7 reasons rentals rocking housing market

Buying a home is 35 percent cheaper than renting in the long term. Still, an increasing percentage of Americans are choosing to sign a lease rather than a deed. 

By Beth Braverman, The Fiscal Times | October 12, 20136

Next stop: Maybe not home ownership. (Courtesy Shutterstock)

 

Home sales have finally begun to slow after a red-hot summer that saw prices soaring so quickly that some began to worry about the return of a housing bubble. But despite the recent housing gains, the country's home ownership rate has continued to fall. Just 65 percent of households in the first half of this year owned their homes, the lowest level in 18 years, and a significant decline from the record high rate of more than 69 percent reached at the height of the housing boom in 2004. Even though buying a home is 35 percent cheaper than renting in the long term, an increasing percentage of Americans are choosing to sign a lease rather than a deed. Experts predict home ownership will fall even further in the next few years. "We could see levels we haven't seen since the 1960s," says Patrick Newport.  Although home ownership rates are likely to rebound a few years from now, the gains will be slow, and housing economists don't see them ever again reaching the unhealthy "bubble" levels hit in the early 2000s.
Here's why:

1. There's a lingering impact from the foreclosure crisis
Foreclosure activity peaked in 2010, and August foreclosure starts were at the lowest level since December 2005. Just because the worst of the foreclosure crisis that led to the housing bust is behind us, it's not so far in the rear view that it's no longer impacting the market. Many of those who have lost a home to foreclosure have no desire to be a home owner again; but even those who do will have to wait years before they can purchase another property. Foreclosures remain on a credit report for seven years, which can make it extremely difficult for those consumers who have been through one to get favorable terms on another mortgage.

2. Lending conditions remain tight
Potential buyers without a foreclosure on their credit report are finding it tough to get a mortgage. Even with a down payment of 15 percent to 25 percent, nearly a third of Americans will not qualify for a mortgage under today's lending standards, according to a study by Zillow.

3. Investors have reshaped the market
Cash-rich institutional investors jumped into the market when homes were at their cheapest and built up massive real estate holdings that they've since turned into rental properties. In addition, many people who were underwater on their homes but needed to move became "accidental landlords" renting out their first home so that they could move to a second. The result: Four million more single-family homes are available for rent than there were prior to the recession, meaning potential renters have far more options.

4. Boomerang kids are going to rent first
Thanks to high unemployment rates and heavy student debt loads, an increasing number of millennials have moved back into their parents' homes after college. Last year, 36 percent of the country's 18- to 36-year olds lived with their parents — the highest share in at least 40 years, according to a Pew Research study released in August. Experts believe those millennials will eventually move out, but they're not going to jump straight from mom and dad's couch into home ownership. "Those young people are probably going to rent before they buy," says Jed Kolko, a housing economist with Trulia. That could push the home ownership rate down even further.

5. Fewer people are married with children
Just 21 percent of current households are married with children, a decline from 24 percent in 2000. Meanwhile, the number of single households has reached 27 percent, more than double the percentage of a few decades ago, according to the Census Bureau. "There's less of a need now for people to stay put and buy a house with space for all their kids," says Jim Lapides, a spokesman for the National Multi-Housing Council. "They're more interested in living close to work and being able to walk places."

6. Potential buyers are worried about mortgage rates
Nearly two-thirds of potential buyers told real estate brokerage Redfin that rising mortgage rates have negatively impacted their ability to buy a home. A fifth of buyers said they had slowed the pace of their home search in response to rising rates. Currently mortgage rates are about 4.5 percent, but the Mortgage Bankers Association predicts they'll reach 4.9 percent by next year.

7. Buying isn't the "American Dream" anymore
The American Dream used to be synonymous in the American psyche with home ownership. Not so anymore. Today, the most popular definition of the American Dream is retiring with financial security, followed by being debt-free, according released in September by Credit.com. Just 18 percent said that buying a home was the American dream.

Buying Still Cheaper Than Renting

Homeownership Now A Tougher Call In San Francisco Bay Area, Honolulu, Orange County, And New York

SAN FRANCISCO, September 19, 2013 – Trulia (NYSE: TRLA), a leading online marketplace for home buyers, sellers, renters, and real estate professionals, today released its Summer 2013 Rent vs. Buy Report, revealing whether buying a home is more affordable than renting in America’s 100 largest metropolitan areas. Looking at homes for sale and for rent on Trulia between June 1 and August 31, 2013, this study compares the average cost of renting and owning for all homes on the market in a metro area, factoring in all cost components including transaction costs, taxes, and opportunity costs. For the full report and methodology, see here.

Rising Mortgage Rates Narrowing Rent vs. Buy Gap
In the last year, the mortgage rate for a 30-year fixed-rate loan rose from 3.75 percent to 4.80 percent,[1] raising the cost of buying a home relative to renting. In fact, homeownership is now 35 percent cheaper than renting nationally, down from being 45 percent cheaper one year ago. Yet despite their current upward climb, mortgage rates will not tip the housing market nationally in favor of renting over buying until rates hit 10.5 percent nationally, given current home prices and rents.

San Francisco Bay Area Almost Tips in Favor of Renting
While homeownership is still more affordable than renting in all of the 100 largest metros, rising mortgage rates may soon turn the tide. Buying a home is now less than 10 percent cheaper than renting in San Jose and San Francisco– a dramatic shift from being 31 percent and 28 percent cheaper a year ago, respectively. Even in Detroit, where purchasing a home is a no-brainer, buying has narrowed to being 65 percent cheaper than renting in 2013, versus being 70 percent cheaper in 2012. If rates keep rising and current rents and prices remain flat, San Jose will become the first housing market to tip in favor of renting once mortgage rates hit 5.2 percent.

Top 5 Metros Where Buying a Home is a Tougher Call
#	U.S. Metro	Cost of Buying vs. Renting (%), Summer 2013	Cost of Buying vs. Renting (%), Summer 2012	Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Summer 2013
1	San Jose, CA	-4%	-31%	5.2%
2	San Francisco, CA	-9%	-28%	5.7%
3	Honolulu, HI	-10%	-24%	5.8%
4	Orange County, CA	-20%	-34%	7.0%
5	New York, NY-NJ	-21%	-31%	7.5%

Top 5 Metros Where Buying a Home is a No-Brainer
#	U.S. Metro	Cost of Buying vs. Renting (%), Summer 2013	Cost of Buying vs. Renting (%), Summer 2012	Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Summer 2013
1	Detroit, MI	-65%	-70%	32.8%
2	Gary, IN	-58%	-63%	20.6%
3	Memphis, TN-MS-AR	-55%	-61%	19.0%
4	Cleveland, OH	-54%	-60%	20.0%
5	Kansas City, MO-KS	-53%	-57%	18.0%

Note: Negative numbers indicate that buying costs less than renting. For example, buying a home in Detroit is 65% cheaper than renting in 2013. Trulia’s rent vs. buy calculation assumes a 4.8% 30-year fixed-rate mortgage with 20% down, itemizing tax deductions at the 25% bracket, and 7 years in the home.

Should You Be Renting or Buying A Home?
Trulia’s new Rent vs. Buy Calculator provides house hunters with an easy-to-use tool to help figure out whether they should rent or buy a home. Applying the same math behind the Rent vs. Buy Report, the calculator allows consumers to enter in actual prices and rents for homes they are considering, along with the mortgage rate they qualify for, their tax bracket, and how long they plan to live in the home. They can also change other assumptions such as annual maintenance and insurance costs. To start calculating whether it is cheaper to rent versus buy, go to www.trulia.com/rent_vs_buy/.

PRE-APPROVED QUOTES

• “While it’s hard to believe after the recent spike in mortgage rates, it’s still more than one-third cheaper to buy a home than to rent,” said Jed Kolko, Trulia’s Chief Economist. “Recent mortgage rate and home price increases have made buying significantly more expensive than last year, but not enough to tip the math in favor of renting.  This is because rates remain well below historical norms, and prices are still slightly undervalued, too.”

• “If mortgage rates rise above 5 percent, the first housing markets to tip in favor of renting would be San Jose, San Francisco, and Honolulu,” said Jed Kolko, Trulia’s Chief Economist. “Nationally, however, mortgage rates would have to reach into double-digits before renting becomes cheaper than buying, and even at 20 percent, buying would still be on par or cheaper than renting in Detroit, Gary, and Cleveland.”

More Buyers are Purchasing with Cash

Real Estate 411:

Multiple Offers Increased as the Market Became More Competitive By Oscar Wei, Senior Research Analyst

To be competitive in a housing market with tight inventory and a restrictive lending environment, many buyers who wanted to have an edge over other buyers opted to make an “All Cash” offer for their home purchase.   Since an “All Cash” transaction does not have to go through lengthy lending approval process, the escrow process is faster and is less likely to fall through, making the offer more attractive and more assured.

According to results based on C.A.R.’s 2012 Annual Housing Market Survey, “All Cash” buyers has been on the rise since the mid of 2000’s, increasing from 11 percent in 2005 to 30 percent in 2012.  Almost one-third of all home buyers paid with all cash in 2012, which is more than 3 times what it was in 2001 when “All Cash” buyers were merely 8.8 percent. The share of all cash buyers in 2012 was also nearly double the long-run average of 15.1 percent since 1998.

 

For more information about the 2012 Annual Housing Market Survey,

Patrick E. Rosenthal 
Aloha Bay Realty
(510) 932-9134 - Direct
(800) 749-9134 - Toll free
(510) 559-9249 - Fax
DRE  #01315655

www.YourHOMEinvestment.com

"Your Trusted Advisor, I'm not just Your Agent."

If you know someone who is considering buying or selling a home, please give me a call. I will provide professional & courteous service along with knowledgeable guidance through the process.

Housing sentiment continues to rise

Fannie Mae’s January 2013 National Housing Survey found that increasing confidence in home sales and an improved sense of job security provide further evidence of a strengthening housing market. Underlying the growing sense of optimism, the percentage of survey respondents who think it is a good time to sell a home continued to climb to 23 percent last month from 11 percent the same time last year. While expectations regarding personal finances stayed relatively flat last month, other housing indicators remained at or near survey highs, indicating consumers remain confident in the stability of the housing market. 


Highlights from the survey include:

• The average 12-month home price change expectation fell slightly from last month’s survey high to 2.4 percent.
• At 41 percent, the share of those surveyed who believe home prices will go up in the next 12 months decreased by 2 percentage points from December’s survey high, while the share who believe home prices will go down returned to the survey low of 10 percent.
• The percentage of those surveyed who think mortgage rates will go up decreased by 3 percentage points to 41 percent, while those who think they will go down dipped slightly to 7 percent.
• Twenty-three percent of respondents say it is a good time to sell a house, up by 12 percentage points year-over-year.
• At 3.7 percent, the average 12-month rental price change expectation fell 0.9 percent from last month’s survey high.
• Half of those surveyed say home rental prices will go up in the next 12 months, a slight increase over December, and the highest level since the survey’s inception.
• The share of respondents who said they would buy if they were going to move held steady at 65 percent.

Appraisals in rising price markets

• Home appraisals are based on recent sales prices of comparable properties.  And in rising price markets, those sales prices might not be high enough to support new home sale prices.  Here are some ways sellers can improve their home appraisal.

• Make sure the appraiser knows the neighborhood.  Sellers can request that the lender send a local appraiser; if that still doesn’t happen, owners should supply as much information as possible about the quality of the neighborhood.

• Provide your own comparables. Sellers should provide the appraiser with at least three solid and well-priced comparable properties.  This will save the appraiser some work, and ensure that he or she is getting price information from homes that really are similar to the one being appraised.

• Document home improvement projects. Sellers should provide before and after photos, along with a well-defined spreadsheet of what was spent on each renovation, which should persuade an appraiser to turn in a number that far exceeds what he or she first called out. It’s important to highlight all-important structural improvements to electrical systems, heating and cooling systems – which are harder to see, but can dramatically boost an appraisal.  Showing receipts also may be helpful.

Home values rise 6% nationwide in 2012

U.S. home values ended 2012 up 5.9 percent compared with 2011, marking four consecutive quarters of national home value appreciation, according to Zillow’s Home Value Index. The Index rose to $157,400 in the fourth quarter, up 2.5 percent over the third quarter, according to the fourth quarter Zillow Real Estate Market Reports. 

The 5.9 percent annual appreciation rate far exceeded yearly rates of appreciation typically associated with healthy markets and represents the largest annual gain since August, 2006 – near the peak of the housing bubble. Historically, housing markets can expect annual home value appreciation of roughly 3 percent on average, according to Zillow research. Looking ahead, the Zillow Home Value Forecast shows home values increasing by 3.3 percent in 2013, a yearly appreciation rate more in line with historic norms.

As home values rose in the fourth quarter, foreclosure activity abated, with 5.22 of every 10,000 homes nationwide facing foreclosure during December 2012. That was down 2.2 homes per 10,000 year-over-year and down 1.2 homes from the previous quarter. Foreclosure re-sales stood at 12 percent of the market, down 4 percent from the end of 2011 and down 0.3 percent from the third quarter.

In the rental market, national rents fell 0.6 percent in the fourth quarter compared with the third quarter, but ended 2012 up 4.2 percent year-over-year. The Zillow Rent Index stood at $1,274 at the end of December.

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Higher Taxes in 2013

A 92 Year-Old Solution for Real Estate Investors Facing Higher Taxes in 2013:

1031 Exchanges Offer Full Deferral of the New 3.8% Medicare Surtax Tax and 20% Capital Gain Tax

 

 

 

 

The familiar adage, “It’s not how much you make, but how much you keep” rings truer than ever for real estate investors in 2013. Not only have capital gain taxes increased significantly for high earners, but many investors below the top tax bracket face an additional 3.8% surtax on passive investment income like capital gains. Fortunately, IRC Section 1031, a provision which has been in the tax code since 1921, provides critically needed tax relief.

Under the American Taxpayer Relief Act of 2012, the top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes above $400,000 and married couples filing jointly with incomes exceeding $450,000. In addition, the new IRC Section 1411 3.8% Medicare surtax on net investment income, which includes capital gains, results in an overall rate for higher-income taxpayers of 23.8% -- a staggering 58% increase from 2012 tax rates!

 

Four Steps Involved in Determining Capital Gain Taxation

 

Absent the tax deferral benefits of a 1031 exchange, below is a summary of the four ways investors will be taxed on the sale of an investment property:

 

1)      Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.

 

2)      Federal Capital Gain Taxes: Investors owe Federal capital gain taxes on the remaining economic gain depending upon their taxable income. Since a new higher capital gain tax rate of 20% has been added to the tax code, investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with over $450,000 in taxable income will be subject to the new higher tax rate. The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.

 

3)      New Medicare Surtax Pursuant to IRC Section 1411: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on “net investment income.” This 3.8% Medicare surtax applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, “net investment income” includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of “unearned income”).

 

4)      State Taxes: Taxpayers must also take into account the applicable state tax, if any, to determine their total tax owed. Some states have no state taxes at all, while other states, like California, have a 13.3% top tax rate.