Tag Archives: sellers

How Will Rising Interest Rates Affect the Housing Market?

This is the topic that’s on everyone’s mind right now.

For the past year, mortgage interest rates have been at crazy, historic lows: http://www.freddiemac.com/pmms/pmms30.htm

Those rates, combined with the robust local economy, have sent buyer demand sky-high and housing prices soaring. The spring market was a frenzy of multiple offers, often far over listing prices.

Then at the end of June, the market threw us a curveball. The average 30-year fixed mortgage rate jumped from 3.93% to 4.46%–the largest weekly increase since April 1987. While rates are still historically low, this surge was a jolt for buyers sweating the spreadsheets trying to decide exactly how much house they can afford. The rise in rates will change the equation for some homebuyers.

For buyers who are stretching their budgets, rate changes can have a big impact. I predict that the $1.8-$2.5 million market will be the hardest hit because these buyers tend to be doing the most leveraging. Below that the effects on the monthly payments are not as great, and above that buyers are coming into the deal with more cash and are less dependent on loans.

So what does this all mean?

The basic economics are that as interest rates rise, buying power decreases and the buyer pool for houses decreases as home prices increase. In our hyper-local market with so many cash and international buyers, it remains to be seen if small increases in interest rates will have a substantial effect. Still, in this volatile market, there are likely to be fewer multiple offers on properties and more loan contingencies.

Advice to Sellers: If you’ve been on the fence about putting your house on the market, do it now, while interest rates are still low. If interest rates continue to rise, it will negatively affect the marketability and price of your house. Also, when you put your house on the market make sure that it is well prepared and makes a great first impression. You might not get a second chance.

Empty Nester? A Condo May Be For You!

Congratulations, Empty Nester! You’ve launched your kids out into the real world! Of course you miss them—at least a little—but look on the bright side. Now that you’re not driving carpool and helping with homework you’ve got more free time, freedom and a little more disposable income to spend on the things in life you enjoy.

Maybe now is the time to think about downsizing from your big, family home into something cozier and easier to manage that matches your new lifestyle. A condo might be just the thing for you!

Think about it: No more landscaping to maintain. No more cleaning the gutters or worrying about the roof or whether or not to paint the house this year. And a smaller space means less to clean!

By downsizing into a condo, you’ll save money on your mortgage and utilities—money that can be socked away for a rainy day, spent on hobbies and interests or travelling. And getting away for those long vacations will be easier and more spontaneous when you don’t have to worry about hiring a housesitter or someone to take care of the yard.

If you’re thinking about using some of your newfound free time to get in shape, you’ll be interested to know that some condo complexes offer amenities like a pool or exercise facilities, making it convenient to work out where you live. The Palo Alto on Alma hyperlink http://101alma.com/ Street offers an updated fitness center and a pool with cabanas. You can save more money by cancelling your gym membership.

Since you’re not cooking for the kids anymore, you might want to spend more time exploring the diversity of wonderful restaurants in downtown Palo Alto. The Woodmark condos adjacent to Heritage Park on Channing Street put you within strolling distance of University Avenue and all the great dining and shopping opportunities there. From the Woodmark, you’ll also be able to walk to Whole Foods, two movie theatres and the Gilman Street farmer’s market downtown.

Oh, and there’s one more benefit to condo living—your kids can’t decide to move back into their old rooms!

Empty Nester? A Condo May Be For You!

Maybe now is the time to think about downsizing from your big, family home into something cozier and easier to manage that matches your new lifestyle. A condo might be just the thing for you!

Think about it: No more landscaping to maintain. No more cleaning the gutters or worrying about the roof or whether or not to paint the house this year. And a smaller space means less to clean!

Oh, and there’s one more benefit to condo living—your kids can’t decide to move back into their old rooms!

Should I Stay or Should I Go? Renovating vs. Selling

Having trouble deciding whether you should remodel your place and stay put or search out a more suitable pad? Read on for some considerations which should hopefully help you with this decision:

Many of my clients like their house enough, but it’s just not the right one for them. If they could tweak the floor plan, upgrade the kitchen, and build out an extra family room – it would be perfect. Except for the howling dog, the drummer who works practices with his band twice each week, and the constant roar of the El Camino traffic. Or, the neighborhood is perfect, the neighbors periodically bring baked goods – but the half-sized lot won’t allow for the extra bedroom you need and the pool you have always wanted.

Neighborhood is key.

As you always hear, you can change almost anything about a house except for the neighborhood. This is where I always start with clients who aren’t sure. Are you happy where you are, should you have a house more suited to your needs? Are you near a busy street or another nuisance that drives you crazy on a regular basis?

Will you be able to recoup any money invested when it is time to resell?

It’s great that you might want to double your square footage, put in a custom kitchen and that hand-excavated 10,000 bottle wine cellar you have always wanted. But when you go to sell in 10, 20, or (heaven forbid) a job change forces a THREE year plan, will you be able to get out of your home without a decent sized “haircut” to your investment? Look around your neighborhood at what has recently sold. Compare that with how your neighborhood has fared over the years. Do you already have the biggest, most expensive house on the block? If so, you may not want to over-improve your current home beyond the standards set by the neighborhood.

Does renovation make financial sense?

Do you have the cash needed to make the necessary repairs, or are you already maximized on your monthly debt and have no cash reserves to cover any unexpected “bumps” in your proverbial road? Would taking an additional loan put you in an uncomfortable financial position?

Can you endure living through construction?

I probably should have put this at the top of the list because it is where most people will stop reading. Living through construction isn’t fun, it disrupts daily routines, and puts an extra layer of stress upon everybody in the household/construction zone. Renovations can be fun when you’re choosing finishes, but what about when the four month project is going on eight months and you can’t possibly endure anymore take out dinners? I’m not saying all projects go over time and budget, but how would you deal with the situation if it did?

Tally up your responses to these questions and ask others for their input if needed. Only you will have the right answer for your personal situation, but a real estate professional can help with a “before” and “after” valuation to determine if the cost of the improvements/changes to your home would be a wise investment. Your favorite Dreyfus agent would be happy to have a more in-depth conversation with you!

Should I Stay or Should I Go? Renovating vs. Selling

Having trouble deciding whether you should remodel your place and stay put or search out a more suitable pad? Read on for some considerations which should hopefully help you with this decision:

Neighborhood is key.

Will you be able to recoup any money invested when it is time to resell?

Does renovation make financial sense?

Can you endure living through construction?

Act fast. Capital gains could jump in 2013.

“A house divided against itself cannot stand” is how Abraham Lincoln put it. While we’re not in Civil War territory today, we’re definitely in a place of political impasse.

Homeowners take note: our government is likely too divided to stop the Bush tax cuts from expiring at the end of 2012, no matter who the next President is. You can still sell your house under the current tax code, but you must hurry.

If you’re like some of my clients, there’s a lot at stake. The Smiths bought their classic bungalow on a shady street in Palo Alto in 1971 for $151,000. That same house is now worth a tidy $2.5 million. Yes, it’s a great problem to have, but it’s also better to pay the current 15% long-term capital gains tax, than next year’s expiration driven rate of 20%. Also, add the medicare tax of 3.8% on gains, recently upheld as part of the new federal health-care program, and you’re looking at a nearly 9% rise in taxes. If, after adding the cost of capital improvements, the Smiths have a basis of $400,000 and net $2,000,000 after costs of sale, they have a long-term capital gain of $1,600,000. Even with the $500,000 tax-free gain exclusion given a married couple on a primary residence, that’s the difference between $165,000 in taxes this year versus $261,800 the next. Keep in mind, too, that the pre-Bush capital gains rates are not a ceiling. A nation that keeps talking about balancing its books is a nation likely to raise taxes, before too terribly long.

The lesson here? If you’re thinking about selling, ask yourself if you’re confident your house will be worth 15% more next year—because that’s the magnitude of gain you’ll need to cover a bigger tax hit. If you decide to take the money and run, do it now and don’t wait to the last minute. That’s what everybody else is going to do. And yes, in my world, it’s almost the last minute. Not only is 2013 coming fast, but the closer it gets the more likely it is to cause a stampede of sellers who, together, drive prices down.

Now for those of you that have been adults for a while, I think it’s worth noting that you can no longer skip capital gains by using the proceeds to buy a more expensive house. That little dance move was removed from the tax code quite a while ago and replaced with the $250,000 exclusion of tax on gain on the sale a primary residence ($500,000 for a married couple). If you did partake in the old tax law, don’t forget that you have carried that gain with you.

At whatever rate you end up paying, the measurement for capital gains is what you sell your property for minus the purchase price and the cost of capital improvements. Maintenance and repair, like painting your house, is not a capital improvement and so not added to your basis. However, in the last 90 days before you sell your house, more fine print starts to work in your favor. Any decorating or repair expense—like painting, landscaping, wallpapering, or fixing the chimney—is deemed a deductible selling cost, as are advertising fees, administrative costs, inspection fees, legal costs, and your real estate broker’s commission.

The Facebook Effect, From Supply to Demand?

As we approach the golden IPO moment, I though I’d take the time to address the “Facebook Effect” on our local market. Despite the breathless proclamations by real estate agents and hopeful sellers about dramatic price increases due to Facebook buyers with money falling out of their pockets, the reality of our recent market rise has been lack of supply and not a surge in demand. Sellers are waiting to sell, and they are waiting because they think prices are going up. And, they think prices are going up because of Facebook.

So here we are at the golden moment, and the big question is: does the Facebook-affected lack of supply, turn into a Facebook-affected increase in demand? Well, yes — oh, and no.

On the yes side, there is a lot of money about to be made by a lot of people, both in and out of Facebook, who live locally. Also, there is a pent-up demand for home purchases after the ’08 crash, particularly move-up purchases by locals. Money plus desire equals rising prices. Yes, more supply can dent that, but it’s hard to deny that disposable income suddenly appearing in our always tight inventory market is not going to affect local housing prices in a positive way.

On the no side, the list is a little longer. Lock-ups and secondary lock-ups will even out the impact of the sudden dollars, as the cash realization is spread out over years rather than grabbed in a moment. Second, with a company average age of 26, the majority of Facebookers are not exactly your typical home buyer profile. They have a bit of traveling and playing to do before they settle down. Third, and more interesting than the rest, is Gen Y’s borderline indifference to material things and putting on a show. These young adults are refreshingly more about the journey than the end. When they do buy, they are much more likely to buy enough house, not a lot of house.

So what do you do if you want to sell or want to buy? I’m happy to advocate a self-serving “do both now.” Current local economic trends make it pretty tough to look a buyer in the eye and tell them prices are going to reverse any time soon. In 22 years of luxury real estate experience, I’ve never seen a market start a recovery and immediately turn around and dive. Residential real estate trends tend to be four to five years, both up and down. So, if you have decided you want to live here and you find the right house, do it now.

On the sell side, it’s more about risk analysis. You know the market is hot as a pistol and you can get a head-turning price for your house. Appreciation in luxury real estate usually occurs quickly, in big jumps and then usually zigs and zags, up and down before the next correction. The big jump has happened, and buyers are now on the ropes. So, do you want to take the risk of even a slight drop in exchange for 2% to 5% more next year? Also, possible capital gains changes next year and the ability to take your money into softer markets almost everywhere else right now are factors encouraging a sell today.

West Menlo Inventory

A few months ago, a client of mine said “I haven’t seen inventory this low in a long time!” I had to do some research and what I found is this – 2 other times in the past 13 years, inventory was this low – soon after, it rose significantly. My advice to you – “if you have been thinking of selling your home – call me!”

Palo Alto Gold

Finally 2012. The year everyone in local real estate has been waiting for. Facebook is going public, the tech sector is chugging along and multiple offers are back. 2011 saw a big rebound in Palo Alto prices and the early goings of January have been hot, hot, hot. Every real estate agent in town has a long list of buyers and you can almost feel the preparation for a spring frenzy. The hordes of buyers are going to overwhelm our meager supply. Or are they?

A quick look at the accompanying charts shows that last year’s market rebound may be more about supply than demand. And that supply has been remarkably low, and falling for quite a while now. With the exception of 2009, which saw some forced selling, the number of homes offered for sale each year after ’08 in Palo Alto has been in the 500’s, substantially lower than norm of 700’s and lower even than the dot.com years’ 600 range.

Meanwhile, the sales numbers are not all that impressive. Last year’s 453 sales, while up from the previous three years, is still 14% lower than the 10-year average before the 2008 collapse. Our hot market isn’t about buyers, it’s about sellers – or lack of them.

So, what if the sellers all show up at once? Take five years of pent-up selling demand, mix in a probable rise in 2013 capital gains rates and add a media frenzy about newly minted tech millionaires in May and you may have a rising inventory cake, with the icing being some options and choices for the buyers and caps on baked in gigantic price increases.

Do I believe any of this? Not sure. The buyer-side demand that we are seeing for Palo Alto is intense and unlike anything since you-know-when. I think we are most likely in for a wild ride in 2012. But, if I was a seller, I’d sell into the teeth of it and not take the chance that everyone else jumps in once they see that the gold rush is on.

The facts about selling your home and capital gains

Everyone in the Valley is talking about how hot start-ups and high-flying IPOs make this the year to cash in for those who are considering selling their homes. While this may be true, there is another more concrete reason to think about selling soon. It’s an issue as old as the hills: taxes.

The current maximum capital gains tax rate will expire at the end of the year. It’s anybody’s guess what the new tax rate will be, but most are thinking it will be higher — quite a bit higher, some believe. Homeowners who are thinking of selling in the next few years may want to pull the trigger sooner rather than later.

Currently, taxpayers are allowed an exclusion of $250,000 for an individual and $500,000 for a married couple on long term capital gains resulting from a sale of a personal residence. To qualify for this exemption, the taxpayer needs to have made the house his or her personal residence for at least 2 of the last 5 years.

The exclusion is not available to second homes, investment property or any home that has not been a primary residence for the required length of time. So all these sellers, plus all primary home sellers with gain above the exclusion level, will be sending some of the profits to Uncle Sam.

For long term owners or those with very expensive homes, this tax rate is significant. For example, if the long term rate rises just 5% in 2012, an individual with a million dollar gain on a qualifying personal residence will face a $37,500 higher federal tax bill selling in 2013 than one would in 2012. A 10% change would mean an additional $75,000 in taxes. For those without a personal residence exemption, those additional taxes would amount to $50,000 and $100,000.

So, if you’re thinking of selling in the next few years, add probable tax changes to your list of reasons to do it now. This may sound like a self-serving comment from someone who makes a living selling homes, but are you willing to bet that rates won’t be much higher in 2013? Oh, and don’t stop dreaming of newly minted valley millionaires.