Monthly Archives: January 2018

Seattle’s Hot Housing Market Is Tough On First-Time Home Buyers

Seattle

Seattle is fast becoming known as one of America’s hottest housing markets and home prices are reflecting the coinciding increase in demand. The average price of a single-family home jumped 12% to 15%  in a year-over-year comparison of S&P CoreLogic Case-Shiller Home Price Index. This means a house that sold for $550,000 in October of 2016 would be listed at over $600,000 in October of 2017.

Available houses in Seattle are not only getting more expensive but are becoming increasingly difficult to find. Geekwire discovered a boarded up, run down house in the city’s Ballard neighborhood listed at a whopping $595,000 on Redfin. When Geekwire reached out to Redfin, they learned the house had multiple pending offers and was estimated to sell for $626,331. High priced tear downs like this one are often the result of a low housing inventory.

“With housing supply in Seattle at historical lows, the pressure placed on buyers to make tough, risk-ridden decisions is amplified. Brokers have to make sure their clients enter the market with eyes wide open,” said Tyler McKenzie, owner and designated broker of John L. Scott Real Estate West Seattle.

While this spike in cost and drop in availability makes it an ideal time to sell in Seattle, it can be rough on first-time homebuyers who aren’t bringing the profits of a home sale to the closing table. Additionally, many first-time home buyers are up against cash offers which adds another layer of competitiveness.

“I recently succeeded in helping buyers purchase a home for which there were ten competing offers. On the day our our pre-inspection, three others were underway,” continued McKenzie. “My role as a broker is to help clients make informed decisions concerning offer strategy. In this market, that may mean waiving contingencies a balanced market would not require of them.”

Challenges like these may be why we’re seeing a drop in the number of first-time home buyers. Not just in Seattle, but across the country. Typically, first time homebuyers have made up 40% of the nation’s home buying population. However, according to a CNBC article and National Association of Realtors’ (NAR) annual Profile of Home Buyers and Sellers report, that market share has been in decline and was sitting at 34% in 2017. The fourth-lowest share in the survey’s 36-year history. NAR’s Chief Economist Lawrence Yun shares that the persistent inventory shortages have also played a part in undercutting many new buyers chance of become homeowners.

So how can first-time home buyers increase their odds in hyper competitive real estate markets like Seattle?

  1. Be patient. It’s very possible that you may not be purchasing the first, or even second house you place an offer on. But you’ll get there if you stay with the process.
  2. An experienced agent is your greatest ally in tough markets like Seattle. When homes are selling well above asking price a REALTOR® can make the best use of your time and money by ensuring your search is focused on attainable properties.
  3. Take a second look at your “have to have” list and decide which items can be reclassified as “would love to have” so your search criteria is realistic.
  4. If possible, put in an offer with a downpayment that exceeds the average 20% and be ready to let go of some contingencies you might otherwise insist on.

First-time buyers should try not to be intimidated by the market. While buying a home in places like Seattle might mean more hurdles, it is still an attainable and worthwhile goal for prospective homeowners.

Major Provisions of the New Tax Reform Law Affecting Homeowners

Congress

The following is an overview of provisions of the new tax reform law affecting current and prospective homeowners. This summary is drawn from The Tax Cuts and Jobs Act – What it Means for Homeowners and Real Estate Professionals, an in-depth review by the National Association of REALTORS® (NAR), which worked throughout the tax reform process to preserve the existing tax benefits of homeownership and real estate investment.

Home Ownership Matters will be providing ongoing updates and guidance on this topic in the coming weeks.

Lawmakers have already signaled a desire to fine tune elements of this new law as well as address additional tax provisions not included in this legislation in 2018, and homeowners across the country will need to continue to be engaged in the process.

Tax Rate Reductions

  • The new law provides generally lower tax rates for all individual tax filers. While this does not mean that every American will pay lower taxes under these changes, many will. The total size of the tax cut from the rate reductions equals more than $1.2 trillion over ten years.
  • The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).

Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year) Single Filer

Current Law Tax Cuts and Jobs Act
10% $0-$9,525 10% $0 – $9,525
15% $9,525 – $38,700 12% $9,525 – $38,700
25% $38,700 – $93,700 22% $38,700 – $82,500
28% $93,700 – $195,450 24% $82,500 – $157,500
33% $195,450 – $424,950 32% $157,500 – $200,000
35% $424,950 – $426,700 35% $200,000 – $500,000
39.6% $426,700+ 37% $500,000

Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year) Married Filing Jointly

Current Law Tax Cuts and Jobs Act
10% $0 – $19,050 10% $0 – $19,050
15% $19,050 – $77,400 12% $19,050 – $77,400
25% $77,400 – $156,150 22% $77,400 – $165,000
28% $156,150 – $237,950 24% $165,000 – $315,000
33% $237,950 – $424,950 32% $315,000 – $400,000
35% $424,950 – $480,050 35% $400,000 – $600,000
39.6% $480,050+ 37% $600,000+

Exclusion of Gain on Sale of a Principal Residence

  • The final bill retains current law. A significant victory in the final bill that NAR achieved.
  • The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.

Mortgage Interest Deduction

  • The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.
  • Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
  • The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
  • Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
  • The House-passed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes.

Deduction for State and Local Taxes

  • The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
  • The final bill also specifically precludes the deduction of 2018 state and local income taxes prepaid in 2017.
  • When House and Senate bills were first introduced, the deduction for state and local taxes would have been completely eliminated. The House and Senate passed bills would have allowed property taxes to be deducted up to $10,000. The final bill, while less beneficial than current law, represents a significant improvement over the original proposals.

Standard Deduction

  • The final bill provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns. The new standard deduction is indexed for inflation.
  • By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers.

Repeal of Personal Exemptions

  • Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law.
  • This change alone greatly mitigates (and in some cases entirely eliminates) the positive aspects of the higher standard deduction.

See Examples:

How The New Law Will Affect First-Time Homebuyers

How The New Law Will Affect Middle-Income Homeowners

How The New Law Will Affect First-Time Homebuyers

Woman

This example is drawn from The Tax Cuts and Jobs Act – What it Means for Homeowners and Real Estate Professionals, an in-depth review by the National Association of REALTORS® (NAR).

To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local taxes might affect a first-time homebuyer, consider the example of Barbara Buyer. Barbara, an accountant making $58,000 per year, is single and currently rents an apartment. She also pays state income tax of $2,900 and makes charitable contributions of $2,088, but the total of these is lower than the standard deduction, so she claims the standard.

Barbara’s tax liability for 2018 under the prior law is as follows:

Salary income $58,000
Standard deduction ($ 6,500)
Personal exemption ($ 4,150)
Taxable income $47,350
Tax $ 7,491

Under the new law, Barbara would get a tax cut, computed as follows:

Salary income $58,000
Standard deduction ($12,000)
Personal exemption ($ – 0 -)
Taxable income $46,000
Tax $ 6,060

Tax Difference Under New Law. Even though Barbara would not get the benefit of the personal exemption under the new law, her higher standard deduction would more than make up for the loss. In addition, the lower tax rates of the new law would help deliver the total tax cut of $1,431 ($7,491 – $6,060) as compared with the prior law.

However, let’s take a look at what happens to Barbara if she were to purchase the condo that she likes costing $205,000. She takes out a 30-year fixed rate mortgage at 4% interest, putting down 3.5%. Assuming she buys early in 2018, her first-year mortgage interest would total $7,856 and she would pay real property taxes of $2,050.

As a first-time homeowner, her tax liability under the prior law would be computed as follows:

Salary income $58,000
Mortgage interest $ 7,856
Real property tax (1%) $ 2,050
State income tax (5%) $ 2,900
Charitable contributions (3.6% of income) $ 2,088
Total itemized deductions ($14,894)
Personal exemption ($ 4,150)
Taxable income $38,956
Tax $ 5,393

Note. Under the prior law, Barbara would lower her tax liability for 2018 by $2,098 ($7,491 – $5,393) by purchasing the condo. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers her monthly mortgage payment by $175 per month.

Now, let’s take a look at what her tax situation would be under the new law as a first-time homebuyer:

Salary income $58,000
Mortgage interest $ 7,856
Real property tax (1%) $ 2,050
State income tax (5%) $ 2,900
Charitable contributions (3.6% of income) $ 2,088
Total itemized deductions ($14,894)
Personal exemption ($ – 0 -)
Taxable income $43,106
Tax $ 5,423

Tax Difference Under New Law. Even though Barbara would still be able to claim all of her itemized deductions under the new law, she would lose the benefit of her personal exemption. This would mean that her taxes would actually go up under the new law by $30 ($5,393 – $5,423). But far worse, look at the tax differential between renting and owning a home. This difference, which was $2,098 under the prior law, has now shrunk to just $637 ($6,060 – $5,423), or $53 per month. In other words, under the prior law, Barbara was given a strong incentive to move into the ranks of those who own their home. The new law still offers her an incentive, but it is a shadow of what it was, and is unlikely to be very compelling.

How Will The New Law Affect Middle-Income Homeowners?

family

This example is drawn from The Tax Cuts and Jobs Act – What it Means for Homeowners and Real Estate Professionals, an in-depth review by the National Association of REALTORS® (NAR).

To illustrate how the new law might affect middle-income family of five, consider the example of Steve and Melinda. Steve is a store manager making $55,000 per year, while Melinda is a school principal, earning $65,000. They have three children, ages 17, 14, and 9. Steve and Melinda recently relocated from another city, and while they are getting to know their new community, they are leasing a home. But they would like to purchase as soon as they identify which area is the best fit for their family. As renters, they pay state income tax on their salaries, totaling $6,000, and also make some charitable contributions equaling $3,120. Since these itemized deductions do not reach the level of the standard deduction, they do not itemize, but they expect to do so when they purchase their home.

Here is a look at Steve and Melinda’s tax liability for 2018, computed under the prior law:

Salary income $120,000
Standard deduction ($ 13,000)
Personal exemptions (5 x $4,150) ($ 20,750)
Taxable income $ 86,250
Tax before credits $ 12,870
Child tax credits (2 x $1,000 less $500 phase-out) ($  1,500)
Net Tax $ 11,370

Under the new law, Steve and Melinda, as renters, would get a tax cut, computed as follows:

Salary income $120,000
Standard deduction ($ 24,000)
Personal exemption ($ – 0 -)
Taxable income $ 96,000
Tax before credits $ 12,999
Child tax credits (2 x $2,000) ($   4,000)
Net Tax $ 8,999

Tax Difference Under New Law As Renters. Steve and Melinda lose the big benefit of the personal and dependency exemptions for the two adults and three children. And the increase in the standard deduction is not enough to make up for this loss. However, the big increase in the child credit for the two younger children and the lower tax rate are enough to deliver them a tax cut of $2,371 ($11,370 – $8,999) as compared with the prior law.

Let’s now consider how Steve and Melinda’s tax situation changes if they were homeowners, rather than renters. Assume they find an ideal home in a nice neighborhood that costs $425,000, and after offering a 10% down payment, Steve and Melinda take out a 30-year fixed mortgage at a 4% rate. Let’s say that their real property tax for the year totals $4,250, which is just 1% of the home’s value.

Here is how their 2018 tax liability would be computed as homeowners, under the prior law:

Salary income $120,000
Mortgage interest $ 15,189
Real property tax (1%) $  4,250
State income tax (5%) $  6,000
Charitable contributions (2.6% of income) $  3,120
Total itemized deductions ($ 28,559)
Personal exemptions (5 x $4,150) ($ 20,750)
Taxable income $ 70,691
Tax before credits $  9,651
Child tax credits (2 x $1,000 less $500 phase-out) ($  1,500)
Net Tax $  8,151

Note. Under the prior law, Steve and Melinda would lower their tax liability for 2018 by $3,219 ($11,370 – $8,151) by purchasing their home instead of renting. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers their monthly mortgage payment by over $268 per month.

Now, let’s take a look at what her tax situation would be under the new law as a home-owning family instead of renters:

Salary income $120,000
Mortgage interest $ 15,189
Real property tax (1%) $   4,250
State income tax (5%) (limited by $10,000 cap) $   5,750
Charitable contributions (2.6% of income) $   3,120
Total itemized deductions ($ 28,309)
Personal exemptions ($ – 0 -)
Taxable income $ 91,691
Tax before credits $ 12,051
Child tax credits (2 x $2,000) ($  4,000)
Net Tax $  8,051

Tax Difference Under New Law As Homeowners. For Steve and Melinda, most of their itemized deductions from the prior law are preserved by the new law. They are limited slightly ($250) by the $10,000 limit on the deduction of state and local taxes. However, they lose big by the repeal of the personal and dependency exemptions, which equal $20,750 for this family. Even so, Steve and Melinda receive a small tax cut of $100 ($8,151 – $8,050) under the new law, thanks to the much larger child credit and lower tax rate. But as renters, they received a tax cut of almost $2,400. Thus, buying a home becomes a net tax change of almost $2,300.

What happened? What happened is that the new law is taking away most of the tax benefits of owning a home. Under the prior law, this benefit was $3,219 for Steve and Melinda. But under the new law, they enjoy only a benefit of $948 ($8,999 – $8,051). This gives them a benefit of just $79 per month, which is obviously a far weaker incentive to own.

Houston Strong stretches to Housing Market as 2017 Home Sales Set Records Despite Hurricane Harvey

When Superstorm Sandy hit New Jersey in 2012, the state adopted a motto during its recovery efforts, saying New Jersey was “Stronger than the storm.”

Five years later, based on the real estate market, Houston showed that it had the same gumption as its friends from the Mid-Atlantic.

Despite the devastation that was wrought on the Space City by Hurricane Harvey in the summer of 2017, new real estate records were set as the sale of single family homes grew by 3.5 percent since 2016.

Home Sales

According to the latest report produced by the Houston Association of Realtors (HAR), 94,726 units were sold in 2017 as compared with 91,530 in 2016, marking the record increase. Additionally, total dollar volume for single-family homes sold in 2017 rose 6.5 percent to $23 billion.

“No one could ever have imagined 2017 turning out to be a record-setting year for the Houston real estate market, which had weathered the effects of the energy slump only to have Harvey strike such a devastating blow,” said HAR Chair Kenya Burrell-VanWormer with JP Morgan Chase. “We know that many are still working tirelessly to rebuild their lives after Harvey, but overall, this clearly illustrates the incredible resilience of the people and the economy of Houston, Texas. We also know that some neighborhoods are performing better than others, so it’s always advisable to consult a Realtor when thinking about buying or selling a home.”

''No one could ever have imagined 2017 turning out to be a record-setting year for the Houston real estate market.'Click To Tweet

The market will be challenged in 2018, however, where the real effects of Harvey can be felt. The housing supply in Houston is definitely constrained thanks to the Hurricane.

Houston was finally reaching a balanced supply of housing inventory when the storm hit. The widespread flooding created by Harvey forced affected residents to gobble up whatever undamaged homes were available for sale or rent in an effort to provide consistent and safe shelter for themselves and their families.

Yet, despite that late summer rush on housing, the market was thriving in December – just four months after the storm – as single-family home sales rose 4.1 percent from December, 2016.

The strongest sales performance took place among homes priced between $250,000 and $500,000. Total property sales for the month climbed 3.5 percent to 8,125.

Home Sales

The single-family home median price (the figure at which half of the homes sold for more and half sold for less) rose 1.7 percent to $230,000. That marks the highest median price ever for a December. The average price declined 0.6 percent to $292,174.

Overall, 2017 turned out to be a pleasant surprise as far as the housing market was concerned.

Heading into the year, Houston was still feeling the effects of a weakened energy sector, but there was some optimism based on the data from the end of 2016 that the city was beginning to recover as inventory numbers were steadily increasing.

Strong employment numbers translated to an influx of home buyers and renters to the Houston area from across the country and around the world.

But then came Harvey, which had an adverse affect not just on homes and residents, but also on the city’s economy as hiring grinded to a halt and those displaced resident sought new shelter, shrinking the inventory again.

Miraculously though, the setbacks related to Harvey were much shorter than expected.

This was fueled by the greatest rental activity in the city’s history as well as a quick rebound of home sales, building momentum for the Houston housing market for the end of the year.

By the end of December, a record 79,117 single-family homes had sold, a new record for a single year. That represents an increase of 3.5 percent from the previous record of 76,450 in 2016.

On a year-to-date basis, the average price rose 2.9 percent to $291,340 while the median price increased 3.8 percent to $229,900. Total dollar volume for full-year 2017 jumped 6.5 percent to $23 billion.

Property Sales

The strongest one-month sales volume of 2017 was recorded in June with 8,362 single-family homes sold. By contrast, the lightest one-month sales volume took place in January with 4,104 sales.

Months of inventory began the year at a 3.3-months supply, and while it grew to a 4.3-months supply just before Harvey struck the region, it ended 2017 at a 3.2-months supply. Months of inventory estimates the number of months it will take to deplete current active inventory based on the prior 12 months sales activity.

Seattle REALTORS® provide consumer answers with HousingTranslator.com

Seattle beat out major cities like Los Angeles and New York to be named the “Crane Capital of America.” One glance skyward and you’ll see why. So why hasn’t all the new construction made housing more affordable?

HousingTranslator.com, a Seattle King County REALTORS® microsite launched in 2017, provides simple and straightforward answers to this question and more about the King County housing market.

“Our members cite a lack of housing supply as the number one issue in the King County market,” said Sam DeBord, a broker with Coldwell Banker Danforth and 2017 President of Seattle King County REALTORS®. “HousingTranslator.com is designed to elevate the discussion about housing priorities. Our goal is to help more people become homeowners.”

If you’ve paid attention to the local news at all recently, you know what we’re talking about. Consumers in King County have seen home prices rise significantly in the past two years with no signs of slowing down. We’ve also seen strong job growth, which is great—but paired with an unprecedented shortage of homes available for sale, it means intense competition for the homes that are available. HousingTranslator.com identifies ways we can make the housing market more balanced for everyone.

“As people use HousingTranslator.com, we think they’ll come to understand that housing opportunities can be expanded,” said DeBord. “We will continue to push for solutions that make our communities a great place to live and work.”

Seattle King County REALTORS® is a trade association of 6,500 real estate brokers who serve clients throughout the Puget Sound area. The organization is a founding member of the National Association of REALTORS®, the largest professional trade association in the country, comprised of 1.2 million members.