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Compass 2Q Report

Yesterday was the Compass 2Q earnings call (transcript here) and as usual, the headlines focused on the net loss of $101.2 million – more than half of which was stock-based compensation for agents.

Compass has been very generous in their support of agents nationwide, and management is finding ways to effectively scale it back a bit. For example, they won’t be offering stocks as a recruiting tool any more.  But we, the existing agents, aren’t affected by recruitment, and we’d be fine if they didn’t hire another agent! So while the stock may get battered, the agents are doing well.

I’ve mentioned that our annual contract is up in July. There was a time when we discussed Kayla joining Compass in NYC, and during that discussion our CEO offered us a 2-year contract. I brought it up again last month, and he agreed to it.  We signed a two-year extension a couple of weeks ago – we are happy here!

Here are the Compass internal comments about the earnings call:

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Number of Seniors is Growing

It’s probably true that seniors are leading healthier, longer lives and will prefer to age-in-place – which will keep a limit on the number of homes for sale and temper any downdraft in pricing.  What is worse is that the resulting back-up will cause others to stay in their current home forever too!

It was asked on Twitter, ‘how could homes prices get cut in half?’ I said, “Boomers die 10x faster”, which got my Twitter account suspended temporarily.  Let’s see if they do it again!

Reader ‘just some guy’ sent in this UT article – an excerpt:

On Thursday, county officials announced that San Diego County has become the first county in the nation to have all 18 of its eligible hospitals receive the Geriatric Emergency Department (GED) Accreditation.

San Diego County is home to a large population of people age 60 and older, and that demographic is projected to continue growing over the next decade. Today, there are approximately 670,000 county residents in this age group, and by 2030, they are expected to surpass 900,000, said Nick Macchione, director of the county’s Health & Human Services Agency.

Seniors are more likely than almost any other age group to visit the emergency room. The county reports that each year, about 275,000 county seniors make ER visits, which leads to about one-third of all hospital admissions. “That is why it’s critically important to have all our hospitals that are eligible be geriatric certified,” Macchione said.

Inventory Watch

There was a nice bump of 17 additional pendings in the past week, from 151 to 168. The biggest increase was in the $4,000,000+ category, which grew from 24 to 32 pendings!

There are two pendings priced at $10,000,000+, and 51 active listings!

It doesn’t look like there will be much more change in the quartiles this year:

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Fire Zone

Here is a wider look at the fire map for Encinitas/Carlsbad.

The blue dot is the location of my listing in La Costa Oaks; a neighborhood of 820 homes built in 2005-2013 (long after the Harmony Fire of 1996).  The newer homes were built on the outskirts of town, so if you prefer a recently-built home, it’s very likely that it’s going to be in the fire zone.

For those who can’t find a traditional insurance carrier to provide fire insurance, there is the California Fair Plan.  Here’s a quote from a Liberty Mutual agent:

Regular homeowners policy (liability, theft, etc.): $1,700 per year.

CA Fair Plan (fire): $3,500-$5,000 per year, depending on the deductible amount.

My sellers’ policy (with fire coverage) with Mercury Insurance is $3,500 per year, so the additional amount with the CA Fair Plan is approximately $3,200 per year if you like a lower deductible.

Homeownership is expensive.  If you want a newer house, it’s likely to be located in the fire zone and be more expensive to insure. If you buy an older home, you’ll probably spend the same or similar amount having to update/improve it every year to bring it up to today’s standard. It’s your choice!

Same/Different

For home buyers, it’s hard to tell if you are on red alert hunting for houses, or sitting on the sidelines because it feels the same. Either way, there aren’t many homes to consider – you can go weeks without seeing anything worth a look – so it’s hard to keep your chops up.

Then add in the end-of-summer malaise as families focus on back-to-school events and we have an environment that you would think was flat. But the first ten days of August are off to a better start than July, and about the same as June.

What is different this summer:

  1. Higher mortgage rates.
  2. No urgency due to stalled pricing.
  3. Having to wait now extends to sellers too.

What is the same:

  1. Ultra-low inventory of quality homes at decent prices.
  2. Sellers have lots of reasons not to sell or lower their price.
  3. Buyers who really want to buy have to cope with the desperation.

The biggest problem is that price reductions don’t change any of the above – unless you really dump. The two listings we’ve seen that chopped $500k have found their way into escrow, so we can say that the half-million reductions work.

But the usual 2% to 5% reductions aren’t going to impress buyers, especially after 30+ days on the market.  By the time any of today’s active sellers lower their price enough (at least 2x), it’s going to be October and a little too close to the 2023 selling season. They will wait until then instead.

What’s the Best Thing Buyers Can Do? Expand the zone – look farther out and/or consider the fixers.

What’s the Best Thing Sellers Can Do? Complete more improvements – make it look like a model.

September should be more productive than we expect – we’re overdue for some real action, and buyers who have been patient might throw some offers around. Hang in there – Halloween is 80 days away!

Tax When Selling Vacation Homes & Rentals

What if you convert a vacation home to your primary residence, live there for at least two years and then sell it? Can you qualify for the full $250,000/$500,000 capital gains tax exclusion? No.

If you sell a main home that you previously used as a vacation home, some or all of the gain is ineligible for the home-sale exclusion. The portion of the gain that is taxed is based on the ratio of the period of time after 2008 that the home was used as a second residence or rented out to the total time that the seller owned the house. The remaining gain is eligible for the $250,000 or $500,000 home-sale exclusion.

If you hold rental property, the gain or loss when you sell is generally characterized as a capital gain or loss. If held for more than one year, it’s long-term capital gain or loss, and if held for one year or less, it’s short-term capital gain or loss. The gain or loss is the difference between the amount realized on the sale and your tax basis in the property.

The capital gain will generally be taxed at 0%, 15% or 20%, plus the 3.8% surtax for people with higher incomes. However, a special rule applies to gain on the sale of rental property for which you took depreciation deductions. When depreciable real property held for more than one year is sold at a gain, the rule requires that previously deducted depreciation be recaptured into income and taxed at a top rate of 25%. It’s known as unrecaptured Section 1250 gain, the number of its own federal tax code section.

Take this simple example: You bought a rental home for $300,000, deducted $109,000 of depreciation and sold the property for $500,000 this year. The first $109,000 of your $200,000 gain is unrecaptured Section 1250 gain that is taxed at a maximum rate of 25%, while the remaining $91,000 is taxed at the regular long-term capital gains tax rates.

Note that the unrecaptured Section 1250 gain can also apply to the sale of your main residence if you took depreciation deductions for it in the past, such as from a conversion from a rental home to your primary home or if you had an office in the home.

Capital losses from the sale of rental real estate can offset your capital gains, plus up to $3,000 of other income.

When real property used in a business or held for investment is exchanged for like-kind real property under Section 1031 of the tax code, all or part of the gain that would otherwise be triggered if the realty were sold can be deferred. This tax break doesn’t apply to main homes or vacation homes, but it can apply to rental real estate that you own.

The rules are very complicated and tricky, with many requirements to meet. Also, President Biden and Congress have proposed rules to limit the break. Make sure to talk to your tax adviser if you’re contemplating a like-kind swap.

See eight examples of the capital-gains tax when selling a home here:

https://www.kiplinger.com/taxes/capital-gains-tax/604944/capital-gains-tax-on-real-estate

Fewer Agents

With the number of sales taking a dive for the next few months – which could turn out to be a few years – we really don’t need as many realtors. Older agents who have been looking for a reason to retire sure have one now, especially if they believe all the gloom-and-doom:

In 2000, about 5 million homes changed hands — about the same number as 2022 is shaping up to be.

But in 2000, there were 766,000 realtors in America; in July of 2022, there were 1.6 million realtors!

X at the Rady Shell

One of the biggest shows of the year rolls into town on Tuesday, and many of us are still scratching our heads about who should headline.  I paid to see the Psychedelic Furs play the OAT at SDSU back in the 1980s and always thought they were a fine punk band of the era, but they are old now!

If you are going  to the show, make sure you get there early to see the preeminent band of the era:

Shiller on Home Prices

If the reason the housing frenzy stalled was due to higher mortgage rates – and then mortgage rates come down – shouldn’t it ease the concerns? Unfortunately, the national doom-and-gloom is heavy and persuasive, and reliance on ivory-tower guesses can become a self-fulfilling prophecy.

Shiller once again thinks the U.S. housing market is headed for trouble.

“Home prices haven’t fallen since the 2007–09 recession. Right now things look almost as bad,” Shiller said. “Existing home sales are down. Permits are down. A lot of signs that we’ll see something. It may not be catastrophic, but it’s time to consider that.”

A drop in home prices, Shiller says, looks very possible.

“The Chicago Mercantile Exchange has a futures market for home prices…That’s in backwardation now; [home] prices are expected to fall by something a little over 10% by 2024 or 2025. That’s a good estimate,” Shiller told Yahoo Finance. “The risks are heightened right now for buying a house.”

While Shiller thinks a double-digit decline in home prices is possible, many in the industry don’t agree. Over the coming year, home prices are expected to rise. That’s according to forecast models produced by the Mortgage Bankers Association, Fannie Mae, Freddie Mac, CoreLogic, and Zillow. Meanwhile, modest home price declines are currently being forecast by John Burns Real Estate Consulting, Capital Economics, Zelman & Associates, and Zonda.

Why do some industry insiders think home price declines are unlikely? For starters, the country outlawed the subprime mortgages that sank the market a decade ago. Not to mention, homeowners are less debt-burdened this time around. Back in 2007, mortgage debt service payments accounted for 7.2% of U.S. disposable income. Now it’s just 3.8%.

There’s another reason some firms refuse to get bearish on home prices: a historic undersupply of homes.

“Our economists have been chiming in on this for a bit now: The market is slowing down, but homes aren’t getting cheaper anytime soon. Price growth will slow/flatten (when compared to the breakneck start of the year), but the lack of supply is a fundamental pressure that will keep values aloft,” Will Lemke, Zillow’s spokesperson, tells Fortune.

In the eyes of housing bears, firms like Zillow are underestimating the possibility of oversupply. In their view, there’s a chance all those spec homes under construction could see markets like Atlanta, Austin, and Dallas get oversupplied in 2023. If that happens, it would put downward pressure on home prices.

“Housing is believed to be structurally undersupplied, but we run the risk of finding more homes on the market than buyers in the near term due to cyclical factors. I think there’s full awareness that in some markets, an increase in inventory may hit at a bad time—a time where demand has notably pulled back,” Ali Wolf, chief economist at Zonda, tells Fortune. “We are not under the belief that home prices only go up…Our forecast calls for a modest drop in housing prices.”

https://fortune.com/2022/08/09/housing-bubble-2022-call-robert-shiller-housing-market/


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