Real Estate Bubble

THE GREAT REAL ESTATE CRASH OF 2005?

At the end of summer, areas of the local real estate market quietly shifted to one that is much more friendly to the buyer. Listings are staying on the market longer allowing for an inventory to accumulate. Additionally, typical contract contingencies that sellers had not seen in recent years are becoming part of the sale.

In my opinion the reporting on this subject has been exaggerated and alarmist. Though the run-up in prices has been extreme in some areas, economic fundamentals are still strong. Price stagnation is not an emergency and a respite in unsustainable increases is not a disaster.

The most likely future for housing is a soft landing. Although prices may decline in a few overheated markets, in most areas home prices will continue to rise, albeit at a modest, more sustainable pace than the past few years.

Take Las Vegas. The city was at the crest of the housing market two years ago, experiencing 52 % annual price appreciation. Price growth eased to 30 % last year, and in mid-2005 it stands at 15 %. That is a balloon leaking air, not popping.

This trend continues in other parts of the country. The D.C. area added 110,000 jobs over the past two years but only 57,000 new homes, keeping demand ahead of supply. With mortgage rates inching up, price appreciation is expected to slow to 20 from 10 % before settling in the 4 to 6 % range for the remainder of the decade.

The widely held comparison to the “dot com” bubble is not valid because the circumstance simply does not play out the same way. A large portion of residential real estate in this country is owner occupied and even if prices begin to fall a majority are not going to sell off their homes in a panic. For the most part, they will continue to live there and ride out an adjustment in the market.

In the long term things look very good: According to new studies from the Brookings Institution and VA. Tech, in the next 25 years the U.S. will need to build 200 billion square feet of homes, offices, factories and other structures to accommodate 70 million more people and to replace homes and offices erased by everything from natural disasters like Hurricane Katrina to plain old obsolescence. Researchers estimate that this massive build out will add up to a $25 trillion development market by 2030, more than twice the size of the entire U.S. economy today. Just something to consider the next time you notice a housing bubble headline.

Tax Benefits

Tax benefits of home ownership:

Most homeowners are aware that mortgage interest and real estate taxes are deductible. To claim these, as well as others discussed here, you must itemize on Schedule A, form 1040 (and under IRS rules, if you itemize you are not entitled to the standard deduction). If you purchased or sold a home in 2005 here are some guidelines for you to become familiar with.

You should have received a statement from your lender by the end of January indicating the interest you paid during the year. If your home loan is with a private party you may still deduct the interest as long as the loan is secured by your home. You can deduct a late payment or pre-payment charge as long as the charge was not for a specific service received in connection with your mortgage. You may also deduct any points you paid, except in refinances or second homes, if you meet certain requirements. Real estate taxes, typically made by your lender from the escrow account, are entirely deductible.

Save receipts and records for all improvements you make to your home. You cannot deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home. This serves to reduce any potential taxable gain that you may have from the sale of your home. Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if have lived in the home as your principal residence for two out of the last five years.

The following are not deductible: homeowner’s, fire, title or mortgage insurance premiums; principal mortgage payments, settlement costs or HOA dues.

Take a copy of your closing statement and any other expenses that might apply to an experienced accountant so they can help separate deductions from costs and eliminate non-deductible items.