What Sellers Need To Know in Today’s Housing Market

If you’re thinking about selling your house, you may have heard about the housing market slowing down in recent months. While it’s still a sellers’ market, the peak frenzy the market saw over the past two years has cooled some. If you’re asking yourself if you’ve missed your chance to sell your house and make a move, the good news is you haven’t – motivated buyers are still out there. But you do need to price your house right for today’s market. Here’s why.

As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:

“Homes priced right are selling very quickly, but homes priced too high are deterring prospective buyers.”

It’s true buyer demand has slowed over the past few months as higher mortgage rates made it more expensive to buy a home. The result is fewer bidding wars and less competition among buyers (see visual below):

But don’t forget – that’s compared to the severely overheated market we saw over the past two years. According to the latest Confidence Index from NAR:

“. . . 39% of homes sold above list price, down from 51% a month ago and 50% a year ago.”

While this is a slower pace than even one month ago, serious buyers are still actively in the market, and they’re buying homes that are priced right. In fact, the Confidence Index also notes the average home is selling in just 14 days.

If you’re aiming to sell your house, be sure you’re working with your agent to price it for today’s housing market. As buyer demand softens, it’s important to understand this isn’t the same market as last year. It’s not even the same market as just a few months ago. But it is still a sellers’ market.

If you’re ready to sell your house, seek the advice of a real estate professional. In some cases, you’ll need to adjust your expectations accordingly to meet the market where it is today. Selma Hepp, Interim Lead, Deputy Chief Economist at CoreLogic, explains what’s happening and what it means when you sell:

“Signs of a broader slowdown in the housing market are evident, . . . This is in line with our previous expectations and given the notable cooling of buyer demand due to higher mortgage rates. . . . Nevertheless, buyers still remain interested, which is keeping the market competitive — particularly for attractive homes that are properly priced.”

Bottom Line

While the housing market has cooled from its overheated frenzy, it’s still a sellers’ market. Work with a real estate professional to understand what’s happening with buyer demand and home prices in your local area as you get ready to enter the market.

RALEIGH REAL ESTATE MARKET

In the Triangle, the recent data from Triangle Multiple Listing Service shows that inventory continues to remain at historically low levels, and the pace and price of the market in Wake County is among the fastest market ever.  One property that came on the market this week had dozens of people trying to see it, and a video of the street where people were waiting to view the property went viral.

The result, according to Matt Fowler, the executive director of Triangle Multiple Listing Service, is that while demand by some measures is at an “all-time high,” affordability might be at an “all-time low.”

According to the listing data in the Triangle Multiple Listing Service database, across all residential property types, there are 2,582 detached homes pending sale, 918 attached homes (townhomes) pending sale, and 189 condominiums pending sale.

Compare that to what’s available on the market: 305 detached homes, 63 attached homes, and 36 condominiums.

Here’s what’s coming soon, with a listing date at some point within the next 30 days: 153 detached, 29 attached, and 2 condominiums.

Looking for a home at an affordable price point, perhaps $200,000-300,000?

There’s even fewer of those in Wake County.  There are a total of 11 properties listed as coming soon and a total of 42 properties actively listed on the market, according to the database.

INVESTOR ACTIVITY IN RALEIGH

In that context, real estate investors are still looking to acquire property, and the data shared with WRAL TechWire from Redfin indicates that nearly one in every four properties sold in the fourth quarter of 2021 were sold to an investor.

Of all the transactions in the quarter, 1,564 homes were sold to investors, according to Redfin’s data set.  That’s 24.5% of market share, and in increase of investor activity of nearly 78% year-over-year.

And the pace of acquisitions accelerated in the area, as well, following the onset of the global coronavirus pandemic.  Here are the numbers in the Redfin data set:

• Q2 2020: 528 homes bought by investors in Raleigh, 9.4% of all transactions
• Q3 2020: 657 homes bought by investors in Raleigh, 9.7% of all transactions
• Q4 2020: 879 homes bought by investors in Raleigh, 14.5% of all transactions
• Q1 2021: 915 homes bought by investors in Raleigh, 18.3% of all transactions
• Q2 2021: 1,283 homes bought by investors in Raleigh, 17.2% of all transactions
• Q3 2021: 1,515 homes bought by investors in Raleigh, 21.6% of all transactions
• Q4 2021: 1,564 homes bought by investors in Raleigh, 24.5% of all transactions

DURHAM REAL ESTATE MARKET

In Durham County, there are 478 detached homes pending sale, 368 attached homes pending sale, and 39 condominiums pending sale.

That’s compared to what’s actively listed and coming soon: 114 detached homes, 38 attached homes, and 28 condominiums are actively listed for sale, with 27 detached homes, 13 attached homes, and 1 condominium listed in the database as coming soon.

And at that price range of $200,000-300,000?

Like in Wake County, there are fewer homes listed for sale between $200,000 and $300,000 in Durham County.  There are a total of 11 properties listed as coming soon and a total of 42 properties actively listed on the market, according to the database.

INVESTMENT ACTIVITY IN DURHAM

Investors are playing an increasing role in Durham’s real estate market, as well.

In Durham, 20.9% of all residential transactions in the fourth quarter of 2021 were purchases of by investors, and their activity increased by 63% year-over-year in the area.

Since the second quarter of 2020, here’s how investors are playing a role in Durham’s real estate market, according to Redfin’s data set:

• Q2 2020: 255 homes bought by investors in Durham, 11.3% of all transactions
• Q3 2020: 282 homes bought by investors in Durham, 10.9% of all transactions
• Q4 2020: 305 homes bought by investors in Durham, 13.1% of all transactions
• Q1 2021: 311 homes bought by investors in Durham, 16.0% of all transactions
• Q2 2021: 432 homes bought by investors in Durham, 14.4% of all transactions
• Q3 2021: 502 homes bought by investors in Durham, 17.9% of all transactions
• Q4 2021: 497 homes bought by investors in Durham, 20.9% of all transactions

If you’re interested in real estate investing, you need to know about 1031 exchanges. Why? This type of transaction can help scale and optimize your portfolio when executed strategically and under the right circumstances.

When you sell an investment property, you’ll pay some hefty capital gains taxes at the time of the sale if you have gains. These taxes will surface at the federal level. The amount will vary based on your income, but in most cases you’re looking at around 15%-20% for federal taxes on capital gains.

Depending on where you live, gain could also be taxed as income or gain at the state level. Further, accumulated depreciation recapture hangs around till the last mile and is taxed at a federal rate of 25%, with varying results at the state level. It would be advisable to get in touch with your CPA for a translation. (In some cases, capital gains taxes can go up to 28 percent).

However, you won’t owe any taxes at the time of sale if you execute your 1031 deferred exchange properly.

Also known as a “like-kind” exchange, a 1031 deferred exchange allows you to defer all capital gains taxes if you reinvest the proceeds in a new property or portfolio of properties of equal or higher value and maintain similar or higher loan amounts. There are other things that need to be considered, but these are the two big ones.

Did you know? You have to hire a Qualified Intermediary (QI) to facilitate 1031 tax-deferred exchanges. Nationwide, the average cost of a QI is around $1,250.

Pros of a 1031 exchange

Beyond the obvious plus of deferring capital gains taxes, there are a number of other reasons why 1031 exchanges are an attractive option for property investors. Here are a six key benefits:

#1: Opportunity to invest in a portfolio

“Like-kind” doesn’t necessarily mean a house for a house. It just means the new investment has to be investment real estate. The recent changes in tax law eliminated all exchange types except for real estate.

This means real estate investors win. Some of the most astute real estate investors have 1031 exchanged a single-family home in a highly appreciated market such as California in order to purchase a portfolio of rental properties in a lower volatility/more affordable state with better cash flow, which can generate greater returns over time.

#2: Ability to elect to reset your depreciation

As a property owner, you can write off “depreciation” of your asset to compensate for deterioration related to the wear and tear, aging or other structural obsolescence of the home. For example, the IRS recognizes 27.5 years as the depreciable time period for an investment property (your CPA can describe other acceptable methods). This means that every year, the amount of the value of your “improvements” (the value of the building) divided by 27.5 can be deducted from ordinary taxable income for 27.5 years. Translation: You have the potential to reduce the amount of income taxes you pay because of depreciation.

However, overall appreciation is typically realized in the value of the land and not the property. This is because assessors typically don’t have information on improvements made to the property unless there is a sale. So while your property may have increased in value based on structural improvements, you may only be able to achieve a similar benefit of depreciation as when you initially bought the property.

In a 1031 deferred exchange, your CPA may elect to reset the depreciable amount of your investment property to a higher value that would give you a bigger tax benefit. Again, see your CPA for a translation.

#3: Exposure to new markets

Want to invest in a market with growing potential? Like-kind exchanges aren’t constrained within state lines. This means you can capitalize on one of real estate’s best advantages, which is the diversification of risk. Getting your foot in the door of an up-and-coming market early could lead to bigger returns down the road.

#4: Trade up for higher-value properties

A 1031 deferred exchange lets you trade up to a property or portfolio of properties with higher returns or qualities that better match your investing goals — and you won’t have to pay tax on the new investment until you sell (unless you choose to do another 1031 exchange).

#5: Greater exit flexibility

Single-family homes can be traded in smaller amounts, which provides flexibility and freedom.

Purchasing a portfolio of single family rental properties gives you the flexibility to sell portions of your assets over time, on your time. One of the great things about single-family rental properties is the ability to accessorize. Commercial real estate typically trades in one big lump, which can create liquidity constraints. Single-family homes can be traded in smaller amounts, which provides flexibility and freedom.

#6: Build equity over time

There’s no cap on how many times you can do a 1031 exchange. That means you could turn a duplex into a fourplex into a single-family rental portfolio into a real estate empire.

Cons of a 1031 exchange

While 1031 exchanges can be a fruitful strategy, there are a couple of challenges to be aware of before you start the process. 

#1 There’s a tight timeline

There are very strict timeline requirements when it comes to 1031 exchanges. You have 45 days to identify which property(s) you plan to buy, and you must close on that property(s) within 180 days. So if you’re not prepared to make things happen quickly, a 1031 exchange may not be the best option.

#2 Finding “like-kind” properties can be difficult

In order to do a 1031 exchange, you must first identify which property(s) you’d like to invest the money in. However, it can be very challenging to find “like-kind” replacement properties that fit the bill, especially within the time constraints of 1031 exchanges. Keep in mind, gains deferred in a 1031 exchange are tax-deferred, but not tax-free. Have the right plan and resources in place. You don’t want to scramble and end up with a subpar property that doesn’t fit your long-term investment goals just to avoid taxes. Or worse yet, you could have to pay taxes on the entire gain.

#3 You’re taxed on “boot”

If you have any cash left from the sale after you close, the Qualified Intermediary will pay it back to you. However, that money (referred to as “boot”) is taxed as capital gains. Additionally, as we mentioned earlier in this article, accumulated depreciation recapture hangs around till the last mile and is taxed at a federal rate of 25%, with varying results at the state level.

If you used leverage, you also need take your loans into account, both on the property you’re selling and the new one(s) you’re purchasing. If your liability is going down, it will be treated and taxed just like cash boot.

Say, for example, you had a mortgage of $1M on the old property, but a mortgage of just $800K on the exchange property. You’d be taxed on that $200K gain.

Home buyers face many challenges in todays market. Inventory levels are at record lows, demand is high and interest rates are starting to increase. Just to name a few. The key to success as a home buyer is perseverance. Over the course of 4 weeks, having made multiple offers, this buyer is looking forward to taking possession of this beautiful home located near Duke University! Congratulations P.J. !!