LOS ANGELES (Dec. 23) – Seasonal factors, combined with shrinking housing affordability, cooled California pending home sales from both the previous month and year in November, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

Pending home sales data:

California pending home sales fell in November, with the Pending Home Sales Index (PHSI)* dropping 13.6 percent in November to 93.8, down from a revised 108.6 in October, based on signed contracts.  The monthly decline was the first double-digit drop in nearly a year.  Pending sales were down 9.4 percent from the 103.5 index recorded in November 2012.  Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.
Distressed housing market data:

The share of equity sales – or non-distressed property sales – grew in November, marking the fifth straight month that equity sales have been more than 80 percent of total sales. The share of equity sales in November increased to 86.4 percent, up from 85.4 percent in October.  Equity sales made up 64.6 percent of sales in November 2012.

Conversely, the combined share of all distressed property sales shrank in November, dropping from 14.6 percent in October to 13.6 percent in November.  Distressed sales were down by nearly two-thirds from a year ago, when the share was 35.4 percent.  Twenty-one of the 38 reported counties showed a month-to-month decrease in the share of distressed sales, with Santa Clara County having the lowest share at 4 percent.

Of the distressed properties, the share of short sales was 8.8 percent in November, down from 9.5 percent in October.  November’s figure was nearly a third of the 23.3 percent recorded in November 2012 and remains at the lowest levels since January 2009.  

The share of REO sales edged down in November to 4.4 percent from 4.7 percent in October.  It was the fourth straight month that REOs made up less than 5 percent of sales.  REOs made up only 11.8 percent of all sales in November 2012.

Housing inventory levels improved slightly for the second consecutive month but were still extremely low.  The Unsold Inventory Index for equity sales inched up from 3.4 months in October to 3.6 months in November.  The supply of REOs rose from 2.7 months in October to 3.4 months in November, and the supply of short sales increased from 3.6 months in October to 4.2 months in November.

5 Home Improvement Projects to Avoid

Good News for the Economy = Bad News for Rates

The economy is improving. As an example, the latest employment report showed that the unemployment rate hit a five-year low. We must realize that, as the economic news gets better, the government will consider whether or not to continue the programs they put in place to stimulate the economy. One such program is the Fed’s purchasing of assets which has led to historically low long-term mortgage rates.

Analysts at Capital Economics noted in a recent HousingWire article:

"The 203,000 increase in November's non-farm payrolls, along with the drop in the unemployment rate to a five-year low of 7.0%, gives the Fed all the evidence it needs to begin tapering its asset purchases at the next FOMC meeting later this month."

Whether such ‘tapering’ occurs this month or early next year is questionable. The fact that mortgage rates will spike when it does occur is more a guarantee.

Here are the thoughts of a few Fed presidents regarding whether it is in fact time to cut back on this stimulus program:

James Bullard, President of the Federal Reserve Bank of St. Louis

“To the extent that key labor market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise. The Committee’s 2012 criterion of substantial improvement in labor markets gets easier and easier to satisfy on a cumulative basis as labor markets continue to heal…Based on labor market data alone, the probability of a reduction in the pace of asset purchases has increased.”

Richard Fisher, President of the Federal Reserve Bank of Dallas

“In my view, we at the Fed should begin tapering back our bond purchases at the earliest opportunity…I consider this strategy desirable on its own merit: I would feel more comfortable were we to remove ourselves as soon as possible from interfering with the normal price-setting functioning of financial markets.”

Jeffrey Lacker, President of the Federal Reserve Bank of Richmond

“I expect discussion about the possibility of reducing the pace of asset purchases. The key issue, in my view, is the extent to which the benefits of further monetary stimulus are likely to outweigh the costs.”

If you are thinking about purchasing a home, buying before the tapering will probably mean a lower mortgage interest rate than if you waited.

SHORT SALES NOT SUBJECT TO STATE OR FEDERAL INCOME TAX FOR CANCELLATION OF DEBT

SHORT SALES NOT SUBJECT TO STATE OR FEDERAL INCOME TAX FOR CANCELLATION OF DEBT

Short sales in California are generally not subject to state or federal income tax for cancellation of debt. The Franchise Tax Board (FTB) issued a letter yesterday stating that, as nonrecourse obligations, short sales in California are not subject to state income tax for cancellation of debt. The FTB's position conforms with the federal treatment of short sales stated in an IRS letter as we previously reported on November 15. These letters will provide welcome relief for short sale sellers given that the tax break for a qualified principal residence under the federal Mortgage Forgiveness Debt Relief Act of 2007 will expire at the end of this year, and similar protection under California law already expired in 2012. The FTB letter includes transactions that closed in 2012 but, as always, sellers should consult with their own tax professionals.

According to the recent FTB letter, “a California taxpayer would not have cancellation of indebtedness where the taxpayer was involved in a short sale pursuant to CCP section 580e.” Section 580e of the California Code of Civil Procedure (CCP) generally protects borrowers from owing a deficiency after a short sale of a residential property with one-to-four units, including both first and junior trust deeds. Exceptions include fraud, waste, cross-collateralized loans, and borrowers that are corporations, LLCs, or limited partnerships. For more information, C.A.R. members may refer to our legal article on Short Sale Deficiencies.

As with the IRS letter, the FTB letter states that even if no cancellation of debt income is owed, a taxpayer may nevertheless have capital gains to the extent that the outstanding debt exceeds the tax basis for the property. A principal residence, however, is generally excluded from capital gains tax up to $250,000 for single taxpayers and $500,000 for married couples filing joint returns (under 26 U.S.C. § 121).

Knowing Your Options for the "Fixer Upper"

The fixer-upper properties on the market will give you more purchasing power when shopping for a new home. Bargains can be found in homes that have been foreclosed, seized by the government or just fallen out of repair due to homeowner neglect. While it is true that you will save thousands of dollars on these homes that will need lots of work, there are hidden costs that buyers fail to consider. Ask yourself if it’s worth it and know your options.

Know exactly what you are getting into

Don’t underestimate the cost of renovations and repairs. A home inspection will let you know the fundamental repairs and maintenance that must be done to the home. Without a home inspector, you may end up over paying for the fixer-upper anyway.

The inspector will evaluate any problems with the interior and appliances, roofing, heating and cooling system, plumbing, electrical wiring, insulation and ventilation, and the structural foundation, exterior faults and more. Fixer-uppers may have a lot of problems with these parts of the home, and a realtor can downplay the extent of the issues because of their stake in the outcome of the sale. A home inspector is worth hiring to get an unbiased perspective and uncover problems you can’t see yourself.

You ultimately have to decide how much money you are actually saving by buying the fixer-upper once you add in the costs. Once you spend all the money on repairs to make it habitable, will you still be satisfied with your choice? Will you hire someone to do the repairs or do you have the patience and skill to do it yourself?

Consider a FHA insured HUD 203(K)

It is worth checking to see if you qualify for a program known as HUD 203(k). It allows the buyer to purchase a fixer-upper with a FHA guaranteed loan, and the best part is that it protects you from extra costs if the “fixing” part costs more than estimated. You must submit a comprehensive list of repairs with corresponding cost estimates with your application, so you will need to get a home inspector, have the cost of labor and repair determined, and prepare your detailed plan for accomplishing it all for the FHA and your creditor.

DIY

The ideal fixer-upper would consist of superficial revamps rather than major appliance, ventilation, or structural repairs. Minor renovations would be painting inside and out, installing ceiling fans and light fixtures, and replacing carpets, windows, or doors.

Be patient

Fixing up the house might take longer than you originally planned, but it can be well worth it. Remodeling and minor repairs will most likely take longer than you expect, especially if you are haven’t dealt with this before. You chose to save money with a fixer-upper. It takes time to give a house the proper care that will result in a comfortable house to call your home. Do your homework and make an informed decision.

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