Housing inflarion

Investment Analysis Clubs Macro Economic Trends and Risks
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We are all aware of the explosive increase in housing costs.

https://fred.stlouisfed.org/series/CSUSHPISA

I simply can’t wrap my head around it. My 1987 ranch house (1400 sq ft) with a 1947 cabin on 1 acre, which I bought in 2003 for $185,000 was Zillowed last week for $505,000. Gasp!

This is on a 2-lane country road near the tiny town of Sequim, WA which is 2.5 hours west of Seattle. Too far for a daily commute, but not too far for a weekly commute and home office.

A 55+ manufactured home development, Lavender Meadows, is being completed about a mile west on the same road. It was a cow pasture a year ago. Now it’s being landscaped and marketing materials are online. I haven’t seen any houses on the development yet.

All the homes will be manufactured homes in a land-lease community.

https://www.lavendermeadowsmhc.com/

The monthly “community fee” (which doesn’t include care of each home’s landscaping) is $800. That doesn’t include the cost of building (or renting) the manufactured home on the leased land. The community fee can rise every year.

I’m shocked at how high the community fee is. I guess that the 55+ residents will have to compare the cost with buying a traditional home, renting a traditional apartment (or house), or assisted living facilities with graded amenities.

I really don’t see how average people, especially average retirees, can afford to keep a roof over their head with these rising prices. Heaven help the elderly single woman, widow or divorcee since many of them have lower savings and Social Security than men. Married people need to be aware that one of their Social Security checks will stop when the first spouse dies. (One of my Tax Aide clients was shocked that she was forced to move when her husband died.)

I followed the traditional route of paying off my house long before retirement. But property taxes are also rising.

Inflationary times are tough.

Wendy

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My 1987 ranch house (1400 sq ft) with a 1947 cabin on 1 acre, which I bought in 2003 for $185,000 was Zillowed last week for $505,000. Gasp!

The Zestimate probably means the property is worth at least $100K more than that. In my experience, Zestimates run low. On the property we most recently put on the market, the Zestimate was $100K lower than where we priced it at. After it went on the market, Zestimate said we were priced $50K too low. Ditto for other properties we have sold. Completely useless.

IP

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<The Zestimate probably means the property is worth at least $100K more than that.>

Holy smokes! I just fell off my chair!

I think of all my homes as “one house unit,” since all the house prices rise at the same time. It’s not like the money is ever going to end up in my pocket. (No, I’m never going to get a home equity loan.) Worse, the increase is going to be taxed unless I buy an equally expensive home. If I have to go into assisted living I won’t be able to exempt the profit.

Wendy

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manufactured homes in a land-lease community

aka, trailer park
The houses do look a step up from traditional “mobile” homes, but the concept is the same. Btw, even the trailer park concept is evolving, as residents form co-ops and take ownership. They have to be quick, though, before a corporation buys the place. https://www.manufacturedhomes.com/blog/residents-manufacture…

I guess that the 55+ residents will have to compare the cost with buying a traditional home, renting a traditional apartment (or house), or assisted living facilities with graded amenities.
Yep. I’m not seeing Lavender Meadows benefitting by the comparison, but presumably they’ve done their market research.

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The question that puzzles me the most are how there are so many buyers/borrowers who make the salaries that can pay the impossible mortgages???

What do they do? What are they paid? There might be examples where small families go together to buy, but in the main, a father and mother paying on huge mortgages. Where rates are creeping up.

It seems logical, that these prices cannot continue on the same curve.

Wendy, per your Yikes! comment, just about everyone I know, including me, “could not afford the mortgage payment, on their own houses, if they had to buy at today’s prices”.

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Worse, the increase is going to be taxed unless I buy an equally expensive home. If I have to go into assisted living I won’t be able to exempt the profit.

Not necessarily so. If you and your husband both own the home, and have lived there at least two years, you can sell and exempt up to $250K each in capital gains. Some other minor ifs ands and buts in there, like you can not have done the capital gains exclusion on another home in the past two years, but you can have gains exempted from taxes. https://www.investopedia.com/ask/answers/06/capitalgainhomes…

Further, if you have mostly capital gains for your income, it may be taxed at a zero percent rate. This chart is a visualization of having $40K in ordinary income, (I know you like your dividends,) and $100K capital gains over the $500K gains exclusion that you could enjoy. 2021 tax rates still, but MFJ. Sadly does not include NIIT in the graphing, so be aware if you play with this website: https://engaging-data.com/tax-brackets/?fs=1&reg=30000&a… You will see that after personal deduction eating up much of the ordinary income, only $34.1K of that capital gains overage that cannot be exempted is subject to taxes.

But perhaps I misunderstood, or you have some other reason why you don’t believe you will receive this tax benefit from sale of home. If that’s the case, I would like to hear the law in question, in case it might impact us.

IP

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Worse, the increase is going to be taxed unless I buy an equally expensive home. If I have to go into assisted living I won’t be able to exempt the profit.

That part of the law changed, you do not have to purchase a new home for the exemption to apply. The one thing that is advisable, though, is to sell the home (and realize the gain) while ones spouse is still alive - to get the full $500,000 MFJ exemption rather than the $250,000 single exemption.

https://www.investopedia.com/ask/answers/06/capitalgainhomes…

Excerpt - Important: The Taxpayer Relief Act of 1997 significantly changed the implications of home sales in a beneficial way for homeowners. Before the act, sellers had to roll the full value of a home sale into another home within two years to avoid paying capital gains tax. However, this is no longer the case, and the proceeds of the sale can be used in any way that the seller sees fit.

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< The one thing that is advisable, though, is to sell the home (and realize the gain) while ones spouse is still alive - to get the full $500,000 MFJ exemption rather than the $250,000 single exemption.>

My Revocable Living Trust owns the house. The Trust’s situs is in Delaware. I bought DH’s Delaware home from him in 1990, before we were married (1993). I paid DH (then DBF) a mortgage until it was completely paid off. I titled the Delaware house in the Trust. When we moved to Washington State, I bought the WA home with cash from my Trust and titled it in the Trust. I sold the DE house and put the proceeds in the Trust.

DH is not an owner of the WA house. He is a Trustee of the Trust after my disability or death but not the settlor of the Trust or a Trustee if I am alive and mentally capable.

I’m not sure of the legalities since Washington State is a community property state. We were married and living in DE when I bought the WA house from my Trust. I don’t know whether it would be considered community property in WA since it is titled to a DE trust and we were still living in DE when I bought it.

This has implications if we were divorced, if I sold the house, and if I died. I don’t understand the outcomes at this point.

Wendy

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…increase is going to be taxed…

Others have addressed the 1997 law that discarded the “defer tax on gains via buying an equal or more expensive house” in favor of “exclude $500k in gains, regardless of next steps.”
Note:

  • If you’ve sold & bought houses before 1997, rolling the gains into the next house, you have to add those gains to the sale of your current house. You know how you’re supposed to save income tax returns for seven years? Exception: years when you’ve bought/sold houses.

Things that might help:

  • The exclusion is only $250k for widow(er)s, but the surviving spouse receives the stepped-up basis of half the house when inheriting, so that’s not as bad as it sounds.
  • If you’ve spent money on the house, that adds to your basis.
  • Whatever profit that you do get taxed on will be taxed as capital gains, not ordinary income.
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I simply can’t wrap my head around it. My 1987 ranch house (1400 sq ft) with a 1947 cabin on 1 acre, which I bought in 2003 for $185,000 was Zillowed last week for $505,000. Gasp!

Assuming Zillow is accurate (I find they over-estimate, which is why their house flipping biz lost a ton of money), that is just under a 5.4% CAGR for your property over that 19 years. It’s not as outlandish when you think of it that way.

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I certainly agree!

We purchased a condo in Sunland (not far from Wendy) in 2010 or so, with an idea of retiring there (I was teaching in Texas at the time, but we’d vacationed in Sequim or on the Peninsula often over the years). Housing prices were down everywhere and we knew we wanted to come back to the NW, so we thought maybe it was the right time.

We rented the condo out with a manager who was very good—and never ended up living there. When we finally were ready to retire, there were some funny things going on with the Sunland leadership AND we decided we wanted to live in town, so looked into manufactured 55+ housing (we’d owned one before, so knew the up- and downsides, including that you won’t get as much appreciation as when you own the land).

Sold the condo at a good price (although it would be considerably more now) and bought our manufactured, very close in town, but quiet and not too big (50 or so homes). Space rent is currently $430 (will go up in June by only $10, which astounded us)and includes water, sewer, and garbage, so a relative bargain.

We surf the net for real estate in our area (for fun) and are always surprised by the price of even relatively modest homes in the Sequim area—certainly not what we’d want to pay!

We’ve watched Lavender Meadows develop and have been curious about what it will cost to live there—too much, I’d say, but when you look at conventional real estate here, it’s not too much of a surprise.

There are two couples who will sell their houses in our little development (both moving to be closer to family) and it will be interesting to see where prices have gone compared to 2018 when we bought our place here. Not selling, however! We’ve remodeled (almost done) to make the place work for us, and my wife has been developing a beautiful garden, so we’re happy here.

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I simply can’t wrap my head around it. My 1987 ranch house (1400 sq ft) with a 1947 cabin on 1 acre, which I bought in 2003 for $185,000 was Zillowed last week for $505,000. Gasp!

It is pretty crazy.

Per Zillow, the value of my house has doubled in the last 18 months. Which is absurd.

Now, I know that Zillow has the reputation of overvaluing homes - but at least in our case, I don’t think that’s the case. About a year before Covid, we had put our home on the market in order to move to a larger home down the street. That never happened after our target home contract fell through, but we had a signed contract on our home before it collapsed - so the ‘before’ price has a FMV confirmation. Meanwhile, the house two doors down from us recently sold - so I’ve got a very close comparable, which matches up with the Zillow value for that house and ours.

Which…wow. To the point where DW and I are seriously considering the possibility of ‘banking’ some of those gains by moving downmarket and making our anticipated move to condo living a little earlier than we planned.

Albaby

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The monthly “community fee” (which doesn’t include care of each home’s landscaping) is $800. That doesn’t include the cost of building (or renting) the manufactured home on the leased land. The community fee can rise every year.

That monthly fee is pretty eye-popping, so I had to take a look at what’s offered. I can kinda understand it.

For one, on-site management isn’t cheap. And there are planned activities that need to be run, with a place to hold them, set up before and clean up afterwards. The community also has what sounds like extensive green space with things that need routine maintenance if you don’t want them to get run down. And all of this needs to be insured. Communities like this typically carry liability insurance, fidelity/employee dishonesty insurance, workers comp, and directors & officers insurance if there is a board - insurance is often a major expense.

What a lot of people don’t understand when they buy into HOAs and similar communities is that they’re buying into a corporation that will have many of the same expenses as other corporations. They’re becoming legal and financial partners of a bunch of strangers (an acquaintance of mine referred to buying a condo as walking into a bar and becoming business partners of everybody in the joint). The corporate expenses are largely invisible unless people are paying attention.

It’s also true in my area and in many others that if you want new construction, you’re almost forced into the HOA/Condo Industrial Complex. These things are big business for a lot of people, so prices would be going up even without all of the other things currently going on. These other things include supply chain issues, inflation in the cost of building materials, and investors buying up a lot of residential real estate which further exacerbates the supply/demand imbalance.

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$800

For one, on-site management isn’t cheap. And there are planned activities that need to be run, with a place to hold them, set up before and clean up afterwards. The community also has what sounds like extensive green space with things that need routine maintenance if you don’t want them to get run down. And all of this needs to be insured. Communities like this typically carry liability insurance, fidelity/employee dishonesty insurance, workers comp, and directors & officers insurance if there is a board - insurance is often a major expense.

Falls Run in Fredericksburg, Virginia, does all that, including a gym and two swimming pools, and their HOA fee is $175/month. Plus, residents own their houses and also the land under them.

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Falls Run in Fredericksburg, Virginia, does all that, including a gym and two swimming pools, and their HOA fee is $175/month. Plus, residents own their houses and also the land under them.

It sounds to me what’s being discussed is akin to a mobile home park - the structures are manufactured housing that basically pay rent to the park owner, with the rental payment called a “community fee.” Which explains why it’s so high - it’s not really analogous to HOA/POA maintenance fees, but is actually mostly the rent being paid for the homesite.

Albaby

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It sounds to me what’s being discussed is akin to a mobile home park - the structures are manufactured housing that basically pay rent to the park owner, with the rental payment called a “community fee.” Which explains why it’s so high - it’s not really analogous to HOA/POA maintenance fees, but is actually mostly the rent being paid for the homesite.

That’s correct and some mobile home parks even have their own water and sewer systems, plus the park typically maintains the roads and such inside the park. So there can be a lot too it.

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Owning your home is an important step toward financial independence in the US. Owning dampens the effects of inflation. (If you sell your home at double what you paid, you might just buy another house for double what it was.) A renter is fully exposed to inflation, with rent increases every year, and whatever the landlord decides to charge.

There is an inflation tax that affects all capital gains, including houses and stocks. But US capital gains tax rates today are very low.

Mobile Homes: Last Week Tonight with John Oliver (HBO), 2020
https://www.youtube.com/watch?v=jCC8fPQOaxU

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“That’s correct and some mobile home parks even have their own water and sewer systems, plus the park typically maintains the roads and such inside the park. So there can be a lot too it.”

My parents lived in Briny Breezes FL - the smallest ‘municipality’ in the state - and essentiall a mobile home park between the Intercoastal and Atlantic Ocean.

they paid $3000/yr in 2000 - don’t know what it is today. They owned ‘shares’ in the corporation for their ‘lot’ about 30x60 feet. Larger lots owned more shares and lots on the intercoastal even more shares - at of course, higher ‘lot’ prices. You’d put your own manufactured home on the lot.

My parents started out buying a 8 foot wide 48 foot long Spartan ‘trailer’ from the 1950s that was on the lot. When they actually retired and spent the winters there, rather than a couple weeks before retirement, they put a side by side - a 10x45 with a 8 by 30 next to it and attached. about 850 sq feet. 2 bedrooms. parking for two cars.

For their $3000 a year, they got yard maintenance, cable TV, a heated swimming pool, a dozen clubs in buildings from garden club, woodshop, theater (300 seat theater), fishing and boating club, ocean house right on the ocean for events/use, 300 feet of beach on the Atlantic, shower houses, a laundry facility (washer/dryers), a postal service/boxes/forwarding, police and fire (purchased from neighboring town), water, etc.

Only had to clean inside your place. 300 foot walk to the pool. 600 ft walk to the ocean. Oh, I forgot the shuffleboard courts and 3 tennis courts. Small library. Water aerobics classes in the pool. Square dance club.

My dad died in 1991. Mom lived there another ten years. Had the option to buy ($40,000 in 2001) but decided I didn’t want to live there. The street where the home was was primarily 60s and 70s and 80s residence. I was 53 at the time. Min age was 55 but could have gotten in likely. Sold it. Mostly my ‘parents generation’ there. Nice place, though. No need to flee south from TX for winters. My parents spent summers in upstate NY. There you want to flee south for winters when you retire unless you are a ski nut, snow mobiler, etc.

I have a powerless HOA…$170/yr. About the only thing it does is maintain the 3 entrance signs into the subdivision - pay for lighting them, and landscaping them and water for them. Doesn’t ‘enforce’ any rules on house appearance. Some home owners don’t even ‘join’.

Other HOAs around here are ‘militant’. Put the ‘wrong’ colors and pink flamingoes in your yard and you’ll hear about it quickly.

t.