Friday, January 19, 2007
Bubble's pop was akin to a slow leak
Home sales tumbled in 2006, but prices mostly dipped. Even so, don't expect a boom soon.
By Kenneth R. Harney, Washington Post Writers GroupJanuary 7, 2007
WASHINGTON — What's the shape of the post-bubble, post-correction real estate market? And what does it mean for buyers and sellers in the new year?
The latest sales data show a small but unmistakable uptick in activity and declining unsold inventories. In late December, the National Assn. of Realtors reported that existing home resales were up by a hair in November — 0.6% — the second straight month of modest increases off the cyclical trough in September. On Dec. 27 the Commerce Department reported sales of new houses rose 3.4% over the previous month, while builders' unsold inventories dropped to their lowest level since last February.
All of this suggests that the 18-month market correction that followed the four-year housing boom has just about run its course. From a national statistical perspective, we're somewhere near slack tide — but no one's looking for another frothy high tide anytime soon.
Some local markets are moving contrary to the relatively flat national trend. Three dozen metropolitan areas — primarily markets with moderate prices and solid employment growth — were still racking up low double-digit house price inflation at the end of the third quarter of 2006, according to federal data. The L.A.-Long Beach-Glendale metropolitan area continued to chug along with an annualized appreciation rate above 7%. Dozens of other areas — primarily where unemployment has been a persistent and increasing economic drag — showed signs of modest deflation in home values, according to the same data.
In the main, however, the housing market appears to have weathered the correction phase of the cycle without the blood running in the streets that some bubble-bust bears had forecast. Median prices of resale houses have fallen 3.6% nationally year-to-year, and anecdotal reports of 10% to 20% asking-price reductions in formerly hyper-inflated markets are common. But that's what corrections are all about, as opposed to outright busts.
Moderate price cuts also eventually stimulate buyers — who'd been sitting on the sidelines wondering when the market might bottom out — to wade back in and start shopping again.
That's where we appear to be at the moment, and where we're headed in 2007, absent unexpected economic jolts to the global capital markets that could send mortgage rates spiking. In that event, all bets are off.
So what are smart strategies in a slowly recovering real estate environment for heads-up buyers and sellers? One good rule: Think baby steps instead of big leaps. Sellers shouldn't assume that with the trend line turning positive they can suddenly price their house for what they might have commanded in early 2005. Forget about it.
In most places, buyers still have the upper hand. There's plenty of inventory to choose from, shoppers are picky and unrealistic pricing is a guaranteed route to sitting dead in the water for months, unvisited and unsold. Be realistic on pricing. And be happy there are buyers out there again.
On the other hand, smart shoppers should recognize that the game is changing, the spring buying season is looming and that lobbing low-ball offers at already marked-down properties isn't a winning strategy. If you are seriously in the market, be prepared to pay a price that may not be as low as you'd hoped, but that just might be your last shot at a particular house before it sells for closer to the asking price a few weeks from now.
Shoppers also need to understand that today's prevailing mortgage rates — a little above 6% for 30-year money, and in the high-5% range for 15-year loans — are less than a point above 40-year lows. They won't be around indefinitely, so a fairly priced house combined with a near-historic low-cost mortgage adds up to a potentially great deal.
A second essential for the emerging market: Smart buyers and sellers need to be well-informed. They need to plug themselves into all the key local data that shapes pricing and deal-making — time on the market, inventory declines and increases, the overall pace of sales and the average gap between asking prices and closing prices. Be in command of these numbers and you will be well-equipped to play heads-up ball, whether as buyer or seller.
A lot of this data is available online and offline from real estate websites, regional or local multiple listing services, Realtor associations and mortgage lenders and brokers. It's also available person-to-person from the front-line experts on any given micro-market: the real estate agents who "farm" specific neighborhoods or market segments. They make their living, in up cycles and down cycles, by listing, selling and thoroughly knowing what's happening inside their target areas.
Better yet: There are no commissions for information from these specialists. All you need to do is show that you're serious and you can compile a lot of valuable market intelligence for free.
*
Ken Harney can be reached at kenharney@earthlink.net.
By Kenneth R. Harney, Washington Post Writers GroupJanuary 7, 2007
WASHINGTON — What's the shape of the post-bubble, post-correction real estate market? And what does it mean for buyers and sellers in the new year?
The latest sales data show a small but unmistakable uptick in activity and declining unsold inventories. In late December, the National Assn. of Realtors reported that existing home resales were up by a hair in November — 0.6% — the second straight month of modest increases off the cyclical trough in September. On Dec. 27 the Commerce Department reported sales of new houses rose 3.4% over the previous month, while builders' unsold inventories dropped to their lowest level since last February.
All of this suggests that the 18-month market correction that followed the four-year housing boom has just about run its course. From a national statistical perspective, we're somewhere near slack tide — but no one's looking for another frothy high tide anytime soon.
Some local markets are moving contrary to the relatively flat national trend. Three dozen metropolitan areas — primarily markets with moderate prices and solid employment growth — were still racking up low double-digit house price inflation at the end of the third quarter of 2006, according to federal data. The L.A.-Long Beach-Glendale metropolitan area continued to chug along with an annualized appreciation rate above 7%. Dozens of other areas — primarily where unemployment has been a persistent and increasing economic drag — showed signs of modest deflation in home values, according to the same data.
In the main, however, the housing market appears to have weathered the correction phase of the cycle without the blood running in the streets that some bubble-bust bears had forecast. Median prices of resale houses have fallen 3.6% nationally year-to-year, and anecdotal reports of 10% to 20% asking-price reductions in formerly hyper-inflated markets are common. But that's what corrections are all about, as opposed to outright busts.
Moderate price cuts also eventually stimulate buyers — who'd been sitting on the sidelines wondering when the market might bottom out — to wade back in and start shopping again.
That's where we appear to be at the moment, and where we're headed in 2007, absent unexpected economic jolts to the global capital markets that could send mortgage rates spiking. In that event, all bets are off.
So what are smart strategies in a slowly recovering real estate environment for heads-up buyers and sellers? One good rule: Think baby steps instead of big leaps. Sellers shouldn't assume that with the trend line turning positive they can suddenly price their house for what they might have commanded in early 2005. Forget about it.
In most places, buyers still have the upper hand. There's plenty of inventory to choose from, shoppers are picky and unrealistic pricing is a guaranteed route to sitting dead in the water for months, unvisited and unsold. Be realistic on pricing. And be happy there are buyers out there again.
On the other hand, smart shoppers should recognize that the game is changing, the spring buying season is looming and that lobbing low-ball offers at already marked-down properties isn't a winning strategy. If you are seriously in the market, be prepared to pay a price that may not be as low as you'd hoped, but that just might be your last shot at a particular house before it sells for closer to the asking price a few weeks from now.
Shoppers also need to understand that today's prevailing mortgage rates — a little above 6% for 30-year money, and in the high-5% range for 15-year loans — are less than a point above 40-year lows. They won't be around indefinitely, so a fairly priced house combined with a near-historic low-cost mortgage adds up to a potentially great deal.
A second essential for the emerging market: Smart buyers and sellers need to be well-informed. They need to plug themselves into all the key local data that shapes pricing and deal-making — time on the market, inventory declines and increases, the overall pace of sales and the average gap between asking prices and closing prices. Be in command of these numbers and you will be well-equipped to play heads-up ball, whether as buyer or seller.
A lot of this data is available online and offline from real estate websites, regional or local multiple listing services, Realtor associations and mortgage lenders and brokers. It's also available person-to-person from the front-line experts on any given micro-market: the real estate agents who "farm" specific neighborhoods or market segments. They make their living, in up cycles and down cycles, by listing, selling and thoroughly knowing what's happening inside their target areas.
Better yet: There are no commissions for information from these specialists. All you need to do is show that you're serious and you can compile a lot of valuable market intelligence for free.
*
Ken Harney can be reached at kenharney@earthlink.net.
Tuesday, January 16, 2007
The 'death tax' is far from dead
The federal estate tax remains up in the air, but the states that traditionally piggybacked on the federal tax are rewriting their rules so they don't lose their cut.
By Liz Pulliam Weston
When it comes to death and taxes, most of the focus in 2006 centered on Congress' ongoing battles over the federal estate tax.
But many states impose their own taxes and costs when residents die. Estates too small to trigger the federal tax can easily rack up thousands of dollars in state death taxes and probate costs. Far from being repealed if the federal tax is rescinded, this state burden is on track to rise over time.
Some states have their own estate- or inheritance-tax systems that are independent of the federal estate tax system.
Another group of states is imposing new estate taxes to make up for revenue from the waning federal tax.
Finally, some states have expensive and lengthy probate systems that apply to an increasing number of estates.
The federal estate tax is scheduled to phase out over the next few years and disappear entirely in 2010 -- only to return in 2011 when the temporary repeal expires. Opponents of the estate tax are struggling to make repeal permanent; the House has already voted to permanently repeal it, but the bill never got to the floor of the Senate for a vote.
But many states have estate or inheritance taxes that are independent of the federal system. Those states, according to John Logan, senior tax analyst with CCH Inc., include: Connecticut, Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania and Tennessee. (Connecticut's tax is scheduled to disappear after 2006.)
State estate taxes, like the federal version, are assessed on the estate as a whole. But states can have different rules about who pays.
Breaking down the exemptions
Inheritance taxes target bequests to the beneficiaries, rather than the estate itself. Typically, beneficiaries are divided up by their relationship to the deceased, with the biggest tax breaks going to those with the closest ties. In Iowa, for example, bequests to spouses, children, parents and other direct descendents (grandchildren, great-grandchildren, etc.) or ascendants (grandparents, etc.) are exempt from the state's inheritance tax. Property destined for brothers, sisters and siblings-in-law is assessed at rates ranging from 5% to 10%, while the rate for other inheritors runs from 10% to 15%.
You can find details about state estate taxes at CCH's financial planning Web site.
In the past, most states haven't had to impose separate taxes to get a piece of their residents' estates. Instead, the states received a portion of what the estate owed the federal government. This "pickup" tax raised state coffers without the estates owing any extra. However, states are losing this boost. The federal law temporarily repealing the estate tax has already phased out the states' ability to take a portion of said tax. That cost states billions in lost revenue.
So it's probably not surprising that several states are trying to hang on to their piece of the pie by decoupling their estate tax system from the federal system. In effect, they're pretending that the repeal isn't happening and taking from their residents' estates some of what they used to get from the federal government.
The search for funds
Illinois was the most recent state to unhook from the federal law in hopes of recouping $45 million to help fill its $5 billion budget gap.
Some states made their decoupling temporary, hoping that revenues would improve enough in coming years so that they wouldn't miss the lost tax. The states also might get a break if efforts to make the federal repeal permanent fail. The full state death-tax credit would return, along with the rest of the federal estate tax system, in 2011.
Taxes aren't the only costs associated with death. Probate, the court process that follows death, usually costs some money and typically affects far more people than estate taxes.
Fortunately, probate is no big deal in most states. Creditors are identified and paid and the remaining assets are distributed to heirs, usually all within a few months. Fees typically range from a few hundred to a few thousand dollars.
Two states, though, are notorious for their lengthy and expensive probates: California and Florida.
The trigger
In California, probate is generally triggered when an estate is worth more than $100,000. That amount doesn't rise with inflation, so over time more and more estates are subject to probate.
The typical probate in California can take 12 to 18 months, and some go on for years. (Marilyn Monroe's estate took 18 years to settle.) The long waits for heirs aren't the only problem: The costs for probating even a modest estate can be astronomical.
Attorneys and executors can each take 4% of the first $100,000, then 3% of the next $100,000, then 2% of the next $800,000, then 1% of anything over that amount. So a $300,000 estate can rack up $20,000 in probate fees. (Monroe's probate fees totaled more than $1 million, says estate planning expert Denis Clifford. Her total debts were about $400,000, leaving just $100,000 to be divided by her heirs.)
By the way, those probate fees are based on the gross estate -- the value of all the property, not counting any mortgages, loans or other debt.
In Florida, estates worth more than $75,000 are subject to probate. For small estates, the process usually takes about six months. Closing a larger estate can take 15 months or longer. Fees for attorneys and executors of about 3% each are usually considered "reasonable" by state law.
There are some benefits to going through probate. The process is monitored by a judge, which theoretically should make it harder for a corrupt executor to defraud your heirs. You also don't have to do anything or spend any money in advance to prepare; rather, your estate will go through probate if you don't take steps to avoid it.
The avoidance technique
But if you have even a modest estate (a home, some investments, a bit of cash), estate-planning attorneys in states with high-cost probates usually recommend avoiding the process. If your estate is relatively small, you may be able to skip probate entirely with techniques like owning real estate in joint tenancy and designating beneficiaries for your financial accounts (known as creating "pay on death" accounts; talk to your financial institutions for details). If your estate is larger, a kind of revocable trust known as a living trust might be the answer. A review of Clifford's Nolo Press book, "Plan Your Estate," could help you decide.
Now, what do you do about state death taxes? If you're rich enough, finding another state to live in is always a possibility (Alaska, maybe, or Hawaii?). Otherwise, you might decide to use tax-minimizing techniques, such as bypass trusts, or change who gets what in order to reduce inheritance taxes. If you want to provide the money to pay taxes so they don't come out of your heirs' share, a life-insurance policy held in an irrevocable trust might be the way to go.
Unfortunately, estate planning is often no place for amateurs. As you can see, the rules are complex and ever-changing. It's tough for even the pros to keep up.
If you have enough money to be worried about death taxes, consider spending a little on an attorney who's an estate-planning specialist. Your local bar association can provide referrals. Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
By Liz Pulliam Weston
When it comes to death and taxes, most of the focus in 2006 centered on Congress' ongoing battles over the federal estate tax.
But many states impose their own taxes and costs when residents die. Estates too small to trigger the federal tax can easily rack up thousands of dollars in state death taxes and probate costs. Far from being repealed if the federal tax is rescinded, this state burden is on track to rise over time.
Some states have their own estate- or inheritance-tax systems that are independent of the federal estate tax system.
Another group of states is imposing new estate taxes to make up for revenue from the waning federal tax.
Finally, some states have expensive and lengthy probate systems that apply to an increasing number of estates.
The federal estate tax is scheduled to phase out over the next few years and disappear entirely in 2010 -- only to return in 2011 when the temporary repeal expires. Opponents of the estate tax are struggling to make repeal permanent; the House has already voted to permanently repeal it, but the bill never got to the floor of the Senate for a vote.
But many states have estate or inheritance taxes that are independent of the federal system. Those states, according to John Logan, senior tax analyst with CCH Inc., include: Connecticut, Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania and Tennessee. (Connecticut's tax is scheduled to disappear after 2006.)
State estate taxes, like the federal version, are assessed on the estate as a whole. But states can have different rules about who pays.
Breaking down the exemptions
Inheritance taxes target bequests to the beneficiaries, rather than the estate itself. Typically, beneficiaries are divided up by their relationship to the deceased, with the biggest tax breaks going to those with the closest ties. In Iowa, for example, bequests to spouses, children, parents and other direct descendents (grandchildren, great-grandchildren, etc.) or ascendants (grandparents, etc.) are exempt from the state's inheritance tax. Property destined for brothers, sisters and siblings-in-law is assessed at rates ranging from 5% to 10%, while the rate for other inheritors runs from 10% to 15%.
You can find details about state estate taxes at CCH's financial planning Web site.
In the past, most states haven't had to impose separate taxes to get a piece of their residents' estates. Instead, the states received a portion of what the estate owed the federal government. This "pickup" tax raised state coffers without the estates owing any extra. However, states are losing this boost. The federal law temporarily repealing the estate tax has already phased out the states' ability to take a portion of said tax. That cost states billions in lost revenue.
So it's probably not surprising that several states are trying to hang on to their piece of the pie by decoupling their estate tax system from the federal system. In effect, they're pretending that the repeal isn't happening and taking from their residents' estates some of what they used to get from the federal government.
The search for funds
Illinois was the most recent state to unhook from the federal law in hopes of recouping $45 million to help fill its $5 billion budget gap.
Some states made their decoupling temporary, hoping that revenues would improve enough in coming years so that they wouldn't miss the lost tax. The states also might get a break if efforts to make the federal repeal permanent fail. The full state death-tax credit would return, along with the rest of the federal estate tax system, in 2011.
Taxes aren't the only costs associated with death. Probate, the court process that follows death, usually costs some money and typically affects far more people than estate taxes.
Fortunately, probate is no big deal in most states. Creditors are identified and paid and the remaining assets are distributed to heirs, usually all within a few months. Fees typically range from a few hundred to a few thousand dollars.
Two states, though, are notorious for their lengthy and expensive probates: California and Florida.
The trigger
In California, probate is generally triggered when an estate is worth more than $100,000. That amount doesn't rise with inflation, so over time more and more estates are subject to probate.
The typical probate in California can take 12 to 18 months, and some go on for years. (Marilyn Monroe's estate took 18 years to settle.) The long waits for heirs aren't the only problem: The costs for probating even a modest estate can be astronomical.
Attorneys and executors can each take 4% of the first $100,000, then 3% of the next $100,000, then 2% of the next $800,000, then 1% of anything over that amount. So a $300,000 estate can rack up $20,000 in probate fees. (Monroe's probate fees totaled more than $1 million, says estate planning expert Denis Clifford. Her total debts were about $400,000, leaving just $100,000 to be divided by her heirs.)
By the way, those probate fees are based on the gross estate -- the value of all the property, not counting any mortgages, loans or other debt.
In Florida, estates worth more than $75,000 are subject to probate. For small estates, the process usually takes about six months. Closing a larger estate can take 15 months or longer. Fees for attorneys and executors of about 3% each are usually considered "reasonable" by state law.
There are some benefits to going through probate. The process is monitored by a judge, which theoretically should make it harder for a corrupt executor to defraud your heirs. You also don't have to do anything or spend any money in advance to prepare; rather, your estate will go through probate if you don't take steps to avoid it.
The avoidance technique
But if you have even a modest estate (a home, some investments, a bit of cash), estate-planning attorneys in states with high-cost probates usually recommend avoiding the process. If your estate is relatively small, you may be able to skip probate entirely with techniques like owning real estate in joint tenancy and designating beneficiaries for your financial accounts (known as creating "pay on death" accounts; talk to your financial institutions for details). If your estate is larger, a kind of revocable trust known as a living trust might be the answer. A review of Clifford's Nolo Press book, "Plan Your Estate," could help you decide.
Now, what do you do about state death taxes? If you're rich enough, finding another state to live in is always a possibility (Alaska, maybe, or Hawaii?). Otherwise, you might decide to use tax-minimizing techniques, such as bypass trusts, or change who gets what in order to reduce inheritance taxes. If you want to provide the money to pay taxes so they don't come out of your heirs' share, a life-insurance policy held in an irrevocable trust might be the way to go.
Unfortunately, estate planning is often no place for amateurs. As you can see, the rules are complex and ever-changing. It's tough for even the pros to keep up.
If you have enough money to be worried about death taxes, consider spending a little on an attorney who's an estate-planning specialist. Your local bar association can provide referrals. Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
Subscribe to:
Posts (Atom)
Get Updated When This Page is Updated
Monthly Home and Garden Tips
Monthly Home and
Garden Care Tips