The uptrend in existing-home sales continues, with January sales rising for the third consecutive month with a pace that is now above year-ago levels.

Lawrence Yun, NAR chief economist, said the improvement is good but could be better. “The uptrend in home sales is consistent with improvements in the economy and jobs, which are helping boost consumer confidence,” Yun said. “The extremely favorable housing affordability conditions are a big factor, but buyers have been constrained by unnecessarily tight credit. As a result, there are abnormally high levels of all-cash purchases, along with rising investor activity.”

A recent NAR survey for January 2011 gives more insight into the market:
29% of purchases were made by first-time home buyers
23% were made by investors
48% were made by repeat buyers
Cash sales rose to 32% of all transactions
“Increases in all-cash transactions, the investor market share and distressed home sales all go hand-in-hand. With tight credit standards, it’s not surprising to see so much activity where cash is king and investors are taking advantage of conditions to purchase undervalued homes,” Yun said.

At a local level, our sales are up 20% and prices are increasing as a result of more multiple offers. The higher priced homes are also starting to move with multiple offers being reported on homes priced at $3,000,000 and above. We have had a number of high end sales reported in Palo Alto, Menlo Park and Atherton.

Tax News…

The federal tax cuts in 2001 lowered estate taxes over 10 years. These cuts brought the existing estate tax rate from a high of 55% to 35% over a 10-year period. The 35% estate tax rate was to stay in effect through the end of 2009. Then, estate taxes were set to disappear in 2010 and finally return to pre-tax cut levels at the start of 2011

Now, there are changes that have taken place for tax years 2011 and 2012. The new law sets federal estate tax rate at a flat 35%. In addition to this lowered rate, there are addition benefits:

·         The number of people affected by the estate tax are reduced as estates under $5 million are not subject to any taxation. The limit was previously $3.5 million.

·         The $5 million estate tax exemption is now portable, which allows for easier post-death planning. After the death of the first spouse, any unused portion of the spouse’s $5 million exemption may go into the other spouse’s estate.

·         The bill now increases the total lifetime exclusion for gift giving to $5 million (previously $1 million), but unifies the estate gift and generation skipping taxes. So, if a taxpayer leaves $4 million to a generation skipping trust for grandchildren at death, then $1 million would be left for exemption. If someone gives away $5,000,000 tax-free during their life, then the entire estate is taxable.

·         The revision also gives estates of 2010 the choice of whether to use 2010 or 2011 estate tax rules. This is important because even though in 2010 there was no estate tax, there was a change in the capital gains tax of the estate. Prior to 2010, estates got a stepped-up cost basis (value to current market) for any assets in the estate. Thus, a property bought 20 years ago for $100,000 that is worth $500,000 today, would go into the estate as $500,000. But, in 2010, it would go into the estate at $100,000 and the heirs would have to pay a capital gains tax on the difference.

Please check with your accountant with questions regarding this.

Mortgage Update

The big question these days is what will the government do with Fannie Mae and Freddie Mac, the two organizations that are the backbone of the US housing industry.  By buying up mortgages, Fannie and Freddie keep mortgage financing readily available and at historic low interest rates.  Without their involvement and continued government support, interest rates would likely be much higher, mortgage availability and terms would be more restrictive, and the "30-Year mortgage" may even fade away.  Since the current national dialogue is leaning against federal involvement, with mounting pressure on cutting the federal budget, it is likely that the subsidies funding Fannie and Freddie will either diminish or go away.  Either way, right now is still a great time to purchase a home -- before these changes bring yet another transformation to the housing market.

CONFORMING (up to $417,000)
30 year fixed: 4.875%
15 year fixed: 4.25%
7/1 ARM: 3.875%
5/1 ARM: 3.5%

HIGH BALANCE CONFORMING (up to $729,750)
30 year fixed: 5.0%
15 year fixed: 4.25%
7/1 ARM: 4.125%
5/1 ARM: 3.75%

NON-CONFORMING (over $729,750)
30 year fixed: 5.5%
5/1 ARM: 4.125