Home prices and home sales have been rising over the past few years, pointing to a recovery in the housing market, but RealtyTrac warns that what we are seeing may not be a true recovery but instead a mirage created by investors-a dangerous mirage that could lead to trouble in the years to come. Cash purchases made up nearly half of home sales across the nation in September, according to RealtyTrac's data. A Goldman Sachs study puts the number at 57 percent. "All-cash is driving up home sales nationwide, which looks good on paper," RealtyTrac said in its most recent Foreclosure News Report. Cash buyers tend to fall into one of four categories: institutional investors, "rich people," retirees, and foreign buyers, according to RealtyTrac. The National Association of Realtors recently reported investors are making up 35 percent of cash deals, and retirees are making up another 12 percent. "The outsized presence of deep-pocketed Wall Street investors is creating a paradox in the housing recovery," RealtyTrac said. "A housing boom is taking place alongside a plunging rate of homeownership." The high percentage of cash buyers might indicate "financing is too costly," according to RealtyTrac. "It's very difficult for a normal buyer to compete with the corporatization of residential real estate," Jack McCabe, owner of McCabe Research & Consulting in Deerfield Beach, Florida, told RealtyTrac. Furthermore, McCabe said, "Once these hedge funds head for the exits, a lot of hedge funds will lose money because of the circumstances they created." Institutional investors have spent billions in the housing market in recent years, buying up homes and renting them out. "Leading the Wall Street REO-to-rental pack is Blackstone, the largest private landlord in the U.S., which has spent $7.5 billion on 40,000 houses," according to RealtyTrac's Octavio Nuiry. Foreign buyers are also investing in the U.S. housing market. "For Europeans it's a no brainer to buy here," Tilman Otto, a broker with Gibraltar Real Estate Group in Henderson, Nevada, commented to RealtyTrac. "Prices are cheap and the taxes are low," Otto said. "I've got a couple of clients that have bought five or 10 properties. The prices have nearly doubled since 2010 when they bought. They're millionaires now-and they're very happy." The current trend of institutional investors and foreign buyers snapping up properties and turning them around for profits is not a sustainable one, according to RealtyTrac. In fact, the company compares today's trend to the last housing boom, noting, "Then as now, market watchers shrugged off warnings of an unsustainable housing bubble, caused in part by speculators driving up prices and chasing short-term profits." Metros with the greatest percentage of cash purchases in September included Miami, where 69 percent of home purchases were made with all-cash, as well as Tampa, Jacksonville, and Las Vegas, where about 62 percent of purchases were made in cash.
Analyst: Today's Recovery Is 'Atypical' but Undeniable
In a report released last week, Clear Capital linked high levels of distressed sales activity with high levels of home price appreciation, something that may seem out of the ordinary. However, in a conversation with Alex Villacorta, VP of research and analytics at Clear Capital, explained that this trend is in keeping with the “first-in-first-out” recovery the nation has been experiencing over the past 18 months. In other words, markets that experienced the worst of the housing crisis—and still have large numbers of distressed sales—are the markets that are now rebounding the fastest. Furthermore, Villacorta explained, “Everything about the housing market over the last 10 to 13 years has been anything but normal. I would even argue that the recovery itself is atypical.” Markets such as Phoenix; Las Vegas; and Sacramento, and Riverside, California, experienced some of the most volatile price changes over the past several years. Prices in these markets doubled in a matter of a couple of years and then overcorrected on their way down, according to Villacorta. The result is a market prime for investors to find “great bargains,” he said. Despite continued high levels of distressed sales, these markets are currently experiencing “tremendous growth,” Villacorta said. There’s no doubt investors are playing an overwhelming role in these markets’ recoveries, leading some to question whether we are seeing a true recovery. In response to these doubts, Villacorta said, “Prices are going up. There’s really no ambiguity about that.” A better question would be whether the current recovery is “sustainable,” he said. On this question, Villacorta agrees with many analysts who say the current rate of price growth and investor activity is not a model that can be maintained for very long. Clear Capital predicts price growth next year will measure about half of what it has been this year—about 4 percent in 2014. While certainly lower than today’s appreciation rates, Villacorta says this rate is closer to the historical norms the market has maintained over many decades. Investor activity may decline abruptly in some markets like Sacramento, where there has been such a sudden surge; but other markets will likely see a slower decline in investor demand. Villacorta also pointed out that some markets will adapt well to declining investor share. The Bay Area, for example, where tech jobs are booming, “is a good example of the traditional buyer segment coming in to replace investor activity without skipping a beat,” he said. “The big question mark is still on the broader economy,” according to Villacorta. He says jobs and consumer confidence must pick up in order for the housing recovery to continue.
Pending Legislation: Gives 1st TD Holders "Veto Power" over Junior Mortgages
In a move that will harm homeowners, legislation is being introduced on Capitol Hill, limiting a homeowner's ability to capitalize on liquidity of their home's equity. Under the guise of "mortgage reform", Sen. Bob Corker, R-Tenn., and Mark Warner, D-Va., have introduced a bill allowing a first-lien holder on a single-family home mortgage to block homeowners/ borrowers from taking out a second lien (i.e. home equity). Note : Public records show both Senators are highly financed by the big banking industry giants such as CitiBank, JPMorgan Chase. Homeowners applying for 2nd TD that increases a (combined) loan-to-value ratio to 80% (or more), the homeowner must obtain the approval of the first-lien holder, according to a 154-page draft of the Corker-Warner bill. The legislation allows 1st TD lender to decide the home's market value thru their own appraisal dept. (No "conflict of interest" here, is there?). The bill also calls for the creation of a new data base that identifies and tracks second liens or any other subordinated liens issued on a mortgaged residential property. (Just what we need ...ANOTHER government data base!!!). This data base will notify the 1st TD lien holder (s) of the existence of a second lien and track the "payment history" of junior liens.
1099c Form For Real Estate Investors
The IRS considers a short sale to be debt forgiveness, which means the IRS categorizes forgiven debt as income. They levy income tax on the money you never earned. As you likely know, in a short sale the seller receives nothing at closing. After commissions and other expenses, everything left on the table goes to the lender as partial repayment of the mortgage. At best, the seller is let off the hook by the lender for any of the debt not repaid. But the IRS still wants a chunk from the failed investment. Unless you are an accountant or tax specialist, you probably aren't familiar with the dreaded 1099c form that the lender sends to the IRS. This form reports the amount of forgiven debt. The IRS counts it as income for the tax year. There is a big exception when the short sale house was your primary residence. The US Congress made primary residence short sales exempt from the forgiven debt laws when the short sale market was heating up. That law is known as the Mortgage Forgiveness Debt Relief Act of 2007. But they didn't apply the law change to investors. Still, if you are an investor making a short sale, there is a clause in the old law that may save you from paying taxes on income you never received. Qualifying for this tax exemption requires that you be financially insolvent at the time the debt was forgiven. This isn't necessarily limited to the property that you sold short. It may or may not include other assets that you own. Both personal and business assets. But it could depend on how you have your investment business structured. This is very good reason to hold each investment property as a separate business entity. Individual circumstances and various state laws determine the best business entity to use but a Limited Liability Company (LLC) is often the right choice. When each investment or business asset is held as an individual entity, the short sale property is highly likely to be insolvent at the time of the sale. In that case IRS shouldn't target your personal income or the income from your other business holdings. Check with your tax adviser first. Another option is personally qualifying as insolvent at the time of the sale. But you have to follow the IRS rules to demonstrate insolvency. Completing the Insolvency Worksheet that comes with IRS Publication 4681 determines if you were insolvent at the time of the debt forgiveness. If your liabilities (including the amount of debt forgiven) are more than your assets (including the price of the short sale) you were insolvent at the time of the sale and do not owe taxes on the forgiven debt. Of course, check with a tax adviser to see how this applies to your specific circumstances.
$15 Minimum Wage
As fast-food workers plan yet another round of one-day strikes on Thursday in cities around the country, labor leaders, economists and industry officials continue to debate the potential effects of raising wages at companies that often assert that such increases would raise consumer prices and shrink the work force. Organizers of the fast-food workers' nascent movement are clamoring for a $15 an hour wage, which would mean a 67% pay increase in an industry where wages average around $9 an hour. But even experts who support some increase worry that a raise to $15 an hour would have profound effects on the industry. Arindrajit Dube, an economics professor at the University of Massachusetts, Amherst, said an increase in pay to $15 would push up fast-food prices by nearly 20%. With the industry estimating that one-third of its costs go to labor, he said a $15 wage would mean wage increases averaging around 60%, raising the cost of a $3 hamburger to $3.50 or $3.60. Stephen J. Caldeira, president of the International Franchise Association, estimated that the demand for $15 wages would lead to a 25% to 50% increase in fast-food prices. "It would definitely hurt the consumer," he said. "Increasing the cost of labor would lead to higher prices for the consumer, lower foot traffic and sales for franchise owners and ultimately lost entry-level jobs." David Neumark, an economics professor at University of California, Irvine, who has studied minimum wage increases in depth, estimated that raising fast-food pay to $15 would result in a 5% or 6% reduction in employment. "Anyone who thinks sensibly about this should be concerned that $15 would have a big effect on employment."