I just recently had a call from a reporter out of San Franciso who said they were from Bloomberg news and it was quite interesting concerning the questions being asked about the slow Las Vegas real estate market conditions.
It started out like this: “As you may know, many people are forecasting a recession due to poor housing conditions and I was calling Las Vegas real estate agents because the Las Vegas real estate market is getting hit really hard. I was wondering if you could put me in touch with some of your clients for an interview to see how the declines in Las Vegas home prices have altered their spending habits.”
Sorry, I can’t put you in touch with my Las Vegas real estate clients because I don’t share their personal information but when I talk to them, I’ll certainly give them your phone number and they can call you if they choose. I did share some other thoughts with this nice reporter concerning how Las Vegas real estate prices have already taken a big hit and I’ve heard of some home owners just walking away because they have mortgages for Las Vegas homes $100,000+ higher then what their Las Vegas home is worth. I guess it was nothing they really wanted to hear because that was pretty much the end of the phone call.
Now, obviously unless you’ve been locked up somewhere with no access to the media or in pure denial, I think it’s safe to say that the slow down in the real estate market is getting blamed for everything including the economy. My thoughts are that the real estate boom (more specifically during the time period of 2003 and 2004) is precisely what kept the economy going to begin with. (Working 12 hour plus days during this time frame certainly helped me contribute to the growth of Starbucks.)
Massive wealth was made with the run up of real estate prices, homeowners refinanced, spent more and money flowed through the economy like there was no tomorrow. (Face it, somebody made money when somebody bought a home in 2005 and 2006. The money did not just disappear — it went somewhere.)
Even Government rich and pension strapped cities certainly made a killing in the increased revenue created from the real estate boom. The revenue coming in from real estate transfer taxes and the slow down from this revenue is one of the many reasons why cities such as Chicago are raising taxes and looking to increase their real estate transfer taxes to find revenue for city services. (Already $2.40 per thousand higher then Las Vegas and let’s not even venture into the big difference in property taxes.) Even these cities spent up the money made during the real estate run up and are now scrambling to replace the decline in revenue.
New Las Vegas home builders made a killing pricing their homes by demand and not what it actually cost so don’t feel bad for them on the recent report of new home sales having the biggest year to year decline since I’ve been alive.
So, what was the real reason for the economy being so good for the past several years?
That question can be debated all day long by the business news channels or the media, much like the debate you can find about the economic stimulus package that plans on rebating a couple of hundred bucks and how this is going to help anything. (Interestingly, Wal-Mart just announced 30% price cuts - they certainly know where those rebate checks are going.)
So, where is all of this leading to?
In 1997, President Bill Clinton signed into law the Tax Payers Relief Act of 1997. A very key provision of this bill was the exclusion of taxes on the profits for a sale of a primary residence of up to $250,000 and $500,000 for married couples if they lived in the home 2 years of the previous five. To this day, it’s a primary reason as to how a home can really be an asset and in my opinion, one of the biggest reasons to own your own home.
No matter what happens this year or even next year, buy your home right to begin with and in five to ten years from now I can say with extreme confidence (for Las Vegas real estate anyways) that it will be worth more then what it is today and when you go to sell it, you will not have to pay taxes on the profits as long as it was your primary residence and you lived in it for two of the five years. For you renters, I can pretty much guarantee you that rents for Las Vegas homes will also be higher in five years and I don’t think you’ll be able to sell your lease. (You may have noticed that even though Las Vegas home prices have declined, the rents certainly have not.)
Now for the important part of this whole message. For real estate investors, taxes on capital gains apply on any profits. Speculators who bought and flipped homes in less then a year certainly learned what this was all about when they had to pay taxes on those profits.
For real estate investors that hold on to investment real estate for more then 1 year, the taxes on these capital gains is capped at 15% (for the time being) and they have to pay a “recapture” tax on the depreciation taken for their investment. A long story short on what all of this means, true real estate investors run all of these calculations and consider them before investing in real estate.
I can’t really speak for other cities, but there is no shortage of Las Vegas homes that are sitting on the market even after the big price declines and we are actually coming across the problem that picking which one to buy has actually become the problem with so many choices. (A check on the Las Vegas MLS today showed 5,652 residential properties available for sale under $200,000.)
In life, when there are too many decisions to make, often times no decision is made unless you have a motivating factor. The true real estate investors are eyeing Las Vegas due to the solid fundamentals and growth that are in place but are kind of in a wait and see kind of mentality even after the big recent price drops. (Once again, I can’t speak with absolute clarity of what is going on in other real estate markets.)
Rebate checks certainly are not going to give them that motivating factor in investing in the very fundamentals that have the biggest impact to any local economy, sticks and bricks.
A much better solution in my opinion would be a temporary relief on the capital gains tax for real estate investors that purchase real estate in 2008 with a minimum holding requirement. (Basically, change the 15% long term capital gains rate to 5% or even lower for real estate investments only and throw it in for vacation or secondary homes also.) True real estate investors would certainly understand the long term benefits of this and in case anybody forgot, real estate is supposed to be a long term investment.
Would it help? It certainly would not hurt and the stability it would create for local economies would probably have much more long term economic benefits then a couple of hundred bucks. Besides that, the fundamentals of real estate investing and the long term benefits certainly would help Americans build a more solid future for themselves and their families.
Paul Francis, ABR,CRS | Coldwell Banker Premier | Las Vegas Real Estate | 702.592.3058
