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MID Ideas

While everyone is looking forward to Christmas tomorrow, let’s sneak in one last article this year on the MID, this from the Reason Foundation:

http://www.mortgagenewsdaily.com/12232013_mortgage_interest_deduction.asp

Here are excerpts:

The mortgage interest deduction (MID) is never left alone for very longIn Unmasking the Mortgage Interest Deduction: Who Benefits and by How Much? Economists Dean Stansel and Anthony Randazzo lay out their arguments for eliminating the popular deduction from the tax code.  Written for the libertarian Reason Foundation, the article examines the history and reasoning behind MID, looks at the financial impact on individuals, the housing market, and tax collections, and presents alternatives which they say would more evenly distribute tax benefits and help the economy.

“The least distortionary income tax system is the one with the broadest possible tax base and the lowest possible marginal tax rates. Consider that if the tax base was broadened to include the $1.2 trillion in itemized deductions for 2011, the average tax rate could be reduced by nearly one-fifth, from 17.3 percent of taxable income to 14.2 percent.”

Stansel and Randazzo say such a reduction in marginal tax rates would directly increase the reward for productive (income- generating) activity. As a result, closing loopholes such as the MID and lowering overall rates would likely lead to a more prosperous economy with higher economic output and incomes.

One defense of MID is that is helps increase homeownership which is usually viewed as a societal good.  But the authors maintain the MID fairly ineffective at this.

Renter households that would prefer to own “if they had just a bit more financial flexibility,” tend to be low income and thus less likely to itemize their deductions.  So, instead of increasing the homeownership rate, the MID increases the amount spent on housing by consumers “who would choose to own anyway, subsidizing spending on housing rather than homeownership.”  If the MID had a significantly positive effect on homeownership, they contend we would expect to see a faster and continuous increase in homeownership, rather than a gradual increase and subsequent decline.

MID

The MID encourages consumers to use debt rather than their own assets to finance home purchases.   This creates a distortion in how financial capital is allocated, which leads to greater amounts of mortgage debt.  The paper frequently quotes economists James Poterba and Todd Sinai who estimate taxpayers could reduce their mortgage debt by nearly 30 percent by using other financial paper assets, (savings or brokerage accounts) to pay off loans.  If all non-housing assets, such as retirement accounts, trusts, and annuities, were liquidated to pay off mortgage debt, Poterba and Sinai estimate that the reduction could be 70 percent.

Furthermore, the marginal effective tax rate for owner-occupied housing in 2003 was only 2 percent, compared to 18 percent for noncorporate investment and 32 percent for corporate investment.  By creating favorable tax treatment for housing compared to other investments, the mortgage interest deduction encourages individuals to over-invest in housing, contributing to housing bubbles.   The Federal Reserve Bank of Philadelphia estimate that government incentives for homeownership, including the MID, have skewed distribution of resources so much that the American housing stock is 30 percent larger than it otherwise would be.

This over-investment means less capital is put toward productive assets in the rest of the economy, like machines and equipment used to produce goods and services. If there are fewer productive assets, there will be less economic growth and a lower standard of living.

In 2011, only about 32 percent of income tax returns filed with the IRS contained itemized deductions and about 21 percent of itemizers do not take the MID.  The percentage of taxpayers claiming a MID has been relatively stable at between 21 and 26 percent since 1991.

Read the full article with solution ideas here:

http://www.mortgagenewsdaily.com/12232013_mortgage_interest_deduction.asp

Inventory Watch – Holiday Week

North SD County’s Coastal Region (La Jolla-to-Carlsbad)

The UNDER-$800,000 Market:

Date
NSDCC Active Listings
Avg. LP/sf
DOM
Avg SF
November 25
95
$376/sf
47
1,988sf
December 2
79
$371/sf
50
2,047sf
December 9
72
$383/sf
43
1,954sf
December 16
81
$378/sf
42
1,948sf
December 23
77
$374/sf
49
1,937sf

The $800,000 – $1,400,000 Market:

Date
NSDCC Active Listings
Avg. LP/sf
DOM
Avg SF
November 25
245
$448/sf
61
2,856sf
December 2
239
$448/sf
64
2,851sf
December 9
226
$461/sf
65
2,812sf
December 16
211
$464/sf
66
2,794sf
December 23
197
$453/sf
73
2,813sf

The $1,400,000 – $2,400,000 Market:

Date
NSDCC Active Listings
Avg. LP/sf
DOM
Avg SF
November 25
227
$580/sf
81
3,692sf
December 2
222
$588/sf
85
3,653sf
December 9
219
$586/sf
87
3,636sf
December 16
211
$593/sf
88
3,627sf
December 23
196
$601/sf
94
3,581sf

The OVER-$2,400,000 Market:

Date
NSDCC Active Listings
Avg. LP/sf
DOM
Avg SF
November 25
340
$1,040/sf
159
6,347sf
December 2
330
$1,049/sf
160
6,342sf
December 9
318
$1,057/sf
163
6,392sf
December 16
317
$1,049/sf
163
6,420sf
December 23
302
$1,063/sf
169
6,405sf

This is usually the slowest week of the year – Merry Christmas!

Weekly NSDCC New Listings and New Pendings

Week
New Listings
New Pendings
May 30
70
84
June 5
87
64
June 11
77
69
June 17
73
66
June 24
100
69
July 1
86
64
July 8
81
53
July 15
106
54
July 22
105
89
July 29
71
74
Aug 5
105
64
Aug 12
77
61
Aug 19
88
73
Aug 26
87
77
Sep 2
76
55
Sep 9
85
58
Sep 16
102
61
Sep 23
84
54
Sep 30
73
80
Oct 7
80
61
Oct 14
78
53
Oct 21
70
63
Oct 28
54
40
Nov 4
63
53
Nov 11
49
64
Nov 18
52
44
Nov 25
48
40
Dec 2
25
34
Dec 9
45
47
Dec 16
56
46
Dec 23
21
39

Weiner’s House Used For Sex

From nbcnewyork.com:

realtorsexA pair of realtors are accused in a lawsuit of trying to keep buyers away from a New Jersey home so they could use the place for “sexual escapades” which were caught on camera, according to a news report.

Richard and Sandra Weiner of Denville, N.J., filed a suit in Passaic County Dec. 6 alleging that former Coldwell Banker realtors Robert Lindsay and Jeannemarie Phelan intentionally priced their house in Wayne above market values so they could use the home as a love nest in late 2011 and early 2012, reports The Record of Bergen County.

(more…)

New Mortgage Rules/Pricing

Fannie Mae and Freddie Mac are too big, and changes are coming.

moneypitBeginning on January 10th, the new QM rules take effect – limiting the debt-to-income ratios to 43%, and capping points and fees charged by lenders to 3% of the loan amount.

Because lenders will be subject to repurchasing any mortgages that don’t comply, some lenders are talking about limiting the DTI to 39% to provide a margin of error.

In the past, borrowers with compensating factors have been able to stretch their D-T-I ratio as high as 50%.  Now they won’t.

Is it a big deal?

It is for lenders, but to home buyers and sellers all it means is that there will be fewer people in the buyer pool for each house for sale.  Buyers may need to lower their sights, which will make the cheaper homes in each market more competitive.

The other change is how Fannie/Freddie will add more fees depending on your down payment and credit score.  It is rather arbitrary too, where borrowers with 680-740 FICO scores get hit the worst.  They can look forward to a nasty choice; to pay 1/4% to 3/4% higher in rate, use a 30% down payment, or manipulate your credit score downward to pay less fees.

The gritty details can be found Here.

For home buyers who are looking for more to reasons to stay on the fence, this is a truckload of fun.  But for the highly motivated buyers (the ones making the market), all it means is being more determined to fight for the best deal you can find, and hope that home prices will reflect the new era.

For anyone selling a great house on a great street, these changes won’t mean a thing.  For those trying to sell an inferior home for retail-plus, don’t be surprised if 2014 brings a more-measured response.

Encinitas McMansion

It’s probably just the holidays but there are a fair amount of the standard newer tract homes lying around these days.  The average pricing is grouped fairly close together between active and sold listings – it appears that buyers are just being very selective at what they are willing to buy now:

Encinitas Tract Houses Built since 1999 priced between $1M and $2M:

Active listings: 23 – with list prices averaging $366/sf

Pending listings: 9 – with list prices averaging $373/sf

Sold in last 90 days: 15 – at an average of $353/sf

Month’s supply: 4.6

Carlsbad Tract Houses Built since 1999 priced between $1M and $2M:

Active listings: 25 – with list prices averaging $353/sf

Pending listings: 12 – with list prices averaging $327/sf

Sold in last 90 days: 24 – at an average of $305/sf

Month’s supply: 3.1

Carmel Valley Tract Houses Built since 1999 priced between $1M and $2M:

Active listings: 24 – with list prices averaging $388/sf

Pending listings: 14 – with list prices averaging $392/sf

Sold in last 90 days: 26 – at an average of $376/sf

Month’s supply: 2.8

The sky isn’t falling, but buyers aren’t jumping at everything.  Here’s one that typifies – newer, larger, but with irritants: road noise, high fees, and smaller yard:

NSDCC Affordability

While we are kicking around that affordability thing, let’s note that by the traditional measuring of the Housing Affordability Index that we are still better than the last peak.

The San Diego index got down to 8 in 2005, and today we are at 27:

http://www.car.org/marketdata/data/haitraditional/#

But that is using today’s San Diego County’s median sales price of $485,040, for which it takes an income of $99,670 to qualify for an 80% LTV mortgage.

Have you seen many houses around NSDCC selling for $485,000?  Me neither.  In the last 60 days there have been 403 NSDCC detached-home sales closed, and only three of those were under $485,000!

The NSDCC median sales price for the last 60 days? $1,010,000.

In the same stretch last year we sold 500 houses, median SP = $837,243 with mortgage rates in the low 3s.

Income needed to qualify for 80% LTV mortgage:

2012: $126,500

2013: $175,000

Logically, this affordability issue should start to matter at some point.  Could we run out of buyers?  There have been 1,425 houses sold this year over $1,000,000 between La Jolla and Carlsbad!

Low Rates To Stay

santa hits brakes

The Fed’s taper announcment didn’t rile the markets, and so far it seems to be well received. How will impact home sales?

Here’s what Bill McBride said,

“Rates will be low for a long long time …”  As far as the “Appropriate  timing of policy firming”, the participants moved out a little with three  participants now seeing the first increase in 2016.

Buyers should be rejoicing at the thought of rates staying low for the next couple of years, and be very deliberate about what home they buy, and for how much.  Conditions are ideal for the wait-and-seers!!

But can buyers keep a hold of themselves?

In spite of every reason to stay patient, buyers will be tempted to jump at every decent deal they see.  The definition of ‘decent deal’ will likely be a moving target in 2014!

Waiting Home Buyers

We have bantered about why sales have slowed down, and some are jumping on the affordability (or lack thereof) issue as a contributing factor:

http://www.car.org/newsstand/newsreleases/2013releases/Nov2013sales

LOS ANGELES (Dec. 17) – A run-up in home prices, coupled with higher interest rates, put downward pressure on housing affordability and led to the fourth straight month of sales declines in November, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported.

“Improving home prices are a double-edged sword for the housing market.  While welcomed news for homeowners and prospective sellers, diminished affordability is squeezing out many buyers and dampening their enthusiasm for home purchasing,” said 2014 C.A.R. President Kevin Brown. “Buyers are playing the waiting game and putting their home search on hold until prices stabilize and more inventory becomes available in the market.”

When you dig into C.A.R.’s own research, there is this graph from the 2013 Realtor Survey taken early this year:

CAR Memebr Survey

It appears that 50% of the potential buyers just need to find the right house.  The motivated buyers won’t let higher prices and rates stop them; they will just be more critical about what they are buying.

Sellers will be smart to do more home tune-ups prior to listing, be sharper on list price, and pick a great realtor to help create a more attractive package for buyers.  With higher prices and rates, they will want a better value now!

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