California Buyers ‘Revel In Newfound Clout’
The California press is focused on the buyer/seller stand-off. “After five straight months of falling sales prices for Sacramento County homes, values edged up slightly in February. The county’s median price climbed nearly 1 percent from January levels, reaching $355,000. Sacramento County’s median home sale prices remain below an August peak of $372,000.”
“‘The receding of the market we saw for three or four months is in large part a function of Bay Area buyers taking a pause,’ said DataQuick analyst John Karevoll. ‘Sacramento will now generate its own demand to a greater degree.’”
“The Bay Area real estate market eased off the brakes slightly in February, but sales remained at their lowest level in five years and prices continued to flatten. ‘Obviously, the air is leaking,’ said Ken Rosen at UC Berkeley, ‘but it’s not looking anything like a collapse yet.’”
“‘We’re at the peak and what happens next is a matter of great uncertainty,’ said Edward Leamer, director of UCLA Anderson Forecast. He said the sales decline will continue and likely translate into a price drop.”
“In Alameda County, 1,422 homes sold, down 19.2 percent from February 2005. The median price was $579,000, up 13.1 percent from a year ago, and flat compared with six months ago. In Contra Costa, 1,456 homes changed hands, down 10.4 percent from the previous February. The median price was $569,000, up 16.6 percent from February 2005, down 0.2 percent from January and down 1.4 percent from September 2005.”
“That may be bad news for sellers, but it’s a welcome change for buyers. ‘We’re seeing a little bit of negotiating now and some price reductions,’ said Paul Ward, a broker associate.”
“Deborah Granelli had her eye on one property that needed about $40,000 worth of work. On the offer date, the listing agent called to say there was a buyer offering $50,000 over the asking price. Granelli told the agent she wasn’t interested in bidding. ‘Things are sitting on the market longer,’ Granelli said. ‘I’m more comfortable saying I’m not comfortable going for this or that property.’”
“A 1,000-square-foot condo on Hermann Street in San Francisco has been sitting on the market for about two months. A few weeks ago, listing agent Steven Bragg reduced the price from $679,000 to $649,000. Despite dozens of open houses, and the fact that the property is priced markedly below the $690 average per square foot sale price for condos in the city, there have been no offers. ‘People believe that house values are going to drop so they’re sitting on the fence waiting,’ said Bragg, an agent in San Francisco.”
“‘What I’m seeing is both buyers and sellers digging their heels in, buyers saying ‘I’m not ready to buy’ and sellers going ‘I’m not going to lower the price,’ said (realtor) David Kerr. ‘A lot of sellers are still pricing to the higher-end and their properties are still sitting there, and they’re not considering realistic offers,’ said Kerr, whose territory includes Oakland and Berkeley.”
“‘Sellers do not recognize what’s going on in terms of the market transitioning,’ Kerr said. ‘They still think that because the house across the street sold for like $50,000 to $100,000 more than theirs, that theirs should be worth that, plus some. And what’s happening is, it’s not happening.’”
“Mathew Moses from Berkeley, has been searching for a home in the $500,000 to $600,000 range since December but hasn’t found anything to compel him to make an offer. ‘The stuff that I’m looking at is way overpriced,’ said Moses. ‘I think it could be helpful if I don’t find anything ideal for me and wait another six months,’ he said. ‘I’m willing to do that.’”
Who will blink first? bearmaster’s link would fit in very nicely here.
BayQT~
an article in the SF Chronicle today
Professional house flippers are making hay with their homes
By Carol Lloyd, Special to SF Gate
Friday, March 17, 2006
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Carol Lloyd
Surreal Estate
Note:This column appears Fridays on SF Gate and Sundays (abridged) in the Chronicle.
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Professional house flippers are making hay with their homes
03/17/2006
Home Sweet Cash Cow - How our houses are financing our lives
03/10/2006
Rent control, protected tenancies and the question of fairness
03/03/2006
The many faces of protected tenant status
02/24/2006
Falling Through Cracks - City churches are closing because they …
02/17/2006
A few years back, when I was shopping for a home, I met an interesting family who were a walking embodiment of the special status afforded homeowners.
We met at the open house of a ramshackle Victorian in Alameda with a sprawling backyard on a tree-canopied street. As the father wandered around the property, the mother held an infant on one hip and a clipboard against the other, carefully detailing the house’s myriad problems. A little girl frolicked at her feet.
Since we also had an infant and a toddler, I began chatting her up. Did they live in Alameda? Was this their favorite neighborhood? How long had they been there?
Gradually, my family friendliness gave way to professional curiosity. Apparently, the young couple were looking not only for a home for their family but for a home that would pay the family bills.
The woman told me that every two years they bought a new house, moved in, fixed it up — and then sold it. It was a living. And with some handy skills like carpentry, gardening and simple accounting hitched to a hot real estate market, no doubt it was a very good living at that.
What made their itinerant homeownership so profitable was that their work was entirely sheltered from income taxes. If they played their cards right, they could make up to $500,000 tax free, every two years.
How? Because this couple was brilliantly exploiting the wickedly profitable (not to mention marriage-centric) IRS code known as the capital-gains homeowner exemption — a law that allows a homeowners to exempt up to $250,000 (and $500,000 for married couples) in capital gains from the sale of their primary residence.
Of course, profits margins that high might be unattainable. But according to this woman, flipping homes like cheap burgers was a much better bet than regular work, which might have thrown them into a 30- or 40-percent tax bracket. In a word, they were professionals — professional homeowners.
Although few homeowners devote themselves to the peregrinations of profit-taking like this family, it’s fair to say this 1997 law has encouraged if not institutionalized the idea of “moving up,” or at least of moving. Gone are the days where people buy a home for life, or even for a decade.
One reason short-term adjustable loans have gained such popularity is that people don’t plan to stay put nearly as long. Selling, profit-taking and buying another home are now part of the American dream.
“The idea behind this law is that it supports homeownership,” says Neil Lehrman, a San Francisco CPA. “This is definitely social engineering through tax policy. You want people to own their homes.”
Any homeowners worth their cement have seen their homes rise sharply in value, and they probably know the basics of this exemption. What many don’t know is how much our tax code caters to the real estate-owning classes.
In addition to the mortgage-interest deductions for primary residences of up to $1 million, there are deductions on interest from equity lines of up to $100,000 (a point I failed to include in my last column on the widespread use of these loans). Because federal capital-gains tax rates do not exceed 15 percent, these taxes can be far lighter than income taxes.
The homeownership exemption sweetens the pot even more. As the law stands, you can reclaim the homeownership capital-gains exemption every two years ad infinitum. Of course, there are limitations — but they’re hardly draconian.
In order to claim the exemption, you must have made the home your primary residence for two years and owned it for two years — but not necessarily the two years before the sale: just two out of the last five years. Moreover, that time need not be a consecutive two years, but may be broken between other residences. (Obviously, this benefits the affluent who own more than one home.)
Death sometimes creates an even more favorable environment for escaping capital gains. If a homeowner dies and leaves his home — or any asset for that matter — to his heirs, the heirs won’t be subject to capital gains if they sell the property upon inheriting it. Why? Because capital-gains laws don’t tax people on the total price of the real estate but on the amount of profit that the homeowner is making.
When the homeowner dies, the property’s value is reassessed, and that new amount becomes the heir’s “stepped-up basis.” (Escaping capital gains doesn’t mean that you escape estate taxes — if your total assets are more than $2 million, you’re taxed at 46 percent.)
“As I tell my clients, death can be the ultimate tax shelter,” says Lehrman.
These tax laws are extremely complicated and riddled with exceptions and limitations. Almost every statement I make should be qualified by a phrase like “in most circumstances,” “except under the following instances” and “consult your tax adviser.”
But my point is this: We’re living in a time with the lightest, most real estate-friendly capital-gains tax laws in the past 50 years. And over the years I’ve been writing this virtual ethnography of Bay Area homeowner behavior, I’ve seen how meaningful these tax breaks are for homeowners of all stripes and incomes.
Is it fair? I certainly applaud the idea of allowing people not to be penalized when they move or retire. After all, people have to live somewhere and most often these “profits” simply need to be are poured back into the homeowner’s new residence.
But do we really want to sanction a profession like “real estate flipper” as untaxable just because flippers can leverage the homeowner exemption over and over? I don’t think so.
If we do want to provide that kind of tax break, why not give the privilege to professions that benefit society as a whole — nurses or public school teachers or scientists working to cure malaria?
In any case, there’s no doubt about it: These tax laws are changing the way middle-income people treat their homes and their finances. First-mortgage deductions encourage middle-class warriors to buy homes.
“You can’t afford to be a renter,” my friend’s accountant told him. “You have to buy a house or go broke.”
By the same token, low capital-gains tax rates and exemptions encourage those same people to move more frequently, cash out and generally turn their homes into America’s most unconsidered cottage industry.
——————————————————————————–
Carol Lloyd is currently at work on a book about Bay Area real estate. She teaches a class on buying your first home in the Bay Area, and another class based on her best-selling career counseling book for creative people, “Creating a Life Worth Living.” For more information, email her at surreal@sfgate.com.
Sounds like a loophole about to close or be substantially reduced.
Kudos to the journalist that wrote about this.
Of course I could be wrong, but I highly doubt that this couple have been doing this “professionally” for more than the past 4-6 years. Now that the market has turned, I have a very strong feeling that this line of “work” will all of a sudden not be as profitable as it once was. If I’m wrong and they can continue selling houses for 500K more than they bought every 2 years while everything else is going down, then kudos….they probably deserve it. Just my $.02
I had a friend back in school whose parents did this. Not full-time, mind you, dad had a job, mom was a home maker, but dad did carpentry on the side and mom was big on gardening, arts and crafts, etc. They’d basically move from place to place in the neighborhood every 3-4 years, fix it up, and do it all over again.
I don’t think they were doing it so much as a revenue stream (although maybe they were, I was like 14 at the time so I really wasn’t too interested in asking them about this facet), but they did really enjoy it as a hobby. Plus it left the house in better condition than when they moved in.
Looks like Carol Lloyd is on vacation or something and they dragged this one out of last year’s archives. Glorifying flippers at this point, even assuming that the SF populace doesn’t know what flippers are and do, is just a waste of space today.
This lady’s columns aren’t worth the effort to click on the scroll bar. Pure fluff.
wonder what % of J6p types think prices are going to go up ?- once most think it’s going down then the bubble has popped
J6p types could also have their legs cut out from under them by tightening credit standards. Once underwriting standards revert to historical norms, this part of the market will not qualify at anywhere near the price level they have bought in the past two years.
California generally had a very nice winter - warm and dry nearly all of January into early March. Now a very wet cycle has returned and has delayed ‘the spring season’. I’ve talked to a number of realtors and all comment that many houses are being held off the market throughout the Central Valley ‘ until the weather clears’. I suspect that the fall and winter run-ups in inventories here is but a taste of what’s coming. The tripling of Valley prices since 2001 were driven by Bay Area bucks looking to make a killing - and 2006 is their preceived payoff. Trouble is, somebody forgot to ask the locals if they can afford the price - and by a long shot they can not. All of the recent indexs of overvalued housing are shot full of Central Valley towns, and when the home building boom stops the reasons will be very evident.
I’ve lived here for nearly 30 years. Rain in Feb/March is not remotely uncommon. Rain in April isn’t even unusual.
Ok so I just looked at weather.com, and here are the wettest months by avg precip:
Jan: 2.28
Mar: 2.26
Feb: 2.04
Dec: 1.31
Nov: 1.07
Apr: 0.75
Oct: 0.44
Sep: 0.21
May: 0.20
Jun/Aug: 0.09
Jul: 0.03
Bottom line: Jan-Mar is ALWAYS the wettest time of year. April is in the top half.
March 2006 so far? 0.78 inches. BELOW AVERAGE.
This is nothing but an easily refuted lie.
The best time to look at a home is when it rains. Why? You can easily see if there’s any water problems OR hear the outside rain and find problems with insulation and ducting. You’ll easily see where water stands on the property, if it flows away or to the house, etc.
A sunny day is great for the seller, not the buyer.
-Richie
Good advice. Last home we bought was the day after an ice storm in Portland.
It did point out where the civil engineering had gone wrong.
The market has just seen about seven years worth of sun, and now it is beginning seven years of rain, and the signs of a developing flood (of inventory) are already in evidence…
Hell, its time to build an ark.
The Sac Bee article makes the situation here sound better than it really is. There is still tons of inventory. Way too many overpriced homes are sitting on the market and have been since last fall. Nice homes priced right seem to be selling. Home prices have essentially doubled (or more) over the past four years. It is hard to look at a crappy Sacramento area home and think, “Wow, I will pay 400k even though it sold in 2002 for 180k.” Regardless, I know many clueless folks who are buying. One thing that may be keeping this thing inflated is people from the coasts or other more expensive areas of the country that think these prices are cheap. The higher priced stuff (600k- 1 mil) is not moving.
The big news that was ignored in the article is that Sacramento County yoy appreciation for resales fell into single digits for the first time in quite awhile. Graphs & more info in my latest post:
February 2006: Appreciation Falls to Single Digits, Monthly Price Declines End
Lander
Sacramento Land(ing) blog
“The California Association of Realtors predicts prices will rise another 10 percent this year.”
If you have a REALLY desirable house–great location, character, and impeccable–this is not impossible.
But if you have EITHER (1) the usual ranch piece of cr*p, (2) so-so location, or (3) inspection issues (and at least one of these three describes 95% of the listings in the SF Peninsula) then you’re already looking at a 10% haircut soon to be 20%.
FYI
They are not talking about a particular piece of property. they are taling about the amrket. I dont think they know what they are talking about!
Fully agree. Very disappointed to see them selling like hotcakes this week though. Definitely seeing a ‘Spring Bounce’ in my area.
People are idiots.
All I can do is shake my head and sit on my cash and shake my head.
I have been wondering how far can this continue for the last 5 years. The only rationalization I have are these reasons why the sellers will be forced to blink first:
1. Affordability is the lowest it has been in the last 5 years.
2. Price appreciation is approaching zero when compared to the latter half of 2005.
3. Rates are moving upward.
4. ARM and IO resets have begun and will only increase in number from here on out.
5. Spreading awareness of the economic irrationality of the current prices.
6. Buyers are beginning to get the clue that waiting is very much to their advantage.
7. Rent vs buy comparisons show renting is fiscally wiser now.
the credit spigot is turned off, very soon. THat one reason is enough
8. Buyers have no eyelids
oh boy, are they in for a rude awakening.
This seller mentality just cracks me up and it’s not limited to the coasts either. Here in layoff paradise Michigan, I see people in my neighborhood listing their houses for 20,000 dollars more than the place sold for two years prior. Wages have declined in the area during that time period, but is that reflected in the listing price? No. Also, they automatically assess my house at 3% more each year so that they can keep the property taxes moving ever higher. It’s as if there is some magic formula that says that houses must increase in value every year. There is a huge disconnect here. We need to wake up to the fact that we are not becoming a wealther nation but a poorer one, and this should (and will be eventually) reflected in housing prices.
I’m in MI too, and amazed that in the one newspaper section there are reports daily of layoffs at every level of many industries, and in the other–the real estate listings–are rents as low as they were in 1995 or lower and asking prices that assume 10% appreciation every year since then. The want-ads look slim slim slim, the payrates look pathetic, but real estate always goes up you know
cheers!
best time to buy will be Christmas eve- cash 2007- giving the seller 5 minutes to make up their mind
FYI, Blogger’s network is down, so for readers of my foreclosure and M&M blogs; I will resume posting just as soon as possible.
Rumors that the Capitol Records tower, which looks like a stack of records and is one of the world’s most recognizable buildings, could be sold to a developer who might convert it into condos has sparked concern among city leaders and preservationists.
yep, saw that on the news last night.
Just another distortion of the RE bubble.
“‘The receding of the market we saw for three or four months is in large part a function of Bay Area buyers taking a pause,’ said DataQuick analyst John Karevoll. ‘Sacramento will now generate its own demand to a greater degree.’”
Either this guy is deliberately trying to mislead, or else he should have studied more economics in college. This notion of “generating its own demand” is foggy at best.
DataDense.
“‘We’re at the peak and what happens next is a matter of great uncertainty,’ said Edward Leamer, director of UCLA Anderson Forecast. He said the sales decline will continue and likely translate into a price drop.”
Picture a surfer riding one of those big waves on the Bonzai Pipeline on Oahu’s north shore, and you will get the idea… (Hint: Big waves do not soft-land to normalcy.)
And what chews you up first: the coral reef of higher interest rates, or the Great White of bankruptcy?
“‘Sellers do not recognize what’s going on in terms of the market transitioning,’ Kerr said. ‘They still think that because the house across the street sold for like $50,000 to $100,000 more than theirs, that theirs should be worth that, plus some. And what’s happening is, it’s not happening.’”
Specifically, sellers do not recognize the quadruple-whammy of higher interest rates, tightening credit standards, fear of falling prices, and swelling inventory, which all lead to an erosion of demand for any particular seller’s home. Instead they are blinded by the $$$ before their eyes, in the form of a hoped-for 20% increase over what the neighbors sold for last August. What they don’t see can hurt their sales result…
What tightening credit standards, all just talk so far, like other people have said, until the psychology changes people will keep buying. MSM and realtors still spouting positive news and burying or obfuscating any bad news.
Yes you can buy and live in a house, sell it two years later and take your monies tax free. Most people doing that were not getting $500,000 a sale. They had loan costs, realtor commissions, fixup costs, etc. Plus here in CA some got caught with their hand in the cookie jar. A fellow in Bakersfield chose to rent his place for 2 3/4 yrs after moving out and wasn’t able to close escrow during the last 3mo. and had to pay taxes on the proceeds….I loved it…nothing like greed
I have to give people like these “family flippers” some credit. I know two couples who have done exactly the same thing (but not as their only job), and they each made an extra half-million over the last few years. Many of you are eagerly awaiting their come-uppance, but life isn’t fair - my impression is that the smart, rich ones already got out a year ago, when suddenly the profit margin started shrinking and it took longer to sell. They’ve moved on to other hobbies, and the people who are going to get killed are the ones just trying to get started now.
On the offer date, the listing agent called to say there was a buyer offering $50,000 over the asking price.
——————————————————————————-
When will people realized there “may not be other buyers” and there is “no $50,000 over asking” and Buyer if he is stupid will be overpaying by $90,000. Did anyone ever verify these bogus statement by Realtors. Really! how niave are buyers.
togoplease: negotiating is like a poker game, and a good salesman is one that can read the person across the table and intuit exactly what the buyer is willing to cough up. It’s dishonest to fabricate a bidder, but if the ploy works, do you think the realtor’s client is going to mind? As the market declines, these same realtors are going to make money in the opposite direction, using these same skills to instill fear in the sellers and forcing the price down to where the buyer is willing to bite.
I dislike the fact that realtors are going to still make alot of money off the panic selling down turning market . It would be great if sellers reduced their loss by simply selling “for sale by owner .”
Realtors lie a lot. Done believe them and make your own decisison.
I think it’s still a while before sellers blink. GO to USA Today website and look up their Money section. There is an article (also in print) about delinquent home loans. The complete list is not in the article, but there is a separate link. California is LAST in the ratings - meaning has the LEAST number of deliquent homes. I have no idea how to explain this. Didn’t we see the most gain, and isn’t affordability like lowest here ?
It actually paints a diferent picture. The coastal areas seem to be having lowest deliquencies, and fly-pver states in trouble. Which can also be interpreted as - the bubble is really national ! To borrow a line from matrix, “The bubble is everywhere”. It is just appearing in different forms in different parts.
The areas which have the lowest delinquencies are the areas that have the highest appreciation. In California, if you can’t afford your monthly payments, you can sell at a profit. In Texas, you can’t cover yourself by selling so the property gets foreclosed. Things will change in CA soon.
What “buyer/seller stand-off”?
This is another inventive phrase created by RE industry trying to put an optimistic tone to a very bearish fundamental shift in RE. “Buyer/seller stand-off” phrase is being regurgitated by most RE commentators in recent weeks, as if there were such a scenario. The blow-off phase in this RE mania has been dominated by existing home-owners flipping properties amongst themselves for the past 2 – 3 years. Of course there were first-time home buyers contributing to this feeding frenzy, but the majority of the trading volume is due to people buying second, third, and fourth home for investment. They are one complacent and greedy bunch, and their omnipotent confidence has been backed by several years of expanding wealth. There is no barrier to entry to this madness. As long as you have a date of birth, you are allowed to borrow hundred of thousands to hop on the speeding train.
What we are experiencing now is the arrival of the lagged effect of 14 rate hikes by the Fed, the temporary inverted yield curve, the escalating home prices outpacing the inventive capacity of the mortgage brokers to allow easy borrowing, decreasing foreigners’ appetite for U.S. assets, and finally speculators just simply exhausted themselves. All of this leads to less easy money flowing into RE speculation, decrease in sales, and eventually a collapse in price. THERE IS NO BUYER/SELLER STAND-OFF! What we have is a lot of speculators standing naked now that the tide is receding (as Buffet would say). They are hoping for a bounce to unload. They are in profound denial that they are actually the last fools. But the longer they wait, the harder it is for them to escape unharmed as the herd stampedes to the exit.
Non-speculative buyers (people buying a home to live in) really have no interest in this standoff. They don’t have to buy now at all, as renting is significantly cheaper than buying (after considering all the savings associated with owning). They are not loosing money every month paying interest to the bank and other expenses associated with owning a home, but rather they have extra cash to regularly append to their savings. They will buy when things make sense financially, when they can feel comfortable that they can pay off the mortgage without relying on the expectation that “real estate will always go up” to bail them out. They will buy when they do not have to sacrifice their quality of life to pay for the monthly mortgage, and are persistently under financial stress.
The more appropriate media headline would be - “Sellers Stand-Stucked”.
WELL SAID !
That about sums it up. Reminds me of a story I read about the stock market crash of ‘29 (don’t remember where, don’t know if it’s true, of course, but here goes). Stocks were taking a tumble and this one guy kept buying, the more the stock dropped, the more he bought. Then, one day he went to his broker and said: “Okay I’d like to sell my stock now.” The broker said: “To who? You’re the buyer…” That’s the problem with these flippers and “investors”, they don’t realize *they are the damn buyers!!*
Great comments.
It’s funny how simple it is…and how hard real estate people have to bend the rules of logic to explain the situation.
They think everyone is just ‘testing’ the market.
Baloney.
There’s a lot of very, very nervous flippers out there.
Ain’t no ‘testing’ about it. I see the price reductions every damn day.
You are so very right. Quite a few of them have maxed out their money supply and need to sell now!!!!
Palo Alto Market: found this on the MurkySnooze website:
Ask the Expert: Vic Spicer, a broker associate with Coldwell Banker, has listed and sold residential real estate in Palo Alto and surrounding cities since 1991. He offers an in-depth understanding of real estate practice on the Peninsula plus familiarity with the neighborhoods and inventory of listed homes.