Oct282013
Ten most undervalued and five most overvalued OC housing markets
I recently reported the housing bubble fully is reflated in Irvine, California, and the OC housing market ricochets off affordability ceiling. Since the OC market is now priced very near its historical relationship between the cost of ownership and the cost of rent, I want to take a more detailed look at what’s happening across the county and find those markets where deals still abound and those markets where none are found.
With the dramatic increase in price and rising interest rates, affordability is declining rapidly. As a consequence, the OC housing market, which started the year rated a 10, is now dropping down to a 7. While this is still a good rating by historic standards, it’s not the buy signal it once was.
Taken in historical context, the housing bubble, and the overshoot of values to the downside are apparent. The last time the market stabilized at near rental parity, it clung to that level for nearly a decade. With the housing market’s extreme sensitivity to mortgage interest rates, and with toxic loan products banned by the new residential mortgage rules, prices shouldn’t easily detach from this equilibrium value and inflate another bubble. With our restricted inventory and high percentage of cash buyers, we may still see a mini-bubble inflate over the next few years.
Resale prices have been going straight up, and the pace of the increases is remarkable. The rally has been cooling in recent months, but we’ve seen no pullback in prices so far, and with interest rates dropping down near 4% again, buyer interest should remain strong over the fall and winter. In fact, I believe this fall and winter represent a great opportunity for those who don’t want to compete against the crazies who will come out again in the spring.
What’s concerning many market watchers is the rapidity of the increase. The only two times in the last 25 years that house prices rose faster than wages, they crashed hard afterward. If the current rally flattens down to a normal rate of appreciation paralleling rent and wage growth, we may avert another crash, but given our history of price volatility, we may see another mini-bubble as buyers get carried away prior to interest rates rising and taking away the punch bowl.
Rents have been rising slowly but steadily. The influx of new apartments should keep price raises in check for several years, but an improving economy should also keep rents going up.
Rents are in their stable long-term range.
What jumps out about the graph of the cost of ownership and rents is the dramatic increase in ownership costs. It’s gone up even steeper than house prices because interest rates have also been rising.
In the past, such steep rises in cost of ownership was offset by toxic mortgage products that allowed fools to make the same payment yet finance prodigious mortgage balances. The recent near-vertical increase in the cost of ownership was entirely absorbed by new buyers. This is largely what’s caused the lack of enthusiasm from buyers lately.
The cashflow investment opportunity in OC has never been very good. Our brief window of opportunity to pick up cashflow-positive properties in OC has closed.
The market overall is still not overvalued by historic norms. We’ve erased the undervalued condition, and the market is now valued right where it typically finds an equilibrium.
The OCHN rating system rates markets between 4 and 6 most of the time. It’s rare that market conditions strongly favor buyers and earn readings of 7, 8, 9 or 10. Although the market is not as good as it was, put in perspective, it’s still pretty good.
The reflation of the housing bubble has not been even and uniform. Over time, I believe these markets will resume their relative valuations compared to each other and to their own historic norms. Since all these markets are adjacent, there is significant substitution effect between them. When one becomes overvalued, it turns off buyers who look for bargains elsewhere. It is my opinion that the list of undervalued markets below will see above average appreciation over the next three years while all markets equalize.
There isn’t much commonality in the markets above. We have premium markets like Coto de Caza and Yorba Linda as well as discount markets like Anaheim or Santa Ana. There is no particular reason these markets should remain undervalued.
Unlike the undervalued markets, the overvalued markets do appear to have a common bond — they are mostly beach communities. Some will argue beach communities are always inflated, so this is to be expected. That is an erroneous way to look at this data. Each of the beach communities carries a significant historic premium, that much is true. However, they are inflated even by that standard. No matter how you look at these communities, prices have simply gone up too high too fast. A correction is in order.
Over the last 25 years, the disparity of income and wealth has favored the top 1% above all others. Perhaps the reason these beach communities have a larger degree of relative inflation than they did 20 years ago is due to the concentration of wealth among these individuals. If you believe that to be the case, then today’s prices are reasonable. Of course, if you plan to invest in these properties based on that continuing, you better hope we don’t see populist changes in attitudes and tax laws that could reverse this trend.
This fall and winter is a good time to house shop
There is never a perfect time to buy. It would have been great to have purchased in the fall of 2011 when inventory was abundant, interest rates were low, and prices were much lower. Of course, the only people who bought then were the brave souls who purchased while prices were still falling. With prices up and interest rates up, the deals are not as compelling today, but inventory is still on the rise, and interest rates are coming down again after the fed fake on taper was announced. Anecdotally, I’m told buyer activity is still low, so competition for properties is low right now. The cloud inventory probably won’t be coming down in price any time soon, so waiting isn’t likely to get a better deal unless policies change at the banks. If you’re thinking about buying, I would encourage you to look now rather than wait for spring when interest rates might be higher and competing buyers will be active.
Fixer Opportunity
Today’s featured property is trashed, and it’s unlikely any bank would finance it. However, with the abundance of cash buyers, someone with vision could buy this place and create significant value. The Coto de Caza community is still undervalued, and between the value add of improving this property and the likely appreciation from getting it below historic value, this property could be a real winner.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”OC13217870″ showpricehistory=”true”]
31862 VIA PATO Coto de Caza, CA 92679
$477,750 …….. Asking Price
$911,352 ………. Purchase Price
10/11/2012 ………. Purchase Date
($433,602) ………. Gross Gain (Loss)
($38,220) ………… Commissions and Costs at 8%
============================================
($471,822) ………. Net Gain (Loss)
============================================
-47.6% ………. Gross Percent Change
-51.8% ………. Net Percent Change
-58.2% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$477,750 …….. Asking Price
$16,721 ………… 3.5% Down FHA Financing
4.24% …………. Mortgage Interest Rate
30 ……………… Number of Years
$461,029 …….. Mortgage
$131,440 ………. Income Requirement
$2,265 ………… Monthly Mortgage Payment
$414 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$100 ………… Homeowners Insurance at 0.25%
$519 ………… Private Mortgage Insurance
$98 ………… Homeowners Association Fees
============================================
$3,396 ………. Monthly Cash Outlays
($565) ………. Tax Savings
($636) ………. Principal Amortization
$25 ………….. Opportunity Cost of Down Payment
$80 ………….. Maintenance and Replacement Reserves
============================================
$2,299 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,278 ………… Furnishing and Move-In Costs at 1% + $1,500
$6,278 ………… Closing Costs at 1% + $1,500
$4,610 ………… Interest Points at 1%
$16,721 ………… Down Payment
============================================
$33,887 ………. Total Cash Costs
$35,200 ………. Emergency Cash Reserves
============================================
$69,087 ………. Total Savings Needed
[raw_html_snippet id=”property”]
Building America: Fascinating map that illustrates when country’s homes were built showing westward expansion and the 90s housing boom
http://www.dailymail.co.uk/news/article-2477890/Fascinating-map-tracks-development-Americas-homes.html#ixzz2j0rtGSlt
Reality is, all of OC is overvalued simply because when you distort the price of money, you distort the price of all assets including RE.
I can’t argue with that. My system uses the mortgage interest rate to determine ownership costs, so when that rate is manipulated and artificially low, ownership costs are manipulated and artificially low. This makes houses more affordable on a monthly payment basis while prices are still far too high.
Report: Market Will Prosper Under Ability-to-Repay, QM Rules
Today’s resilient capital market has the capacity to adapt readily to the pending Ability-to-Repay and Qualified Mortgage (QM) rules set to take effect January 10, 2014, according to a white paper CoreLogic released Friday.
The paper titled, ATR/QM Standards: Foundation for a Sound Housing Market, provides an overview of the rules themselves and examines their possible impact on the market.
The Ability-to-Repay rule requires lenders to take eight borrower attributes into consideration: “borrower’s current income or assets; current employment; the monthly payment for the loan, as well as any other loans secured by the same property; monthly payments for property taxes and insurance for which the borrower is responsible; current debt obligations; the borrower’s monthly debt-to-income ratio or residual income; and credit history,” CoreLogic explained.
A “Qualified Mortgage” meets a set of standards that provide “safe harbor” for lenders. These mortgages are automatically considered to be compliant with the Ability-to-Repay rule.
“To be QM-eligible, a loan has limits on points and fees to be paid, as well as underwriting features allowed,” CoreLogic stated.
Wishful thinking. The housing market will certainly adapt — it has no choice. But limiting credit availability will not help reflate the bubble any.
I heard a rumor from my loan broker that 5-5-90 loans are back, no PMI.
Most loans will still be available, but the price will be so high that nobody will use them.
I’d heard that too, but when I asked around, the only loan I found available (high balance quality borrower) was a 90% LTV with ~90 bps MI. I wonder how creative the builders’ affiliated lenders are? If you buy a $1m Great Park home today, will they be able to offer anything other than an 80% LTV loan?
Don’t look for changes to housing tax breaks soon
WASHINGTON — Here’s a side effect of the 16-day federal shutdown and debt ceiling crisis that could prove popular among tax-sensitive homeowners: The stalemate removed even the remotest possibility that Congress could undertake fundamental tax changes curtailing housing breaks this year and renders it unlikely next year as well.
This means that the mortgage interest deduction, local property tax write-offs, second-home deductions and capital gains exclusions are safe for the time being — despite a far-reaching tax overhaul package taking final shape in the House. The package may be outlined by Ways and Means Committee Chairman Dave Camp (R-Mich.) in the coming weeks and could target these write-offs directly. A parallel effort is underway in the Senate but reportedly is not as far advanced as Camp’s.
Even if the bipartisan special committee appointed last week to resolve differences between House and Senate budgets by Dec. 13 proposes a tax overhaul schedule, the prospects for any serious action appear slim.
As a general matter, Democrats insist that any major reforms produce net new revenue — taxes — to help lower the federal deficit. Republicans counter that by streamlining the labyrinthine tax code and lowering the top marginal brackets for corporations and individuals, the economy will be stimulated and generate more earnings. Those additional earnings, in turn, will yield greater tax revenue for the government and lead to lower deficits and debts.
Through an extraordinary effort, Camp has managed to keep details of his plans secret by excluding Democrats from the bill-drafting process, strictly limiting access by staff members to meetings and imposing a gag order on participants. But given his publicly announced goals of sharply lower top tax brackets — 25% for corporations and individuals — housing analysts can’t see how he can make up the lost revenue without deep cuts to current individual tax deductions.
Let’s get this done while I’m out of the home-ownership market!
Exactly. If they are going to reduce the HMID, which I ultimately think they will, it will pummel Irvine house prices. I would rather buy after than before.
This issue would be at the top of my list of concerns if I were buying soon. The AMT doesn’t allow higher-earners in CA to deduct taxes/mello roos, but the mortgage interest deduction is pretty big. The 4% going 30-year rate minimizes the impact currently:
e.g. $900k 4% mortgage for a couple in the 33% IRS/9.3% FTB range = ~$1,100+ monthly tax savings. Take that rate up to 6% and the tax savings jump to nearly $1,800 monthly.
Mello Roos is not deductible for anybody.
I think it is now:
Mello-Roos Is Deductible Now
Thanks.
“if the assessments are not for local benefits”
I just read that article, and I think the rule is the same as it has always been, and since Mello Roos is always for local benefit, it is not deductible. I am not saying that 98% of filers who pay Mello Roos are not deducting it, but if their return is reviewed, chances are the Mello Roos portion of their property tax will be disallowed.
Pending home sales fall on declining home affordability
The number of real estate contracts signed and recorded declined 5.6% from August to September, as home affordability receded under the influence of higher mortgage rates, home prices and consumer uncertainty, the National Association of Realtors concluded Monday.
The NAR Pending Home Sales Index – a barometer of real estate contract signings – fell from an index score of 107.6 in August to 101.6 in September. It also declined 1.2% from year ago levels when the index hovered at 102.8.
This is the lowest index level reached since December of last year, and NAR is blaming the influence of declining home affordability, lower consumer confidence and a government shutdown that shook up both construction activity and home sales.
“Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity,” said Lawrence Yun, NAR’s chief economist. “In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.”
The numbers suggest a lackluster fourth quarter, with Yun saying for the first time in 29 months pending home sales failed to come in above year ago levels.
“This tells us to expect lower home sales for the fourth quarter, with a flat trend going into 2014,” he said. “Even so, ongoing inventory shortages will continue to lift home prices, though at a slower single-digit growth rate next year.”
“Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity”
Since mortgage interest rates are still hovering in the low 4% range, isn’t he really saying that real estate prices are simply too high?
Home Sales Collapse At Fastest Rate In 40 Months
Despite Joe Lavorgna’s seemingly gigantic cognitive dissonance in the face of this report, the pending home sales data collapsed in September (and remember this is before the shutdown and was heralded at the time as buyers rushing to buy before the risk of the shutdown slowed acceptances). Affordability, argued by some serial extrapolators as still being ‘relatively’ positive – has drastically weighed on housing at the margin just as we argued previously. This is the first annual drop in 29 months, the biggest drop in 40 months, and the biggest miss against expectations in 40 months.
Of course, NAR Chief Economist seems to have found an excuse by time-shifting his narrative…
NAR chief economist, said concerns over the government shutdown also played a role. “Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity,” he said. “In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.”
http://www.zerohedge.com/news/2013-10-28/home-sales-collapse-fastest-rate-40-months
Guilty! Chase to pay out $5.1B to GSEs, FHFA
JPMorgan Chase (JPM) will be paying a total of $5.1 billion to resolve outstanding mortgage issues with the Federal Housing Finance Agency and the two government-sponsored enterprises, Fannie Mae and Freddie Mac.
The two agreements were announced Friday afternoon.
As part of the settlements, JPMorgan Chase agreed to pay $2.74 billion to Freddie Mac to resolve outstanding claims over securities sold to the GSEs by JPMorgan Chase, and affiliated firms, Bears Stearns & Co. and Washington Mutual.
In addition, the lender will pay $1.26 billion to Fannie Mae to resolve the same legacy mortgage issues. In total, the bank will be paying out $4 billion to address allegations over securities law violations.
Fannie Mae and Freddie Mac reached separate agreements with JPMorgan Chase to resolve outstanding repurchase claims over toxic mortgages, with the mega bank agreeing to pay $1.1 billion to resolve putback claims from the GSEs.
JPMorgan agreed to pay Fannie Mae $670 million in the fourth quarter in exchange for being released from all repurchase liability on the loans in question.
Furthermore, the bank will pay $480 million to Freddie Mac to resolve claims of reps and warrants violations.
The loans in question were originated in the 2000 through 2008 period.
Ooo, goodie! Well, let’s see now, who’ll be paying that $5.1 bil? Jamie Dimon? Ha ha, let us not be silly. He doesn’t have that kind of cash personally. Besides, it’s Chase that was found guilty, not any Chase employee. So the salaries and Christmas bonuses of every last Chase employee are perfectly safe.
Chase will, of course, have to declare a smaller profit this year. Perhaps even a loss! So that means they will pay less tax, which means US taxpayers will be forking over some portion of that $5.1 bil. Their stock might take a hit — although that’s hard to predict, since the market might well raise their stock price, given the removal of uncertainty. But let’s say the market does the old-fashioned obvious, and dings their stock because of apparent bad management. That means, for the most part, the big institutional investors with financial stock in their portfolios will take a hit. Pension funds, grandma’s 401k, they’ll all chip in a little bit to that $5.1 bil.
But of course the bulk of it will probably be paid by future JPM customers, who will experience the necessary price rises to compensate for the wealth siphoned off by the Feds to feed their hungry maw.
Well, that’s modern justice for you. The Feds deputize JPM to collect $5.1 billion from US taxpayers, 401k and pension fund investors, and half a million new bank customers. That’ll definitely make them think twice next time, ah ha ha ha ha ha.
DataQuick: risk of a “substantial correction” runs especially high
“Some immediate implications to look for include an increase in home price listings and overall sales as homeowners with negative equity are gradually swept toward a position of positive equity, a decrease in foreclosures as homeowners have the equity to sell and avoid default, and an increase in demand for home equity lines of credit as borrowers look to tap into increased equity from home price growth,” Crawford said.
Other consequences DataQuick says to look out for: “[C]ontinued single-family rental demand driven by decreases in home affordability, sustained risk of home price corrections and stringent mortgage credit standards, and an increase in purchases by investors” driven by the two preceding factors.
The risk of a “substantial correction” runs especially high as growth rates remain elevated, Crawford warns—especially since that growth isn’t supported by steady economic fundamentals.
“In the past, moderate economic fundamentals have support long term home price growth rates of three to four percent respectively,” he said, noting that the yearly growth average across all 42 counties is roughly 16 percent currently. “While generally positive, current economic drivers are weaker than those experienced in most previous expansions, leading to considerable uncertainty about future economic prospects.”
In other findings, sales dipped in most measures, with 26 counties reporting monthly increases, 28 reporting quarterly increases, and 29 posting yearly improvement (compared to 29, 37, and 28 in August, respectively).
Foreclosure statistics were similarly discouraging. Twenty-four of the 42 reporting counties experienced a decline in foreclosures from August, down from 31 in August. Twenty-six reported a decline over the last quarter, while 24 reported a drop over the last year—that’s compared to 26 and 28, respectively, in August.
Honest question here, according to the OCHM chart right now is as good a time to buy as it was in 1998-1999 (when it was an amazing time to buy).
IR, or anyone else, do you believe this to be the case?
Well, at this point, the fed is pretty well puckered-up from holding a trebleC on the trombone it has been playing since about 2009, so it depends on how much longer it can hold it 😉
I didn’t know you were a musician muchacho.
Pugy-
I think all it means is that we are at a similar point in the cycle:
-Prices have risen off their lows
-Homes are fairly valued and no longer bargain-priced
-Previous peak pricing no longer seems impossible
What I don’t think it means is that we are in for as large of a bubble this time. The last cycle should have peaked in 2002 but due to the confluence of factors that we’re all familiar with, it was allowed to keep growing for another 4 years. That’s not likely to occur this time. So if you want to buy a place to live, it’s still a decent time, but I wouldn’t expect the same kind of easy money gains that were had by those who purchased in 1999.
Sound advice. I agree.
I would also note that 1998 and 1999 turned out to be a great time to buy because of an insane housing bubble that followed. It should have merely been a good time to buy with a few relative bargains. If not for the insanity that followed 1998 and 1999 would have been considered just an okay time to buy.
There is no longer a debt ceiling imposed upon the federal government budget. And what does that fortell?
“The Fed has worked for decades to suppress inflation, BWA-HA-HA-HA-HA-HA-HA-HA-HA but economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak. Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.”
http://www.nytimes.com/2013/10/27/business/economy/in-fed-and-out-many-now-think-inflation-helps.html?_r=0
Are you ready for what’s coming down the road? The MSM is preparing you.
Some Janet Yellen quotes…
Viva central planning!
These anti-capitalists disgust me.
Grandma needs print her Bingo money.
In case you’ve never seen it, using the media to sell the idea of inflation has been done before:
Vintage pro-inflation propaganda
Whoa, history does repeat itself.
Scary thought just in time for Halloween:
“…rising wages help borrowers repay debts…”
Huh?, Since when is it assumed wages will automatically increase with inflation?
What is the color of the sky in Janet Yellen’s world?
Reality: Wages are *not* going to increase.
Global wage arbitrage will see to that.
Is Janet Yellen from the 1950’s?
Watch the video I linked above. The idea that wage inflation will accompany price inflation is core to the arguments liberal economists use to justify it. The video has an esteemed professor drawing charts showing how wages will outpace price increases. Unfortunately, it won’t work out that way.
Wait, is the lady who is supposed to be taking us into QE infinity because we don’t have inflation…aactually going to rais interest rates under the declaration we are having inflation? I’m so confused. What is she saying?
Is she going to print or not?
If not, I think we can expect to see housing crash.
Me – She will print. She has no choice. The interest rate swps market will implode when interest rates rise and the banks, including the Federal Reserve, will do everything they can to keep interest rates low. There will be no taper. QE will increase.
No, that’s true. The collapsing value of the dollar will help borrowers repay debt. That’s the point, actually, since the all-fired biggest borrower on the planet — the Federal government — needs serious help with its $17 trillion debt. All this booshwa about household debt is just a cover story, the real issue is how to keep exploding interest costs on the Federal debt from destroying all hope of a brave new socialist future when interest rates can’t be held down any longer (because, for example, boomers are wanting to withdraw their savings to live in retirement).
Of course, it’s also true that wages will not rise as fast as prices. So although the debt will seem to vanish away, it will be “paid for” by a decreased standard of present living. The trick is, however, that it will be paid by everybody, not just the borrowers. Everyone is going to have their savings, if any, confiscated, and their standard of living reduced, to pay off the debt of borrowers. And since government is the biggest borrower of all, that’s pretty much where your money is going to go.
That’s the QE end game. There won’t be any taper, ever. It’s just that inflation will make that $85 billion a month laughably small.
Just wait till these genius’s discover (the hard-way) that RE can still suffer during inflation because the ability to raise rents comes into play.
tic….
Here’s What Happens When Wall Street Builds A Rental Empire
Most rental houses in the U.S. are owned by individuals, or small, local businesses. Culpepper’s landlord is part of a new breed: a Wall Street-backed investment company with billions of dollars at its disposal. Over the past two years, Colony American and its two biggest competitors, Invitation Homes and American Homes 4 Rent, have spent more than $12 billion buying and renovating at least 75,000 homes in order to rent them out.
This new incursion by hedge funds and private equity groups into the American single-family home rental market is unprecedented, and is proving disastrous for many of the tens of thousands of families who are moving into these newly converted rental homes. In recent weeks, HuffPost spoke with more than a dozen current tenants, along with former employees who recently left the real estate companies. Though it’s not uncommon for tenants to complain about their landlords, many who had rented before described their current experience as the worst they’ve ever had.
Former employees of the companies, who spoke on condition of anonymity because they worry about jeopardizing their careers, said their former colleagues can’t keep up with the volume of complaints. The rush to buy up as many homes as possible has stretched resources to the point of breaking, these people said.
“Complaints were coming at us like out of a fire hose,” said a former Invitation Homes employee, who worked in the property management division and routinely fielded maintenance requests.
Call centers were overwhelmed. “Getting someone on the phone was next to impossible,” the employee said. “I have no doubt the customer experience was compromised.”
Other ex-investment company employees spoke of increasing pressure to fix up the homes cheaply and quickly.
A former inspector for American Homes 4 Rent who worked in the Dallas office said he routinely examined homes just prior to rental that were not habitable. Though it wasn’t his job to answer complaints, he said he fielded “hundreds of calls” from irate tenants.
http://www.huffingtonpost.com/2013/10/25/wall-street-landlords_n_4151345.html?1382703846&ncid=edlinkusaolp00000008
Huffpo: always finding the bad in wall st and the good in central planning
Come, it’s not as philosophical as all that. You speak like they have the wit to even understand the meaning of “central planning.” HuffPo is read largely by stupid young oversexed females, so it specializes in Harlequin Romances for the girl with the college degree in Peace ‘n’ Justice or Gender Studies.
The names have changed a little, but the characters are the same. There’s some pathetic victim, there’s a Bad Boy whose antics are exciting (Wall Street), and there’s the mighty king father conqueror who will subdue the bad boys and then deck you out like the owned princess you are. Of course, he may be a little Heathcliff rough in the way he spreads your cheeks and takes you, but that’s only to be expected, and frankly for many of them a little thrilling.
That’s why conservative or libertarian complaints about the NSA, IRS, and various other instances of arrogant overreach are totally lost on this crowd. Don’t you realize how lawless this means they are? They just take what they want! Oh yes baby yes…! It’s like threatening to whip an S&M enthusiast. Not the result you’re expecting.
I don’t know if this post worthy, but why tax laws become ever more complicated. For our readers that are landlords.
Understanding the IRS’s ‘new math’ for landlord repairs
As you must know by now if you’ve been reading this column, the Internal Revenue Service recently adopted a massive set of “repair regulations” that, for the first time, establish when an expense for or on property is a currently deductible repair or an improvement that must be depreciated over many years. These regulations go into effect on Jan. 1, 2014. (See “IRS finally provides guidance on building repairs vs. improvements.”)
Our previous four columns covered new “safe harbors” established by the regulations. When these apply, you may currently deduct the cost of an item without worrying whether it is a repair or improvement under the complex regulations. These are the:
small taxpayer safe harbor (see “Good news for owners of smaller residential rental properties”).
routine maintenance safe harbor (see “Understanding the new routine maintenance safe harbor for landlords”).
materials and supplies safe harbor (see “Save big bucks on your taxes by deducting all sorts of weird odds and ends“).
de minimis expensing safe harbor (see “IRS provides guidance on whether expenses can be deducted instead of depreciated“).
If, God forbid, you can’t utilize any of these safe harbors, you’ll have to look to the main portion of the new regulations to determine how to treat the expense involved. This, to put it mildly, can be difficult.
In this and several future columns we’ll cover how the new regulations attempt to define what is and is not a repair vs. an improvement.
So, put on your seatbelts, here goes.
The basic rule is that an expense must be depreciated if it improves a unit of property. It is currently deductible if it does not rise to the level of an improvement — for example, a repair or routine maintenance. Thus, to know how to classify an expense you must know (1) what the unit of property is, and (2) whether you’ve improved it.
The gloves are off: Senators ready to fight over Yellen, Watt appointments
Senate Democrats spent Monday getting jittery, a situation that resulted in Sen. Harry Reid, D-N.V., filing a motion for cloture to cut off a potential Senate filibuster over the confirmation vote covering Rep. Mel Watt’s, D-N.C., nomination to lead the Federal Housing Finance Agency later this week.
Senate Banking Committee Chairman Tim Johnson, D-SD, backed Reid’s maneuver Monday afternoon.
“There is no legitimate reason Mel Watt should not be confirmed as the director of the Federal Housing Finance Agency, and I look forward to the Senate vote on his nomination later this week,” Sen. Johnson said.
Yet, some in the Senate may find good reason, especially when it comes to the other big nomination from the President’s desk — namely that of Janet Yellen to lead the Federal Reserve.
Word on the street is Sen. Rand Paul, R-Ky., is threatening to interfer with the Yellen nomination, which is expected to take place sometime in November. Paul wants it delayed until he gets a full vote on the Federal Reserve Transparency Act – a proposed law that calls for an audit of the Fed.
But veteran banking expert Christopher Whalen took to Breitbart.com to say, Sen. Paul’s request to stall the nomination only addresses part of the problem.
He writes, “While it is notable that Senator Paul is willing to use the Yellen nomination to push forward his proposal to audit the central bank, the fact is that conservatives in the Senate who want to see job creation and growth restored in the U.S. should be opposing Yellen’s nomination in general terms.”
Didn’t see Irvine on either list.
Seems like in Irvine prices are close to or above the 2006 peak. I have no idea what is going on here.
I think it’s another bubble but without the easy money pushing it.
To own a piece of perfection in Irvine, isn’t any price considered a value? 😉
I did a detailed post on Irvine last Monday:
Housing bubble fully reflated in Irvine, California
We still have easy money, it’s just coming in another form. This time, we have government-backed loans with federal reserve subsidized interest rates. The qualification standards are higher, but the money is cheap and plentiful to those who qualify. Since Irvine buyers tend to have better FICO scores, the impact of this cheap money is felt most in more desirable areas.
It will only prove to be a bubble if interest rates rise too high too fast — but that is very possible. The stable 30-year loans should prevent a catastrophe this time around.