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| A Closer Look at
the Mix of Home Sales |
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STATE OF THE CALIFORNIA HOUSING
MARKET 2007-2008 - Survey Highlights |
| 2009 Survey of
California Home Buyers - Highlights
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| Income Tax Time: Value
of Homeownership |
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A Closer Look at the Mix of
Home Sales
By:
Oscar Wei, Senior Research
Analyst and Sara Sutachan,
Senior Research Analyst
California home sales
continue to stay strong with
seasonally adjusted
annualized sales in July
increasing 8.1 percent to
553,910 from 512,530 in June
and 12.0 percent above the
revised year-ago figure of
494,390. The year-to-year
percentage gains in sales
have moderated in recent
months, and the 12 percent
increase over the prior year
was the smallest increase
since April 2008.
Year-to-date sales,
nevertheless, remained well
above the sales level of
last year, with a 43.4
percent increase over the
same period of 2008.
The
statewide median price at
$285,480 in July increased
for the fifth consecutive
month with a 3.9 percent
increase over the prior
month median price of
$274,740. The yearly decline
of 19.6 percent was also the
smallest in the last 19
months.
The
recent increase in the
median price is attributed
in part to the change in the
mix of sales since the
beginning of this year.
Since reaching a peak of 85
percent in January 2009, the
market share of homes sold
under the price range of
$500,000 (the low-end
market) has been gradually
declining and was down to 74
percent in July. Meanwhile,
the market share of homes
sold between $500,000 and $1
million (the middle tier)
surged from 12 percent in
January 2009 to 20 percent
in July, and homes sold
above $1 million (the
high-end market) improved
from 3 percent to 6 percent
for the same period.
The
shift in the market share
was due primarily to the
slow down in the sales for
lower-priced homes, and a
gain in the sales of
higher-priced homes
throughout the first half of
the year. In January, the
low-end tier registered a
year-to-year increase of
177.7 percent in home sales,
but had since come down to a
smaller gain of 23.0 percent
in July. In the same time
frame, the middle tier went
from an annual decrease of
11.8 percent to an annual
gain of 1.1 percent, while
the high-end tier improved
from an annual decline of
47.2 percent to a
year-over-year drop of 4.2
percent.
The
gain in sales has softened
at the low-end market
because of low inventories.
Statewide, inventory has
shown a steady decline since
the start of the year, with
the unsold inventory index
dropping from 6.6 months in
January 2009 to 3.9 months
in July 2009. Inventory
levels, however, differ
between price tiers and are
tighter at the low-end
market. The unsold inventory
index for the low-end market
has been around 3 to 4
months since the beginning
of the year, and was 3.2
months for July 2009, as
compared to 6.9 months for
the same month last year.
The middle tier had an
inventory level of around 9
months early this year, but
had dropped to 4.3 months in
July, and was lower than 6.6
months a year ago. The
inventory level of the
high-end segment has
declined since the start of
this year, but continued to
experience elevated
inventories. The unsold
inventory index for high-end
homes was at 9.6 months in
July 2009, slightly below
9.8 months for the same
month last year.
With inventory levels well
below the long-run average,
a supply shortage at the low
to middle-tiers may have
constrained sales in
lower-priced homes and led
to an increase in the median
price. The supply of homes
is expected to increase
later this year as the
number of foreclosures
continues to rise from last
year. However, the
government and lenders’
efforts in modifying loans,
combined with delays in
processing the backlog of
delinquencies may ease the
number of defaulted loans,
thus making a prediction on
the number and timing of the
flow of distressed
properties less certain.
Much of the current market
activity is being financed
by the government sponsored
enterprises Fannie Mae and
Freddie Mac (GSEs) and the
Federal Housing
Administration (FHA), such
that making permanent the
current loan limits for high
cost areas in California
will be essential to the
absorption of these
impending foreclosures and
to a recovering housing
market.
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| STATE OF THE
CALIFORNIA HOUSING MARKET 2007-2008 - Survey
Highlights
After a disappointing
2006, the housing market seemed to have
stabilized in early 2007, with sales of existing
detached homes holding steady at around 450,000
homes and the median price staying near
$560,000. In the spring, however, tighter
underwriting standards drove sales below 400,000
units, mostly at the expense of homes below $1
million. However, because the market above $1
million was not affected as severely, the
statewide median price held steady, with slight
year-to-year gains. By mid-year, even that
segment of the market was choked off by the
adverse effects of the global liquidity crunch
that had a more pronounced impact on homes over
$500,000, which relied on jumbo loans.
This year's State of
the California Housing Market report examines
these and other developments in real estate over
the past year, places recent events into a
historical context, and looks ahead to 2008. The
annual report also provides detailed statistics
on consumer demographics, data on home buying
and selling behaviors, analyses on current
housing market conditions, and insights on the
direction of the market.
KEY FINDINGS
Homes stayed on the
market longer as the market shifted in favor of
buyers. The median time on market was 8.6 weeks
in 2007, as compared to the record low of 1.6
weeks in 2004. Time on market last rose to these
levels in the mid-1990s, when time on market hit
11 weeks in1995.
With homes staying on
the market longer, the sales price to list price
ratio also widened. The median price discount in
2007 was 4.3 percent, significantly higher than
zero percent in 2004 and 2005. It was the
highest since 1995 when the median price
discount was 5.7 percent.
The median net cash
gain fell for the second year from $202,000 to
$180,000, after it peaked in 2005. The number of
sellers who sold their home with a loss
increased sharply from 1.9 percent in 2006 to
11.9 percent in 2007, the highest since 1997
when 12.5 percent of sellers had net cash loss
from their home sales.
The share of first-time
buyers increased from 27.1 percent in 2006 to
30.4 percent in 2007, but was still considerably
below the long-run average of 38.4 percent due
primarily to affordability constraints.
The percent of
first-time buyers with zero down payment dropped
from the record level of 40.3 percent in 2006 to
29.4 percent in 2007, while repeat buyers
adjusted slightly downward from 11.3 percent in
2006 to 10.2 percent in 2007.
As home prices in
California increased more rapidly than loan
limit in recent years, more home buyers needed
to borrow above the conforming loan limit. In
2007, nearly half of all new first mortgages
were jumbo loans, more than double the share in
2001.
With the spread between
fixed and adjustable rate mortgages shrinking,
home buyers opted out of adjustable-rate
mortgage (ARM) in favor of fixed-rate mortgages
(FRM) in recent years. The share of adjustable
rate and hybrid loans among all new first
mortgages decreased from 32.6 percent in 2006 to
20.2 percent in 2007, while the share of fixed
rate loans surged from 60.2 percent in 2006 to
74 percent in 2007.
The liquidity crunch
not only lowered the number of home buyers who
could be eligible for a more favorable loan
product, but it also affected those who needed a
second mortgage. The use of second mortgage
decreased considerably from the recent high
reached in 2006. The share of home buyers who
had a second mortgage dropped sharply from 43.4
percent to 32.7 percent.
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2009 Survey of California Home
Buyers - Highlights
After back-to-back years of sharp
declines in sales, the California housing market bounced back in
2008 with a 27 percent increase in sales. The increase was due
in large part to the growth in the absorption of distressed
properties, which comprised over half of the sales. With deeply
discounted distressed sales flooding the market, prices have
dropped significantly since early 2008. The accumulation of
foreclosures, REOs, and short sales will continue to put
downward pressure on home prices, until mortgage problems begin
to subside in the second half of 2009. Despite their negative
impact on home owners’ equity, the decline in home prices,
combined with historically low mortgage rates, have dramatically
improved housing affordability and have created opportunities
for home buyers.
The Survey of California Home Buyers is
the 10th annual CALIFORNIA ASSOCIATION of REALTORS® (C.A.R.)
buyer survey that details how home buyers have changed their
behaviors in recent years to adapt to the new housing market
environment and to the increased use of the Internet in the real
estate business. Some of the key findings include:
• Distressed sales made up more than
half of sales in California. According to results from the
survey, 49 percent of all buyers bought a home through a regular
market sale, 38 percent bought an REO/bank-owned property, and
13 percent bought a short-sale property.
• Home buyers, in general, were
optimistic about the future direction of home prices in their
neighborhood. While fewer than one in ten believed prices would
go up over the next year, one-third believed prices would go up
in the next 5 years, and 60 percent thought prices would go up
in 10 years.
• Home buyers continued to experience
considerable difficulty in obtaining financing for the homes
they bought. On a scale of “1” to “10”, with “1” being “very
easy” to obtain financing and “10” being “very difficult”, home
buyers reported a high average level of difficulty in obtaining
finance of 8.1.
• A recent study by the CALIFORNIA
ASSOCIATION OF REALTORS® suggests that the financial benefits of
owning a home outweigh that of renting for first-time buyers.
For a first-time buyer household that purchases an entry-level
home between Jan. 1 and Nov. 30, 2009, the overall tax liability
savings in the first five years of homeownership is well over
$11,000 when compared to renters.
• When asked why they were satisfied
with their agent, home buyers continued to cite “always quick to
respond” (73 percent) and “negotiated good deal on their behalf”
(61 percent) as the top two reasons.
• Home buyers needed the most help with
price negotiation (36 percent), determining prices for
comparable homes (24 percent), finding the right home to
purchase (21 percent), negotiating the purchase of distressed
property with banks (18 percent), and negotiating the terms of
sale (2 percent).
• Home buyers offered some suggestions
to agents on how to improve their services. Home buyers would
like their agents to improve the speed of communications (33
percent); provide references for lenders who will perform (32
percent), become more knowledgeable on how to deal with banks on
REOs, short sales, and other distressed properties (32 percent),
demonstrate the ability to negotiate aggressively for buyers (31
percent), and provide references for lenders who will recommend
the best product for the buyer (28 percent).
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Income Tax Time: Value
of Homeownership
In the midst of tax
season, the California
Association of REALTORS®
(C.A.R.) has decided to
take a closer look at
the benefits that go
along with
homeownership,
particularly the
consumption and tax
benefits. There are
generally two primary
reasons for owning a
home: for consumption
purposes and for
investment purposes. At
this time of year,
everyone is doing their
tax returns or will have
to do so before April
15th. It is crucial to
reap all of the tax
advantages available to
you as homeowners. We
will take a quick look
at how valuable your
homeownership is and how
it can add to your
bottom line during this
tax season.
Our first look at the
value of homeownership
is the return on
investment alone. Let’s
take a look back. Just
imagine you bought your
home at the median price
five years ago. That
home would have cost you
$227,160 (February 2000
single-family median
home price). In just
five years, the value of
your investment has
skyrocketed to $471,620
(February 2005
single-family median
home price), thus
reaping a 107 percent
gain in the value of
your home. On average
that is a 20 percent per
year return, which is in
and of itself an amazing
return on your
investment in any
circumstances. In fact,
that is nearly 3 times
the nation’s return 7
percent per year over
the same time period.
That return on your
investment does not even
take into account that
the investment also
provides a place to live
for you and your family.
Because this real estate
investment is also your
primary residence, you
have a vested interest
to take the proper care
i.e. renovations,
maintenance, and
repairs, all of which
are necessary in any
real estate investment.
Therefore the benefits
reaped are two-fold: the
improvements made to the
actual structure and
property, and also the
improved quality of
living for you, your
neighborhood, and
community overall.
From a pure investment
standpoint, if you
decided to sell your
home in 2004, $250,000
of that profit or equity
is tax free if you are
single and doubles to
$500,000 if you are
married and file a joint
tax return, as long as
you have lived in the
home for at least 2
years and it is your
primary residence (IRS
Publication 523). Let’s
take a look at the
February 2000 example
again. If you purchased
your home in February
2000 for the then median
price of $227,160 and
decided to sell five
years later in February
2005 for the going
median price of
$471,620. The equity
gain on the sale of your
home would be $244,460
and thus that amount
earned would be
tax-free.
Along with home equity
gains and overall
appreciation, there are
other huge tax
advantages to owning
your own home—interest &
property tax deductions.
Let’s fast forward to
those who have purchased
a home recently. If you
buy a home today at the
February median of
$471,620, and if
property taxes are about
1 percent of the
property value, the
property tax deduction
for that home would be
approximately $4,716 in
your first. In the
first 12 months the
interest paid on that
home loan would total
$21,420 (Interest
calculated assuming a
20% downpayment with
5.71 percent FHFB
February 2005 composite
mortgage rate).
Therefore, if you are in
the 25 percent tax
bracket the total tax
savings in the first
year of owning the home
would be around $6,530
($26,130 interest paid &
property taxes x 25
percent marginal tax
bracket). The IRS allows
you to deduct the entire
amount of interest paid
on your home loan as
long as you complete a
Schedule A on your 1040,
the loan is in your
name, and the mortgage
must be secured by
collateral (usually the
home itself—IRS
Publication 936).
Many homeowners are also
taking advantage of the
ability to consolidate
credit card debt and
roll it into a home
equity loan. The main
advantage to this
approach is being able
to deduct the interest
on the home equity loan
as the first mortgage
deduction rules apply.
Interest on credit card
debt is non-deductible
and the rates charged
are typically higher
than that of the current
rates charged on home
equity loans. By taking
advantage of these types
of perks, homeowners are
able to better handle
their debt and improve
their financial
situations.
Homeowners reap many
advantages when tax
season comes around.
Make sure you squeeze
the most out of your
homeownership as you
can. |
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