property. This is based on the appraised value of the house when he died. In our example, since the house was worth $100,000 at the time of his death, your mother basis was increased by $50,000 (half of the appraised value). Thus, your mother's tax basis currently is $65,000 ($15,000 plus $50,000). For purposes of this illustration, we will assume that no major improvements were made to the house. However, if there were improvements, that would be added to basis.
If your mother sells the house for $310,000, her gross profit would be $245,000 ($310,000 minus $65,000). She would also be entitled to deduct any fix-up costs, closing expenses and real estate commissions in order to determine her net capital gain. But even without these additional expenses, since your mother has owned and lived in the house for many years, she can exclude up to $250,000 of gain. In other words, she will not have to pay any tax whatsoever when her house is sold.
There are absolutely no restrictions on how or where the sales proceeds can be used. The money belongs to your mother, and she is free to use it as she pleases. Even though it may be foolish to you, she can even squander the money or give it away.
She can also give gifts to her family. Currently, she can give up to $11,000 to anyone, and these gifts will have no tax consequences for either the gift giver or its recipient.
Should your mother rent or buy? This is a very personal question, which can only be answered by the individual herself. However, here is one suggestion. Can you afford to buy a house (or a condominium unit) for your mother? She can pay you a nominal monthly rent, and you will have some tax benefits. But more importantly, your mother may not object to renting if her family is the landlord, instead of some stranger.