Advice for home owners November 3, 2022

When Markets Shift, there are always people who benefit from the new conditions… Who are the “Winners” in today’s market?

Market Observations By Scot Campbell – Real Estate Broker   ~  Source: Freddie Mac & Reports on Housing

BACKGROUND: Home Prices skyrocketed from July 2020 through February 2022. Buyers & many Sellers benefited from mortgage rates that dipped all the way down to 2.86% in September 2021… but then the mortgage market began to increase. The Federal Reserve raised the federal funds rate 300 basis points from 3/17/22 to 9/21/22, another 75 basis point increase expected on 11/2/22. These actions increased mortgage rates to 7.08% (10/27/22 FreddieMac).

Today, most homeowners have a very low mortgage rate on their existing home, thus are not motivated to move. According to Steven Thomas (Reports on Housing):  89% of homeowners have a mortgage that is 5% or lower…71% have 4% or lower… and, 29% have 3% or lower. According to the California Association of Realtors ~ Housing Affordability Index, only 12% of prospective buyers could afford to buy the Median Priced home in June 1022 when mortgage rates were at 5.81%. Now that rates are above 7%, affordability has fallen further (assuming buyers elect to limit their financing choices to a Confirming 30 year fixed rate loan).

Given the shift in market conditions outlined above, there are two classes of property owners who could be considered “Winners” from these new conditions:

LANDLORDS:  Sometimes when you decide to move, it makes sense to keep your exiting home as a rental, especially if you qualify to buy without the sale of the old home. Many “would be” buyers for a home like yours, can no longer afford to purchase… so instead, they are going to rent. The economic principle of the substitution effect has kicked in strong. There are now many more prospective tenants for your property: Greater demand means higher rents and a more financially qualified pool of prospective tenants.

 Important consideration if you rent out your former principle primary residence: The reduced capital gains rate (IRS section 121), $250,000 profit exemption per spouse, expires on the 3-year anniversary of the date you move out. If you want to take advantage of IRS section 121, end the lease no later than 2.5 years after you move out, so you have a “comfortable” 6 months to get your old home sold (and enjoy $250,000 in capital gains per spouse tax free).

Landlord/Tenant laws/enforcement were affected by Covid-19, so selecting a highly qualified tenant is more important than ever before to insure reliability of rent payments.  I offer leasing service with excellent tenant screening and the same high quality imagery package as my For Sale listings… Reach out if you would like more information.

HOMESELLERS WHO WANT RELIABLE INCOME AFTER THE CLOSE: For years, sellers of real estate have used Installment Sales (seller carry back financing) to reliably collect income after selling a property… they also did it to defer and minimize capital gains taxes. When rates were very low last year, buyers had no interest in seller carry financing (because most carry back sellers expect to be paid off in 5 or 10 years… buyers prefer not to have a balloon payment), and sellers certainly were not excited about a 2.86% interest rate. But now, with a qualified buyer, sizable down payment and/or Blanket Encumbrance, sellers who carry back financing can get an excellent after-tax return & reduce risk to a level well below other investments. Research shows approximately 42% of the potential move-up buyers are sitting with lots of equity and an existing mortgage between 3% & 4%… these are buyers who would pay top dollar for your property if they could get an interest rate close to what they have now. I am already seeing property owners benefiting from the Market Shift by doing Installment Sales. Once again, there is an abundance of qualified buyers with strong down payments and the ability to make reliable mortgage payments… And, this is exactly what some property sellers want because a standard sale with all profits realized in the year of sale could trigger a very large capital gains tax bill (as much as 38%, perhaps more if the property is highly appreciated).

Another consideration sellers like:  By accepting interest only payments, the capital gains tax can be deferred until the principle is paid off… So, sellers collect interest (for years) on money that would have been paid to the IRS.

If you would like to explore the benefits of doing an Installment Sale, I can answer your questions and compute the approximate income payments you will receive depending on the sale price, amortization, and interest rate. Please contact me, I am happy to speak to you on the phone or in person.

Important – This article is Not Intended to be specific advice: Receiving rent or installment payments tends to be more beneficial under the tax code when ordinary income is low (often when people are retired). Do NOT sell a highly appreciated property without advice from a CPA/Tax/Legal Expert who understands your complete situation. Advice and counsel of a Realtor and Qualified Mortgage Broker who are familiar with the IRS rules, lending regulations, & best practices are an absolute necessity prior to entering into a purchase contract involving an Installment Sale.