How Far Will Prices Drop?

NEW -> Contingent Buyer Assistance Program
<p>NIR - I am impressed. Close enough. I am an Enrolled Agent. I represent taxpayers during audits, prepare tax returns for clients that were previous audit clients, and prepare tax and estate planning strategies for clients who were previous audit clients.</p>

<p>I don't write much about tax loopholes because I see tax planning as a matter of compliance while legally avoiding as much tax as possible. Most folks completely misunderstand loopholes and end up either cheating or inadvertently file incorrectly. My main objective is to save my clients money and in their income bracket, that means saving them inconvenience and penatlies and interest. Most of my clients come to me because they have gotten bad advice by a tax professional who advised them on a "tax loophole".</p>

<p>And just so I do not mislead you, I am also a land surveyor. And I run money for some of my clients.</p>
 
<p>awgee,</p>

<p>Glad to have a tax pro on this forum. Thank you for the free tax information.</p>

<p><em>I am also a land surveyor</em>. The idea that you do consulting for builders or city planning did cross my mind.</p>
 
Back to the %age drop. I totaly agree with Irvinerenter. Majority of people didnt save enough knowing that they can get interest only loans. I know a few, others may not be much different. People who actually have $100K or more sitting in banks, there are only few who actually havent bought homes, most people who have multiples of $100K savings have earned/profitted elsewehere. So, back to the example of Irvinerenter, I agree that due to lack of 20% down, prices will be pushed downwards. Mortgages are not controlled by the Govt and we all know that. In falling market, loans are risker and it always result in higher interest rates. If that happens, I figure drop may even surpass 50%. It property can run up 300% in 5 years, sure it has room to drop as well.
 
<p>Assuming that the Case-Shiller HPI for LA metro (which includes OC) is representative of OC, and that rents have increased approx 5% per year since 1997:</p>

<p>It would take a 58% fall in peak 2006 prices, minus rent increase between 2006 and market bottom, to return to the 1997 price/rent ratio.</p>

<p>It would take a 51% fall in peak 2006 prices, minus rent increase between 2006 and market bottom, to return to the 2000 price/rent ratio.</p>

<p>So, if rents increase 10% between now and when the market bottoms, I would predict at least a 41% drop in nominal prices.</p>

<p> </p>

<p>Caution: math stuff ahead.</p>

<p>55% rent increase from 1997 to 2006 (5% annual)


270% price increase from 1997 to 2006 (Case-Shiller HPI)


1 - (1.55 / 3.70) = 0.58</p>

<p>34% rent increase from 2000 to 2006 (5% annual)


174% price increase from 2000 to 2006 (Case-Shiller HPI)


1 - (1.34 / 2.74 ) = 0.51</p>
 
<p>Interesting stuff, what this really tells me is that realistically people were shilling the homes for 50-60% in the area. BUT really I think you're going to see a drop between 45-55%. You know those IAC people are going to want to squeeze every penny out of the "captive" audience. I know my apartments are doing well and i'm not going crazy with rents. </p>

<p>Take it easy and dont' work too hard.</p>

<p>-bix</p>
 
I'm guessing that prices will drop 40%. My only thought is, once they get to the 30% mark I think a lot of people will start buying, thinking it may be the bottom...the big "if" is if they can qualify. Like I said before, home prices have already dropped 20% on the East Coast where I own....it's happening.
 
Okay I did a rent to own calculation instead for a house in a DC suburb (McLean, VA):





Median Income in McLean: $123,000


Sale Price: $1,400,000


Monthly Rent: $4300


Commission: 6%


Misc Closing Costs: 2%


Net Sale Price: $1,288,000





Property Taxes: $9785/year = $815/month


Insurance: $3000/year = $250/month


Landscaping: $100/month (if you don't pay this as a landlord your tenants are very unlikely to do this)


Net Rent = $4300-815-250-100=$3134/mo





Yield on Vanguard Tax Exempt Money Market: 3.66%


Interest per month on $1,288,000 = $3928/mo





Rental Income is taxable but most landlords in the area are likely in the 33% bracket for federal and 5.75% for state. Many try very hard to avoid reporting but:


Taxes Paid as Landlord: $3134*(1-.33-.0575)=$1183


Net Rent after Taxes: $1951





As the tenant you could potentially deduct rent payments as a business expense but lets ignore that for simplicity.





$3928-1951 = $1977/month spread for pride of ownership.
 
<p>I'm new to the landlord business, but there's something to be said for the 27.5 year depreciation you get on the property. Don't actually know how to add that into your equation...perhaps awgee can assist.</p>

<p>Thanks for the break down, great to see an actual work up on paper. I've contemplated trying to be one of those people that "works hard" to avoid reporting... ;) Not really in my nature, but tempting !</p>

<p>awgee?</p>
 
<p>Trooper</p>

<p>IN my opinion any tax you pay is FAR cheaper than whatever the IRS is going to do to you. Believe me once the tax man steps in, the colonoscopy you recieve is going to be painful and long lasting. Anyways good luck and don't work too hard.</p>

<p>-bix</p>
 
Hey Troop - I am unsure of what exactly you want to know? But, generally, the cost basis of the improvements, (subtract land value from sales price), is derpreciated over 27.5 years for residential income property. The yearly depreciation is included as a yearly expense which is subtracted from the rental income.<p>



Upon sale, the allowable depreciation is recaptured and taxed at a 25% rate. Don't hold me to the exact rate percentage, but it less than the maximum marginal tax rate which many income property owners are taxed at. Plus you are defering income tax, so theoretically you are making money on the defered amount.<p>



bix - Unless a tax return is prepared incorrectly, the tax paid should be the same no matter who prepares it. When the IRS sends a CP 2000, a notice of non-compliance, it does not fully account for all circumstances which may be to the taxpayers advantage and it is incumbant upon the taxpayer, or their representative, to ammend the retrun with all appropriate info or explain why the notice is incorrect.
 
<p>Awgee, </p>

<p> Yep I know, I've been down that road a few times. Usually we all ASSUME (and we know how that goes) that we did not pay enough, the last time it was overpaying! So I got a nice little addition to the return (again with said help of people like Awgee!). Good luck and don't work too hard.</p>

<p>-bix</p>
 
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