August 23, 2011 Real Estate Report

Needed: A Shot of Confidence

The economy has suffered significantly in the past four years. This year we have seen a series of challenges, some man-made and some a present from nature. Now that the commotion over the budget struggle and S&P downgrade has quieted down, one would have expected that the markets would have quieted down as well. And we did have three relatively quiet days to start the week. That all went out the window on Thursday as massive volatility to the downside returned. The triggers? Worries over the European debt crisis seem to crop up every other day and the economic news released at home this week was weak. In perspective it was not that weak, as existing home sales fell, but they still were 20% above the level of last July and weekly jobless claims were up, but only slightly. There was definitely a significant reaction, or perhaps over-reaction, to the numbers.

Are the markets telling us that we are heading into a recession? Or are they just adjusting for the slowdown that has already occurred? This is impossible to determine right now, however, one thing we know is that the debt debate did not help as Americans were not in the mood to spend on big ticket items in July while there was a threat of a government shutdown. Right now we have an increased crisis of confidence. The markets need to gain confidence and so do consumers. Meanwhile, rates continue to hit record lows. Lower rates as well as lower oil prices will boast consumer spending. Theoretically, that could turn into the good news we are looking for. Consumers know a good deal when they see one and right now they are flooding the offices of lenders to refinance. We are keeping our warning in place because we know when and if this "good news" arises and confidence ticks up–the sale on car and home financing may be over.

Home prices have fallen and demand for rental units has increased so much that it’s now cheaper to buy a two-bedroom home than to rent one in most major U.S. cities. According to real estate web site Trulia, buying was cheaper than renting in 74% of the country’s 50 largest cities in July. In just 12% of the cities, including New York, Seattle and San Francisco, renting was cheaper. In the remaining 14% of cities, renting was less expensive but close to the cost of buying. In addition to a continuing decline in home prices, rock-bottom rates have added a lot of weight to the buy side of the scale. Add in the tax perks of home ownership and for those who can afford it, it certainly is a buyer’s market. "It’s a personal decision, of course. But if you have a steady job and you are planning to stay for seven years or more and have enough cash to put down and enough left over for seven or eight months of expenses, you’re better off buying in most places," said Daisy Kong, a spokeswoman for Trulia. Even where it’s cheaper to rent, it doesn’t necessarily mean renters will come out ahead, according to Ken Johnson, a real estate professor at Florida International University and co-author of a new study on whether it’s better to buy or rent. "Paying off a home loan is a kind of forced savings," he said. Each check homeowners write lowers the balance they owe and increases the value of their property holdings. That, unlike cash in a bank account, is not easy to tap. Source: CNN/Money

Watch out for Generation Y: This large, diverse, well-educated generation will drive the housing market recovery over the next 10 years, according to economists with the University of Southern California Lusk Center for Real Estate. Gen Y (15-32 year olds) boasts about 77.4 million members, which is about equal in size to the baby boomers (46-64 years old). Yet, Gen Y is much more diverse and educated (60 percent of Gen Y goes to college), according to the center, which recently presented its findings at the USC Lusk Center Orange County Executive Briefing. Stan Ross, Lusk Center Chairman of the Board, says that “baby boomers and Gen Y comprise 50 percent of the population and will soon be part of the largest U.S. wealth transfer ever.” As more of this age group joins the work force, “they will produce a massive increase in housing demand,” forecasts the USC’s Lusk Center. However, Ross points out “these kids are concerned. They have watched the stock market, financial markets, and economy wipe out their parents’ retirement plans. As a result, they will choose lower-risk investment strategies.” Source: The Hoyt Organization

The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. Here are ten tips from the IRS to keep in mind when selling your home.

·         In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

·         If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

·         You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.