2017 Spring Housing Update for New Jersey

With Q1 coming to end soon, here are the latest updates and predictions for the 2017 New Jersey Real Estate Market.

Overall Outlook

• The Recession that was projected last spring for 2018 is not coming to fruition.
• Home sales and prices will continue to rise over the next few years
• Mortgage delinquency in New Jersey is fading. It was down to 5.7% in 2016 from a high of      11.3% in 2012.

Employment:

• Job creation is improving which is the biggest predictor of housing.
• Higher job creation in 2016 will help New Jersey have a better housing market this year.
• The New Jersey economy seems to be poised for expansion.

Home Prices:

• Prices in the rest of the country have recovered to the 2005/2006 levels, but New Jersey home prices still remain lower than they were during that peak except in transit towns where prices have fully recovered.  This is good news, as prices in our state will continue to rise and not decline as they may in the rest of the U.S. 
• Nationally home prices are up 7%.  In contrast, New York is up 4.5% and Pennsylvania is up 5%.  New Jersey saw a big increase in 2013 when prices rose 4.2%, but then only 1.4% in 2014, 1.5% in 2015 and just .7% in 2016.  New Jersey saw strong appreciation in Q4 2016 when prices rose 1.3%, which is indicative of a solid upward trend for 2017.
• The slowing price increases are a result of weak income gains in NJ.  This limits a buyer’s ability to pay more for the same house.  Nationally incomes rose 3.9%. New York rose 3.3% while New Jersey rose only .4%.  Additionally, property taxes tend to go up each year more than .4%.

Home Sales and Inventory:

• Home sales are up 17% Y/Y statewide.
• Residential transaction volume is the highest it has been since 2012 with $34.7 billion dollars of residential real estate sold in 2016 statewide. 
• 2016 holds the all time record for home purchase contracts in New Jersey at 109,471.  The prior record happened in 2005, when it was 105,468.
• Inventory is still low.  There are 24,000 fewer homes on the market than the peak in 2008.  This will lead to more home price increases.
• The top 5 counties with the lowest absorption rate (number of months it would take to sell out of current inventory) are:

1.     Hudson – 2.9 Month Supply

2.     Essex – 4.0 Month Supply

3.     Union – 4.1 Month Supply

4.     Morris – 4.2 Month Supply

5.     Middlesex – 4.2 Month Supply

           

Note:  A balanced market is 5-7 months.  Anything over 7 months is a buyer’s market.  Anything lower than 5 months is a seller’s market.

• Luxury and vacation home sales are strengthening although homes over $2.5M have a higher absorption rate except in train line towns with employees who commute to New York City due to the Wall Street effect on the luxury market. 
• The Gateway Project will positively impact homes sales for NYC train line towns in New Jersey.  This project will double the rail system capacity in New Jersey by building a new NJ Transit hub in the old post office building across from Penn Station in New York City.  The project has been approved and initial work is underway.  Commute times will be significantly reduced for towns with longer commutes now.

Interest Rates:

• Rising Interest rates are occurring more rapidly than they have since the recession.  After increasing them .25% today, the Fed has promised to raise them 2 more times in 2017.  This impacts affordability for buyers and they must lower their price range in order to stay within their budget. 
• We have retained more affordability in our state which is great for 2017 because rising interest rates will not prevent a slow down in the housing market.
• Promised tax cuts and less regulation from the current administration could impact the economy, but right now experts are not sure whether it will be positive or negative. 
• Interest rates are projected to be 5% on average by the end of the year.

Investment Opportunity:  Newark

• Everyday 50,000 employees go to Class A office space and then leave in the evening.  Tax Abatement Pilot Programs (Payments in lieu of taxes) for developers in areas determined for re-development will help to change that.
• Renovated properties and new construction of lofts, condos, and apartments will create a great investment and first time homebuyer opportunities.
• Re-inventing Newark as a tourist destination will bring needed revenue to the area to restaurants and retail stores already present and new ones coming into the area.  See the Vogue article that recently came out at: http://www.vogue.com/article/newark-new-jersey-travel-guide-tips

Initial 2018 Forecast:

• Job Expansion shifts into 2nd gear.
• Household income continues to rise.
• Millennial Home Buying is in Full Swing.
• Financial Sector expansion crosses the river.
• Political chaos worsens with 2018 mid-term elections.

This is intended as a quick update.  If you have any questions or would like to discuss any of these topics in more detail, please contact me at:  973-307-0023 or cheryl@thedarmaningroup.com

If you know anyone that would like to buy or sell real estate, please pass along my information!

Tax Benefits of Home Ownership

U.S. taxpayers have enjoyed specific tax benefits for home ownership since personal income tax was introduced by the 16th amendment in 1913. While these benefits may not be the primary reason that motivates a person to buy a home, they are still tangible and not available to tenants.

The exclusion of capital gains tax on the profit made from a home is unique from other investments and provides homeowners significant savings. Single taxpayers can exclude up to $250,000 gain and married taxpayers up to $500,000 gain. During the five-year period ending on the date of sale, a taxpayer must have: owned the home for at least two years; lived in the home as their main home for at least two years; and, ownership and use do not have to be continuous nor occur at the same time.

Gain on the sale of a principal residence in excess of the allowed exclusion are taxed at the lower long-term capital gain rate of the owner.

A homeowner may take the standard deduction or itemized deductions in any tax year based on which will create the largest deduction. Property taxes and qualified mortgage interest are allowable itemized deductions.

Qualified mortgage interest is acquisition debt plus home equity debt not to exceed the maximum amounts. Acquisition debt is the amount of debt incurred to buy, build or improve a first and second home up to $1,000,000. Home equity debt is limited to $100,000 over the current acquisition debt on the combination of a first and second home and may be used for any purpose.

For more information, see your tax advisor or see IRS Publications 523, Selling Your Home and 936, Home Mortgage Interest Deduction.

Before You Pay Cash for a Home

The National Association of REALTORS® reports in its 2016 Profile of Home Buyers and Sellers that 12% of all buyers paid cash for their home.

Before paying cash for a home, a buyer should decide if they might put a loan on the home in the near future.  It may affect the ability to deduct the interest on a mortgage placed on the home at a later date.

Homeowners can currently deduct the interest on up to $1 million of acquisition debt which are the borrowed funds used to buy, build or improve a home. Paying cash for a home establishes acquisition debt at zero. The only deductible interest to the owner would be home equity debt which is limited to $100,000 over acquisition debt.

Paying cash certainly seems like a simple decision but it may limit a homeowner’s ability to deduct interest on a future mortgage. You can get more information about this from IRS Publication 936 or from your tax professional.

Not Available for All Buyers

Lenders regularly publish mortgage rates but they may not be available for all buyers.

Imagine that the mortgage payment based on an advertised rate influenced a buyer to make an offer on a home. After negotiating a binding contract, this buyer makes a loan application and finds out that for any number of possible reasons, that rate isn’t available.

Even if the person does financially qualify for a loan at a higher interest rate, it will not be the payment that the buyer expected when the contract was negotiated.

Lenders evaluate several factors such as the borrower’s credit score, debt-to-income and loan-to-value ratios. These variables are used to assess the risk associated with the repayment of the loan.

While mortgage money is a commodity, it isn’t priced the same way items are that involve cash for goods. The lender puts up the money today based on a promise from the borrower to repay over a long term, possibly up to thirty years.

The simple solution to avoid surprises such as the one described here is to get pre-approved at the beginning of the home search process. Since pre-qualification does not mean the same thing to all lenders, call if you’d like a recommendation of a trusted mortgage professional.

Six Reason to Consider Rental Homes

Single-family homes offer an investor the ability to borrow large loan-to-value amounts at fixed interest rates for long terms on appreciating assets, tax advantages and reasonable control. Some of these characteristics are not available through other investments.

75-80% loan-to-value mortgages are available on most residential properties up to four units. Comparatively, the stock market allows you to borrow up to 50% on a stock but if the price goes down, they will require additional cash to keep the ratio at or below 50%. If it isn’t available, your stock can be sold to satisfy the loan.

Real estate investors call getting a long-term mortgage putting an investment to bed. The fixed-rate and the 20-30 year terms are exceptions to loans for most other investments, if they’re available at all. 

Real estate tends to go up in value over time. There can be a lot of variables that affect the price like supply and demand, condition and available mortgage money, in addition to the general economy.

Rental real estate has several different tax advantages. The profits are taxed at lower, long-term capital gains rates for investors who have owned the property for more than 12 months. While the property is being rented, investors are given a non-cash deduction based on cost recovery of the improvements. Tax deferred exchanges can also be available if specific conditions are met which allow an investor to postpone paying the tax on the gain.

It isn’t necessary to have a partner with most rental homes if the investor can qualify for the mortgage. This allows investor control to make all the decisions that an owner is entitled such as setting the rent, making improvements and determining when to sell.

Rental real estate can earn a much higher rate of return than other available investments while providing income during the holding period. It certainly is worth investigating the possibility with a real estate professional who understands and works with rental properties.

What Would You Give?

Yogi Berra said he’d give his right arm to be ambidextrous. While most first-time home buyers are not going to that extreme, it is interesting to see what sacrifices are being made according to the National Association of REALTORS® 2016 Profile of Home Buyers and Sellers.

• 43% - cut spending on luxury or non-essential items
• 34% - cut spending on entertainment
• 27% - cut spending on clothes
• 14% - canceled vacation plans
  9% - earned extra income through a second job
• 7% - sold or decided not to purchase a vehicle
• 44% - did not need to make any sacrifices

Forty-percent of first-time buyers experienced some difficulty during the mortgage application and approval process. Single, male buyers expressed a higher incidence of difficulty than single females and married or unmarried couples.

Pre-approval from a qualified mortgage lender before the home search process begins is still considered the best advice for all buyers who will purchase with a mortgage. Your real estate professional can make recommendations for a loan officer that could help you avoid unnecessary aggravations.

Mortgage Loans from Relatives

Occasionally, when dealing with close relatives who might also become heirs, signing a note and handling the paperwork properly may seem like a needless effort but it could mean the difference in being able to take a legitimate interest deduction.

Home mortgage interest is deductible only if the loan is a secured debt which involves the buyer signing an instrument like a mortgage or deed of trust that makes the ownership of the home security for the debt. That instrument must then be recorded or otherwise perfected according to state or local law and the home, in case of default, must be able to satisfy the debt.

In a family situation, a parent, grandparent or other relative may decide to loan a buyer the money to purchase a home because they have it available and it isn’t earning much in certificates of deposit. They offer to loan it for a rate equal to what a conventional lender is charging but without the fees.

While it may appear to be a win-win situation, there could be problems if things are not done correctly. Even if the borrower makes the payments, they are not entitled to an interest deduction unless three criteria are met: 1) sign a debt instrument specifying the terms 2) securing and record the debt properly and 3) the home is sufficient collateral for the loan.

It would be prudent to consult with an attorney before you sign the final settlement papers to be comfortable that both buyer and the lender-relative are complying with IRS regulations. For more information, see IRS Publication 936 – Home Mortgage Interest.