New Democratic Tax Plan Proposed

Excerpts from Kiplinger Tax Letter 1/27/06:

The Democrats have proposed their own tax reform package called the Fair, Flat Tax Act.

The Proposal Points:

1) A Flatter Tax Bracket, with married filers paying 15% of the first $25,000 of taxable income, 25% on income on the next $95,000, and 35% on income over $120,000. The tax rate for singles would be half of the above, therefore eliminating the so-called “marriage penalty”.

2) A much higher Standard Deduction: $30,000 for married couples, and $15,000 for single taxpayers.

3) Elimination of the Alternative Minimum Tax

4) Mortgage Interest Deductions and Charitable Donation deductions to be preserved, however interest on second homes would be eliminated

5) A tax credit of 10% for state income taxes rather than the current deduction.

6) Current 2% of net income threshold before misc. deductions are allowed would be eliminated

7) Capital Gains would be treated like ordinary income, thus significantly increasing the tax rate on capital gains. It is not clear whether the current favorable exclusions of gains for the sale of a personal residence would be maintained. Other tax increases would be implemented including longer depreciation periods, fewer tax free employee benefits, a flat 35% tax on corporations, significantly decreased tax benefits for health care expenses, elimination of flexible spending accounts, taxation of damage awards for physical injuries and workers compensation, and others.

 The tax reform debate thus appears to be heating up and may become a major issue for 2006.

Home Buyer & Seller Survey Shows Rising Use of Internet, Reliance on Agents

Press Release by the National Association of Realtors

WASHINGTON (January 17, 2006) – Technology is transforming how Americans buy and sell homes in unexpected ways, including how they work with real estate agents and brokers, according to one of the largest surveys of real estate consumers ever conducted. The study was released today by the National Association of Realtors^®.

Nine out of 10 home buyers use a real estate agent in the search process, but use of the Internet to search for a home has risen dramatically over time, increasing from only 2 percent of buyers in 1995 to 77 percent in 2005; it was 74 percent in 2004.

When asked where they first learned about the home purchased, 24 percent of buyers identified the Internet, up strongly from 15 percent in 2004 and only 2 percent in 1997. Although most buyers use an agent to complete the transaction, 36 first learn about the home they buy from a real estate agent and 15 percent from yard signs; five other categories were 7 percent or less.

NAR President Thomas M. Stevens from Vienna, Va., said the findings underscore the complexity of the home-buying process. “Buyers who use the Internet in searching for a home are more likely to use a real estate agent than non-Internet users, and consumers rely on professionals to provide context, negotiate the transaction and help with the paperwork,” said Stevens, senior vice president of NRT Inc.

“The real estate industry today bears little resemblance to the way we did business 10 years ago. It is hard to find another industry that has adopted technology so readily to its customers,” Stevens said. “Realtors^® have invested a lot of time and money in building information technology, and because of these efforts, more consumers than ever are using the Internet in their home search.”

The survey shows 81 percent of buyers who use the Internet to search for a home purchase through a real estate agent, while 63 percent of non-Internet users buy through an agent

A clear downtrend in FSBOs (”For Sale by Owner”) has been seen since that market share experienced a cyclical peak of 18 percent in 1997. Only 13 percent of sellers conducted transactions without the assistance of a real estate professional in 2005, and 39 percent of those FSBO transactions were “closely held” between parties who knew each other in advance, up from 32 percent in 2004. The FSBO market share was at 14 percent in both 2003 and 2004. NAR began tracking the FSBO market in 1981; the record was 20 percent in 1987.

The median home price for sellers who use an agent is 16.0 percent higher than a home sold directly by an owner; $230,000 vs. $198,200; there were no significant differences between the types of homes sold. “While many unrepresented sellers are motivated to save on paying a commission, we think the price difference speaks for itself,” Stevens said. “Owners without professional assistance also have problems in understanding and completing paperwork, prepping the home for sale, getting the right price and selling within the time planned.”

“The housing market today contrasts sharply with predictions a decade ago that the Internet would ‘disintermediate’ real estate agents, including speculation that NAR membership would fall in half. In reality, it’s grown dramatically – selling real estate is not like selling a book or buying an airline ticket,” he said.

Median price of a home in California at $548,430 in December, up 15.6 percent from year ago; sales decrease 17.6 percent

News from the California Association of Realtors 

LOS ANGELES (Jan. 25) – The median price of an existing home in California in December increased 15.6 percent and sales decreased 17.6 percent compared with the same period a year ago, the California Association of REALTORS® (C.A.R.) reported today.

“Sales fell last month compared with December 2004’s record-setting pace, prompted by consumers’ concerns about rising interest rates,” said C.A.R. President Vince Malta. “The last few months of 2005 marked the first time since mid-2004 that the fixed-rate mortgage was above 6 percent on a sustained basis and the adjustable-rate mortgage was above 5 percent for three months in a row.

“Consumers also were rattled by both the spike in energy costs and the hurricanes late last year,” he said. “Looking ahead, we expect those concerns to impact transactions completed in January as well.”

Closed escrow sales of existing, single-family detached homes in California totaled 531,910 in December at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity decreased 17.6 percent from the 645,860 sales pace recorded in December 2004.

The statewide sales figure represents what the total number of homes sold during 2005 would be if sales maintained the December pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

The median price of an existing, single-family detached home in California during December 2005 was $548,430, a 15.6 percent increase over the $474,270 median for December 2004, C.A.R. reported. The December 2005 median price remained nearly unchanged compared with November’s $548,680 median price.

“We are experiencing a return to a more balanced market, in line with our expectations, although unsold inventory is still near historical lows, with a 3.6 month supply of homes for sale,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Time on the market also is nearly unchanged at 44 days in December compared with 40 days for the same period last year.

Highlights of C.A.R.’s resale housing figures for December 2005:

. C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in December 2005 was 3.6 months, compared with 2 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.

. Thirty-year fixed mortgage interest rates averaged 6.27 percent during December 2005, compared with 5.75 percent in December 2004, according to Freddie Mac. Adjustable mortgage interest rates averaged 5.17 percent in December 2005 compared with 4.18 percent in December 2004.

. The median number of days it took to sell a single-family home was 44 days in November 2005, compared with 40 days (revised) for the same period a year ago.

Statewide, the 10 cities and communities with the highest median home prices in California during December 2005 were: Los Altos, $1,427,500; Calabasas, $1,295,000; Newport Beach, $1,080,000; San Clemente, $1,025,000; Rancho Palos Verdes, $1,020,000; Santa Barbara, $1,000,000; Los Gatos, $972,500; Danville, $960,000; Cupertino, $924,000; Mill Valley, $918,0
 

Interest Rate News

From HSH Associates  January 13, 2006

Thirty-year fixed mortgage rates (FRM) dipped back a little this week, with the overall average losing eight basis points, or .08%, according to the nation’s leading survey of mortgage pricing. Five-one Hybrid ARMs crept upward by three basis points to end the week at an average 5.93%. As short- term interest rates continue to grind higher while longer-term rates hold steady or even decline a little bit, we edge closer to an “inversion” for rates.

Simply put, inversion is when long-term interest rates — in this case, long-term mortgage rates — are below those of their shorter-term counterparts. Inversions usually occur when the Fed has lifted short-term interest rates high enough to suggest to bond traders that growth in the period just ahead will be throttled back to a point where inflation will be kept in check. However, while the Fed has indeed been raising short-term rates in an effort to moderate growth and the potential for inflation, long-term interest rates have remained remarkably restrained in the face of solid growth and inflation which has been on an upward trajectory over the past couple of years. Longer rates respond not only to the Fed’s moves but also to open market conditions reflective of growth, inflation and investor appetite for a given investment.

While bond watchers often look to the spread between the two-year Treasury versus 10-year Treasury to determine if (or when) an inversion occurs, mortgage borrowers can keep an eye on a number of products along the yield curve. Along with the nominal level of interest rates, whether you can get a lot of — or just a little - rate stability for a given price is certainly a consideration when selecting a mortgage product to suit your needs. If the price is almost the same, or even less, why not opt for as much rate stability as you can get, since it’s essentially “free”?

Case in point: with this week’s dip in long-term rates, the average rate for the 30-year FRM and that for a 10/1 Hybrid ARM — a fixed rate for only ten years — are identical. This is the first such pairing since July 2002, when the 10/1 was coming back down from an 18-month inversion. As you might expect, the hybrid was all but abandoned in favor of the longer-term fixed loan. In the last year or so, there has been renewed interest in 10/1 product, but more in interest-only versions than in the fully- amortizing flavor.

Will things become more inverted? It seems likely. The Fed’s campaign of raising short-term rates is expected to have a few “measured” steps left in it, while signs of tempering growth and little new inflation usually suggest lower long-term rates. After a year when ARMs got a lot of play, only artificially low Option- style ARMs may offer payment relief for at least some of 2006, while fixed-rate mortgages may be at prices near or even below Hybrid ARMs. Very long-term fixed, or very short-term option ARMs, seem likely to be the dominant products for 2006, but it’s still early in the year.

 

Los Angeles Office Vacancies Down, Rents Up, LA Times Reports

The overall office vacancy rate for Los Angeles County fell to 12.3% from 14.8% a year earlier, while monthly asking rent increased 5 cents to $2.11 per square foot, reported real estate brokerage Cushman and Wakefield. More than 4.5 million square feet was absorbed by the market last year, with only 791,000 square feet of new space constructed. Cushman and Wakefield predicts that the average vacancy rate for office space in the county will decrease to 10% by the end of the year, considered to be the state of equilibrium between buyers and sellers. For the past 15 years, it has generally been considered to be a buyers market due to the rapid increase in office building construction which took place in the late 1980’s, which led to the commercial office real estate crash in teh early 1990’s. Westside office vacancy rates decreased to 9.2% from 13.3% a year earlier,m while average rents climbed 10 cents to $2.73 per square foot. Even downtown Los Angeles improved from a 17% vacancy rate a year earlier to 14.3% currently. The office market in the South Bay of Los Angeles continues to lag behind the activity in many parts of the Los Angeles County market, particularly in the Century Boulevard Corridor.

New Condo Complex Approved for Redondo Beach

A new 12 unit condominium complex has been approved by the Redondo Beach City Council on Tuesday, January 17, 2006, to be constructed in place of the former Van’s Belgian Waffles Building at Catalina and Francisca avenues. The project will contain a dozen “East Coast, nantucket style” beach condos. This is the first project approved since the demise of the “Heart of the City” plan previously proposed and rejected by the Redondo Beach electorate.

South Bay Residential Markets to see Price Appreciation in 2006

On Friday, January 13, 2006, California Association of Realtors Vice President and Chief Economist Leslie Appleton-Young spoke at the Trump National Golf Club, as reported by the South Bay Daily Breeze, and predicted that the Southern California coastal cities should experience price appreciation in their residential real estate markets of from 6 to 12 percent. She characterized the current real estate market as being in the process of a “soft landing” which means that the supply for homes declines at the same time that a downturn in demand occurs. During this soft landing, consumers will take a more cautious approach to the housing market than in years past. She stated “one of the most important things to remember is that we are in an economy that is growing. GDP (Gross Domestic Product) growth last year (went up) about 3.4 percent.” She predicts an increase of 3.6 percent this year. ” Secondly, employment growth is good”. Appleton-Young explained that home prices are on the rise because of strong demand due to low mortgage rates and the consumers shunning alternative investments, and a restricted supply, due to constraints on construction, the recent rapid increase in construction costs, and the low number of homes for sale. Sales in the state of California are up 4.8 percent for 2005, but Appleton-Young predicts a 2 percent decline for the state’s 2006 housing unit sales. The National Association of Realtors is predicting a 3.7 percent decrease in the U.S. Housing Market for 2006. “Higher interest rates and consumer spending are the two greatest risks to watch out for (this year)” she said.

South Bay Los Angeles Real Estate Market Analysis

The overall South Bay Los Angeles real estate market continues to moderate, with the average number of days a property is on the market, the price per square foot, and the discounting from listing price all moving in a negative direction . The average number of days on the market has reached about 40 days, an increase of just over 30 days from last August. Properties over $1 million have an average days on market approaching 50 days, while lower priced properties average in the mid 30 days on the market range. The average price per square foot of properties sold has pulled back slightly from $556/sf to about $545/sf in December. The average price per square foot, however actually increased in the Beach Cities, remained stable for the Palos Verdes Peninsula, and continued a three month declining trend in Torrance. The average discounting of the list sales price is now approx. 2.85%, the highest in over a year. Discounting is most pronounced in properties in excess of $1 million.

It is difficult to determine if the slow down in the market is due to normal seasonal activity or due to a general decline in the residential real estate markets many pundits have been predicting. We should have a better read on the direction the market is taking in the early spring, however the overall market still seems to be remaining relatively stable.

The number of properties sold on the Palos Verdes Peninsula for the full year 2005 decreased approx. 11.5% from the same period in 2004 (605 units sold in 2005 versus 684 units sold in 2004), however the average price per square foot increased approx 18% to $563/sf. The rate of increase in price, however, is moderating, as the average price per sq. ft. for properties sold in the Palos Verdes Peninsula increased only approx. 1.4% in the fourth quarter of 2005. The largest percentage increase in price per square foot over 2004 occurred in the Valmonte (32% increase) and the Monte Malage (30% increase) neighborhoods.

Source: Ron Becker of RB Innovations, an appraisal firm, and Remax Palos Verdes research