Bernard’s San Ramon Valley Blog

Why You Shouldn’t Believe Everything You Read In The Newspapers

The press continue to spread doom and gloom regarding the housing market, and there is little doubt that in many parts of the country, even many parts of the Bay Area, there is much cause for concern. The problem is that these reports always focus on large areas. It is not very relevant to tell a home owner in San Ramon or Danville how much home prices have eroded in Northern California. Your home is not located in Northern California. It is in a specific city. Sometimes even which part of the city makes a difference.

Real Estate Is Local
This is a phrase that is often quoted by real estate professionals and for very good reason. Take a look at the chart at the foot of the page. This has been generated from accurate data that clearly shows how sale prices of a typical 4 bedroom 1800 to 2500 square foot home have been affected over the past year. By taking just the typical family home into account we get a much more realistic picture than when we consider overall averages. To make it even more meaningful, rather than just look at the whole of the East Bay, or even the San Ramon Valley, I have broken it down by city. The figures make interesting reading. They may even affect your decision to buy or sell now, rather than waiting until later.It is immediately apparent that many of our local markets are very resilient compared to many others.
Certainly parts of our area have suffered more than others. Average prices have fallen by 16% in east San Ramon for example. Most of the volume here is in Windemere and many of the sales are distress sales - homes that have been foreclosed and then sold by the banks at bargain prices. Banks don’t want to own homes!In complete contrast to this are areas like Danville, Pleasanton and the rest of San Ramon, where, although prices have fallen, the decrease over the past 12 months is only 4-5%.
And look at Lamorinda. I have grouped together the towns of Orinda, Moraga and Lafayette because the demographics are similar and in order to have sufficient numbers of sales to provide meaningful results. Over the 12 month period under consideration, Lamorinda values have actually risen. Of course there are far fewer distress sales in this area.
So what can we predict from these figures? We still don’t have enough data to say that we have “passed the bottom”, although it seems likely that we have done so in some locations, most obviously Lamorinda.Danville, Pleasanton and the west side of San Ramon also look to be in good shape, particularly taking the relatively small decline in prices there into consideration. Walnut Creek also looks like it may be stabilizing although it would be nice to have a little more data here.Is It A Good Time To Buy Or Sell Now?
If you are moving within the immediate area, and you are both buying and selling, now is a great time to do so. I would advise finding a buyer for your home first if possible, as then you know exactly how much you can budget for your next home, but there is plenty of choice out there and interest rates are low. If you don’t have a home to sell, it is also a great time to buy. The likelihood of home prices falling further is slim, and even if they do, any gains you make will most likely be taken up with higher interest rates. The Fed has indicated that rate cuts are at an end and there is only one way for rates to go from here.  Also remember that while there is plenty of inventory, sellers are more motivated to accept a lower price for their home. When the supply starts to reduce, you can expect to pay more for your home.

Why Moving Up In A Down Market Makes Sense

This is traditionally the start of the busiest period in the year in real estate sales activity, driven to a large extent by the need for families with children to get them enrolled in new schools  in time for the new school year. For those who are buying or selling due to a job change, or any other case of necessity, the question does not arise but for discretionary buyers or sellers, it is an important consideration. My response may give you some food for thought.The answer to the above question depends on your personal  circumstances. If you are buying up, this is probably the best time imaginable to move house. Here’s why:

Let’s suppose you have a home that was worth $800,000 2 years ago. A move up then to a $1.2m home would have cost you an additional $400,000.

If we assume that home prices have fallen 20% in the last 2 years, your $800,000 home is now only worth $640,000. Fortunately for you, that $1.2m home has also dropped in value - to $960,000. So moving up to that same home would cost you only $320,000, saving you $80,000 in extra mortgage costs. Yes it’s true that you have to sell your home for 20% less than you could possibly have sold it for 2 years ago but so what? Those times are gone. You can still move up to the same home you could have then, only now it will cost you less money. Moving up in a down market is a great thing to do.

If you are currently renting, or perhaps a first-time buyer, it could also make a lot of sense to buy now, rather than wait until later.

There is no doubt that there are many potential buyers who are currently sitting on the fence and “waiting for the market to bottom out” in the belief that this is what serves their best interests, but in reality, this is probably not such a great idea.

First of all, how do you know when the market has bottomed out? The answer is, only after we have passed it and prices are on the rise. Most of the economists feel that we either at, or very near to, the bottom any way.

Also bear in mind that interest rates are now amazingly low. The only way they are going from here is up. And let’s face it, the most important number you should be looking at is your monthly mortgage payment. That is a lot more relevant than the price you pay for your home.
If you buy in today’s market, you have the benefit that there are a large number of homes from which to choose, including some bargain priced bank-owned ones. And sellers, in general are very motivated. If you buy after the bottom, when house prices are on the rise, you face increased competition and the possibility of multiple offers.

There is a further tangible benefit you may want to consider regardless of your circumstances. Suppose you wait until prices are rising again, maybe another 4-6 months. Moving house is not generally just an investment like buying stocks and shares. By buying now, you actually get to live in your new home faster and enjoy it. Life is not just about saving every dollar you can. Time is the one commodity you can never have more of!

This is a subject I have covered in the past but one that a number of people have recently raised again which is why I am revisiting it this month.

This is a summary of the Taxpayer Relief Act of 1997 (Section 121) which repealed and replaced the tax deferral provisions contained within Section 1034 of the Internal Revenue Code.

Generally, a Taxpayer can sell real property held and used as his or her primary residence and exclude from gross income up to $250,000 in capital gain taxes if the Taxpayer is single and up to $500,000 in capital gain taxes if the Taxpayer is married and filing a joint income tax return.  The Taxpayer is required to have lived in the real property as his or her primary residence for at least 24 months out of the last 60 months (two out of the last five years). 

Note that the 24 months do not need to be consecutive and there are certain exceptions to the 24 month requirement when a change of employment, health, or some other unforeseen circumstances has occurred.

Section 121 is effective for dispositions of real property held as a primary residence after May 7, 1997.  Taxpayers can complete a 121 exclusion no more than once every two years.

Taxpayers should carefully monitor the amount of “built-up” capital gain in their primary residence and may want to seriously consider selling their primary residence before the capital gain tax liability exceeds the $250,000 or $500,000 limitation.  The Taxpayer’s capital gain tax liability in excess of these exclusion limitations will be taxable.  A sale of the primary residence would preserve the tax free exclusion of the capital gain and would allow the Taxpayer to acquire another primary residence and start all over again.

Special legal, tax and financial planning is needed in circumstances where a Taxpayer already has a significant capital gain tax liability in excess of the $250,000 or $500,000 exclusion limitation.  For example, the primary residence could be converted to rental or investment property and then sold as part of a 1031 exchange after it has been rented for a sufficient amount of time in order to demonstrate the Taxpayer’s intent to hold the property as rental or investment property.  This would allow the Taxpayer to dispose of his or her primary residence, defer all of the capital gain tax liability, and diversify and allocate the capital gain tax liability pro-ratably over a number of rental properties clearing the way for further financial, tax and estate planning opportunities.

The tax liability calculation is not so simple when  divorce or the death of a spouse occurs during the period of home ownership. If you have any doubts about how any capital gains you make will affect your tax liability, you are strongly recommended to discuss the implications with your tax advisor.