Here is what we notice about the market right now:

• Listings are receiving fewer offers compared to 60 days ago – instead of 10 offers, a listing might have 2.
• There are now several instances of a listing only having one offer.
• Sellers who were overly-aggressive with their list price have to quickly reduce in order to generate activity.
• Inventory is up and in some areas significantly, giving buyers more options and flexibility.
• Home buyers who are under contract with a new home waiting for that new home to be built have been negatively impacted by rising rates.
• More buyers are considering 7 and 10-year mortgage products in order to have a lower interest rate.
• The pendulum is swinging away from the drastic seller’s market we have seen for the last 18 months.

When you sell your home, you stand to receive an influx of cash. Though there are several costs associated with a home sale, you can likely still bank on the fact that you’ll be depositing a lump sum in the near future. But before you start planning how you’ll use the money or start looking for a new home, you’ll want to understand whether you fall under the criteria of the capital gains tax. If so, the profit from your home sale could end up being smaller than you expected.

What is a capital gains tax?

A capital gains tax is a fee on the profits gained from the sale of an asset. This tax appears in transactions involving various assets—bonds, stocks, boats, cars, and real estate. In real estate, it’s common for homes to appreciate, often leading to a situation where the seller sells the property for more than they originally purchased it. The capital gains tax on the sale of a home is assessed on the difference between those two prices.

Avoiding Capital Gains Tax on a Home Sale

• The 2-in-5 rule: If you have owned the home and it has been your primary residence for two of the five years leading up to the sale, you can exclude up to $250,000 of gains if you’re single, or $500,000 if you’re married and file a joint return. If the profit exceeds these amounts, then the excess is reported as a capital gain. The two years of living in the home don’t have to be consecutive, nor do they need to be the final two years leading up to the sale.
• Two-year window: You can claim the $250k or $500k exclusion as long as you haven’t already claimed it on the sale of another home in the past two years.
• Cost of repairs/improvements: In the context of the capital gains tax, the “cost basis” of your home includes the purchase price, certain legal fees, improvement costs, and more. Including the expenses incurred making repairs and improvements to the home will increase the home’s cost basis, thereby reducing the capital gains.

Paying Capital Gains Tax on a Home Sale

Sometimes, avoiding the capital gains tax may not be possible. If these criteria fit your situation, the gains from the sale of your home may be fully taxable:

• The home you sold is not your primary residence
• You owned the home or lived in it for less than two years in the five years leading up to the sale
• You purchased the property through an investment exchange (known as a 1031 exchange)
• You are subject to expatriate taxes
• You sold another home within the previous two years and used the capital gains exclusion on that sale

Capital Gains Tax Rates

Capital gains tax rates break down into two basic categories: short- and long-term. Short-term capital gains tax rates apply if you owned the home for less than a year. The rate is usually the same as your ordinary income. For example; if you purchase a home, home values in your area go through the roof within the first few months, and you decide to sell right away to take advantage of the competitive market, you’ll be required to pay capital gains tax on the sale. Long-term capital gains tax rates apply if you own the home for longer than a year, and are taxed at 0%, 15%, and 20% thresholds.

For more information on the financial characteristics of a home sale, read A Guide to Understanding Escrow.

This week, for the first time in 32 months, mortgage rates hit 4%.

While this increase may feel painful for buyers currently looking at property, it is important to put today’s rates in perspective.

We believe we will look back a few years from now and see that a 4% rate was like buying money at a discount.

Interest rates hovered between 4.5% and 3.75% for the 8-year span of June, 2011 to June 2018

Between January, 2000 and December, 2010 rates were as high as 8.25% and as low as 5.0%.

When looking at the history of interest rates and researching economists’ forecasts, we believe it is reasonable for rates to hit 5% within the next 24 months.

When interest rates increase 1%, a buyer’s monthly payment increases 10%.

So, if rates do go to 5%, it is like an additional 10% price increase for a buyer.

Given all of this information, we believe the biggest risk to a buyer in today’s market is to wait.

Mortgage rates are likely on their way up and there is an opportunity to buy money at a discount today.

What is a Listing Agent?

Generally, a real estate transaction involves a listing agent representing the seller and a buyer’s agent representing the buyer. Listing agents will conduct a Comparative Market Analysis (CMA)—which uses recent housing market data to compare the seller’s home to other listings in their area—to accurately price the property. The agent will list the home, coordinate showings and open houses, and negotiate with buyers’ agents to find the best offer for their client. Once the transaction is complete, the listing agent and buyer’s agent will split the commission of the sale.

Hiring a listing agent removes the risks of selling your own home by placing the selling process in the hands of an experienced licensed professional. Once you’ve found the right agent, you can begin working together to form your selling strategy.

Advantages of Working with a Listing Agent

Accurately Pricing Your Home

Your listing agent will begin the selling process by finding the value of your home. There are various factors that influence home prices, including seasonality, market conditions, home features, and more. Agents have exclusive access to the data behind these trends, allowing them to conduct a thorough CMA to accurately price your home. Of all the costly mistakes in the selling process, an inaccurately priced home is perhaps the most consequential. An overpriced home will attract the wrong buyers, increase your home’s days on market, and could lead to serious post-sale complications, that, in some cases, could jeopardize the sale. An underpriced home leaves money on the table. With a listing agent’s CMA, you can rest assured that the price of your home is backed by current market data, which will set you and your agent up for successful negotiations.

Marketing Your Home

Listing agents are experienced professionals who possess a wealth of knowledge on how to market your home. Your agent will list your property on the Multiple Listing Service (MLS), an online database to which they have exclusive access. Getting your home listed on the MLS will greatly increase its exposure to interested buyers. Your listing agent will coordinate showings and open houses, opening the door to conversations with buyers and their agents.

Your agent will also make recommendations and help coordinate all marketing efforts, like staging and photography. They’ll also be able to recommend what, if any, repairs need to be made before you go live. Their expertise will streamline the selling process, getting your house ready and on the market quickly.

Offers / Negotiations / Closing

The complexities of the critical stages in the selling process highlight the value of an agent’s expertise. A listing agent will work on your behalf to field and assess incoming offers, communicate with buyers and their agents during negotiations, and ultimately, see the deal through to closing.

Local market conditions can often dictate how your agent approaches offers and negotiations. In a seller’s market, there’s a good chance you will have multiple competing offers on the table, contingencies are often waived, and all-cash offers may arise. Trying to pin down the best offer in these competitive situations can be overwhelming, but listing agents specialize in understanding the terms of these kinds of offers to identify the one that best aligns with your goals. If you’re selling in a buyer’s market, the buyer will have the leverage. Your listing agent will work with the buyer’s agent to reach an agreement on the buyer’s contingencies and finalize the terms of purchase.

From list to closing, your listing agent is there to answer any questions you may have, allay your fears, and guide you toward a successful sale. When searching for an agent, keep in mind that their ability to connect with you on a human level is just as important as their professional qualities. Selling your home can be an emotional roller coaster, and you’ll want someone by your side who you can trust on the journey ahead. If you would like some help connecting with an agent, get started here: https://fosterhomescolorado.com/contact-me

Our heart goes out to all of the people impacted by the Marshall Fire in Boulder County.

If you would like to give your support, we have set up a special fund through the Windermere Foundation where we will match any donation you make up to $5000.

You can make that donation HERE.

This devastating event will have significant impacts on the real estate market both short term and medium term.

There are some interesting things to consider related to the fire:

1. This will be the costliest wildfire in Colorado history, by far.  The total losses will probably approach $800 million.  The most expensive wildfire up until now was last year’s East Troublesome fire at just over $500 million.
2. It’s likely that the vast majority of the residential property owners who lost their homes were underinsured.   Given the recent rise in both property values and construction costs, these homeowners may find that their insurance won’t cover their actual loss.  We encourage everyone to check in on their own property insurance versus actual replacement costs.
3. Nearly 1000 households are now in need of housing.  Today there are only 161 residential properties for sale in Boulder County.  In addition, the rental market also has low supply.  We expect that many of the people impacted will consider housing alternatives outside of Boulder County simply out of necessity.
4. The homebuilding industry is currently challenged with both labor and material shortages.  It may take long time to replace the properties that were destroyed by the fire.

Again, we are so sad for the people who were impacted.  We are also encouraged to see all the different ways that our community has stepped up to help.

We are all committed to help these people get back on their feet and replace what they lost.

CoreLogic just released their quarterly Home Equity Insights Report.

Their analysis shows U.S. homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of over $3.2 trillion since the third quarter of 2020, an increase of 31.1% year over year.

In the third quarter of 2021, the total number of mortgaged residential properties with negative equity decreased by 5.7% from the second quarter of 2021 to 1.2 million homes, or 2.1% of all mortgaged properties.

Negative equity means a home is worth less than the amount owed on the property.

In Colorado, the percentage of homes with negative equity is even lower than the National average at 1.5%.