A Surprising Safe Haven For Savings
October 20, 2008
An emerging story beneath the headlines
By Dave Jenks, Vice President of Research and Development and Jay Papasan, Vice President of Publishing and Executive Editor, Keller Williams Realty
Amidst fears of a financial market freefall, the real estate market is emerging as a bright spot. Indicators are pointing to an end to the bust; in fact, real estate may be poised for a bounce.
While consumers are scrambling to diversify their saving and investment accounts and retreating from paper assets (e.g. stocks) into hard assets (e.g. gold), the savviest among them are looking deeper than morning’s headlines and realizing that real estate is a solid investment option in the current market.
Home prices have corrected and fallen back into alignment with historic trends. The inventory of homes for sale is finally shrinking from the June 2008 peak. Also, based on year-over-year comparisons, housing affordability is now higher than it’s been for the past five years. All signs point to the real estate market turning the corner. So for investors seeking a safe haven in this financial storm, housing emerges as a surprisingly good choice—an undervalued hard asset with upside potential.
As the following chart illustrates, the unsustainably high run-up in home prices between 2001 and 2005 is coming back in to alignment with the historic 4 percent trajectory in home price appreciation. Indeed the market has corrected. While it is quite possible that the market will continue for a time to “over correct,” the important point to realize is that no one can ever predict or time the floor—until after the fact when opportunity has been lost.
Now is the time to buy and the reasons are many:
•Real estate remains one of the most stable long-term investments with relatively modest fluctuations in annual gains.
•The extensive housing inventory in most markets is providing great choices for investors.
•Mortgage money is available to financially stable buyers and interest rates remain attractively low.
•Real estate investments tend to bring a greater annual return on investment (ROI) than stocks, gold or commodities, because they are leveraged (buyers put 20 percent down, and receive appreciation on the entire value of the property).
•Just as the late 1980’s and early 1990’s provided a massive opportunity for real estate investors to make great buys and build wealth, the current market will do the same. Smart money is already back in the market buying up the distressed properties.
•There is a simple formula for investing in real estate – Criteria, Terms and Network. That formula and the step-by-step process for using it are clearly described in the best-selling book, The Millionaire Real Estate Investor.
Federal Tax Credit for First-Time Home Buyers
October 1, 2008
Did you know that part of the Housing and Economic Recovery Act of 2008 includes some special help for first-time home buyers?
We’ve listed some of the highlights of the program below, as well as some detailed Q&As!
1. Who is eligible to claim the $7,500 tax credit?
First time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after April 9, 2008 and before July 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.
2. What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
3. How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. No other applications or forms are required. No pre-approval is necessary; however, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests.
4. What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.
5. Instead of buying a new home from a home builder, I have hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after April 9, 2008 and before July 1, 2009.
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
6. What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
7. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit
Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
8. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
9. Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as “married filing separately” (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
10. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
11. I heard that the tax credit is refundable. What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
12. What is the difference between a tax credit and a tax deduction?
A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375.
13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
No. The tax credit cannot be combined with the MRB home buyer program.
14. I live in the District of Columbia. Can I claim both the DC first-time home buyer credit and this new credit?
No. You can claim only one.
15. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
16. Does the credit have to be paid back to the government? If so, what are the payback provisions?
Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
17. Why must the money be repaid?
Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.
18. Because the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.
19. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose (”elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
20. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
21. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2008 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
Olde Taylor Farms Estate Community in Johns Creek Files Bankruptcy
July 11, 2008
The housing crisis has moved up the economic ladder with Olde Taylor Farms a luxury subdivision in Johns Creek going bust. Harrison Design Associates, the developers of Olde Taylor Farms in Johns Creek, with homes priced from $1.6 million to more than $3 million, filed for Chapter 11 bankruptcy protection July 1.
Olde Taylor Homes is situated amongst some of the most prestigious schools and organizations in Atlanta, such as the Atlanta Athletic Club, St. Ives Golf and Country Club, Woodward Academy, and Wesleyan School.
An exclusive enclave of 33 residences, Olde Taylor Farms is a serene community with pedestrian and bike paths that cross over the Chattahoochee River. The neighborhood backs up to open green space that can not be developed. Community sidewalks and wooded homesites will encourage neighbors to spend time walking and enjoying their outdoor living areas. Ancient oaks and hardwoods line the streets and give the neighborhood an established feel.
From GA-400 take Exit 10 - Old Milton Parkway. Follow signs to GA-120 East. Take a left onto Medlock Bridge Road/GA-141. Turn right onto Bell Road and continue left on Bell Road. The subdivision will be on the right.
Olde Taylor Farms Homes for Sale
The Beginning of the End of Super-Low Mortgage Rates?
June 18, 2008
There are several factors that indicate that home buying will be increasing which in turn will help fuel a recovery of the housing market.
The National Apartment Association recently conducted an online poll in which results showed 17 percent of renters plan to purchase their first home within the next year; 41 percent of the 2,041 respondents planned to be home owners within two years. Only 31 percent planned to still be paying rent five years from now.
The past six months have seen a drastic drop in mortgage rates, however fixed-rate mortgage rates rose to 6.32 percent, the highest it has been since October. Following the months of aggressively dropping interest rates, many feel that the Fed will be forced to raise rates back up. If interest rates rise, so to will mortgage rates.
According to a press release by Freddie Mac, Frank Nothaft, Freddie Mac vice presient and chief economist said that, “Mortgage rates jumped this week after a number of Federal Reserve officials, most notably Chairman Bernanke and Vice Chair Kohn, expressed concern over a threat of inflation.” We may very well be seeing the beginning of the end of the super-low mortgage and potential buyers may realize that with rising rates, now may be the time to jump in. Nothaft added, “Moreover, pending home sales for April unexpectedly rose by 6.3% and mortgage applications for home purchases … were also up last week.”
Will House Prices Continue to Drop? Is it Safer to Rent and Buy Next Spring?
June 13, 2008
If you are like most of my clients, then you are probably asking these same questions. I thought it might make sense to share the dialogue between a client of mine that might help answer these questions. Dialogue below.
Client: Do you think the house prices will continue to drop? Should we consider renting, and buy next spring?
Brenda: I have been in real estate in Atlanta for 5 years and during the past 5 years have seen our average appreciation to be between 4% - 6% depending on the area. Right after the bank issues that occurred in the banking industry (July/August), we began to see a leveling off. During the 4th quarter of 2007 we began to see a decline, although still not significant compared to other US markets. In the first quarter of 2008 we saw prices, on average to be 6.6% below the same quarter of 2007. We are seeing a climb back upward, but it is hard to know if that is just because of the time of year or if we will continue to see the market recover. Some are already beginning to say the recovery has started, others say it has not. I will not have Q2 numbers until mid July to know the trends for sure, but even if I do, it can only give me a snapshot of the rear view mirror vs. a prediction of the future.
I can tell you that our team is swamped! It has really exploded for us in the last two to three weeks. This time of year is always busy, but we are really seeing alot of activity. Our Keller Williams office, of about 250 agents, has also just had two of its strongest months if that is any indication. Regarding waiting until next spring, I would have a hard time advising you to do that based on what I am seeing. I think now is the absolute best it has been in our market to buy in some time. It is always possible it will go lower, but I also think it may just level off and then recover as well. But if I could predict it for certain, I would be a very rich person!
I have been working with clients all week that are also relocating and want to live in Forsyth County. They thought they would have a lot of flexiblity to negotiate price, especially on new construction. However, just today they said to me that it is harder than they thought it would be to get sellers to negotiate their prices down. But, from my perspective, it is still the most flexibility I have seen over the past 5 years to negotiate prices. Depending on where you choose to live may also impact your negotiation. There seems to be more flexibility on price out in Forsyth County then there is in Dunwoody/Sandy Springs.
Below is a chart that might give you a little better visual on what we have seen in our market since 2000. As you can see we are currently on par with the same trend line we saw in 2004. Prices are currently holding at levels between 2004 and 2005:
Let me know if you have any other questions.
Client: I am working hard to be educated. Another family from here is relocating to the area and they feel that the housing prices will drop more and they plan on renting. I was trying to locate more factual information so I can make an educated decision. I appreciate all of your help.
Brenda: You are smart to try and gather factual information. I think it is very hard to do right now as the media has really run a bit wild with all of this. You can literally find two articles in the paper some days that say two totally different things about the market. The media also tends to paint the housing market with a very broad brush. The national statistics often do not apply at the local level.
I am pasting an article below that I think was one of the most factual and balanced articles that I had seen in a long time. It was in CNN Money and outlined the Top Ten Cities that would likely recover the quickest from the housing market challenges and why. Atlanta was ranked as #4.
I am not sure what your relocating friends are basing their information on, I can only tell you what I see happening and I work in this every single day and have for the past 5 years. I cannot say with absolute certaintly that we have hit the bottom, but I can say with certaintly that this is a great time to buy. Waiting may gain you a few more bucks, but I really do not see it being anything dramatic in the Atlanta market. And, in fact, I think waiting is more of a risk. If you wait for prices to go lower, but interest rates or inflation rise, then you waited for nothing. Instead, you have just spent more money on rent and storage costs…something you cannot recuperate.
Those who seem to know what they are talking about when it comes to our specific local market will consistently say that Atlanta did not see the extremely high appreciation rates that other cities experienced and as a result, Atlanta will also not see the lows. As a result, if we drop any further in our average prices, it would likely still be in the lower single digits. Even if we were to drop another 3%, on a $500K home, that is $15K. My sense is you could likely negotiate that 3%, and probably more, off the current price of the home now and not incur the additional rental and storage costs…not to mention the hassles of renting. It is pretty difficult to time the stock market and the housing market is the same.
The other thing that you see in many of the articles is they compare how much the prices have dropped from the same month/quarter of 2007 to 2008. I think 2007 prices are long gone and it doesn’t make sense to continue to compare to them. What does make sense is to look at if the 2008 numbers are following the natural trend lines that we see in Real Estate month to month as you can see visually in the graph below.
Inventories are also at their highest right now so you have the best selection to choose from. As we get past the summer months, selections will be a bit more limited. I have an entire book of about 30 charts that I get updated every quarter regarding how the market is doing. I’d be happy to review them with you guys when you are in Atlanta next….the file is too big and complicated to just send via email. If you find any other information that you would like me to take a look at, I am happy to do so.
Client: Thank you so much for the article. My sense is that with the continued growth that Atlanta experiences the housing market cannot bottom out like other areas. We tend to do the research and want to buy in an area that tends to have good resale. I try to take the media with a grain of salt.
The Future of GPS Technology in the Real Estate World
May 19, 2008
There are sites now starting to pop-up where you can download your own Points of Interest (POI’s) into your GPS unit.
Realtors could load up a GPS with specific POI’s for clients and ultimately make them available through a website where they can just download them into their own GPS.
They are also starting to come out with beta software to do GPS tours…when you drive by a POI, it starts an MP3 with info on that POI…so think about call signs IVR being replaced by a GPS recording. What I see in the future is that every real estate listing has a POI you can download from the internet into your GPS…advertising/information is also downloaded on a voice file with that POI.
Go to these sites to read more: http://www8.garmin.com/products/poiloader
Custom POI sites: http://www8.garmin.com/products/poiloader/POISource/
There are more links there that can be clicked upon.
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