Palos Verdes Blog

Palos Verdes blog is about Palos Verdes real estate market trend, valuable news about how to buy, sell, or lease homes, condos, town-homes, apartments, multi-family homes, and land, including short sales, and foreclosure information.

Nov. 23, 2020

Home sales and starts soar

 

QUOTE OF THE WEEK

“Either you run the day, or the day runs you.”—Jim Rohn, American entrepreneur, author, and motivational speaker

 

NATIONAL MARKET UPDATE

 

 

In October, Existing Home Sales shot up surprisingly to a 6.850 million annual rate, the fastest pace in 15 years! After five straight months of gains, sales are 18.9% higher than before the pandemic. But inventory is down to 2.5 months.

However, more homes are on the way. Housing Starts hit a 1.530 million annual rate in October, their highest level in 13 years, following six monthly gains in a row. It's no surprise home builder confidence is at a 35-year high.

The Mortgage Bankers Association revised its 2021 forecast upward for the third straight month, and now expects $1.59 trillion in purchase originations next year, after $1.42 trillion in 2020, a 16% hike over 2019.

 

 

REVIEW OF LAST WEEK

 

 

MORE VACCINES VS. MORE CASES... Investors' hopes were buoyed by news of three(!) coronavirus vaccines, then dashed by reports of more cases, posing greater risk to both public health and the recovery. 

As trader sentiment went in two directions, so did the big stock indexes--the Dow and S&P 500 down, the Nasdaq up. Meanwhile, the recovery rolls on, October Industrial Production up, continuing jobless claims down.

Auto manufacturing, up 6.9% from a year ago, has already had a full V-shaped recovery. Likewise, Retail Sales, up in October and now 4.9% higher than their February peak before the shutdown.

The week ended with the Dow down 0.7%, to 29,263; the S&P 500 down 0.8%, to 3,558; but the Nasdaq UP 0.2%, to 11,855.

Bonds benefited from the equity sell-off. The UMBS 3.0% went up .16, to $104.55. The national average 30-year fixed mortgage rate hit a record low for the 13th time this year in Freddie Mac's latest Primary Mortgage Market Survey. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

DID YOU KNOW?... Ocean Spray, the largest U.S. producer of cranberry products, sells about 79 million cans a year of jellied cranberry sauce, its most popular variety by far. 85% of those sales occur from now until the end of the year.

 

 

THIS WEEK'S FORECAST

NEW HOMES SELL, CONSUMERS SPEND, CONFIDENCE SLIPS THOUGH ECONOMY GROWS... October New Home Sales should show continued growth. Same for Personal Spending, as consumers keep powering the recovery, though Consumer Confidence is forecast to dip. The GDP-Second Estimate is expected to register a strong bounce back for the economy in Q3. 

U.S. financial markets will close Thursday for Thanksgiving Day. Friday, stock markets will close at 1 p.m., bond markets at 2 p.m.

NOTE: Weaker economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and higher loan rates.

 

Nov. 23, 2020

Home sales and starts soar

 

QUOTE OF THE WEEK

“Either you run the day, or the day runs you.”—Jim Rohn, American entrepreneur, author, and motivational speaker

 

NATIONAL MARKET UPDATE

 

 

In October, Existing Home Sales shot up surprisingly to a 6.850 million annual rate, the fastest pace in 15 years! After five straight months of gains, sales are 18.9% higher than before the pandemic. But inventory is down to 2.5 months.

However, more homes are on the way. Housing Starts hit a 1.530 million annual rate in October, their highest level in 13 years, following six monthly gains in a row. It's no surprise home builder confidence is at a 35-year high.

The Mortgage Bankers Association revised its 2021 forecast upward for the third straight month, and now expects $1.59 trillion in purchase originations next year, after $1.42 trillion in 2020, a 16% hike over 2019.

 

 

REVIEW OF LAST WEEK

 

 

MORE VACCINES VS. MORE CASES... Investors' hopes were buoyed by news of three(!) coronavirus vaccines, then dashed by reports of more cases, posing greater risk to both public health and the recovery. 

As trader sentiment went in two directions, so did the big stock indexes--the Dow and S&P 500 down, the Nasdaq up. Meanwhile, the recovery rolls on, October Industrial Production up, continuing jobless claims down.

Auto manufacturing, up 6.9% from a year ago, has already had a full V-shaped recovery. Likewise, Retail Sales, up in October and now 4.9% higher than their February peak before the shutdown.

The week ended with the Dow down 0.7%, to 29,263; the S&P 500 down 0.8%, to 3,558; but the Nasdaq UP 0.2%, to 11,855.

Bonds benefited from the equity sell-off. The UMBS 3.0% went up .16, to $104.55. The national average 30-year fixed mortgage rate hit a record low for the 13th time this year in Freddie Mac's latest Primary Mortgage Market Survey. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

DID YOU KNOW?... Ocean Spray, the largest U.S. producer of cranberry products, sells about 79 million cans a year of jellied cranberry sauce, its most popular variety by far. 85% of those sales occur from now until the end of the year.

 

 

THIS WEEK'S FORECAST

NEW HOMES SELL, CONSUMERS SPEND, CONFIDENCE SLIPS THOUGH ECONOMY GROWS... October New Home Sales should show continued growth. Same for Personal Spending, as consumers keep powering the recovery, though Consumer Confidence is forecast to dip. The GDP-Second Estimate is expected to register a strong bounce back for the economy in Q3. 

U.S. financial markets will close Thursday for Thanksgiving Day. Friday, stock markets will close at 1 p.m., bond markets at 2 p.m.

NOTE: Weaker economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and higher loan rates.

 

Nov. 18, 2020

PROPERTY TAX EXCLUSIONS & TAX RELIEF

The following are brief descriptions of a few of the programs available to Los Angeles property owners.

*Please note this is a partial list and intended to be used as a general information only.* More information can be found at http://assessor.lacounty.gov/exclusions-tax-relief.

Homeowners’ Exemption

If you own a home and it is your principal place of residence on January 1, you may apply for an exemption of $7,000 from your assessed value. New property owners will automatically receive a Claim For Homeowners’ Property Tax Exemption. Homeowners’ Exemptions may also apply to a supplemental assessment if the prior owner did not claim the exemption. Further instructions are included with the claim form.

Decline in Value

If you believe that your property value warrants review due to a decline in market value, you may file an application for Decline-in-Value Review.

In 1978, California voters passed Proposition 8, a constitutional amendment that allows a temporary reduction in assessed value when a property suffers a “decline-in-value.” A decline-in-value occurs when the current market value of your property is less than the current assessed value as of January 1.

Eligibility:

1.  You must demonstrate that on January 1, the market value of your property was less than its current assessed value.

2.   You must file a Decline-in-Value Review Application, form RP-87, with the Assessor between July 2 and November 30 for the fiscal year beginning on July 1. Applications are valid if postmarked by November 30. If November 30 falls on a Saturday, Sunday, or a legal holiday, an application is valid if either filed or postmarked by the next business day.

Veterans’ Exemption

  • If you are a single veteran with assets of less than
  • $5,000, a married veteran with assets of less than
  • $10,000, or an unmarried surviving spouse of an eligible veteran, you may apply for the Veterans’ Exemption of $4,000 applied to the assessed property value.

Although it is unnecessary for the veteran to reside on that property in order to qualify, this exemption claim must be filed every year.

Disabled Veterans’ Exemption

If you are a disabled veteran who is blind in both eyes, has lost the use of two or more limbs, or is totally disabled as a result of injury or disease incurred in military service, you may be eligible for a Disabled Veterans’ Property Tax Exemption. The Veterans Administration must certify the veteran’s disability.

Unmarried surviving spouses of certain deceased veterans may also qualify.

Solar Energy System

The initial purchaser of a building with an active solar energy system may qualify for an exclusion from assessment on that portion of the value attributable to an active solar energy system, less the amount of any rebates. To qualify for this exclusion, an Initial Purchaser Claim for Solar Energy System New Construction Exclusion must be filed with the tax assessor’s office.

The addition of an active solar energy system to an existing property is automatically excluded from assessment. For example, the installation of photovoltaic (PV) cells on an existing home would not be subject to assessment. There is no need to file an exclusion form to benefit from this exclusion.

Note: An “active solar energy system” does not include solar water heating for swimming pools or hot tubs.

Detailed information and forms can be found at http://assessor.lacounty.gov/exclusions-tax-relief.

Please note this is intended for information only. Information deemed reliable but not guaranteed. Please contact your local Assessor, legal or real estate professional with questions regarding your specific situation.

via Lawyers title

 

Nov. 16, 2020

National Market Update Monday

 

NATIONAL MARKET UPDATE

 

The equity homeowners have in their properties keeps growing. Attom Data reports 16.7 million homes are equity-rich as of Q3, meaning the amount of the loans secured by these homes is 50% or less than their market value.

The National Association of Realtors website reports housing market activity took a rest during election week. Their Housing Market Recovery Index (HMRI) slipped, yet remains above its pre-pandemic baseline.

Freddie Mac’s Chief Economist notes: “mortgage rates remain about a percentage point below a year ago.... Heading into late fall, the housing market continues to grow and buttress the economy.”

 

 

REVIEW OF LAST WEEK

 

VACCINE RALLY...The week kicked off with news a COVID-19 vaccine from Pfizer and German partner BioNTech was more than 90% effective. The S&P 500 hit a record high, the Dow bounced up, but the Nasdaq tripped.

The prospect of a vaccine that would quell the health crisis and speed the economic recovery boosted stocks that had suffered from the pandemic recession, but hurt those that had benefited from the work-from-home boom. 

What little economic news we got largely favored investors' upbeat mood. Initial jobless claims fell by 48,000, continuing claims by nearly half a million. Inflation was mild, so a Fed rate hike remains a long way off. 

The week ended with the Dow UP 4.1%, to 29,480; the S&P 500 UP 2.2%, to 3,585; but the Nasdaq down 0.6%, to 11,829.

Bonds edged down overall, though our UMBS 3.0% went up .01, to $104.39. Freddie Mac's latest Primary Mortgage Market Survey reported the national average 30-year fixed mortgage rate moved up a tick from last week’s record low. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

DID YOU KNOW?... Salt has been the world’s most popular seasoning for a long time. In ancient Rome, it was given to legionnaires as monthly wages. This “salt money”—“salarium” in Latin—is where our word “salary” comes from.

 

 

 

 

THIS WEEK'S FORECAST

 

 

HOME BUILDING, RETAIL UP, EXISTING HOME SALES HOLD... October Housing Starts should continue up, closing in on the 1.5 million annual rate experts say will meet market needs. Retail Sales are also forecast to gain, while Existing Homes Sales dip yet hold near a strong 6.5 million yearly rate.

NOTE: Weaker economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and higher loan rates.

 

 

Nov. 13, 2020

Buying Frenzy Heats Up in Second-Home Market

Homes are selling much quicker than they did a year ago, and sales of resort and second homes are no different. “Properties are moving fast,” Gay Cororaton, senior economist and director of housing and commercial research at the National Association of REALTORS®, said Friday during the virtual 2020 REALTORS® Conference & Expo.

In September, 68% of vacation homes sold in less than a month, according to the REALTORS® Confidence Index Survey. Historically, about 30% sell that quickly, she said. “It’s a pretty amazing uptick compared to past years,” Cororaton added. Sales of resort and second homes accounted for 6.3% of overall home sales in the third quarter, up from about 4.5% in the second quarter, according to the RCI.

One consequence of the pandemic has had a clear influence on these sales. “Working from home is a positive factor in demand for vacation homes,” Cororaton said. Many people who can work remotely are choosing to do so in their second or vacation homes, she said.

Price increases are following those sales. In the third quarter, prices in vacation-home counties rose by about 32% year over year. Seventy-nine percent of these counties experienced year-over-year price gains. NAR defines a vacation-home county as one in which seasonal housing accounts for at least 20% of stock.

Sales in vacation-home counties increased 48% on average year over year in the third quarter; overall, 81% of vacation-home counties saw a year-over-year sales increase. Areas with the biggest boosts were in the far Northeast; the Upper Midwest, including Minnesota, Wisconsin and Michigan; and the Southwest, mostly in Arizona, Colorado, New Mexico, and Utah.

While commercial land sales have been relatively flat during the pandemic, sales of recreational land increased by 5% in the third quarter, according to NAR’s Q3 Commercial Real Estate Market Survey. Developed residential land was up 6% during this time period as well.

An unsurprising result of the pandemic is the reduction in the share of international buyers in the second-home market. Their share of purchases in September was down about 4%, but that’s being made up by domestic buyers, Cororaton said.

Via magazine.realtor

Nov. 11, 2020

Current market rates

The average 30-year fixed rate mortgage (FRM) rate declined to a new average low in the week ending November 6, 2020, now at 2.78%. The 15-year FRM rate remained level at 2.32%. FRM rates have descended to historic lows due to efforts to stimulate lending during today’s recession. Beginning in March, the Federal Reserve (the Fed) dropped their benchmark interest rate to zero and began purchasing mortgage-backed securities (MBS), fulfilling their role as the lender of last resort to ensure mortgage originations continue. The Fed recently announced their intention to keep their benchmark interest rate near zero through at least 2023.

FRM rates are also tied to the bond market, tending to move in tandem with the 10-year Treasury Note (T-Note) rate. The 10-year T-Note recently plunged to its lowest rate on record, now slightly higher at 0.82% as of November 6, 2020. Bond market investors are reacting to the gutted economy and the expectation of a continued halt of many business activities. This has led them to accept significantly lower yields in return for the safety of treasuries, which in turn has pulled FRM rates down.

The spread between the 10-year T-Note and 30-year FRM rate is 1.96%, still above the historical difference of 1.5%. The higher margins seen through much of 2018-2019 and rising in 2020 signify that mortgage lenders are padding their risk premiums on top of restricting mortgage credit. Now, the only player able to move FRM rates lower is the Fed, which may be accomplished by a combination of the Fed’s current extreme MBS purchases and the somewhat controversial tactic of “going negative” to induce lending at even lower interest rates.

The average monthly rate on ARMs decreased slightly to 2.89% in October 2020, still above its low point of 2.49% experienced in May 2013. The average ARM rate is roughly level with the average 30-year FRM rate, making these riskier mortgage products less appealing. Therefore, ARM use will remain low over the next couple of years, as the Fed will work to keep interest rates on FRMs low. 

The 2020 recession, along with the impacts from the global pandemic, are being felt in the housing market. Social distancing has caused economic activity to spiral, resulting in lost jobs and less willingness to take on large purchases. Many homebuyers and sellers are hitting pause on their plans and while today’s low mortgage interest rates have thus far supported home prices, they aren’t enough to support transactional volume. Expect home sales volume to end the year well below 2019, reversing course once a consistent recovery is underway, likely around 2022-2023.

Via journal.firsttuesday.us

 

Nov. 9, 2020

Home sales boom continues /National Update Market

 
NATIONAL MARKET UPDATE

The post-lockdown home buying boom isn't slowing down. The National Association of Realtors listing site reports homes sold faster in October than September for the first time in 9 years as low interest rates drove pent-up buyer demand.

Forbes magazine reports housing is in a “full-fledged boom.” Last quarter saw $1.1 trillion in mortgages issued, the most in 14 years, while in September, the number of people buying new homes hit a 14-year high!

In addition, residential construction spending went up 2.8% in September, to a level 10.1% higher than a year ago. These new homes should soon begin to relieve the inventory shortage many markets are experiencing.

 
 
REVIEW OF LAST WEEK

HOORAY FOR GRIDLOCK... Stocks rallied as investors saw Republicans keeping control of the Senate and Democrats the House, so a gridlocked Washington won't make extreme moves no matter who's President, undecided as of Friday.

Those extreme moves include increasing the capital gains tax rate, altering the healthcare system, or passing a massive stimulus bill that throws in money for things other than pandemic relief. Gridlock should prevent most of that.

Meanwhile, the recovery goes smoothly. Easily beating October forecasts, the economy added 638,000 jobs, the unemployment rate sank to 6.9%, the ISM Manufacturing index headed skyward, and jobless claims fell.

The week ended with the Dow UP 6.9%, to 28,323; the S&P 500 UP 7.3%, to 3,509; and the Nasdaq UP 9.0%, to 11,895.

Bonds were mixed, a tick up overall, though our UMBS 3.0% went down .12, to $104.38. The national average 30-year fixed mortgage rate fell to a record low for the twelfth time this year in Freddie Mac's latest Primary Mortgage Market Survey. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

DID YOU KNOW?... Ryan’s World, the top YouTube channel in 2019, earned $26 million and was hosted by an 8-year-old. The most watched YouTube channels are for kids--they love seeing the same video over and over!

 
 
THIS WEEK'S FORECAST
INFLATION STEADY, JOBLESS CLAIMS SLIDE... We'll get reads on consumer price inflation with the Consumer Price Index (CPI), and wholesale price inflation with the Producer Price Index (PPI), which can foretell where consumer prices are headed. Both are expected to barely move up. Moving down should be Initial Unemployment Claims, a good move for sure.

NOTE: Weaker economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and higher loan rates.

 

 

Nov. 6, 2020

Basic Types of Liens & Judgements

TYPES OF JUDGMENTS

Money judgments, spousal and/or child support judgments.

A.     A money judgment has a duration of 10 years from the date the judgment is filed.

B.      A spousal/child support judgment duration will extend over the 10 years. Spousal support judgments will be considered until released; child support liens will be considered up to 5 years after the child reaches the age of majority.

C.      A money judgment can be extended for an additional 10 years when a renewal of judgment is recorded within 10 years of the original date of entry of the judgment.

D.     The only judgment that has a duration of 20 years is one in favor of the United States of America, a Federal Corporation.

E.      Escrow orders demands and full or partial satisfactions from the judgment creditor. The title company pays demands at close of escrow.

TYPES OF LIENS

Federal tax liens, state tax liens, EDD liens and county tax liens.

A.      All the above mentioned liens have a duration of 10 years from the date recorded unless they are released.

B.      The lien can be continued for successive periods, and its original priority maintained, by recording a re-filing notice before the original lien expires.

C.       Like judgments, these liens are blanket liens and attach themselves to ALL property belonging to the delinquent taxpayer.

D.      Escrow orders demands, title company pays, lienholder records release.

E.       Escrow must have an IRS Power of Attorney form to obtain a demand.

F.       Title will not close without a demand on federal and state tax liens.

TYPES OF LIENS THAT ATTACH TO A SPECIFIC PROPERTY

Mechanic’s liens, notice of action (lis pendens), homeowner association liens, & substandard/abatement liens.

A.  Mechanic’s liens are created when a contractor/subcontractor who has done work on a specific property was not paid when the work was completed. The duration of a mechanic’s lien is 90 days from the date recorded. The contractor can foreclose on the property that they recorded the mechanic’s lien on, but must commence the action within the 90 days.

B.  A lis pendens is a notice that a court action affecting the property has been filed. This document is also used to foreclose on a property under a mechanic’s lien. This item has an unlimited duration and must be released or withdrawn.

C.  Homeowners liens are recorded when a person is delinquent on their association dues. No fixed duration. Escrow must get demand.

D.  Substandard liens are recorded by the city or county. They can be for weed abatement, hazardous substances or substandard dwellings. They have no fixed duration. Escrow must order a demand to see if money is owed.

 

Via Lawyer's Title

 

Nov. 4, 2020

Tax Benefits of Ownership: The Mortgage Interest Deduction

This updated excerpt from the forthcoming edition of Tax Benefits of Ownership covers the basics of the mortgage interest deduction, from reporting methods to economic effects.

Two residences, alternative deductions 

A long-standing policy of the federal government is to encourage residential tenants to favor mortgaged homeownership, not renting, for their monthly expenditures on shelter. To shape this bias, the government uses the tax code to deliver an annual subsidy to buyers who finance the purchase of their principal residence or a vacation home. The social policy is propagandized through the news media using the slogan “The American Dream.”

The homebuyer receives this mortgage subsidy in the form of an annual reduction in their income taxes allowed by the mortgage interest deduction (MID) rules. Tenants have no equivalent personal subsidy for the cost of their shelter.

The MID creates an incentive to permanently own a residence, bound to it by title and a 30-year mortgage debt. One downside is the mortgaged homeowner and family have reduced job mobility and impaired financial flexibility.

Homeowners process the MID as an itemized personal deduction subtracted from their adjusted gross income (AGI). The result is a reduced amount of taxable income, and in turn reduced tax liability.

When a mortgaged homeowner prepares their tax return, they have two alternatives for reporting personal deductions:

  • itemize and total all their deductible expenditures — charitable gifts, medical expenditures, state income taxes, property taxes and home mortgage interest; or
  • take the standard deduction (a fixed amount set at $12,000 for individuals, $18,000 for heads of household and $24,000 for married individuals filing jointly). [Internal Revenue Code §63(c)(7)(A)]

When the amount of permissible itemized expenditures exceeds the amount of the standard deduction, it is beneficial for the homeowner to itemize their deductions.

The real estate-related itemized deductions a homeowner takes — reported on Schedule A — fall into two categories:

  • the MID, a deduction of interest accrued and paid, limited to interest on up to $750,000 of combined mortgage principal [IRC §163(h)(3)(F)]; and
  • homeowner property taxes combined with state income tax, together limited to a total of $10,000. [IRC §164(b)(6)]

As a subsidy, the MID incentivizes individuals to own and finance the purchase or improvement of their principal residence and second home rather than renting. No mortgage financing, no interest deduction. Implicitly, mortgage payments are the economic equivalent of rent paid as tenants. However, tenants have no tax incentive to rent.

For a residential tenant considering a plan to minimize their future income taxes, the monthly payment on a purchase-assist mortgage as implicit rent goes beyond that of a mere substitute for renting. When itemized, mortgage interest paid reduces their taxable income – the reduction being the subsidy for homeownership.

The amount of reduction in taxes due to mortgage homeownership depends on the homeowner’s tax bracket, which ranges from 10% to 37%.  The tax bracket rate sets the subsidy amount received as the taxes avoided at the homeowner’s tax rate on income equal to the mortgage interest paid on principal up to $750,000.

With the MID, interest accrued and paid on a home mortgage is deductible from income when the mortgage:

  • funded the purchase price or the cost of improvements for the owner’s principal residence or second home; and
  • is secured by either the owner’s principal residence or second home. [Internal Revenue Code §163(h)(3)(B)]

The MID reduces the property owner’s taxable income under both the standard income tax (SIT) and the alternative minimum tax (AMT) rules for setting the owner’s income tax liability. The AMT is a supplemental income tax analysis targeting high-income earners who have a high ratio of SIT deductions.

Related article:

Mortgage interest deduction changes in 2018

Purchase/improvement mortgages 

Interest paid on lender and carryback sales mortgages which fund the purchase or substantial improvement of an owner’s first or second home is deductible on combined mortgage principal up to $750,000 for an individual and couples filing a joint return. The mortgage balances are limited to $375,000 for married persons filing separately.

Thus, when principal collectively exceeds $750,000 for mortgage funds used to acquire, construct, or further improve a principal residence or second home, only the interest paid on the first $750,000 is deductible.

New improvements paid for with mortgage funds need to be substantial for interest on the mortgage to qualify for the MID. To qualify for MID, improvements must:

  • add to the property’s market value;
  • prolong the property’s useful life; or
  • adapt the property for residential use.

Mortgage funds used to repair property and maintain its good condition do not qualify for funding of substantial improvements. [Internal Revenue Service Publication 936]

Refinancing limitations 

Homeowners often refinance an existing purchase-assist/improvement mortgage, especially during recessionary periods with lowered mortgage rates. Here, interest on the principal portion of the refinancing used to fund payoff of a MID mortgage qualifies for MID treatment. Conversely, interest paid on principal generated by refinancing which exceeded the payoff amount for the existing purchase-assist/improvement mortgage(s) does not qualify for the MID.

For example, a homeowner takes out a $500,000 mortgage to fund the purchase of their principal residence. The mortgage principal balance is now paid down to $400,000.  The owner needs cash funds and refinances the residence, paying off the original purchase/improvement mortgage. As intended, the proceeds from the refinancing exceed the amount of the payoff demand on the MID mortgage.

In this scenario, interest on only $400,000 of the refinancing qualifies for MID reporting, unless the excess funds generated by the refinance funded substantial improvements to the residence.

Qualifying the principal residence and second home 

For interest on purchase-assist or improvement mortgage funds to be itemized as MID, the mortgages must be secured by the homeowner’s principal residence or second home.

principal residence is an individual’s home when:

  • the homeowner resides in it a majority of the year;
  • the home is located close to the homeowner’s place of employment and banks which handle the homeowner’s accounts; and
  • the home’s address is used for tax returns. [IRS Publication 523]

second home is any residence selected by the owner. The selection may be changed from year to year and includes mobile homes, recreational vehicles and boats or real estate.

Second homes are often rented out during the year. When rented, the mortgage interest paid qualifies to be itemized as a MID when during the year the owner occupies the property for the greater of:

  • more than 14 days; or
  • at least 10% of the number of days the residence is rented. [IRC §280a(d)(1)]

When the owner does not rent out their second home during the year, the property qualifies for the MID whether the owner occupies it or not. [IRC §163(h)(4)(A)(iii)]

Any rental income the owner receives from a tenant occupant of the second home is reported as investment/portfolio income when the owner qualifies for the MID by occupying the property in excess of the 14-day/10% rule.

The owner may not treat a second home they have rented to tenants as a passive income category rental property when the owner’s family occupies the property for more than the threshold 14 days or 10% of the days rented during the year. With the family use exceeding the threshold, the second home is reported as a portfolio income category asset and the home mortgage interest qualifies for the MID treatment.

Conversely, the owner may not report the property as a passive income category investment to write off interest on principal in excess of $750,000. Further, they may not take depreciation deductions on the second home much less deduct the cost of repair and maintenance. A property which qualifies as a second home is not a passive income category asset though it is a portfolio category investment. [IRC §§163(h)(4)(A)(i)(II); 280a(d)(1)]

However, a second home, when purchased for personal use while held for a profit on resale, qualifies as investment (like-kind) property for exemption from profit taxes under IRC §1031. [IRC §1031; IRS Private Letter Ruling 8103117]

Taking the deductions 

The MID is only allowed for interest which accrued and was paid during the tax year, called qualified interest. [IRC §163(h)(3)(A)]

Procedurally, an owner deducts interest on first and second home mortgages from their adjusted gross income (AGI) as an itemized deduction to set their taxable income and thus their tax liability. In contrast, interest paid on business, passive/rental or portfolio investment mortgages reduces the owner’s AGI as interest offsets income from assets and services within each income category before setting the AGI.

When a homeowner takes the standard deduction, the MID is not involved as it is taken only as an itemized deduction. [IRC §63; IRC §163(h)(3)(F)]

The home as additional security 

Consider a homeowner who mortgages the equity in their home to fund the down payment on the purchase of an income-producing property. They execute a note as evidence of a money debt owed a lender or carry-back seller who extends credit in lieu of a larger cash down payment.

The homeowner wants to avoid the MID limitation on mortgages secured by the principal residence or second home. They want to be able to write off all the interest paid on the note against future income from the property they purchased by executing the note.

To do this, the homeowner negotiates with the lender or carry-back seller to secure the note by two separate trust deeds: one as a lien on the home and the other as a lien on the property purchased.  This is not a blanket trust deed covering two parcels, but two trust deeds each for a different properties for the same debt.

The lender or carry-back seller is satisfied with the financial risk regarding the loss of principal. They view the home secured by the trust deed as the primary source of recovery should the owner default on the note.

In addition to the owner’s home, the note is secured by a second trust deed on the property purchased. The buyer needs justification for writing off the entire interest accrued and paid on the mortgage against income from the property purchased with the loan or carryback mortgage. Here, the home equity is used as additional security under a separate trust deed from the one secured by the investment property purchased to avoid the MID taint.

Only one debt for which there is one note, but two trust deeds each referencing the same debt owed. However, arranging a blanket trust deed describing both properties risks imposition of MID limitations which the owner wants to avoid.

Economic effects of the MID

While purportedly created to encourage low- to-middle-income households to become owners and benefit financially, the MID is mostly limited to disproportionately increasing the wealth of high-income homeowners. High-income earners — who are more likely to own a home and have a greater sum of personal deductions — itemize their deductions instead of claiming the standard deduction.

Additionally, the size of the subsidy is directly proportional to the amount of the mortgage, and thus the associated property value. The wealthier the homeowner the greater the price they pay for a home and the larger the mortgage, and in turn the bigger the tax savings.

However, consider the ultimate beneficiaries of the MID as lobbyists for its continuance to include homebuilders, sellers, brokers and lenders. Without the income tax reduction for itemizing interest as the MID, the typical homebuyer overextends themselves to pay the price a seller asks for a property. Thus, without the MID refund, buyers are going to pay less for the same property as sellers are confronted with buyers who have no subsidy.

The MID operates to directly inflate home prices. Buyers taking out purchase-assist mortgages have more disposable income to spend on the same property due to the MID reduction in their income taxes. Essentially, buyers are reimbursed for overpayment to sellers by reduced income taxes through the MID.

However, most homebuyers have insufficient financial posture to be able to benefit by itemizing their deductions.  Thus, most mortgaged homeowners of low-to-mid-tier priced housing no longer receive the subsidy, or as much subsidy, depending on the level of their wealth.

Worse for availability of the subsidy, the 2018 increase in the standard deduction greatly increased the likelihood most current or prospective homeowners will take the standard deduction, as opposed to itemizing their deductions. This shift decreases the availability of MID to benefit low- and middle-income households, a condition which tends to lower the price they can pay. This factor, while working to depress home prices, is offset by any trend in lower mortgage interest rates that increases the buyer’s ability to borrow more mortgage money based on the same income.

Related article:

Is the mortgage interest tax deduction driving inequality?

via journal.firsttuesday.us

 

Nov. 2, 2020

National Market Update

 

NATIONAL MARKET UPDATE

 

 

Economists say don't worry about mild drops in monthly data--it’s the trend that counts. That was seen in the year-over-year figure for New Home Sales, UP 32.1%, though September slipped 3.5% after four months of big gains.

Same story with contracts signed on existing homes, as the Pending Home Sales index scored 20.5% year-over-year growth, the second highest ever, even though it dipped 2.2% in September following four months of increases.

The U.S. housing market is the most outperforming economic sector in the world. The National Association of Realtors says buyers pay roughly $20 less per month than last year for a median listing price home that now costs $35,000 more!

 

REVIEW OF LAST WEEK

 

 

GRIN AND BEAR IT... Investors saw the bears tank the market on fading economic stimulus hopes and rising coronavirus cases. But Europe is worse off, and even though more testing is logging more cases, our case fatality rate is falling. 

The GDP report elicited a grin. Economic growth bounced back in Q3 to a 33.1% annual rate following Q2's 31.4% drop, drawing a V-shaped recovery for the overall economy. 

Returning to our super low unemployment rate is still a long way off, but weekly and continuing jobless claims fell, incomes are rising despite declining government payments, and consumer spending is just 2% below February's high.

The week ended with the Dow down 6.5%, to 26,504; the S&P 500 down 5.6%, to 3,270; and the Nasdaq down 5.5%, to 10,912.

Bonds dipped a tick on the good economic data, though our UMBS 3.0% went UP .09, to $104.50. In Freddie Mac's Primary Mortgage Market Survey, the national average 30-year fixed mortgage rate rose one basis point (.01%) above its record low. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

DID YOU KNOW?... There are no muscles in your fingers. It’s astonishing, but the functioning of the fingers is actually controlled by muscles in the palms and arms.

 

THIS WEEK'S FORECAST

 

 

MANUFACTURING, SERVICES, AND JOBS KEEP GROWING, THE FED MEETS... Both manufacturing and services sectors of our economy should continue expanding in October by the ISM Manufacturing and ISM Non-Manufacturing Indexes. October Nonfarm Payrolls are expected to show over half a million more jobs returning. The Fed will meet and won't hike rates.

NOTE: Weaker economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and higher loan rates.