Homeownership Tax Breaks

We’re officially in the tax season again and fortunately homeownership still avails homeowners multiple tax deductions in helping to alleviate some of the burdens due Uncle Sam in April.

Many home-related expenses are deductible and apply to most any “abode,” including a mobile home, single-family residence, town house, condominium, or cooperative apartment.


Mortgage Interest

Typically for the average homeowner the interest paid on the monthly mortgage payment is the largest single tax deduction they are entitled to.

The IRS allows the homeowner to deduct all the mortgage interest paid on loans up to $1 million dollars ($500,000 or less if married and filing separately). This applies to mortgage loans taken out after October 13, 1987, “to buy, build, or improve your home (called home acquisition debt).”  For home loans higher than this $1 million there will be limitations as to the amount that is deductible.  Interest deductibility only applies if the mortgage is a secured debt. A secured debt is “one in which you sign an instrument (such as a mortgage, deed of trust, or land contract).”

Mortgage interest is also fully deductible on a second home, and this deduction may apply to “homes” such as a boat or RV, as long as they have cooking, sleeping and bathrooms facilities.

If the second home is used as a vacation rental, the mortgage interest is still deductible provided that the homeowner spends at least part of the year at that location.  Deductibility requires homeowner use of the second property at least 14 days per year, or more than 10 percent of the number of days that it is rented out (whichever is longer).  If these requirements are not met the IRS may consider the place a residential rental property and eliminate the interest deduction.

Interest deductibility also applies to home equity debt, “but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married and filing separately),” says the IRS.  Always consult a qualified tax professional for this and all tax matters.  More deductions will be covered in a following blog.





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Mortgage Tax Relief to Die? Pt. 1

In 2007, in the midst of the recent real estate and mortgage collapse, Congress enacted the Mortgage Forgiveness Debt Relief Act. The intent of this law was to stop a very punitive tax that millions of distressed homeowners were facing.

This was a tax on income, but oddly an income that homeowners never received, because it was a “forgiven” or a so-called “imputed” income.  Millions of homeowners nationally were facing huge bills from the IRS for unpaid taxes for phantom income, money never received, and many of these were from California, Arizona and Nevada, states severely hit in the mortgage meltdown.

Originally the tax worked this way, imagine that a borrower took out a home loan for $500,000; then they suffer a job loss and can no longer afford the home. The property is then sold with the banks permission by a short sale or foreclosed upon, and in the end the lender is only repaid $425,000 from the sale or auction.

The homeowner now is subject to an “income” tax on the $75,000 that was “forgiven” or “imputed” by the bank.  In the midst of their financial crisis the can not afford to pay the tax.

In 2007, Congress moved to help distressed homeowners by changing the rules.  Via the Debt Relief Act Congress exempted as much as $2 million in forgiven homeowner mortgage debt that now became non-taxable ($1 million if married filing separately).  Unfortunately the law was valid only until the end of 2013.

Unless the legislation is extended large numbers of troubled borrowers will again face huge new taxes.  The result may be that many distressed borrowers may face the unfortunate incentive to go to foreclosure rather than seek a short sale in order to avoid the huge tax bill.

Without tax forgiveness foreclosure levels might begin to rise significantly because fewer borrowers will be inclined to engage in a short sale.  Continued in second blog.


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Key Housing Indicator Drops

Pending home sales, which is a key forward looking indicator on the health of the housing market, dropped in December, this according to the National Association of Realtors® (NAR).

The Pending Home Sales Index (PHSI) fell 8.7 percent in December to 92.4, this was down from 101.2 in November, and is 8.8 percent below December 2012 when it was 101.3.  Pending home sales reflect contracts but not closings, and are at the lowest level since October 2011, when the index was 92.2.  Declines in pending sales were experienced in all four major regions and were partially attributed to the harsh weather in parts of the nation.

By region, the PHSI in the Northeast dropped 10.3 percent to 74.1 in December, and is 5.5 percent below a year ago. In the Midwest the index was 93.6 for December, which declined 6.8 percent from the previous month, and is 6.9 percent lower than December 2012. Pending home sales in the South fell 8.8 percent to an index of 104.9 in December, and are 6.9 percent below a year ago.

The index in the West, which was not impacted by inclement weather, but mostly impacted by constrained inventory, dropped 9.8 percent in December to 85.7; this is 16.0 percent below December 2012.

NAR chief economist, Lawrence Yun, noted that several factors impacted the PHSI, he said, “Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers,” he added. “Home prices rising faster than income is also giving pause to some potential buyers, while at the same time a lack of inventory means insufficient choice. Although it could take several months for us to get a clearer read on market momentum, job growth and pent-up demand are positive factors.”


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New-Home Sales Down

According to the most recent figures released from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, new-home sales dropped 7.0 percent in December to a seasonally adjusted annual rate of 414,000 units.  On the positive side new-home sales for all of 2013 were up 16.4 percent over the previous year, this despite December’s sharp decline.

Rick Judson, Chairman of the National Association of Home Builders (NAHB) said, “December’s decline in new-home sales follows elevated levels in the previous two months and means the fourth quarter was still much stronger than the third.  While we expect sales to gain strength in 2014, builders still face considerable constraints, including tight credit conditions for home buyers, and a limited supply of labor and buildable lots.”

By region the Northeast, had the largest drop in new-home sales in December, “plummeting” 36.4 percent to the slowest pace since June 2012.  Extreme cold weather for the month clearly had had an impact on sales.  New-home sales also dropped in the West, falling by 8.8 percent, falling also by 7.3 percent in the South, while they rose 17.6 percent in the Midwest.

The supply of new homes on the market in December dropped 2.8 percent, the lowest figure since July, while “settling” in at a five-month supply. Analysts generally consider a six-month supply of homes for sale healthy for the market.

Chief economist for the National Association of Home Builders (NAHB), David Crowe stated, “Consumers are getting used to more realistic mortgage rates, which still remain favorable on a historical basis.  As household formations and pent-up demand continue to emerge, we anticipate that 2014 will be a strong year for housing.”  The NAHB says that the rise in mortgage interest rates beginning earlier last year may have hampered sales.





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Existing-Home Sales UP

According to the National Association of Realtors®, existing-home sales rose slightly in December with sales for all of 2013 hitting their highest level since 2006.

An existing-home sale is considered a completed transaction that may include single-family homes, townhomes, condominiums and co-ops.  Total sales went up by 1.0 percent to a seasonally adjusted annual rate of 4.87 million in December edging up from from 4.82 million in sales for November.  December’s existing sales finished 0.6 percent below the 4.90 million-unit level for the same period one-year earlier.

NAR data shows that for all of 2013 5.09 million existing-homes were sold, which is 9.1 percent higher than 2012. It was the strongest performance for existing-home sales since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom.

Chief economist for the NAR, Lawrence Yun noted that housing has experienced a healthy recovery over the past two years. Saying that, “Existing-home sales have risen nearly 20 percent since 2011, with job growth, record low mortgage interest rates and a large pent-up demand driving the market.  We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population.”

Foreclosure transactions accounted for ten percent of December sales, while 4.0 percent were short sales. Foreclosures sold for an average discount of 18 percent below market value in December, while short sales were discounted 13 percent.

The NAR says that, “Total housing inventory at the end of December fell 9.3 percent to 1.86 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace, down from 5.1 months in November. Unsold inventory is 1.6 percent above a year ago, when there was a 4.5-month supply.”

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Home Prices UP

The latest data from the National Association of Realtors® (NAR) shows that national median existing-home prices jumped by 11.5 percent for all of 2013 finishing the year at $197,100.  This was a substantial increase over median prices for 2012, which finished at $176,800.  The gain for 2013 was the “strongest gain since 2005 when it rose 12.4 percent.”

For the month of December national median existing-home prices, for all types of housing, was $198,000, this was a 9.9 percent increase over the same period in 2012.

Sales of distressed homes, which include foreclosures and short sales, accounted for 14.0 percent of all sales activity in December, and were essentially unchanged from November’s numbers.  In December of 2012 distressed sales were at 24 percent, leading analysts to state that the December 2013 increase in home prices were due in part to the continued “shrinking share of distressed sales.”

Unfortunately fist-time buyers continue to account for a smaller share of overall home purchases with only 27 percent of purchases going to first-timers in December, this was down from 28 percent in November and 30 percent in December 2012.  In a normal market first-time buyers usually make up about 40 to 45 percent of overall homes purchases.

The NAR says that all-cash sales comprised 32 percent of total transactions in December, which was unchanged from November, but the 32 percent was an increase over December of 2012 when they accounted for 29 percent of sales. Individual investors purchased 21 percent of all homes in December, up from 19 percent in November, but investor purchases were unchanged from December 2012.

NAR President Steve Brown noted that with jobs expected to improve this year, sales should hold even despite rising home prices and higher mortgage interest rates.  He said, “The only factors holding us back from a stronger recovery are the ongoing issues of restrictive mortgage credit and constrained inventory,” he added, “With strict new mortgage rules in place, we will be monitoring the lending environment to ensure that financially qualified buyers can access the credit they need to purchase a home.”





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Feds to Taper

Feds to Taper

Last month Ben Bernanke, chairman of the Federal Reserve, stated that the Feds would finally begin to taper, or cut back, on their quantitative easing (QE).  In short with QE the Fed has printed large sums of new dollars then spent much of this to purchase government bonds and treasury securities, all to stimulate the economy and keep interest rates low.

Some analysts believe the Feds have stirred a “mini boom” in the housing market with this policy.  A side note is that the QE policy has added substantially to the national debt.

Bernanke, who will soon be replaced by Janet Yellen as Fed Chairman, said in December that the Fed would begin tapering back on its $85 billion a month bond buying program.  He said, that beginning in January, the Fed would purchase only $35 billion a month in mortgage backed securities instead of $40 billion, and also reduce the purchase of long term Treasury Bills from $45 billion per month to $40 billion.  Originally many believed that the Feds would cut QE in half.

Apparent reasons for the Feds actions were attributed to recent upbeat economic data and the bipartisan Congressional budget deal that promises to avoid another government shutdown here in January.

Housing starts jumped 23 percent in November, that’s the highest level since January 1990. Also unemployment numbers have dropped slightly.  On the surface the unemployment numbers look better, but the reality is that we have the lowest labor participation rate in 40 years.

RealtyTrac® (RT), the nation’s leading source for comprehensive housing data says, “the Fed isn’t out of the woods yet. Critics say the Fed has $3 trillion dollars of very long-term assets on its books. If interest rates rise 2 to 3 percent, their market loss could measure in the hundreds of billions of dollars.”

According to RT, supporters of QE argue that, “tapering stimulus now, just when unemployment hit 7 percent from 7.6 in June, is the wrong idea. Advocates want to keep interest rate low to encourage more home buying and hiring.”


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NAR Housing Data

NAR Housing Data

The latest data released by the National Association of Realtors® (NAR) indicates that new housing starts are still lagging behind in terms of what the market needs.

NAR data shows that the latest annualized pace of 999,000 new housing units is still insufficient to “satisfy demand,” and another 50 percent increase in housing starts is needed to help relieve the current inventory shortage, this despite the fact that new home construction reached the 3rd highest level in the past 66 months.

The latest figure for December was a decline from the previous month, which was the best in over 5 years. However, last months numbers were still higher than a year ago.  Both single-family and multifamily housing starts softened last month.

Housing inventory of newly constructed homes is essentially at a 50-year low, says the NAR, and they say much more construction is need.  The availability of credit is a prime problem with the lagging inventory.  The NAR explains that larger “publicly-listed companies like KB Homes and Toll Brothers can tap Wall Street funds to get busy. However, small local builders have historically been the principal supplier of new homes in America. These local homebuilders rely on construction loans, which are very hard to get. Many local lenders have indicated the burdensome regulation arising from Dodd-Frank financial market regulations have hindered their ability to lend. Hence, large companies are getting bigger at the expense of smaller guys getting shut out.”

Normally, for a single-family home, it is about 6 months between beginning as a housing start to housing completion and being ready for sale.

As a consequence of the restrictions on credit to the smaller local builders, the insufficient number of new housing starts will probably mean a continuation of the shortage of housing inventory for the rest of this year, therefore, home prices and rents will rise in nearly all local markets in 2014, says the NAR.

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Builder Confidence Dips

Builder Confidence Dips

According to the latest data released by the National Association of Home Builders (NAHB), confidence of home builders relative to the market for newly built, single-family homes dipped slightly in January.

The NAHB’s Housing Market Index (HMI) slipped by one point to 56, this down from 57 in the previous month of December.

Data for the HMI is derived from a monthly survey that gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”  As part of the survey builders are also asked to rate foot traffic of prospective buyers as being “high to very high,” “average” or “low to very low.”  In order to calculate the seasonally adjusted index the scores are tabulated where any number over 50 indicates that more builders view conditions as good rather than poor.

In January all three HMI components declined from the previous month. “The index gauging current sales conditions edged one point lower to 62, while the index gauging expectations for future sales fell two points to 60. The index gauging traffic of prospective buyers fell three points to 40.”

The regional HMI scores, based on a three-month moving average, shows that the Northeast and West each rose four points to 42 and 63, respectively, while the South held steady at 56. The Midwest fell a single point to 58.

NAHB Chairman Rick Judson stated, “Following an unexpected jump last month, builder confidence has essentially leveled out and is holding at a solid level.  Many markets continue to improve and this bodes well for future home sales.”

Additionally, NAHB Chief Economist David Crowe said, “Rising home prices, historically low mortgage rates and significant pent-up demand will drive a continuing, gradual recovery in the year ahead.  However, the pace of the recovery could be stronger were it not for rising construction costs and inaccurate appraisals that are keeping some home sales from going through.”

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