A Real Realtor

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graphrix_IHB

graphrix_IHB

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<p>As some of you know I grew up and live in the Villa Park/Orange area of OC. In my many years of living here I know of about three Realtors that have been through the ups and downs of the market and today are the most successful. One of those Realtors is Ron Accornero and he sends out a quarterly newsletter about Villa Park with the current market conditions. Two quarters ago he turned to a realistic bearish opinion. This quarter he actually encourages you to sell and to park your money and buy once the market returns to normal. While some will say he is just trying to get your listing I would really look into what e is saying. His website is <a href="http://www.ocsignature.com">www.ocsignature.com</a> but unfortunately he doesn't update his newsletters on the site. So I will post what he has to say word for word and if you do not believe me whisper your fax number to me and I will fax you the newsletter.</p>

<p><strong>Do you know where you are going?</strong></p>

<p>This is a very typical question I am asked these days about the real estate market. Only God knows the answer, but he gives us the tools to estimate where we are going. When I was in school I used to wonder what value learning history was for us. It took a few years, but I now realize that history is our biggest teacher. If we look at the past 30 years of real estate markets we begin to get an idea of where we are going. We were also taught that history repeats itself. We have had 3 market cycles since 1980. The first cycle was from 1980 when interest rates went up to 20% and you had to become very innovative to sell a home. This lasted untila 1986 when rates declined and the real estate market started to pick up in volume. This good market lasted until 1990. The market started to slow in 1991 and remained slow until 1995. We saw signs of the market picking up in 1996 and every year got better until 2005. We saw increases every year during those times of 10 to 17% in the value of a home. That amounted to a 10 year run-up in home prices. In 2006, we saw a number of sales decline, but prices still increasing. In the last half of 2006 after the summer rush, the low sales activity has caused prices to start declining. I would estimate that prices have declined 15-20% of the highs reached during this period. Since 1980 we have had 2 up cycles of 4 years and 10 years and two down cycles of 5 years and 6 years. I each cycle it takes a period of time for other influences to adjust, for example, salaries and net worth of the home buyer. The appreciation of existing properties accounts for the move up buyer being able to afford the higher prices. It is the first time home buyers who are hurt the most in an increasing real estate market.</p>

<p>Now that we are coming off a 10 year run up in home prices it is going to take some consumer confidence and increases in salaries before we see any increases in the price of homes. Most of the homes listed on the market currently are listed at prices that represent the market high. We currently have 31 listings in VP, 11 of which have been on teh market for 200 days, 6 currently over 100 days and 15 relatively new listings. (My note here he is adjusting for the DOM manipulation) Buyers that are coming from other areas, not finding suitable value in Villa Park are moving to more expensive areas of Orange. Homes that are priced below existing listings in VP are selling within 30 to 45 days. We still see excellent demand for properties, but do not see prices increasing much over the 3 to 4 years. It may be a good idea to sell now and invest your equity and buy again in 3 to 4 years. You can make 6 to 7% in interest in some of your investments on your equity which you may not receive staying in your present residence. One million dollars invested at 7% for 4 years will yield approximately $280k. It is not likely your home will appreciate this amount over 4 years if we continue in the current market. </p>
 
<p>$280K sounds nice - now let's look at what you can keep depending on your tax liability situation.</p>

<p>1. Tax on gains </p>

<p>2. Cost of selling and buying in the future</p>

<p>3. Tax on future interest earn on $1M</p>

<p>4. Expensive rental expenses. Non-tax write offs</p>

<p>5. What if there is a price increase in 4 years.</p>

<p>The list goes on and on. </p>

<p>If it is the only home you have for your family, rethink of selling is very critical. I have seen way too many families, try to time the market by selling, are being very desperate even in this down market.</p>

<p> </p>
 
<p>I think it is important to note that Ron Accornero has been a very successful broker for 19 years and in the business for 30 years. I don't know how long you have been in the business but I sometimes wonder by the comments you make. I have been nice to and will continue to do so but you are starting to push it. My reaction to this is going to be harsh because like most agents they try to be a financial advisor when they are extremely clueless on how to create wealth and how to really take advantage of the tax system.</p>

<p>1. Tax on gains - Capital gains are 15% right now and historically average 28%. You would be crazy to not take advantage of this low tax rate and you are going to have to pay them eventually anyway so why do it at a higher rate. This is actually why a portion of society did sell because they knew that this tax rate will not last and in 2010 it will be 20%. </p>

<p>2. Cost of selling and buying in the future - This is such a small portion of a cost that of the $280k gain would only eat up 10% of it. Plus in this current enviroment if you are a buyer and paying closing costs then you have no guts and niether does your agent. </p>

<p>3. Tax on future interest earn on $1M - If it is in a savings account yes you get taxed every year but notice he said invested. In a mutual fund you are not taxed until you sell or taxed on the dividends. Which is 15% a historically low rate. Also you could put that money in an annuity and you would defer the taxes.</p>

<p>4. Expensive rental expenses. Non-tax write offs - Sorry but this is just BS. Rents are cheap right now. You need to stop looking at the MLS for rental rates and look at craigslist and other places for real examples of rent. For example in Villa Park the place across the way rented for $3000 a month and four years ago rented for $2800 a month a whopping 1.8% per year increase which means the renter gained because of inflation. The place would sell for $800k easy so if you had 20% down with the tax break it costs about $3600 a month to live there plus the $160 a month the owner pays for water, trash and the gardener. Anyone who understands finance 101 would realize that they would be stupid to buy when it costs $9120 less to rent and they don't $160k to rent. If the price goes down even 5% the tax breaks would never make up for it. </p>

<p>5. What if there is a price increase in 4 years. - Really you need to take off the rose covered glasses. I will bet $100 right now that in 3-4 years prices will be down by 15-20% when adjusted for inflation and even more from the peak. Becareful here since from the peak Irvine is already down 15.6% and 18% when adjusted for inflation. That is $134k so you can kiss your down payment goodbye. Even in the 90s we didn't see drops so big so fast and this has just started. Everyone I know agrees with me completely that prices will come down significantly including a SVP over at John Laing who now uses Robert Shiller's charts for historical reference. Right now buying real estate is like catching a falling knife.</p>

<p>"I have seen way too many families, try to time the market by selling, are being very desperate even in this down market." Exactly they can't sell and are desperate. So lower your price now or just keep trying to catch that knife. There are going to be many more who are desperate between now and the end of summer and it will only continue to escalate.</p>
 
<p>I think nirvinerealtor makes some good points. It is really hard to time the market. I 100% believe that prices will fall over the next few years but I am not recommending my parents to sell, rent, and then buy another house even though they could make a good amount of cash if they time it perfectly. There is too much risk to play the timing game with the property to live in. However, my in-laws own a second home in OC which they bought 13 years ago and I am recommending that they sell that and buy again down the road.</p>

<p>My point is that the variables nirvinerealtor talks about are extremely meaningful for the properties people actually live in. </p>
 
<p>rkp,</p>

<p>Then here we go again, gains on 2nd home are taxed again if you did not live in it for 2 in the last 5 years. Then your net after tax is less, so you only hope price will drop so much more in the future to make it economical. </p>
 
<p>rkp,</p>

<p>You are right it is tough to time the market. I for one am not going to sell my house in the next three to four years so it will pay off to ride it out. I think what Ron was trying to say is that if you are thinking of selling within the next few years and want to move up that this would be a great strategy. If I were in that position I know that I would do this because I would come out ahead. I also think it proves the point that so many on this forum have been making especially Irvinerenter's that it will be a wise financial decision to rent and wait. But I do know of a few people who just wanted to sell at or near the peak because they believe the 15% capital gains won't be around forever. If you have $500k in profit you would pay $75k in taxes (federal only) you would net $425k. But if you had $500k in profit and the cap gains was 20% you would net $400k . It would be even worse if it ever returns to historical norm of 28%. </p>
 
When I read this board (and others like it), it seems to me that the "Big Lesson" that should be taken away from all this isn't that we should all sell our homes and ride the market down. To me, the bigger point is that seeing real estate as an investment for small-time homeowners leads to trouble.





A lot of us got really lucky in the latest upswing, but just as I wouldn't ever recommend that somebody buy a home because it will go up in value, I also wouldn't recommend selling a home because the market is set to be flat to declining. Timing the market, up or down, to me seems like a speculative (and risky) move no matter what the direction.





I think this realtor is missing the bigger point: homes are homes, investments are investments, and mixing the two (especially when you're overextended) leads to trouble.





Just my $0.02...





-OCR
 
<p>If I were a homeowner right now, I think my decision to stay or cash-out would be influenced by factors like whether or not I'm happy with the home, happy with the area, and happy with the commute. Oh, and my cost basis in the home.</p>

<p>If everything were going swimmingly, I'd probably just stay put. On the other hand, if I were thinking of moving for some reason, I'd rather cash out now while the market is still disconnected from fundamentals rather than goof around and lose a potential $50-100k. </p>
 
OakCreekRenter,





I somewhat disagree on your point of <em>"... homes are homes, investments are investments, and mixing the two (especially when you're overextended) leads to trouble".





</em>There are two types of "homeowners" (excluding flippers and landlords): those that like to stay in the same house for years, continually improving it; and those that attach a return-on-investment model on our home. Your statement applies to the first but not to the second. You and I may not agree with them philosophically, but we can't deny they exist, and their impact on home prices.
 
almon,





If the market correction / crash is really bad, OakCreekRenter's statement will ring true for everyone. The return-on-investment type of buyer being prevalent in our market is one of the reason we have inflated prices. Crashes have a way of crushing this type of buyer.
 
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