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April – Real Estate Newsletter

April Real Estate News

“Sales prices in over half of measured markets since 2005 are now at or above their previous peak level.”Troy McMullen, Forbes

TOP STORY: The Advantages of Moving Up

The American Dream is to own a home. Well, lit turns out it’s a recurring dream! Did you know that more than eight out of ten home sales in America are made by repeat buyers?

Beyond the desire for a bigger and more beautiful home, there are many practical reasons to buy the next property: Growing families need more space; adult children may be caring for aging parents – or for children who are still not quite out of the nest. A promotion or new job may make relocation desirable to cut down on commuting time.

For whatever reason, the move-up home is at once an improvement to one’s standard of living, a better tax shelter and a leveraged investment with the potential for slow, steady growth. That can be important for people who are looking forward to a profitable sale prior to retirement.

Five Basic Reasons to Move Up

The move-up home, then, is that odd combination of the emotional and the practical. On the one hand, buyers can take pleasure in architecture, interior decorating, gardening and the fun of showing; off one’s new home to friends and family.

At the same time, taking on the responsibility of a larger and more expensive home involves some sober, hard-headed business; considerations. (As with any important financial decision, a talk with your accountant or financial planner would be in order before considering the purchase of any home.)

lnvestopedia.com, an on-line home finance site, lists five basic reasons for moving up.

The first is that an additional income- earner has joined the household. With that added income comes the need for additional tax shelter.

More Expensive Homes = Bigger Tax Benefits

Deductible mortgage interest is one of the chief financial benefits of home ownership. By allowing the taxpayer to deduct the amount of mortgage interest they paid during the year from their taxable income, this reduces the amount of taxes they will have to pay. This deduction allows the taxpayer to switch from the standard deduction (15%) to the itemized deductions, which can potentially be larger than the standard deduction, according to lnvestopedia.com.

As it turns out, people who own expen­sive homes tend to benefit far more from the mortgage interest deductions than most first-time buyers, who tend to buy less expensive homes. Why? A study by the Tax Foundation, a non-profit research group, reported that upper-income earners in fact “benefitted disproportionately” from the tax benefit, households earning $100,000 or more claim an average $8,928 deduction on their federal taxes, while people earning $200,000 or more claim $14,374.

In contrast, homeowners earning at least $40,000 annually had mortgage-interest deductions of $2,462, on average, while owners in the $50,000-plus bracket deducted $4,068.

High-income homeowners, in fact, benefit so greatly from deductible interest that the President’s Advisory Panel on Federal Tax Reform has criticized the home mortgage interest deduction for “encouraging the construction of larger homes, and not necessarily broadening homeownership among middle-income Americans.” (Here the assumption is that the larger home is more expensive.)

In other words, the tax benefits to own­ers of more expensive homes are so great that some people consider them unfair. Still, that seems a pretty strong recommendation for moving up.

A recent article in realtor.com reminds us that the mortgage interest deduction has been in place since the original tax code. “While many politicians and officials over the years have broached the idea of eliminating it, it remains in place – at least for now – most likely because it serves as a solid incentive for people to buy rather than rent.”

Capital Gains Exclusion

The other great tax advantage – and one that some homeowners fail to take full advantage of – is the capital gains tax exclusion. When you sell your “principal residence” and make a profit, individual owners can shelter up to $250,000 of the profit on the sale, while couples can shelter up to $500,000.

To be eligible, the law requires you to have lived in the home at least two of the previous five years to qualify.

Also, sellers may be able to enlarge the tax advantages of the capital gains tax exclusion by determining the adjusted cost basis of the home.

Here’s a simplified example of how this works: A hypothetical homeowner spent $50,000 on home improvements (and was smart enough to save the receipts!). The same homeowner subsequently sells his or her home for a $300,000 profit. Since tax law protects only $250,000; the remaining $50,000, however, is taxable.

But, here’s the magic of determining the adjusted cost basis: Our homeowner is allowed to deduct the cost of home improvements – in this case $50,000—from the $300,000 sale proceeds, making an adjusted cost basis of $250,000. Voila! The entire profit has been excluded from capital gains taxes. (For the sake of sim­plicity, this example omits other possible costs that could be deducted from the sales proceeds, such as brokerage commissions. Again, please consult your accountant.)

Changing Needs

Back to the investopedia list of reasons for buying the next home: #2 – The need of a growing family for more space. Among the homebuyers questioned for the NAR survey, 12% said they were buying a larger home to accommodate an expanding household. Of those buyers, 18% said they needed extra room for aging parents, while 14% needed more space for adult children or other relatives.

The third reason for buying is that people may seek out smaller homes as they look toward retirement and want to live closer to adult friends and children. Keep in mind though that smaller homes don’t necessarily mean less expensive homes. We know that prices vary widely from place to place, and in some places, such as the Bay Area, or Denver or Seattle, small homes may be more expensive than large homes in other cities.

Reason Four: One or both wage earners have received promotions and need to relocate for a new job or assignment. Those with demanding jobs with long hours may wish to live closer to the workplace. If the office is downtown, for example, people may opt for a close-in suburb. Or, perhaps, the entire household faces the adventure of moving to an entirely new community.

Whatever the reason for buying, a more expensive home also has greater potential as an investment (if all other conditions remain equal, such as the quality and desirability of the surrounding neighborhood) in future years. These factors can lead to a profitable sale, and possibly yet another purchase, down the road.

MARKET GROWING DESPITE LABOR SHORTAGE

“The housing market will continue to grow this year at roughly the same rate as in 2016. Modest construction of new housing and the low turnover of existing housing stock will keep inventories lean and price gains hot. Building j constraints will limit the speed of residential construction. Builders face the same challenges as in recent years: lack of available land and lots, labor and lending. Nevertheless, builders are trying to keep up with Steady demand for housing; Building permits indicate that further growth is in store for residential construction; early in the year.” – Rodrigo Sermeno, Kiplingers

The Move-Up Home as an Investment

The 5th reason to sell, according to Investopedia.com is that your home has appreciated in the current market and you’ve decided it’s time to reap the benefits. Ideally, you will sell the current home at a profit while buying something more expensive that reflects your changing tastes.

However beautiful and aspirational, the move-up home is also a financial and investment decision, not just a way of tooting one’s horn about material success. There are many tax and personal financial decisions to be made. A home, after all, is a big financial investment, and can have implications not only for taxes but for retirement, as well.

The Power of the Long Hold

While most people who are not professional investors buy homes primarily as shelter first and as investments second, real estate is an investment asset. Real estate, in fact, is often viewed as a solid, reliable investment over a long hold.

BOOMERS BUYING FEWER HOMES

“In the last several years, baby boomers’ participation in the housing market has dwindled. Many already own homes and may have been reluctant to sell until their properties recovered the value they lost in the housing bust, [NAR Chief Economist Jonathan] Smoke said…”While a sizable number want to downsize to control expenses, we’re seeing others move to the biggest house they’ve ever owned because they’ve got children and grandchildren and they want those people to come visit…” He added that many boomers are opting not to move to traditional retirement hot spots [like Arizona and Florida, instead choosing to move closer to family.” -Ilycp Glink, Moneywatch2017.

“Over the past 40 years, real estate has gone up an average of 4.62% per year,” says onemorerental.com, a real estate investment website. ‘The combination of accelerating equity pay-down (with each payment, you pay more principle and less interest), and appreciation means that the investor’s equity in any given property will grow exponentially the longer they hold it.”

To homeowners with vivid memories of the Great Recession and crashing home values, the idea of home ownership as a comparatively safe investment may seem hard to swallow. Yet people who could hold on to their homes through that difficult time have seen their values grow back to levels approaching their 2006 peaks.

That experience, while distressing when prices were in a downturn, could be used to argue that home ownership is a stable, slow-growing investment that retains its value in the long run.

The Advantage of Leveraging

What makes home buying a comparatively safe investment? Leverage is the primary reason.

Leverage is defined as “using a loan or some other form of money (basically anyone’s money other than your own) to buy property,” says BiggerPockets.com, a financial website. “Buying a house using a mortgage is a perfect example of leveraging.”hat makes home buying a comparatively safe investment? Leverage is the primary reason.

In the opinion of the writer, real estate is a better investment overall than the stock market. He offers a hypothetical case. “If you invest $20,000 into the stock market, and it goes up 10%, you’ve made $2,000.”

“If you invest that same money into real estate,” he adds, “you can buy a $100,000 property with an $80,000 loan. Let’s say it only goes up 5%. Well, you’ve made $5,000. Or in other words, you’ve made a 25% profit!”

MILLENNIALS WANT SAFETY, PRIVACY, SPACE

“Millennial buyers want to make sure that their money is well spent: Making a sound financial investment is a top goal….This new generation of first time home buyers is focused on safety, privacy, and more space, indoors and out. That’s because millennials’ top reasons for buying a home are that they’re getting married or moving in with a partner, growing tired of their current living space, or planning an addition to the family. Or perhaps all three!! So it’s no wonder that millennial buyers prefer single-family homes (39%) or townhomes (34%). Just 15% are interested in multifamily homes, and 10% in condos. – Cecily Wedge worth, realtor.com

Buying While Selling

Whether buyers are trading up or scaling down, it’s likely that people in both situations face the same unappealing task: that of selling one home while buying another. As is nearly always the case with real estate, conditions vary from market to market. Even in favorable circumstances, however, selling one home while buying another can be a difficult needle to thread.

Ideally, one wants to sell the old place first, then use the sale proceeds toward a down payment on the new place. Getting the timing right on this can be tricky, however, depending on market conditions. In some cases, for instance, you may be able to sell your old home quickly yet require a much longer time to find a suitable replacement.

People can also make their lives more complicated by doing major work on the new home before they move in. Even without these kinds of logistical issues, it’s hard enough to sell one home and buy another without being caught homeless in between.

People who are simultaneously buying and selling are well advised to make some contingency plans. If you find yourself without an address for a few weeks, you may choose to stay with family, if you’re on exceptionally good terms; others may choose to rent an apartment.

In some cases, however, buyers can be obliging, and are willing to rent back your former home to you on a month-to- month basis, until you find something to buy or make other arrangements.

And Your Next Home?

So far, we have talked about practicalities, in terms of tax treatment, commuting, being close to friends and family and other purely rational considerations. There’s a final factor, however, that only you can answer and that is: What do you want your next home to be?

Nobody else can answer this question for you. If selling one place and buying another can be hard work, finding the exactly right home for you to buy is one of the chief pleasures of moving up. It continues to be The American Dream.

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