Nation-wide, the housing market continues a return to proper form from the sickly state of nearly 5 years ago. Everywhere one turns, new indicators can be seen as to support this claim. In a Denver market where housing inventories are tight, highly motivated buyers are creating an environment where multiple bid offers on listed properties are becoming the norm. This growing trend is reflected by home prices that in turn are steadily on the rise both here at home in the 5280 city, and across the country.
As indicated by the following chart, the housing recovery continues across 20 cities covered by the S&P/ Case-Shiller Home Price Indices.
At year’s beginning, the composite was -as a whole- up 8.1% from 12 months prior. What this means is that of the 20 major cities included, the average home price increased slightly over 8% year-over-year (YOY). This gain is the greatest YOY gain experienced since June 2006 when home prices peaked
Well, The S&P/Case-Shiller Home Price Index measures the average change in value of residential real estate given a constant level of quality. It is included in the S&P/Case-Shiller Home Price Index Series which seeks to measure changes in the total value of all existing single-family housing stock. The Index can be qualified into single city areas as to gain specific quantifiable information.
The thing that is so exciting about the Case-Shiller Home Price Index –Both from a Consumer and Broker’s standpoint- is that the data is a “third party” source that provides unbiased data on the state of the industry. The index is followed closely by agents, brokers, investors, and other real estate industry professionals as to gain a feel of overall trends within various markets.
According to Denver’s Case-Shiller, home prices in Denver have rebounded to their 2007 levels.
Why is this exciting?
Well, the home price index for January, 2013 was 134.17, meaning that the local market home resale prices averaged 34.17 percent higher than they were in the bench mark year of January, 2000. The last time that Denver had reached this price level was back in October of 2007 when the Index was reported at 136.09. As most can attest, a lot has happened between then and now so this return to a strong showing in housing sales pricing comes as a joy to many.
The numbers do not lie.
Year-Over-Year, home prices in Denver rose 9.2% in January 2013.
As data from non-biased parties such as S&P Case-Shiller continue to roll in, the current “housing recovery” continues to be supported. Denver seems to be holding strong in the midst of the city’s current record price appreciation that goes back to 2011. January marked the 13th straight month of year-over-year gains, which were preceded by 18 straight months of declines.
Being that the Denver market is running so lean on inventories, prices are sure to keep steadily on the gain. Gains that are expected to reach double-digit returns in the very near future. With Denver mortgage interest rates being so low (As of March 26th, 2013 3.46% avg.) this will undoubtedly continue to create a feverish environment with a hyper-affordability appeal.
These factors -coupled with the understandable element of pent-up buyers that have been patiently waiting for the market to show improvement and lend steady signs of stability before re-entering- further prove that (pardon the cheesy cliché) NOW, MORE THAN EVER, IS THE TIME TO BUY!
For some time now, we have attempted to shed light on the fact that pricing in today’s real estate market, as it is in the markets for every other sale able item, will be determined by the concept of ‘supply and demand’.
According to dictionary.com:
“The relationship between supply and demand determines the price of a commodity. This relationship is thought to be the driving force in a free market.”
In real estate, supply and demand is represented as the current month’s supply of homes for sale (the number of homes for sale divided by the number of homes sold in the previous month).
While there is no steadfast rule that will apply to pricing in every category of housing, here is a great guideline:
- 1-4 months supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
- 5-6 months supply creates a balanced market. Historically home values appreciate at a rate a little greater than inflation.
- 7-8 months supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.
What is happening across the country right now?
In most parts of the country, home values are rising. This is for two reasons:
- According to NAR’s latest Existing Homes Sales Report, raw unsold inventory is at the lowest level since December 1999 when there were 1.71 million homes on the market.
- According to this month’s Pending Sales Report from NAR, houses going into contract reached levels last seen in April 2010 which was the month the Home Buyers’ Tax Credit expired.
This has resulted in a 4.2-month supply at the current sales pace which is the lowest housing supply since April 2005 when it was also 4.2 months.
Based on the table above, we can see that the supply/demand ratio is leaning toward a sellers’ market where prices will appreciate. That has created positive movement in housing values in most parts of the country.
When your real estate professional discusses home values, he/she should be prepared to show what the supply/demand ratio for homes similar to yours is in your area.
Case Shiller released their latest Home Price Index yesterday. The headlines that followed were true but, in our opinion, a little misleading. Here are some of the highlights of the report that have dominated major media coverage:
- Home prices rose 5.5% in the 12 months ending in November 2012 (the latest data available).
- In the 12 months ended in November, prices rose in 19 of 20 cities.
- Housing is clearly recovering. Prices are rising as are both new and existing home sales.
Great news for the housing industry. Realize however that all the highlights mentioned above refer to year-over-year comparisons.
What is NOT Being Reported
There is another finding in the report that hasn’t garnered many headlines – month-over-month prices are softening.
There is no doubt that prices are up over the same time period last year. However, home price movement is seasonal. During the winter months for each of the last three years, prices have softened. That is taking place again this winter. As the report states:
“Winter is usually a weak period for housing which explains why we now see about half the cities with falling month-to-month prices compared to 20 out of 20 seeing rising prices last summer.”
This does not mean the housing recovery is slowing. It just means that home values are following their historic trend. As explained in the report:
“The better annual (year-over-year) price changes also point to seasonal weakness rather than a reversal in the housing market.”
If you are thinking of selling, you really need to know what will happen to home values in the short term. Prices, based on history, will soften over the next several months in many markets. Therefore, if your plan is to move by next summer, waiting for higher prices before putting your house on the market may not make sense.
According to the Cas-Shiller Home Price Index, the value of residential real estate continues to appreciate. In Denver, Case-Shiller reports “a change of 0.98% from last month and 6.72% [increase] from one year ago.”
CNN Money reports: This latest rise comes as the housing market has shown numerous other signs of recovery in recent months. The rebound is spurred by a combination of record low mortgage rates, an improving jobs market and a drop in foreclosures to a five-year low, reducing the supply of distressed homes available.
The confluence of historically low interest rates, and rising real estate values is unprecedented. With rental rates on the climb in the Denver Metro Area, this is an excellent time to consider an investment in residential real estate.
I am often asked “Where are home prices headed over the next year?”
As a whole, the Denver market has responded well this year, and I think we will see average appreciation city wide around 4% for the year. I also expect this trend to continue, and perhaps increase, as we see the local and national housing shortage have a greater affect on price and inventory.
Recently, several groups have stepped forward and given their projections as to what level of appreciation we can expect by the end of 2013 on a NATIONAL scale. Here is what they said:
- Demand Institute Study: 1.75% appreciation
- Urban Land Institute: 2%
- Home Price Expectation Survey: 2.44%
- National Assoc of Business Economists: 2.8%
- Wall Street Journal’s Survey of Economists: 3.25%
All five groups are calling for home values to rise through the end of next year. However, none are projecting that we will hit historic annual appreciation levels (3.6%) that existed prior to the housing bubble. In my opinion, plenty of room to climb.
Since the Supreme Court passed “Obamacare” (i.e. the Affordable Health Care Act) earlier this year, I’ve been getting an unusual question from some fearful home sellers, “Will the passing of Obamacare force me to pay a new 3.8 percent tax on home sales beginning in 2013??”
I did the research and here is what you need to know home sellers - the majority of taxpayers will NOT have to pay it.
Which is totally true… except for the fact that it’s a total falsehood!
The rumors have long since been debunked, yet after the Supreme Court upheld the Affordable Health Care Act, I’ve once again heard some people once again pushing this narrative.
Added Capital Gains May Affect Some
Now there is an additional capital gains tax included in the Affordable Care Act, and yes it will affect a narrow field of real estate transactions. Here is how it breaks down:
The tax will affect those sellers of real property who will be otherwise taxed on capital gains under current tax laws. Under current laws, if you sell your primary residence and meet the ‘time ‘ criteria, you are exempt up to $250,000 or $500,000 (filing individually or jointly). Any amount realized OVER that amount is taxable under current tax schedules based on income. As such, this new tax will apparently be added to the current capital gains tax burden IF your income is over $200,000/$250,000 (filing individually or jointly). For those selling second homes and investment properties, the tax, once again, will be applied to the amount of gain realized.
The following also comes from midiShaw in a comment to the above answer.
Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income.
From Factcheck.org - ”The truth is only a tiny percentage of home sellers will pay the tax… Only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on profits from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home.
We can understand how this misconception got started. The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. (This provision begins on page 33 of the reconciliation bill that was passed and signed into law.) And it does say the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code. And the fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn’t apply to vacation homes or rental properties.)
The Joint Committee on Taxation, the group of nonpartisan tax experts that Congress relies on to analyze tax proposals, underscores this in a footnote on page 135 of its report on the bill. The note states: “Gross income does not include … excluded gain from the sale of a principal residence.”
And just to be sure, we checked with William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation. “Some home sales would see a tax increase under this bill,” Ahern told us, “but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple).”
Remember I am not a tax expert. I’m just calling them like I see them. When it comes to IRS regulations, always check with your accountant or financial advisor for your tax information.
I have always believed it makes more financial sense to buy a home than rent. Even with the economy at it’s most turbulent, owning a home will eventually cost a person less than renting.
The only unknown, depending on where you live, has been, how long does it take for homeowners to “break-even” on their investment?
In other words, how long does it take a person to prove owning a home makes more financial sense that renting the same property? Now we have some current answers to rely on.
Zillow, a real estate listing site, recently surveyed 200 American cities and incorporated all homeownership costs and compared them to rental costs. They found 75 percent of Americans, on average, reach a “break-even point” in homeownership in three years or less.
That means in more than 3/4ths of the 200 metro areas analyzed, owning a home pays for itself – in three years or less. This is a fairly quick return on investment if you ask me.
Zillow’s findings support other reports that show that rising rents, record-low mortgage rates and falling home prices have made homeownership a more attractive option. Homeownership costs included down payments, closing costs, mortgage payments, property taxes, utilities and maintenance costs, projected home price appreciation, rent increases, as well as tax deductions and inflation.
Good News For Denver Homeowners
In the Denver Metro Area, home ownership is still be a great investment. According to the survey, Denver-area consumers who choose to purchase a home instead of renting one, will break even (on average) in 2.5 years. That’s a fairly quick return on investment even for a cautious investor.
In some of the metro areas surveyed, home buyers break even in less than two years. In Miami, a homebuyer would only have to stay in their home for about 1.6 years for the purchase to pay off. Miami’s metro area, along with Tampa, Fla., Memphis, Tenn., and several smaller cities, have the shortest break-even times.
In some Western cities, homeownership is not as appealing. For example, it would take home buyers in San Jose (California) 8.3 years to break even on their homes — the longest period of time of any of the cities surveyed.
Historic Levels Of Affordability
All in all, the big take away you get from this survey is buying a home has never been a better decision, especially when you factor in the fact rent prices have risen more than 5 percent over the past year.
The Zillow survey proves what many of us have known for years. Owning a home is still a much better proposition than renting in virtually every major housing market in the nation.
|City||State||Years to break even|
While we all take time off this month to go on vacation or just to celebrate the 4th of July, I’ve got some good and some bad news to share about the local real estate market.
The bad news is Colorado faces a potential new wave of foreclosures as banks prepare to file foreclosure paperwork on a slew of distressed properties. Low prices and a recently settled federal lawsuit that targeted bank foreclosure practices led lenders to hold back on new filings until now.
More Waves Never Good
This is never encouraging news, especially when you consider there are 4 million foreclosed properties about to hit the market nation-wide. The reality is once we move the 4 million off the books, there will be another wave. And another wave. Prepare for it.
Cleansing our system of these distressed properties may take years. So don’t try to wait it out if you need to act now.
Now For The Good News
Because YES there is a silver lining to all this gloom. All these foreclosed properties that are about to flood the market? They will not shake the overall housing recovery. It’s still going to rebound, especially here in the Denver Metro area. Yes, it’sprobably going to take years to completely purge but overall the local and national markets are still poised to grow.
Why such optimism in a face of a distressed property tsunami? Chew on these numbers.
Denver HPI On The Rise
ReMax recently surveyed 53 real estate markets to gauge the relative health of local housing markets. In 48 of the markets polled, housing sales were up annually, and in 46 markets, home values had increased annually.
The recent CoreLogic home price index report says the same thing — Denver’s home sales prices are continuing to rise. The report, released Monday, shows the Denver-Aurora-Broomfield area saw home prices increase by 6.5% in May compared with May 2011. That figure includes distressed or foreclosed sales. This makes the fourth month in a row metro Denver’s HPI has posted year-over-year positive gains. This is good news folks.
Want More Good News?
If those 2 reports weren’t enough, how about last week’s Case-Shiller report from Standard & Poor’s, which states Metro Denver’s May HPI (excluding distresses sales) rose 4.5% from May 2011. The Denver area’s HPI even beat the national average. In the Denver area, home prices, including distressed sales, increased 5.1% in April 2012 from April 2011, and rose 4.1% in March 2012 from March 2011.
Don’t listen to the fear-mongers. When three reports from three different organizations report the same findings, you should pay attention. The fact are: Home sale prices are up nationally but especially here in Denver-metro area. This is a great indication that we are prepared to weather the storm of foreclosures about to hit the market.