Is Downsizing in Your Best Interest?

 

Everyone thinks of downsizing once they are empty nesters or many homeowners just might want a change.  Downsizing your home does have many financial advantages as well as less upkeep but is it the best way to go when it comes to taxes?  When you downsize more than likely you will end up with cash from the sale of your larger home which could end up adding to a big tax bill.  

 

Currently if you sell your home (principal residence) for a profit, you could qualify to  knock off $250,000 ($500,000 for married filing jointly) of your capital gain.  In order for you to benefit from the maximum exclusion you will need to pass the ownership and use test by the IRS.  The IRS will want to make sure you have owned the home for the last two years and that you have lived in the home as your principal residence for the past two years (ending on the date of the sale).

 

The IRS does have exceptions to the rules when it comes to the ownership and use test.  For example, if you are moving before owning the home for two years because of a job change (seen as unforeseen circumstances) it is exempt.  Other unforeseen circumstances the IRS has are divorce or natural disaster.  In circumstances such as these, the IRS will allow the homeowner to prorate the exclusion.

 

A homeowner does not have to live in the home for two consecutive years just as long as a homeowner has lived in the home 24 months out of the five years prior to the sale of the home.  Also, you can only claim and exclusion once every two years.

 

Before you decide to sell your home, you will want to calculate your cost basis.  Do this by figuring out the capital gains on the sale of your home then subtract your cost basis from the selling price.  Your cost basis includes the purchase price along with settlement fees, closing costs and commissions associated with both the purchase and the sale. Take these and add to the cost of all the improvements you have

done to the home which will be your cost basis.

 

Determining if something is a capital improvement or repair is also important because capital improvement can be added to your cost basis but repair cost cannot.  Why?  A capital improvement will increase the value of your home, while a repair will just restore your home to its original condition.  For example, a new deck is a capital improvement while fixing your plumbing is considered a repair.  A new roof would be a capital improvement however, just replacing a  few shingles is just a repair.

 

If you are looking to downsize, you may want to consider whether to buy or rent.  Renting will release you from all the obligations of owning a home but you will not be building equity and you will have to answer to a landlord.  There is no right or wrong answer, it is a personal preference which is right for you.

 

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A Bright Future Might Be In Store For Single-Housing Home Construction

According to the Federal Reserve Bank of Kansas City single-family home construction is in store for a bright future.  A new study found that the years of underbuilding will come to an end.  This has left us in a deficit estimated at more than one million homes according to the National Association of Home Builders.

Jordan Rappaport, a senior economist at the Federal Reserve Bank of Kansas City, points out several points that align with the NAHB’s Home Building Geography Index data.  The key findings are on commute times, telework and home construction.  Those that work in a large metropolitan area, say that the largest concern about the suburbs is the commute.  The benefit is hybrid working which reduces commute time and expense.

The reduction in commuting will encourage more single-family permits but it will be a slow increase.  There are many headwinds that the National Association of Home Builders has reported that will prevent a quick boost in permits.  For example, when single-family construction begins to rebound, supply constraints are likely to slow its climb to its predicted long-term rate.  Moreover, shortages of workers, construction materials, and ready-to-build lots are all likely to constrain the growth of single-family construction in the short term.

Even with pushback, the jump in the construction of single-family homes will provide a long-term growth period for home building.  Once single-family home construction begins to ramp up, it is predicted to remain high for years to come.

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Are Building Material Prices Still Up?

The overall building material prices are down from summer prices except for the prices of ready-mix concrete.  In fact, the price of ready-mix concrete is rapidly rising.  The largest decline seen was in softwood lumber and steel mill prices.  Gypsum prices are still high over 20% from the same time last year.

Prices of building materials saw a 0.3% decrease in September according to the Producer Price Index (PPI). There was also a decline in the PPI for goods input to residential construction (including energy) for the third consecutive month in September.

Gypsum, which is used in drywall, is also an ingredient used in ready-mix concrete.  High demand for cement combined with lower imports of aggregate due to a large quarry shutdown in Mexico have spread thin the supply of domestically produced ready-mix concrete as well as gypsum.   Even though single-family house building is has slowed a little, concrete prices are still rising because it is used for many other applications outside of residential construction. Ready-mix saw a PPI increase of 1.4% this fall which marks the sixth consecutive increase.  This is the largest year-to-date increase in the index’s 34-year history.

Softwood lumber’s  PPI declined 2.9% this fall but the prices are still 14.5% higher than a year ago.  Steel Mill products saw a decrease of 6.7% this fall and have dropped 16.1% over the past four months.  In fact, the index is the lowest it has been since June 2021 which is still double the price that the steel mill was before COVID-19.

Home prices have decreased since last June 2021 2.3% which was reported to be the largest three-month drop since April 2020.  The small decline has happened during high prices on materials though.  In the South, there is a 2.6% increase, a 0.7% decrease in the Northeast, a 0.3% increase in the West and prices stayed the same in the Midwest.

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IS THE HOUSING MARKET HEADING FOR A CRASH

The housing crash of 2008 was a devastation to the U.S. housing market.  Currently, the economy is slightly taking a negative turn.  The slowdown in the U.S. economy is having many homeowners concerned with the state of the market.  Fortunately, data reveals that today’s slowdown is nothing like the crash in 2008. One of the biggest factors for it not to crash down is the low inventory supply which comes from current homeowners putting their homes on the market, newly built homes being listed and short sales or foreclosures. 

Even with the uptick in housing supply, resales are still low.  Data shows that inventory is up 27.8%  which was the same time last year but compared to 2019 it is down by 42.6%.  This means that the current inventory is still super low because current homeowners are still hesitant to put their homes on the market.  This does not mean however that there are not enough houses on the market to cause a crash or prices to drop.  This would take a flood of current homeowners that would want to put their house on the market at the same time for this to happen.

Ironically even with such low inventory, homebuilders are slowing down their production currently.  “It has become a very competitive market for builders where they are trying to offload any standing inventory,” says Ali Wolf, Chief Economist at Zonda.

The slow down is a reaction to the higher mortgage rates and softening buyer demand. Builder’s do not want to overbuild like they did before the 2008 crash occurred.  Those in the industry say it is a sign that builders are being intentional about not overbuilding homes like what happened during the bubble before the 2008 crash.  The latest report from the U.S. Census states that at today’s current pace, we’re headed to build a seasonally adjusted annual rate of about 1.4 million homes this year. This is the perfect mix to make a stable market.  This will add more inventory at a pace that does not create an oversupply of inventory that the housing market can not absorb.  This is due to the builders being cautious about how much and how fast they are producing.

Distressed properties which are both foreclosures and short sales are another place inventory is pushed out in the market from.  In the 2008 housing crisis, there was an influx of short sales and foreclosures to flood the market in a short period of time.  This crisis was mainly due to the lenders allowing people to secure a loan they really could not afford the home.  Today’s market does not have to worry about this as much because lending standards are much stricter today than they were back then.  These tighter standards are pushing out more qualified buyers and fewer foreclosures.

Around the time of the 2008 crash, there were well over a million foreclosures per year.  When the lender’s tightened their reigns on lending standards the amount of distressed homes started to decline.  Also the introduction of the forbearance program in 2020 and 2021 has also aided in preventing a repeat crash.  This program gave homeowners the option for loan deferrals and modifications that were not there in the past.  And data on the success of that program shows four out of every five homeowners coming out of forbearance are either paid in full or have worked out a repayment plan to avoid foreclosure.

These three factors are the biggest reasons we will not see another big crash like we had in 2008.  Even though our housing supply is growing in 2022, it will not even touch the number of homes that would need to hit the market to saturate it and make home prices drop.  If you are in the market for a new home, contact a local real estate agent who can help you with the purchase of a new home.

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SINGLE-NEW FAMILY HOMES ARE BUILDING IN THE SMALLER MARKETS

 According to the National Association of Home Builders (NAHB) Home Building Geography Index (HBGI) we are seeing a change in the locations of single-family home builds. The building activity in the last 30 months shows a decrease in building in metro areas, largely due to COVID, housing affordability and highly regulated markets.

“The geography of home building has shifted over the last two and a half years, with more single-family and multifamily construction occurring in lower-density markets.  This shift was first caused by the initial impact of COVID shift continued in recent months due to housing affordability conditions that are causing both prospective renters and buyers to expand their geographic search for housing, aided by hybrid work patterns that allow for a combination of remote office work,” said NAHB Chief Economist Robert Dietz.

Another wrench in the system is the problem with getting building materials, construction labor shortages and and the Federal Reserve’s stingent monetary policy.  “Looking at the last 12 months, single-family production has slowed in all regional submarkets, both large and small, due to ongoing building material production bottlenecks, construction labor shortages, and the Federal Reserve’s tigtening monetary policy,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Georgia.

The National Association of Home Builders Home Buidling Geography Index (HGBI)  is a quartley measurement of building conditions across the country and uses county-level information about single-and-multifamily permits to gauge housing construction growth in various urban and rural geographies.  The National Association of Home Builders tracks single-family and multifamily grow rates and market shares in all seven regions of the U.S. The HGBI takes the place of the of the Leading Market Index (LMI).  The LMI would base their findings off single-family housing permits, employment, and home prices.

Currently it is report that the market share for single-family home builiding in large metro core and inner suburbs too a dive from 44.5% to 41.6% from the fourth quarter of 2019 to the second quarter of 2022.  This shows the precovid vs postcovid figures, accounting for the results due to COVID. In the outer suburbs of large and medium metro areas has jumped up from 17.4% to 19% during the same time period as the decrease in the larger areas. The share also increased from 28.8% to 29% in the small metro core counties and in rural areas it rose from 9.4% to 10.4% This is mainly due to homebuyers wanting to move away from the dense areas during COVID.

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MAKING SURE YOU ARE IN GOOD STANDING BEFORE PREAPPROVAL

 Preapproval for a home mortgage can be confusing, especially if you are a first-time homebuyer.  Many homebuyers want to know if they are preapproval ready.  In order to know, here are some things that lenders look for when preapproving someone for a home loan.

Mortgage pre-approval is not a mortgage pre-qualification.  A preapproval is more in-depth than just answering a few questions from your lender.  There is a lot of paperwork involved which includes employment verification, checking records, savings records and investment records.  Lenders nationwide will like for the same elements when pre-approving for a loan. These include a minimum of two-year employment history in the same job or field, a credit score of 620 or higher, a savings track record, financial asses records, proof of down payment  (3% to 20% of home price), and an all-in debt to income ratio fo 43% or less.  The majority of lenders nationwide will not charge for a pre-approval, however, there are some out there that will ask for reimbursement to pull your credit report.

Your job and credit history play a big part in the pre-approval process.  The two year employment rule is very strict.  If you are a current graduate and can prove future income from your employer this will suffice, but if you change from W-2 pay stubs to self-employment this is a no go.

A credit score of at least 620 is also the rule of thumb.  Before you go to a lender to get pre-approved, you can check your credit score for free through the credit unions.  In today’s market, the loan approval for credit scores is every strict.  For a mortgage, the middle score is what counts and is derived from all three of the provideers, TransUnion, Equifax, and Experian.  If you and your partner are purchasing the home together, the worst middle score of the two will be used to determine preapproval.

Another important factor is your assests and downpayments.  “The ability to budget and save shows financial discipline,” says Staci Titsworth, a regional manager for PNC Mortgage in Pittsburgh.  If you received a big bonus, or an intertance, the lender will also have to show the underwriter where the money came from and that it is not borrowed.  Lenders know that life is not perfect and there will be bumps in the road.  Examples include job loss, job changes, and unexpected expenses.  For many of these reasons, people have to dip into their savings to cover these unexpected expenses. In a nutshell you want to be able to have enough info for the lender to explain to the underwriter your financial ability to repay a loan.

Your debt and income ratio is also very important aspect of the process. Lenders desire to see a debt-to-income rati of 43% or less.  If you make $10,000 a month gross before takes, and $4,300 of it goes towards your debt you are okay. This needs to include you future house payment, monthly property taxes and homeowners’ insurance. There is some room to negotiate when it comes to this. Let’s say your DTI is 46% but you have a great credit score and 5% in the bank for a downpayment.  More than likely most lenders would approve you.

Starting the process early is a good idea in case you need to work on some areas to help with your credit, this will give you time to do so.  If you are going to purchase within the next year, then you will want to start looking at getting preapproved now. Note that preapprovals usually are only valid for 60 to 90 days but can be extended if you keep updating with your current financial situation.

If you are in the market to purchase a home, remember to use both a real estate agent and a lender who can help you with all your homebuying needs.  Going to see a home with a preapproval in hand will show that you are a serious buyer.

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THE HOMEWOOD SUITES IN COVINGTON WILL BE CONVERTED TO AN APARTMENT COMPLEX

 The former Hilton Homewood Suites located in Covington will be turned into an apartment complex called the Fairlane and the rent at the Fairlane will start around $900 a month.  This is according to Zachary Kupperman who along with his partners purchased the property and plans to turn it into an 86-unit apartment complex.

Zachary Kupperman is no stranger to a project like this.  He is responsible for developments such as The Hotel St. Vincent and the Drifter Motel in New Orleans.  Covington is a perfect area for a project like this because so many works remotely and can rent or purchase farther away from New Orleans.  “In bedroom communities like Covington something like (the Fairlane project) can solve all three problems at once,” said Kupperman.

The closing of the hotel was mainly due to the COVID-19 pandemic and the shortage of travelers during the stay-at-home orders. This has been seen all around the country and not just locally.  Renovating closed-down hotels due to COVID has become a trend.  This coupled with the strong growing need for affordable housing has piqued many developers’ interest in such ventures.

The Homewood suite is a type of lodging that is becoming rare to find these days with not only a place to sleep but a kitchen and living area as well.  This kind of accommodation came around for the business traveler who might need a place to stay for weeks at a time.  Although in the past Hilton has offered this type of room, they are now moving away from this sector and refocusing on a more boutique hotel.

The former Covington Homewood Suites is located at 101 Holiday Square close to the Interstate 12 junction with Frontage Road.  It is a perfect spot because it sits between a Honda dealership and The Collins (an apartment community that rents from $ 1,300 plus).  As mentioned earlier, The Fairlane will start one-bedrooms out at $900 a month which is very affordable in this area.

“There is no heavy construction and the conversion is a fairly light touch, with some painting, carpeting, adding some appliances,” he said. “So spending has been much less.”

The total acquisition and renovation will cost around $9 million which is less than half of what a comparable complex would cost to build from the ground up.  Many of the rooms in the hotel were already being used as long-stay accommodations.  The apartment complex will be able to use the existing pool, hot tub and gym area for the amenities.  The unties will be designed by Covington-based Crown Designs and New Orleans-based Key Real Estate will be managing the complex.

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