Real Estate And The Psychiatrist

Includes: IYR
by: Acting Man

By Ramsey Su

This is a follow up to my recent rant: California Real Estate and the Neurosurgeon.

"If you are thinking about investing in California real estate, you need to have your head examined."

If the neurosurgeon cannot find anything obvious that's wrong, you may need to seek psychiatric answers as to why you may want to buy real estate today. As a buyer, if there is ever a right time to procrastinate, this is it.

Government and Fed intervention have taken over the real estate market for over a decade. Bernanke's QE3 is the only air left for this endless attempt to keep the bubble inflated. There are so many issues facing the real estate market today that I admire the courage of those who are willing to sign on the dotted line for a long range commitment to real estate ownership of any kind, anywhere.

Is the perfect storm approaching? There are no more stimulus plans on the table that I know of. Everything ahead are takeaways. While I heard these mentioned, I have no idea what is real and what is just talk. We should find out more as the fiscal cliff cage fight moves into the later rounds.

1. QE3. QE1 and QE2, one way or another, dropped mortgage rates from the 6% range to the sub 4% range. That is hell of a lot of stimulus but the results have been minuscule. QE3 has been in effect for close to two months now and so far mortgage rates may have dropped 10-20 basis points with no noticeable change. The Fed is exhausted. There is nothing they can do to pump up a real estate bubble.

2.Capital Gains. This is one scary storm for real estate. If the upcoming tax reforms include changes to capital gains so that Warren Buffett can pay more taxes than his secretary, it may be very detrimental to the real estate market. With less than two months left, it is probably too late to try to sell before year end, which would be locking in the favorable capital gains treatment of old.

3. $500,000 Homeowners Capital Gains Exemption. This was Clinton's payoff to the Silicon Valley fat cats who supported him, and to fellow politicians. How many homeowners would have a $500,000 gain, when that is way above the average, medium or median price of a home in the U.S.? Could this trigger a massive sell-off in the higher end of the property market to capture this exemption while it is still in effect?

4. Mortgage Deductions. No comments needed if this is changed.

5. Tax Deferred 1031 Exchanges. This is one of the best tax breaks, available to real estate and not stock market investments. By being able to trade up and deferring taxes on the profit, real estate investors have far more capital to build upon.

6. Mortgage Debt Relief Act. This act exempts debt that has been forgiven from being treated as income. This freebie is due to expire by year end. Even though the odds are it will be extended again, it should be a wake up call for those with negative equity that this gift may not be available indefinitely. It is also a gift the significance of which many do not appreciate. For example, let us say you are a doctor in Las Vegas, with a $200k deficiency in your mortgage and a $200k income. Without the exemption, a short sale would push you into the over $250k bracket immediately. You would become the target for higher taxes.

7. Loop Holes. There are lots of references to closing loop holes. Pertaining to real estate, I do not know what they may be. Are they looking at depreciation schedules? Other deductibles?

In conclusion, I believe tax accountants and tax attorneys are going to be very busy strategizing the most advantageous moves for their clients. There may be many different outcomes, but I was wondering, will there be any tax related reasons to buy? So it is likely that all the pressure will be on the sell side, the only question is how big it will be.

(Click to enlarge)

From our friends at the housing rebound put into perspective by trying to account for the loss money's of purchasing power (estimated by official CPI data and in-house measures).