January sales for El Dorado County

The decline in county real estate sales from 2005 to 2006 received much media attention throughout the year, partly because 2005 was so exceptionally good. The same will not be experienced when comparing home sales during 2007 to 2006. The 129 existing county home sales during the first month of the New Year were (for a change) actually higher than January of 2006. In the last 12 years, six January’s have seen more sales and six fewer than reported last month. All other counties in the Capital region reported fewer sales than a year earlier with the exception of El Dorado.

The county continues to maintain the highest median selling price in our 8 county region. The “median” selling price of all those 129 homes finished at $450,000, down $37,000 and 7 percent from a year ago but $8,000 higher than January of 2005 and $127,000 above January of 2004. The $450,000 median price range has been consistently holding since last October. The county’s “average” selling price did take a significant hit in prices. The “median” is the midway point where half the homes sell for more and half for less while the “average” is the total dollar amount divided by the total number of sales. The average selling price of $478,000 was a drop of $107,000 from January of 2006 and a $38,000 decrease from last December. What’s up with that? Fewer million-dollar sales.

In January there were only two home sales reported in excess of a million dollars. In December there were 5 sales in excess of a million bucks and an additional 26 sales higher than $700,000. Fewer higher end home sales will dramatically impact the statistical “average.”

Cameron Park currently has 140 homes for sale. Thirteen sales were reported last month with an average price of $462,000. The number of sales was consistent with January of 2006 but the average price declined 8 percent. El Dorado Hills (home of the Mac Mansions) reported 35 sales on an inventory of 400 homes with an average selling price of $622,500. The price decline of $131,500 from January of 2006 was the result of fewer Mac Mansions going into escrow.

The greater Placerville area has 140 homes currently on the market. Nineteen sold last month with an average selling price of $377,500. Sales were up from last year same month by 35 percent but average prices declined by 19 percent. In the towns of Diamond Springs and El Dorado there are 80 homes with a For Sale sign in the front yard. The average selling price of a home in the area was $423,000. Pollock Pines/Sly Park currently has 114 homes for sale. Seven sold last month with an average selling price of $409,000, an increase over last year’s $348,000. Cool/Pilot Hill reported 7 sales on an inventory of 60 listings. The average selling price was $450,000 down from $505,000.

Land sales continue to decline. There are 688 vacant parcels currently for sale. Only 17 closed escrow last month with an average selling price of $244,500. A year ago the average selling price was $321,000. Cost of new home construction is deterring many from building. In the past 2 years material and labor costs have increased 17 percent while county building permits and impact fees have increased over 100 percent.

According to DataQuick Information Services, 35 new home sales were recorded in the county during January with a median selling price of $500,000. New home sales have fallen 35 percent since this time last year and median prices have declined 10 percent.

I wasn’t expecting a rain free January or 419 new listings. Excessive unsold inventory continues to over-shadow our recovery. The declining number of new listings since last October had been encouraging. October… 342, November… 259, December… 180. Then last month, KABOOM!… 419! It was an unusually high number of new listings for a January and 18 percent higher than a year ago. At that rate, our inventory of new listings is increasing three times faster than our monthly sales.

With 2006 as our new year-over-year comparison base, reviewing 2007 monthly sales numbers will be refreshing. Oh yes, I nearly forgot …county condominium sales INCREASED 50 PERCENT for the month, from 2 to 3.

New home outlook

The National Association of Home Builders is projecting a first-ever overall decline in housing prices for 2007. Despite a pick-up in demand and a projected increase in housing starts by the second quarter, NAHB Chief Economist David Seiders is calling for a "modest downward" correction in prices this year on a national basis.

"Sales activity has bottomed out already," Seiders said at the NAHB's annual convention in Orlando earlier this month. "But we've got one heck of an inventory overhang."
David Berson's outlook hasn't changed at all since a press briefing in January, when the Fannie Mae economist said the market is in the home stretch. He said there a still a few bumps in the economic road, but the worst is in the rear view mirror. "I don't think we're quite at the bottom point," Frank Nothaft agreed. "There's still a little room for the market to weaken."

Seiders of the NAHB said the large supply of standing inventory of both new and existing houses could be underestimated by 100,000 units because they were sold to investors who failed to close. The deals are counted as sales by the Census Bureau, but are not erased when they fall through. The result, Seiders said, is "an extra source of supply without any corresponding demand." Overall, he added, the new home market is "overbuilt by at least 400,000 units."

The economist expects production to increase in markets not saddled with huge inventories, leading to an overall increase in starts. But he expects "the weight of the inventory overhang" to exert downward pressure on overall house values "for some time." If prices do, in fact, move lower this year, it will be the first time they have done so since the Great Depression, he pointed out.

Seiders also reported that widespread cuts in house prices and deepening sales incentives have brought consumers back into the market. According to the NAHB's proprietary monthly survey of 30 large builders, which account for about 25 percent of all new home sales, cancellations have declined, leading to "slight improvements" in net sales and closings.

Other builder surveys show that traffic to new home communities is picking up, which, along with reports from the Mortgage Bankers Association that purchase money applications are on the rise, "also supports the proposition that housing demand has stabilized," the economist added.

Even if sales are solidifying, Berson said, it will be some time before they outpace production numbers and prices start to rise again. "It's the unsold inventory that has caused prices to drop, and most of that has to be sold off before prices can go back up," he said.

Calculating the sales profit on your home.

The IRS allows us to sell our homes and exclude the first $250,000/$500,000 profit from any income tax. But what if you made more profit than you can exclude? Or what if you used a portion of your home as a “home office”? Or what if the property you sold was rented out for a period of time? How do you determine profit? The IRS explains this with the following formula:

Selling Price - Selling Expense = Amount Realized
Amount Realized - Adjusted Basis Gain (or loss)

Let's take the following example. You bought your house for $290,000 and at settlement paid $10,000 in closing costs (such as title insurance, escrow fees and other allowable closing fees). Your basis is $300,000. Several years later, you added a room to your house at a cost of $50,000 and now your adjusted basis is $350,000.

You have now sold your house for $635,000. In order to accomplish this, you paid a real estate commission of $30,000, closing fees of $2,000, and miscellaneous expenses of $3,000. To determine the “amount realized” you deduct these costs ($35,000) from the selling price, and come up with $600,000.

Many homeowners want to deduct the amount of their outstanding mortgage when calculating gain. That just will not work. You cannot take your mortgage into consideration when you are determining your profit. It is, of course, useful to determine how much money you can take to the bank after the house is sold.

Looking at the formula stated earlier, your gain is $250,000 ($600,000 - 350,000). Since you have owned and lived in the house for two out of the last five years before the house was sold, you are eligible for the up-to $500,000 exclusion of gain ($250,000 if you are single or file a separate income tax return).

On the other hand, if your gain was more than $250,000 -- or if you are not eligible for the $500,000 exclusion -- you will have to pay the IRS a capital gains tax based on 15 percent of that profit. You will also pay a State tax on this gain.

Now, let's add another fact to our scenario. You worked from home, and over the years claimed $3,000 in depreciation for your home office. In order to qualify for the home-office deductions, that portion of your house must be used regularly and exclusively for your business. If you let your kids play in that area, or you also watch the Sunday football games there, no deduction is permitted.

Here's the tricky part. The IRS allows taxpayers to depreciate that portion of the home which is used for your business. If, for example, the depreciation formula would have allowed you to deduct $5000, even though you have only deducted $3000 in our example, you will have a taxable gain of $5,000.

The regular capital gains tax for most taxpayers is 15 percent. However, the tax on the depreciation (called “recapture tax”) is at a maximum rate of 25 percent. And you have to report that on Schedule D (entitled Capital Gains and Losses).

Now, let's change the facts a little more. You bought the house on January 15, 2001 and lived in it until March 15, 2003. You then rented it out, but sold it in February 15, 2006. Since you have lived and owned the property for the requisite 2 out of 5 years (called the ownership and use test by the IRS), you are eligible to take the exclusion.

However, if you depreciated the property during the period that it was rented, the same analysis described above would apply. You would not be able to exclude that part of your profit equal to the recaptured depreciation you deducted while renting your house.
This is extremely complicated, and if you have not lived in your house for at least two years before the projected sale date, familiarize yourself with the rules and consult a qualified tax professional. For example, let's say that you only lived there for 22 months before it was rented out. Depending on the time frame, you could move back into the house for two more months, and then claim the full exclusion. It should be noted that the two year period of use and ownership does not have to be consecutive. So long as you have lived in your house for a period of 24 months over the five years before the house is sold, you are eligible for the exclusion of gain.

It would be a shame if you lost the opportunity to exclude up to $500,000 just because you were two months shy of that goal.