This article from John Wasik, a columnist in Bloomberg News, tells us that in the next 2 weeks, President George W. Bush’s Advisory Panel on Tax Reform will issue its final report by Nov. 1, and it’s possible that tax deductions for housing may be pared. If passed by Congress, such a proposal would raise the after-tax cost of a home and reduce prices in the hottest markets.

The president’s tax panel is discussing capping the mortgage interest deduction at $350,000, limiting interest write-offs to 25 percent of income, or adding a tax credit for mortgage interest so that all taxpayers would receive the same deduction. Trimming write-offs for company health insurance and local property taxes are also being considered.

The combined lobbying of the real estate, banking and home construction industries may ensure that home deductions remain, regardless of the panel’s recommendations to Congress.

Read the whole article here.

Could it be true? Have we seen the top of the market? In this article from the LA Business Journal, it appears that we are now seeing over valued markets, and that reductions are becoming the new trend in many markets.

A good friend who recently moved to Laguna Beach says, “Prices on my street are off around 15% from when we moved in. Inventory has tripled in Laguna Beach, and nobody shows up for open houses. Brokers pinging me regarding reductions. The unwinding has begun.”

Los Angeles topped the list for overvalued housing prices, with its prices estimated as overvalued by 33.7 percent. L.A. was followed by Sacramento (31.3) and Riverside (30.7).

According to the report, half of the nation’s 50 largest housing markets are overvalued by 10 percent or more. Three are overvalued by 30 percent or more and another 11 are overvalued by 20 percent or more. Of the 14 markets overvalued by 20 percent or more, seven are in California: Los Angeles, Sacramento, Riverside, San Diego, Santa Ana, Oakland and San Jose.

L.A. also came in ninth place out of the markets surveyed in the Risk Index, meaning its prices are at high risk for declines in the next two years.

Are we heading into a buyer’s market? How soon will it take effect?

Another article, this time from Real Estate Journal, discusses how some home sellers are turning to Web logs, or blogs, to make their properties stand out among traditional real-estate listings.

When Mesha Provo, an avid gardener, decided to sell her home in El Sobrante, Calif., she wanted to showcase her property — with its arbor blanketed with wisteria — to appeal to other plant lovers. She started a blog detailing her garden’s story through passionate postings and vibrant close-ups of her flowers, and eventually added pictures of the house.

A gardener found her blog — through a flyer put together by a real-estate agent — fell in love with the house, and ultimately paid $612,000 for it, $43,000 more than the asking price.

Fidelity Assets offers home sellers and listing agents the equivilant of a blog for a house listing. It’s called Property Showcase, and it’s a great recruiting tool for selling agents to get new listings, and it’s a great way for a motivated home seller to showcase their home to millions of active buyers in the market.

In the wake of Katrina, some degree of damage was done to roughly 160,000 houses in New Orleans, or 74% of the city’s housing stock. The houses that remain have doubled in value, in many areas, due to the lack of available housing in the neighboring areas.

The big question is how city and state officials are going to handle the devistation and rebuilding at this point?

The removal of debris — cars, boats, hazardous household chemicals, such as paint thinner and bleach, and trees — strewn across the city is expected to take as long as two years. Compounding the enormous scale of sludge and objects large and small, state officials have struggled to find staging areas in the city for their removal operations and identify enough acres of land in southeast Louisiana where the debris can be properly disposed of.

But it’s the fate of homes in New Orleans that remains the most emotionally wrenching aspect of the reconstruction process.

Read the full article from the Wall Street Journal here.

Earning Excess Returns in Real Estate

Several of our readers have asked us to post information about REITs. What are they? How do people make money from them? After this quick primer on REITs, click this link and read the story from Morningstar that gives a good background on what a REIT is and how you can profit from them.

Real estate is actively bought and sold in two parallel markets–the private market (for trading individual properties directly) and the public market for REIT shares. When private markets value properties more highly than the public markets, REITs can earn excess returns simply by selling properties to private investors. Alternately, when public real estate is priced too high–through lofty REIT share prices–REITs can add value to shareholders by issuing shares to the public and using the proceeds to snap up private properties. Few individual investors, though, can play this game.

For the full story, you can read the whole article on Morningstar’s website.

Interest Rates And Housing

With interest rates on the rise, do you have the right kind of mortgage? And are housing prices in your community a bubble about to burst?

In this video (ooh, video), Business Week takes a look into the cycle of rising mortgage rates, and what this means for home owners?

This is a really good piece that covers the market dynamics of mortgage rates. Highly recommended viewing.

According to the National Association of Realtors’ monthly measure, affordability in August fell to its lowest level since September, 1991.

Contrary to the predictions of some bubble-watchers, it’s highly unlikely that housing prices will crash à la Nasdaq, 2000. What’s more likely is that prices will fall, possibly by double-digit percentages, in a few of the most overheated markets — parts of California, Florida, and other coastal hot spots.

In the midsection of the country, where housing inflation only caught fire in the last year or so, prices are still reasonable and are likely to keep going up. In-between markets like Boston, New York, and Washington, D.C., may just stall for an extended period.

This article from Business Week goes into detail about homes becoming less affordable, a traditionally bearish signal, but a softer market is more likely than a collapse.

“Rent divided by two divided by price.”

Developed by Redbrick Partners, a real estate investment management firm that operates investment funds made up of single-family houses, the formula is a relatively simple rule of thumb that calculates the percentage yield for most properties costing $250,000 or less.

Most novice landlords tend to figure their vacancy costs at 3% to 5%. But what they forget is that sometimes they have to spend money to collect their rents. This article discusses how much you should budget for Insurance (about 6%), Maintenance (about 11% of the rent you charge will go toward this expense), Property taxes (roughly 11% of your rent), Management (about 6% of the rent), Capital expenses (approx. 1% of the home’s market value — or 8% of your rent).

In other words, if you are charging $1,500 a month, or $18,000 a year, $9,000 is going to be used to cover the costs described above.

And if you’d like to find out how much would be earned by your investment further, click on this link to learn what a $20,000/year in rent will cost you to buy.

Aging homeowners who want to pass their properties onto their children and take advantage of their lifetime gift-tax exclusions–$2 million for couples and $1 million for individuals–might want to establish a Qualified Personal Residence Trust.

This article from Business Week addresses that during the five- to 15-year trust term, the parent retains ownership of the house and benefits from mortgage-interest and property-tax deductions. The residence is turned over to the children without substantial gift taxes when the trust term expires, even though the real estate likely will have appreciated in value.

After turnover, the parent pays fair market rent to continue living there. The home value is discounted for trust purposes–factoring in the owner’s age, the length of the trust term, and the Internal Revenue Service’s monthly “hurdle” interest rate–and split to represent the value of the gift and the value of the right to reside on the premises, or the retained interest.

The gift value typically is smaller than the retained interest, lessening the tax burden placed on the heirs. Those who do not want their children to become their landlords should consider setting up another trust after the original trust term ends, appointing trustees to be in charge of making decisions about the property.

After three decades of expansion, the size of the average U.S. home appears to be moderating.

Home size grew to more than 2,300 square feet in 2001 from approximately 1,500 sq. ft. in 1970, but growth has slowed significantly since then. The U.S. Census Bureau reports that American homes averaged 2,400 sq. ft. as of June 2005.

Observers cite a number of reasons for the shift, including the steep cost of furnishing and maintaining large residences, high fuel prices that send the cost of heating and cooling such homes into the stratosphere, and rising interest rates and land costs that make it more difficult to afford bigger dwellings.

There also is a perception in some areas that owners of McMansions are spoiling the views of the neighboring homes that they often overshadow or that they have a negative impact on the environment.