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The heat is on this summer.
July is set to bring record-high temperatures to every part of the United States, but sometimes it feels like it’s more than just the outside heat that’s scorching. More and more, everyone is being pushed to feel like the fiery sands are shifting beneath our feet in the real estate world.
After two and a half years of unheard-of gains in home prices and a market that transformed into something unlike anything anyone has ever seen, it looks like things are veering in a new direction. No one can quite predict what that direction will be or when it will start, but if it’s anything like what we’ve witnessed in the last two years, it’s going to be a doozy.
Here’s the thing to remember: real estate has always been about change. Transformation is baked into this business. Property is the most stable, concrete asset out there, and in real estate, we move people to and from that asset. The asset itself doesn’t go anywhere, but everything around it changes. Understanding this fundamental truth of the property business makes it easier to understand why the market changes so much and so often.
Summer is always a frenetic time for home sellers, home buyers and real estate investors, but this year feels even more scorching than usual. Whatever side of the real estate equation someone is on – buyer, seller, investor, or agent, learning more about the market is a way to lower the temperature and reach whatever goals you might be chasing.
The Cloudy State of Global Real Estate
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The sky isn’t falling yet, but globally, things aren’t looking positive for the real estate market. You don’t need to be reminded of the headlines, but here they are anyway: a raging war that’s unseated the world’s economy, skyrocketing inflation that’s pushing the cost of everything way higher than it should be, and the potential for a housing bubble pop that could strike everyone as hard or harder than those first two dire situations.
Globally, the biggest banks in the world are increasing their interest rates more than they have in decades. Though the reasoning behind the increases is sound, given the shocking level of inflation that’s squeezing everyone around the world, it’s already having a chilling effect on residential real estate everywhere.
The Organization for Economic Co-operation and Development (OECD) is a global intergovernmental organization that’s been the center of economic progress since the sixties. Its forty or so member countries are the top economies in the world, the places that set the tone for global economic realities. In a recent analysis by Bloomberg, half of OECD countries have price-to-income ratios above what they were just ahead of the 2008 recession. In layman’s terms – economists who look at global trends are feeling the push of a major economic downturn.
That number has warning bells going off for everyone with good reason. A high price-to-income ratio means that people have little extra to spend at best, and at worst it means they can’t afford to maintain what they already have. The United States is on the list at number seven, below leader New Zealand, the Czech Republic, Hungary, Australia, Canada, and Portugal.
What does this mean for private real estate holders in America? It means that global economic leaders need to tamp down inflation as much as possible, and to do that they need to slow down the tremendous rise in housing prices that we’ve seen in the last two years. That necessarily means raising interest rates. It’s a delicate dance, because every effort they make to pull back on housing prices has the ability to further nudge the potential avalanche of recession.
Even with all of that gloom and doom, it’s important for everyone with a stake in real estate to take a step back and think critically about where we are. A collapse like what we saw in 2008 is not likely given the changes in lending regulations that were put in place after the Great Recession. The strength of labor markets around the world will also make it difficult for things to take a massive downward spike, at least not one that happens all at once.
The takeaway for home sellers and real estate professionals is that the rise in housing prices that we’ve seen over the last two years is going to cool much more than it has already. While it’s still a seller’s market, it won’t be that way for a whole lot longer.
An Uncommon Approach to Selling Your Home
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Even the most experienced homeowner can use some quick insight into what’s new and what’s working in home sales. With the landscape of real estate constantly changing, finding new ways to attract buyers is always a good thing.
Here are three unconventional ways to increase your home’s sale potential.
- Overnight guests
It’s not unusual for someone to take a bit of time to make a major decision like buying a home, but this home sales technique takes the phrase “let me sleep on it” to a whole new level. Letting a potential buyer stay overnight in a property is an innovative way to let them really get a feel for the home. The idea is to get them to have a major emotional reaction that will translate to more of a willingness to meet your price.
Before trying this one, make sure to check with your real estate attorney to see what liabilities could be involved.
- Go for the highest bidder
Though real estate auctions are associated with homes in foreclosure, that’s not the only way that they can work. Selling a house through a real estate auction is one viable alternative to other kinds of home sales.
Homeowners who want to sell their house quickly while also going for as high a price as possible can explore holding a real estate auction for their property. One thing to keep in mind here is that a real estate auction isn’t free – expect to pay as much or more in service fees and other costs as you would if you listed with a real estate agent.
- Throw in the kitchen sink
When people imagine selling a home, they usually either imagine scenes of beautifully staged homes or totally empty rooms. Leaving furniture or even some appliances can be viewed as a negative for the sale.
One newer idea is to flip the notion of extras on its head, offering potential buyers the bonus of goodies that aren’t traditionally part of a real estate deal. These could be things as simple as a big TV on the wall or as extravagant as a free vacation. Sweetening the deal with extras that don’t have anything to do with the house is one way to get some attention from potential buyers.
Before trying any of these outside-the-box real estate sales techniques, think through the boosts and benefits thoroughly. Either way, it’s nice to know there are options!
How the Land Trust Model is Shaping Affordable Housing in Detroit
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Especially given the blazing rise in real estate prices over the last two years, affordable housing is a legitimate and hard-to-solve problem across the United States. Areas of the country like Detroit that have had a long history of economic struggle are being hit the hardest.
Creative solutions to the problem of affordable housing have to be part of the path to making homeownership a reality. To that end, community development organization Dream of Detroit, among others, is bringing a novel concept to help solve this not-so-new problem.
A community land trust is a non-profit organization that works through a board model to create opportunities for home ownership and build community assets in areas where there is a high level of need. The nonprofit organization actually holds the deed to the land, and it is then able to offer that land to families at a lower cost than a traditional home sale. This kin community-driven, shared housing model can make owning a home possible for families who would never have been able to do so prior.
Lack of mortgage opportunities has been a real problem in Detroit for decades. For many years, the city was seen as “un-mortgageable” by lending institutions. This meant that working families couldn’t buy homes, further pushing the city into disrepair and economic disparity. That’s a legacy that continues today, as most home purchases are still made with cash in Detroit.
The community model works by taking areas of land that were previously undeveloped or that had fallen into disrepair and bringing them back to life. The nonprofit organization purchases the piece of property, then a family comes in and builds a home on the land. The non-profit leases the land to the homeowner, who signs a 99-year lease. Essentially, they lease the land but they own the house that sits on the land. Often, community spaces like gardens and playgrounds are incorporated into these planned communities. Communal spaces are maintained by the non-profit umbrella organization.
At its core, the idea here is that the property stays affordable not only for the current owner but that it stays within the community so that it’s affordable for future owners. So far, the idea is helping to revitalize communities that were previously economically depressed in Detroit. This is a starting place for Michigan, but it could be a model that would work in other cities to support home ownership in otherwise unreachable housing markets.
Wild Homes: Weatherproof and Wondrous in Wilmington
Image by Landmark Sotheby’s International Realty
Wilmington, North Carolina, is known for its laid-back beach vibe and its unique coastal flavor of southern charm. It’s not generally known for its architecture. Enter this recently listed “waterfront resort residence”, which is far more like what you’d find in SoCal or Hawaii than what’s commonly seen on the beaches of the southern Atlantic.
Image by Landmark Sotheby’s International Realty
From the outside, it’s clear that this house was designed by someone who wanted to bring a different kind of lifestyle to Wilmington. The home was created in the tropical modernism style that rose in Hawaii following World War II, which is why it’s so unlike the other things you’ll find in New Hanover County. It’s built with exposed steel and concrete, which are architectural features that also help ensure the longevity of the home through the brutal North Carolina hurricane season.
Image by Landmark Sotheby’s International Realty
The central theme of this house is the blending of the inside and the outside. In fact, it’s almost like the two aren’t separate at all. A long lap pool runs right under the center of the house, bordered by two open-air living spaces, one with an outdoor fireplace. Interior walls are decorated with warm woods including African Wenge, sawn white oak, and American walnut, but the furniture is sparse and the spaces are open.
Floor-to-ceiling windows overlooking the Atlantic ocean include a view of the fifty-foot floating dock that comes with the property. This unusual home at 1 Auditorium Circle, Wrightsville Beach is listed by Sotheby’s International Realty for a cool price of $13.9 million.
Six U.S. Cities have More Housing Listings Now than Before the Pandemic
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Everywhere you look in real estate in the United States, people are looking for homes. According to Freddie Mac, the United States is in need of roughly 3 million houses, due to supply chain issues and an already low number of existing homes on the market.
After the last two years of the housing market frenzy, you’d expect that there would be fewer homes listed for sale now than before the pandemic. For most of the major real estate markets in America that’s true, but it’s not happening everywhere.
For the first quarter of 2022, six of the top fifty housing markets in the United States had, on average, more listings than they did in the quarter immediately preceding the pandemic back in 2020. Per an analysis by Black Knight, a mortgage data and technology tracking company, Kansas City, San Antonio, Portland, Seattle, San Jose, and San Francisco all had more listings now than they did two years ago.
Some of this shift most certainly has to do with the shift to remote work thanks to pandemic restrictions. Most of those cities are at the highest level of home prices, and people are moving out of them in order to find places where housing is more affordable. Thanks to remote work possibilities and a robust economy in terms of labor, home buyers have plenty of choices about where they live. Essentially, people are leaving high-priced housing in Seattle, Portland, San Jose, and San Francisco for places where they can get more houses for less money.
On the other side of the coin is Raleigh, NC, which has the largest housing deficit in the country. Markets with high housing deficits continue to have an extraordinarily low inventory of homes.
The question about what this means centers on supply versus volume. Is the increase in new listings because the supply is finally catching up to at least somewhat meet the demands of the marketplace? Maybe. The other option is that sales volumes are slowing instead, leading to a lower number of real estate deals being locked down. Whatever the reason is, it’s certain that the housing market is shifting substantially in a new direction.
Getting a Firm Foundation in Capital Gains Tax
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Capital gains tax is the much loathed, often misunderstood, federal tax on money made from the sale of assets. In real estate, capital gains tax directly impacts people who sell their homes for a profit, but there are plenty of caveats.
Whether a home sale is subject to capital gains tax has to do with a complex maze of qualifications that include whether the home was a primary residence or an investment property, tax bracket, marital status, length of time the home was owned, and even whether someone is a member of the military. Where a home seller falls into each of those categories affects whether and how much they’ll have to pay in capital gains tax.
If you are subject to capital gains tax, the next step is straightforward – you’ll owe either short-term capital gains tax or long-term capital gains tax. Both are payable quarterly, though they can be held until the end of the year and folded into your annual tax filing. The IRS mandates that these are included in yearly tax reports.
Short-term capital gains tax comes into play when the asset was owned for less than twelve months. This might be called “short term” because the holding was only for a short amount of time, but if you’re taxed at this rate, then you’re definitely getting the short end of the stick. The tax rate for short-term capital gains is a whopping 37%. Selling a house that’s eligible for capital gains tax within the same twelve-month period as purchasing it is a definite no-no from a tax perspective.
Long-term capital gains tax is calculated at a much lower rate than short-term capital gains tax. Think ten to twenty percent depending on other factors – half or more than short-term capital tax. The government does this to incentivize people to put more money into long term investments. The idea is that the longer investments are held, in the wider scheme of things, the better off the economy is as a whole.
Capital gains tax is only assessed on the profit from the sale of a home, not on the principal. For example, if you bought a home ten years ago for $250,000 and sold it this year for $325,000, then you would owe long-term capital gains tax on $75,000. If your income falls into the mid-range, then you’d owe 15% in taxes on that profit. The IRS is going to send you a bill for $11,520.
In 2022, there was a surge in capital gains tax across the board at an unprecedented level thanks to huge stock gains and real estate price increases. This sent a lot of people scrambling to pay off those bills. In the coming years, using techniques like tax loss harvesting could be a better solution than simply taking the hit.
Making sense of capital gains tax is important for anyone selling a home. Knowing what this major federal tax is, how it could apply to you, and by extension how to avoid it, has the potential to save you a lot of money on the sale of a home. Though it’s important to always consult with a tax professional about your options on taxes, learning what you can about your own situation is important too. Nobody wants to pay more in taxes than they have to.
Overvalued? Why Experts Say the South Florida Real Estate Market is Way too High
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Though the general consensus among economists is that the current real estate market isn’t a bubble so much as a new floor, some researchers in South Florida are warning of a massive overvaluation in home prices.
The South Florida real estate market has long been one of the highest in the United States. Miami is competitive not only because of the local demand for real estate, but also because of a higher than average number of foreign landowners that purchase in the area.
Researchers at Florida Atlantic University have been tracking and analyzing home prices across Florida and the United States for years through the FAU Real Estate Initiative. Led by Associate Dean of Graduate Programs Ken Johnson, the team evaluates areas like affordable housing, population changes, natural resource infringement, and investment. This initiative is part of the wider school of finance, and it focuses on providing both data about real estate as well as data driven solutions to the problems that they uncover.
Per recently released research from the Real Estate Initiative, current home prices and rent levels are far separated from the actual values of property in South Florida and across the United States. In South Florida, it’s almost 30%, but more than a dozen markets across the country are closer to fifty percent. Those numbers are striking in part because they’re more than double what they were a year ago according to the research from FAU. That separation is the core of the problem, and it might not manifest in the ways that we normally expect housing bubbles to look.
Such a gap between what homes are valued at in the market versus what they’re worth has the potential to negatively impact the economy. Rather than being a bubble that bursts, researchers at FAU are concerned about a slower, more insidious housing affordability crisis. The dramatic fallout of previous housing bubbles is less likely than a constant grinding away at populations who are already struggling with maintaining adequate housing.
Researchers point to the constant influx of investors from out of state who have long shaped the Florida real estate economy. Palm Beach County in particular is seeing a major shortage of inventory among the most recent waves of outside homebuyers. The issue at heart isn’t whether developers and investors will be able to afford to live in these parts of Florida, but whether even members of the middle class like healthcare workers, teachers, and service workers will be able to afford to live in South Florida. Housing affordability for marginalized communities is another beast altogether.
As far as solutions, FAU proposed inventory increases as the best way to address the problem and decrease the record housing prices. That’s a long term fix, but it’s also a fix that will solve the fundamental issues in the market in South Florida. For now, home buyers and investors can only keep riding the wave of a hot housing market that is only just starting to show some signs of cooling.
Ask Connect: Should I Sell My Rental Property?
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This section includes real questions from real homesellers, plus our answers.
About two years ago, I relocated from Tampa, Florida to Cincinnati, Ohio for work with a plan to come back in three years. Rather than selling my house, I rented it out to an acquaintance at a rate well below the market rental price with the idea that they would take care of it until I came back home.
In the time since then, things have changed, as they so often do in life. My employer is offering me a permanent position at a salary that I can’t turn down, plus I’ve developed a real love of the community in Cincinnati. The bottom line is that I don’t want to go back to Florida, for lots of reasons.
I don’t want to make a rash decision that’s based totally on the market, but I do want to make a smart decision. Being a landlord isn’t my cup of tea, and I dread it every time I have to fix something or deal with the house at all, even though my renter is as good as a renter could possibly be. I’ll make a sizable profit from the sale with the market where it is now. I know I’ll sidestep capital gains tax if I sell now because I’ve lived in it for two of the last five years.
The issue really is that I’ve got a great interest rate on the loan at 3.75% and that the tenant really loves living there. They love it so much that they’re willing to pay market rate for the rent, which would represent a sizable increase. It would clearly give me a good source of extra income.
With the housing market feeling like it could turn at just about any time, I’m worried that I’ll kick myself if I hold onto the property. I’m not much of an investor, and I’m also concerned about capital gains tax.
Should I sell or keep on being a landlord?
– Confused in Cincy
It sounds to me like you’ve already answered your question, but you’re trying to talk your way around it anyway. That’s not a bad idea, so let’s walk through it.
Being a landlord isn’t as simple as collecting rent, as you’ve already figured out. There’s maintenance to be done on the home, repairs to take care of when a tenant leaves, and vetting that you’ll need to do when you do eventually have a changeover. No renter stays forever, even though your perfect tenant might stick around for a while. You could easily solve the problem of managing the property if you hired a property management company to take care of all of those things.
There’s still more to it than that, beyond the property management piece. Taxes on a rental property aren’t straightforward, and you’ll be dealing with things from halfway across the country to boot. You’ll definitely want to work with an accountant who has experience in working with landlords. If you do hold onto it for much longer, as you pointed out, you’ll owe capital gains tax on any profit you make over the life of the property. There are also things to consider like how much you owe on the loan and how old the house is, i.e. whether it will need repairs.
Where things are, it sounds like you’ll make a solid profit on the sale of the house and that you’ll be able to step away without too much hassle. It’s a seller’s market for certain right now. It’s impossible to know the future of the market, and there’s not much use in trying to forecast how high home prices might go. Instead, you’ll do better to focus on whether you want to keep this property, right now, and continue to maintain it. There are lots of ways to diversify your investments that don’t involve being a landlord.