We noted last week how the jumbo mortgage market is back-pedaling in two ways. Banks stopped funding jumbo loans with 10% down payments, and the program that qualified the self-employed borrowers by using their last 24 monthly bank statements was also terminated.
The actual impact is hard to gauge, but we can say the buyer pool is quite a bit smaller today than it was a month ago….and those loan programs won’t be coming back anytime soon.
For the remaining buyers left in the hunt, won’t they have their way when negotiating. How many other buyers are competing to buy that house? Any?
Doesn’t that mean the sellers have to come down off their price? Shouldn’t there be a correction?
The reason that sellers hold out for their price is because they have other options. They have plenty of equity so they can get additional financing if they need money, instead of moving. They can also rent their house for a ridiculous amount if they don’t need to tap their home’s equity. The majority of sellers need to leave town to make the move worth it, so there is a natural reluctance to give up the familiar – unless they get their price.
Today we hear agents say they don’t know when the market will come back.
Let’s identify which market. They don’t know when the sellers’ market will come back.
It’s going to be a buyer’s market for the next 2-4 months, and the vast majority of agents have never seen a buyers’ market, let alone know how to navigate it. Over the last ten years, listing agents have gotten away with doing little or nothing to accommodate the buyers – their mantra has been, “hey, if you don’t like it, then cancel and we’ll get someone else”. But will there be any other buyers today? If so, at what price?
Buyers might get talked into escrow at a price close enough to list to make the sellers happy, but getting them to the finish line will be a major challenge today.
Here are my tips for sellers in a buyers’ market:
Get a pre-listing inspection, and fix as many issues as possible before going on the market.
Have specific quotes available for other issues that aren’t fixed yet.
In spite of furnishing this data to the buyers, expect that they will want to re-negotiate.
Build a defense in advance.
You may still need to do a little something for them to get the deal done, but at least being prepared will keep it to a minimum.
Our reader elbarcosr agreed that it’s easy to get page views with everyone sitting at home on the computer anyway these days. Here are today’s counts of our Winstanley listing:
Facebook ad: 1,451
The Facebook ad was responsible for 840 of the YouTube views, which means the MLS and the blog accounted for 486 views. The blog views have been running around 100 per video, so almost 400 views of the video tour came from potential buyers who saw it in the MLS remarks or on one of the search portals.
It makes you think potential buyers don’t mind previewing a home by video!
We had about 15 showings in person, and three written offers.
The three original bathrooms were enough for most buyers to pass altogether in a very conservative environment these days. I think I could have sold it 3-4 times if the house was completely turnkey. But you can only sell it once, so balancing the investment vs return is a critical step.
These results are about what I was expecting before the covid-19.
Mostly-renovated houses in desirable neighborhoods on the lower-end of the range are still going to attract significant interest. Play your cards right, and you can still sell in the first five days on the market.
There is no reason to transfer your house to your kids – use a family trust instead. If you need dough, then get a reverse mortgage. Hat tip to just some guy!
Adding an adult child to your house deed, or giving them the home outright, might seem like a smart thing to do. It usually isn’t.
Transferring your house to your kids while you’re alive may avoid probate, the court process that otherwise follows death. But gifting a home also can result in a big, unnecessary tax bill and put your house at risk if your kids get sued or file for bankruptcy. You also could be making a big mistake if you hope it will help keep the house from being consumed by nursing home bills.
There are better ways to transfer a house to your kids, as well as a little-known potential fix that may help even if the giver has since died.
WHY YOU SHOULDN’T GIFT A HOUSE
If you bequeath a house to your kids — which means they get it after your death — they also get what’s known as a “step-up in tax basis.” All the appreciation that happened while you owned the house is never taxed.
Certified financial planner Kenneth Robinson of Rocky River, Ohio, says last year he advised a client not to let his mom give him her house. The mother paid $16,000 for her home in 1976, while the current market value is close to $200,000. None of that gain would be taxable if the son inherited the house, Robinson told his client.
The mother signed a quit claim to give her son the house anyway and died shortly afterward. That potentially meant a tax bill of about $32,000 for Robinson’s client.
Families who realize the mistake in time can undo the damage by gifting the house back to the parent, says Jennifer Sawday, a partner at TLD Law in Long Beach, California.
“We do last-minute deeds to get that house back in place when we know someone is dying,” Sawday says.
OTHER REASONS NOT TO GIFT A HOUSE
Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the indigent. But gifts or transfers made within five years of applying for Medicaid can lead to a penalty period, when seniors are disqualified from receiving benefits.
Transferring your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be divided.
A POTENTIAL ‘HAIL MARY’ FIX
Robinson consulted a certified public accountant and an estate planning attorney. Both said what Robinson feared was true: The client was stuck paying taxes on the $184,000 gain in value since his mother bought the property.
“They were as discouraged as I was,” Robinson says.
But then Robinson hired a tax research firm and learned of a workaround. Section 2036 of the Internal Revenue Code says that if the mother retained a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.
“Many people do not know about this and are therefore losing out on the step-up and the lower taxes they would be entitled to,” says Michael Eisenberg, CPA financial planner with the American Institute of CPAs’ Financial Literacy Commission.
There are specific rules for what constitutes a life interest, including the power to determine what happens to the property and liability for its bills. To ensure that outcome, the son, as executor of his mother’s estate, filed a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death, Robinson says.
THERE ARE BETTER WAYS TO TRANSFER A HOUSE
There are other ways around probate. Many states and the District of Columbia allow “transfer on death” deeds that allow people to leave their beneficiaries their houses without having to go through probate. Another option is a living trust, which typically costs $1,500 to $3,000 to set up but can ensure all a person’s assets avoid probate.
And probate in many states is nothing to fear. Most states have simplified probate procedures for smaller estates. Only in a few, such as California and Florida, is probate so expensive and time-consuming that most people should try to avoid it.
“We see avoidance of probate as a big issue in people’s minds, sometimes bigger than it has to be,” Robinson says.
As expected, the COVID-19 news continues to worsen. But escrows in process should have a good chance of closing, as long as buyers are satisfied, and the sales count should be fine for a week or two.
Mike DelPrete offered the following data:
The following chart shows property transactions in China during the early stages of the outbreak. Transactions dropped significantly — nearly 100 percent — during a number of weeks during the crisis, and are now growing again (but still down over 50 percent from last year).
There are similar results in Italy, with a top portal telling me that they expect transaction volumes to be down 20–40 percent in February and 70–90 percent in March. Another source cites that visits to apartments for sale in early March were down more than 50 percent compared to a year ago.
Will our sales will be down the 20-40 percent this month, and down 70-90 percent next month?
With the California Association of Realtors issuing a strong warning to agents to abide by the governor’s request for non-essential workers to stay home, it’s almost a certainty that new pendings will stop now. Agents will be in awe, and wait for others to figure out how to sell homes during the lockdown.
Two things about the governor’s stay-at-home plan: 1) Walking is permitted, and 2) He said law enforcement won’t be busting people. It makes it sound like it’s your choice, but lives could be on the line.
Will buyers engage?
Let’s stick with the math.
If sales next month go down 70-90 percent, it means we lost at least half of the buyer pool.
It’s natural to expect that the lesser-motivated half of the buyer pool will check out – but they weren’t going to matter anyway because the other half of potential buyers were more motivated.
Buyers who are motivated will keep watching, but there won’t be many new listings to consider……and buyer malaise will set in. You know the feeling – when you get so discouraged that you don’t check every auto-notification, figuring it’s just another dud with lousy photos and no easy path to buy it anyway.
Many will decide that it will take a miracle to buy a house now!
Sellers will check out too, and many of the active listings will cancel, why? Because sellers and agents can’t imagine how to sell a house except by showing it in person to strangers who could give you the virus. Any listings that are occupied will probably shut it down.
If we lose half the buyers and sellers, then we’ll be lucky if sales only drop 70 to 90 percent!
Can agents adapt?
What do we need to do?
Let’s sell by video! I’ll show you later this week.
What will it take to sell your home during the lockdown?
You need to be the best buy in the neighborhood, and in the top 10% of active listings within a mile or two radius.
You need to have a fantastic video presentation, and be willing to accept an offer from a buyer who hasn’t been inside. Once you designate the buyer, then they will walk over for a showing in person. There will be two other visits – the home inspector will spend 3-4 hours, and the appraiser will spend about 30 minutes. But that’s it, and those three intrusions should be manageable, though it would be best if the sellers move out before we begin.
There needs to be give-and-take on all sides. Agents have to deliver a quality video presentation – preferably without elevator music and cheesy marketing. Buyers need vision – they need to master video as their preferred way of seeing homes in the new social-distancing era. And escrow has to go perfectly.
It will be the future of real estate sales.
Should sellers wait it out?
Yes, for almost all sellers – those who don’t need to sell in the next 3-6 months.
It will be smart for the aspirational sellers – those who will only sell at the higher end of the range – to wait until other sellers go first, and let them leave a decent set of post-virus comps upon which to build a case for retail pricing. Everyone expects the ‘pent-up demand’ to set off a frenzy, but after 1,000s of Americans don’t survive the virus, the marketplace could be quite somber – especially if rates are above 4%. But hopefully we will see full recovery within 6-12 months after the virus pandemic is declared over.
Trump will declare victory well in advance of the experts, and it could ignite his followers. Any lull in the market could be over sooner than you think. More on that next!
Who is selling? I haven’t checked in a while! This chart tracks when the home was purchased by the sellers. Today’s numbers are from those sold between Jan 22 and Feb 14 of this year:
0 – 2003
2004 – 2008
2009 – 2011
2012 – 2019
The long-time owners aren’t moving as much as they used to! Those who have purchased since 2012 have no problem selling for a decent-to-huge gain, and more of them have been taking their profits – and hopefully buying another.
There were four flippers in today’s 2012-2019 group.
It is physically, mentally, and emotionally taxing to sell your long-time home – especially sorting through all your stuff/junk and throwing out the family heirlooms once your kids convince you they don’t want it.
In February, we will be doing a seminar called Downsizing in 2020 – The Last Move.
The number of people moving is half of what it used to be.
The gap between who’s left California by major van lines, and who’s arrived, is now at its widest in 13 years.
Every January three major van lines put out data on their state-to-state moving business. Such interstate moves by van lines are a shrinking migration niche for folks with deep pockets. Corporations have shied from paying the pricey tab for professional relocation services. Not to mention that Americans overall aren’t relocating like they once did.
Inbound moves: The state’s real problem. Americans may visit the Golden State, but don’t want to live here. So just 19,196 inbound van moves last year vs. 22,492 in the previous year — down 15%. Last year is 37% below the 16-year average. Census data for 2018 showed the total number of Californians arriving from other states was the lowest in five years.
The SP:LP ratio has been very consistent for those selling a home under $2,000,000 – you can expect to get pretty close to your asking price. Above $2,000,000 is a different story.
Mortgage rates had averaged 3.99% in 2017. You can see how the lower-end buyers became less concerned about getting a discount as rates started rising in early 2018 (they reached 4.59% in May, 2018):
This is another place that listing agents manipulate the data. When marking their listings as sold, many will lower the list price to match the sales price in order to make it look like they sell their listings for ask.
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