Editor’s note: This is the first of a two-part series.
At the National Association of Realtors’ annual conference, Wells Fargo economist Mark Vintner and NAR Chief Economist Lawrence Yun shared their takes on what’s in store for the real estate industry in 2013. As you make your plans for the upcoming year, heeding their advice can give you a huge competitive edge.
1. Tighter lending standards will continue
According to Yun, the average buyer who was turned down for a loan had a 19 percent down payment and an average FICO credit score of 734! Part of the reason that lenders are so reluctant to make loans now is that they don’t want to load up their books with low-interest loans, especially since the outlook is for an increase in interest rates probably in 2014 or 2015.
Opportunity: The tough lending standards and the increase in the minimum down payment amounts don’t bode well for single and first-time buyers. If you are specializing in this part of the market, it may be smarter to shift to working with slightly older clients, preferably couples with two incomes. In fact, NAR’s 2012 Profile of Home Buyers and Sellers shows a decline in the percentage of first-time and single homeowners with a corresponding uptick in the percentage of married couples purchasing homes.
2. The state of the mortgage deduction
NAR will bring out its heavy artillery to protect the mortgage interest deduction. The "MID" was not part of a compromise bill passed by legislators this week to avoid a "fiscal cliff," but is expected to be part of a larger debate over tax deductions that will take place in coming months.
It already appears that the Obama administration is considering a Romney plan that would cap tax deductions and close loopholes. This probably means that the mortgage interest deduction will stay intact for most homeowners, except for those who have other deductions that exceed the cap.
Opportunity: Watch what happens in this area very carefully. If the cap hits high-end earners, this could cause additional declines in the luxury market. This means that you may need to niche your business for the lower end of the market in 2013.
On the other hand, many affluent areas are seeing an explosion of all-cash offers. If you do business in an area where there is a lack of inventory and there are plenty of all-cash offers, focus on obtaining more luxury listings and prospecting for more cash buyers. By the way, if you’re wondering where to find cash buyers, many of them are from another country. If you are fluent in another language or specialize in an area where foreign buyers are likely to purchase, focus on expanding your business in these areas in 2013.
3. The fiscal cliff
Probably the most surprising part of this session was Vintner’s observation that 50 percent of the fiscal cliff was going to come into play no matter what Congress does about the tax issues. Social Security taxes will increase on everyone since the current reduction will not be extended. Obamacare taxes kick in fully in 2014, including more taxes on dividends and capital gains.
Opportunity: Real estate investment may be one of the best options to defer taxes. No one has mentioned altering the 1031 tax-deferred exchange provisions. Assuming those stay in place, an owner can continue trading up for more expensive properties and deferring the taxes on the gain until the owner is ready to cash out. This allows the investor to amass wealth more quickly.
One caveat, however: 1031 exchanges are complex and should not be undertaken without being evaluated by a tax professional who specializes in this area.
4. The Fed may tolerate high inflation
Yun predicted the Fed might be willing to tolerate inflation rates as high as 5-6 percent to get the economy moving again.
Opportunity: We are in the midst of a "perfect storm of opportunity" consisting of historically low interest rates, low prices and inflation. Furthermore, since real estate is a hard asset (i.e., one that historically keeps pace with inflation), there is really no better time to purchase than now. To illustrate this point, if we have inflation of 5 percent per year over the next five years, a $200,000 property today will be worth $255,256 five years from now. This means with the low prices and low interest rates, the owners have a huge upside potential.
Furthermore, inflation means that homeowners with fixed mortgage loans will be paying them off with an inflated dollar. Assuming that the inflation rate goes to 5 percent over the next five years, each dollar that the homeowner pays today will be worth approximately 78 cents five years from now.
To really capitalize on these trends, show reluctant buyers the cost of waiting to buy their first home or to trade up to a more expensive home. There really is no better time than right now.
Need more tips to help your business in 2013? If so, don’t miss Part 2 on Thursday.