Dec. 20, 2010

HARRY’S WEEKLY UPDATE

A CURRENT LOOK AT THE COLORADO SPRINGS RESIDENTAIL real estate MARKET

 

THE NEW TAX LAW GIVES TAXPAYERS AND THE ECONOMY A SIGNIFICANT BREAK

The recently-passed extension of the “Bush Tax Cuts” will give most taxpayers a significant break on their income taxes for the next two years. Because of the 2001 tax act sunset, ordinary income tax rates were scheduled to increase for 2011. After a lot of bickering about “The Rich”, Congress finally decided that the 2010 Tax Relief act would extend the lower rates to all brackets for two years.

Now, leaving aside the details, let’s compare how much taxes were scheduled to have been paid vs how much will be paid under this new extension and see what effect this new tax bill will have on some typical taxpayers:

Single Worker - $50,000 Income, No Children              

Tax would have been  $10,680     Tax will now be $9,075

 

Married Couple - $150,000 Income, 2 Children in college

Tax would have been $34,753      Tax will now be $23,170

 

Senior Retired Couple - $100,000 Income

Tax would have been  $13,762      Tax will now be $8,590

Obviously, this tax relief will take some financial pressure off a lot of taxpayers and will allow them to spend more money in the economy, thus stimulating small businesses, new hires, consumer spending and economic activity in general. Hmmm, wait a minute. Isn't that what we call a “stimulus”?  Golly, why didn’t we think of that sooner?       

 

BUT WAIT, THERE’S MORE …

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, also extends and expands a wide variety of valuable tax breaks, most notably a payroll tax reduction for 2011.

Payroll tax rates

For 2011 only, the 2010 Tax Relief act reduces the employee portion of the Social Security tax on earned income from 6.2% to 4.2%. The self-employed pay both the employee and employer portions of Social Security tax, and the Tax Relief act also reduces their rate by two percentage points for 2011, from 12.4% to 10.4%.

As of this writing, the maximum taxable wage base for Social Security taxes hasn’t been established for 2011. But for 2010, it’s $106,800, and with inflation low it likely won’t increase much for 2011. So the maximum tax savings from this break will likely be between $2,100 and $2,200.

Long-term capital gains rates

Under the 2001 tax act, the 15% long-term capital gains rate was scheduled to increase to 20% in 2011. The 2010 Tax Relief act extends the 15% rate through 2012.

Qualified dividend tax rates

The 2010 Tax Relief act extends taxation of qualified dividends at the 15% long-term capital gains tax rate through 2012 (0% for those in the bottom two brackets). Without Congressional action, dividends would have gone back to being taxed at ordinary income rates in 2011, with a top rate as high as 39.6%.

Increased exclusion on small business stock gains

To make investing in certain small businesses more attractive, the Small Business Jobs Act of 2010 (SBJA), signed into law in September, temporarily increased the qualified small business (QSB) stock gain exclusion to 100% for stock acquired after Sept. 27, 2010, and before Jan. 1, 2011, that’s held for at least five years. Additionally, the SBJA eliminated the alternative minimum tax (AMT) preference item on such gain, making it tax free for AMT purposes as well.

The 2010 Tax Relief act, however, extends the acquisition deadline for 100% gain exclusion and elimination of the AMT preference item to Dec. 31, 2011.

Itemized deduction and personal exemption phaseouts

The 2001 tax act reduced the adjusted gross income (AGI)-based reductions on itemized deductions and personal exemptions for 2006 through 2009 and eliminated them for 2010. The 2010 Tax Relief act extends this elimination through 2012.

Deduction for state and local sales taxes

For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income tax rates or who purchase major items, such as a car or boat. But this break expired after 2009.

Now the 2010 Tax Relief act has extended it for 2010 and 2011 (but not for 2012).

Dependent care credit

The 2001 tax act increased the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 for one qualifying dependent and from $4,800 to $6,000 for more than one qualifying dependent through 2010. The 2010 Tax Relief act extends these higher limits through 2012.

The maximum credit is generally 20% of eligible expenses, which is $600 for one dependent and $1,200 for more than one dependent. There’s no upper AGI limit for claiming the credit, but taxpayers with AGIs of $43,000 or less are eligible for a larger maximum credit.

For 2010 and 2011, the Tax Relief act also allows you to offset your AMT liability with certain nonrefundable personal credits (such as the dependent care credit and certain energy-related credits) for which you’re otherwise eligible.

AND, IN ADDITION ….

  • If you have loved ones in the middle or lower tax brackets, they may benefit from extensions of breaks that you won’t qualify for, such as various education- and child-related credits and deductions.
  • If you’re interested in reducing energy consumption, you may want to take advantage of extensions of various energy-related breaks.
  • If you’re currently unemployed, you may benefit from the act’s extension of unemployment benefits.

Considering all of these significant changes, we think you had better check with your tax advisor about how these changes will affect your tax liability. After all, we want you to be comfortable with your finances when it comes time for you to buy your new house from us.

MORTGAGE RATES JUMP ….WILL HOME PRICES FALL ???

Borrowing money to buy a house just got more expensive. The average rate on a 30-year mortgage rose to 4.83%, Freddie Mac said Thursday. That's an increase of about two-thirds of a percentage point in five weeks.

The rate increase means monthly payments on new mortgages will jump. Five weeks ago, a buyer with a 30-year loan would have had mortgage payments of $487 a month. Now it's $526. That's an 8% price difference – more than enough to give most shoppers pause.

Will costlier mortgages push already wobbly home prices lower? History offers some answers.

The recent rise in rates isn't nearly the sharpest in Freddie Mac's history. Between June of 1979 and April of 1980, 30-year mortgage rates rose 5%. And, our recent 8% increase in monthly payments over five weeks has nothing on the record five-week jump of 21% in 1980. In that single five-week period, monthly payments per $100,000 soared from $1.109 to $1,347.

The effect on house prices? They rose more than 15% from 1979 to 1981.

Bottom Line: Better buy now !!! Call us !!!

 

MORTGAGE RATES AND HOME PRICES

Inflation, to be sure, offset all of the increase and more. Subtract it, and house prices declined 9% over those two years. The nominal price increase, however, suggests that a whopper of a rate increase failed to trigger a selloff.

In 1987, following only a moderate uptick in inflation, the Fed gradual raised the core interest rate from 6% to 6.75% in late April and early May. The 30-year mortgage rate took a wilder rise, spiking nearly one and a half percentage points to 10.47% over five weeks ended May 1. Monthly payments rose 13%, to about $913 per $100,000 borrowed.

House prices soared 9% that year. Inflation averaged just 3.6%.

Mortgage payments rose nearly 11% over five weeks ending Aug. 8, 2003, to $621.58 per $100,000 borrowed. The increase signaled a broad economic recovery; growth in gross domestic product accelerated from 1.8% in 2002 to 3.6% in 2004. Immediately following the 2003 mortgage rate rise, prices shot 42% higher after inflation over three years.

It's unlikely that the recent mortgage rate increase foretells a rally of anywhere near that magnitude, but homeowners shouldn't assume that higher rates worsen the outlook for house prices. Current mortgage rates, after all, are still extraordinarily low. The 4.17% rate recorded five weeks ago is the lowest since at least 1970, when Freddie Mac was created. The average rate over the past four decades was close to 9%.

That's not to say that house prices won't dip for other reasons. Even before the recent rate increase, the Case-Shiller index of house prices fell 2% in the third quarter following a 4.7% rise in the second quarter.

Jobs, incomes and economic growth will likely decide what happens next, not a change in the 30-year mortgage rate.

The down-side, however, is that rising rates could still squeeze some housing markets because first-time home buyers may find that they’re not able to qualify for as large a loan as they could just four weeks ago. That could put pressure on home sellers to reduce prices.

Higher rates are also certain to push others completely out of the market. Analysts at Credit Suisse estimate that the recent rise in rates has the same effect as a 7% increase in home prices for prospective buyers. Assuming a 10% down payment, with rates at 4.5%, a buyer typically needs income of $84,000, to qualify for a $400,000, 30-year fixed-rate loan. At a 5.5% rate, the income requirement rises to $92,000. A general rule of thumb holds that every one-percentage-point increase in rates effectively raises home prices for buyers by roughly 10%.

Bottom line:  Rising rates certainly doesn’t make it any easier for homeowners to sell.  But how much will it hurt? Economists say the impact might not be all that bad if rates are rising, because the economy is growing. As one economist said, “For the housing market, low rates in a crummy economy are worse than higher rates in an improving economy,”

            

THE “QUE” SAYS WE’RE DOING BETTER AND 2011 LOOKS GOOD

The Southern Colorado Economic Forum *(SCEF) publishes the QUE, a quarterly report on the El Paso County economy. The Forum is part of the College of Business outreach to the Colorado Springs Community.

Here are several interesting facts that are contained in the latest issue of the QUE.

Fred Crowley, Chief Economist of the Forum, reports that our local Business Conditions Index (BCI) stands at 77.32. This is 12.6 percent higher than its low of 68.67 in February 2009. The current BCI lagged the anticipated levels for the third quarter by approximately 5 percent. This reflects the sideways trend in the national economy during the same period. While disappointing, this is not believed to be a precursor to a double dip recession.

Despite these quarter-to-quarter observations, the longer term pattern suggests the local economy is growing, albeit at a rather snaillike pace. The Forum believes growth will become more apparent in the 4th quarter of 2010. The BCI is expected to be in the low to mid 80’s through the first quarter of 2011.

With reference to the local housing market, despite an expected decline, single-family building permit activity has held up well. October 2010 surpassed October 2009 by 7 units.

Another factor pointing towards an improved real estate market is the decline in the number of active listings in the region. Currently, there are 5,124 active listings. This is approximately 464 fewer than there were in October over the last several years. The decline in the supply of homes for sale is expected to lead to a more stable housing market.

Last quarter, the QUE reported the rising trend in housing prices. The average price of an MLS facilitated home sale in October 2010 was 12.64 percent higher than the average price in October 2009. Sustainable price increases will depend on job/income growth, low interest rates and some semblance of a balance in the supply and demand for housing.

Further increases in housing prices are anticipated as the economy continues to recover, employment increases, foreclosures decrease and interest rates remain near record low levels. An improving local economy, rising home prices and low interest rates are expected to reduce foreclosures by 600-700 in 2010.

In general, increasing retail sales could be a harbinger for solid economic activity in the first quarter of 2011 and reduced unemployment in coming year.

All of these comments, plus many more, are contained in the latest edition of the QUE. The QUE is available free via an electronic subscription. If you would like a subscription, send an e-mail to fcrowley@uccs.edu and have the word SUBSCRIBE as the subject. To see a complete copy of the latest QUE, please click here.

*The Southern Colorado Economic Forum gathers, analyzes and disseminates information relevant to the economic health of the region. Through its efforts, the Forum has gathered a number of unique data sets. The Forum and its staff are available for fee-for-service work to analyze business situations, develop forecasts, conduct and analyze surveys and develop solutions to other business problems you may have. Examples of prior work include Small Area Forecast for the Pikes Peak Area Council of Governments, Colorado Springs Airport Passenger Survey, exit survey for La-Z-Boy, a Community Audit for the Pikes Peak Workforce Center and the Data Mining Project for the Colorado Workforce Centers. If you would like additional information about how the Forum can assist you, contact Fred Crowley at (719) 255-3531 or e-mail at fcrowley@uccs.edu.

And, please remember, I would be honored to serve as your Broker for all of your residential real estate needs. I want to help you, my reader, make the most prudent and accurate Real Estate business decision.

Also if you know of anyone who desires to buy or sell local real estate, or, who is moving in or out of the Pikes Peak region, remember that, with over 37 years of providing relocation and Real Estate services to clients throughout the country, I am uniquely qualified to assist them with the relocation process, including buying and/or selling their homes on both ends of their move. Please allow me to implement my negotiating skills on your behalf.

Just click on the icon at the top of this email to listen to my latest podcast. ….And, if you would like to learn more about our Job Loss Protection Program, or, about our CyberHomes Complete Market Analysis of a property, please contact us. 

LATEST STATISTICS

Click here for the latest Sales and Listing statistics for the Pikes Peak area

 

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