S&P/Case-Shiller Home Price Index Update

The latest data for the S&P/Case-Shiller Home Price Index were published today and they were not pretty. Home prices were down 19% in the 12 months ending in January 09.

When I first looked at these data back in December 07, I was upbeat about the Atlanta market which did not seem to have experienced a real estate bubble. Since then, the Atlanta home prices have fallen hard and are now below their 10-year average. Same for the Los Angeles market which I use to show the bubble effect.



While home prices are still heading south, I see no reason to rush into buying a house.
Why not wait for the dust to settle and home prices to stabilize?

How Much House Can I Afford (Revisited)

Having sold my condominium, I am revisiting a calculator to find out how much house I now can afford (previous amount was $281,000).

My new inputs are:



And the results are:



I am now limited by the front end ratio of 28%. The total mortgage amount comes at $242,000 at 5.5%, and the total house value at $322,000.

New Limitations on a Popular Tax Benefit

The Housing and Economic Recovery Act of 2008 was passed to help homeowners on the brink of foreclosure keep their home. But there is a lot more in the bill than just that.

To help offset its cost, the Housing and Economic Recovery Act of 2008 has put some new limitations on the exclusion of gain from sale of principal residence. The 2 out of 5 years rule is still in place (so are the $250K/$500K limits), but a home seller will no longer be able to exclude the portion of the gain for the periods the property is not used as the primary residence after Jan 1, 2009. There will be 3 exceptions: -the period between the last date the property was used as the primary residence and the sale date -the periods the home seller was serving on qualified official extended duty (up to 10 years) -the periods of temporary absence due to change of employment or health conditions (up to 2 years).

Extract of The Housing and Economic Recovery Act of 2008

SEC. 3092. GAIN FROM SALE OF PRINCIPAL RESIDENCE ALLOCATED TO NONQUALIFIED USE NOT EXCLUDED FROM INCOME. (a) IN GENERAL.—Subsection (b) of section 121 of the Internal Revenue Code of 1986 (relating to limitations) is amended by adding at the end the following new paragraph: ‘‘(4) EXCLUSION OF GAIN ALLOCATED TO NONQUALIFIED USE.— ‘‘(A) IN GENERAL.—Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use. ‘‘(B) GAIN ALLOCATED TO PERIODS OF NONQUALIFIED USE.—For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which— ‘‘(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to ‘‘(ii) the period such property was owned by the taxpayer. ‘‘(C) PERIOD OF NONQUALIFIED USE.—For purposes of this paragraph— ‘‘(i) IN GENERAL.—The term ‘period of nonqualified use’ means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse. ‘‘(ii) EXCEPTIONS.—The term ‘period of nonqualified use’ does not include— ‘‘(I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse, ‘‘(II) any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and ‘‘(III) any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary. ‘‘(D) COORDINATION WITH RECOGNITION OF GAIN ATTRIBUTABLE TO DEPRECIATION.—For purposes of this paragraph— ‘‘(i) subparagraph (A) shall be applied after the application of subsection (d)(6), and ‘‘(ii) subparagraph (B) shall be applied without regard to any gain to which subsection (d)(6) applies.’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to sales and exchanges after December 31, 2008.

Extract of IRS section 121. Exclusion of gain from sale of principal residence (as of Jan 2, 2006)

(a) Exclusion Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. (b) Limitations (1) In general The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000. (2) Special rules for joint returns In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property— (A) $500,000 Limitation for certain joint returns Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if— (i) either spouse meets the ownership requirements of subsection (a) with respect to such property; (ii) both spouses meet the use requirements of subsection (a) with respect to such property; and (iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3). (B) Other joint returns If such spouses do not meet the requirements of subparagraph (A), the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property. (3) Application to only 1 sale or exchange every 2 years (A) In general Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied. (B) Pre-May 7, 1997, sales not taken into account Subparagraph (A) shall be applied without regard to any sale or exchange before May 7, 1997

How Much House Can I Afford?

Fannie Mae provides future home buyers a calculator to help them estimates how much house they can afford to purchase. I took the calculator for a test drive. Here are my entries:



I then click on Calculate and voila!...



…and what the hell? Either this calculator is broken or I just found the reason for the current housing market crisis.

According to this calculator, and assuming a 6% interest rate, I can afford to purchase a $335,000 house which after down payment and closing costs would leave me nearly $4,000 in the red?? Why is this calculator telling me to bring $84,000 to the closing when I told the calculator I only have $80,000? Not to mention that my total debt-to-income ratio would rise to 50% (new monthly payment $2,450 + current debt payment $800 divided by monthly gross income $6,500).

According to this Yahoo How-to guide the standard requirements for conventional mortgages as established by Fannie Mae are the 28% and 36% debt-to-income ratios. Monthly mortgage payments, interests, property taxes and insurance cannot exceed 28% of the buyer’s monthly gross income. This is called the front-end ratio. Total monthly debt payments (housing, credit card payments, car payments, etc) cannot exceed 36% of the buyer’s monthly gross income. This is called the back-end ratio. I was not able to find any confirmation of those debt-to-income ratios on Fannie Mae’s website.

For a second opinion, I turned to the Yahoo calculator How Much Home can I Afford? I plugged in the same information and here are the results:



Now this makes a lot more sense. According to this calculator, the maximum house I can afford is around $281,000 (assuming a 6% interest rate). I am currently capped by the 36% debt-to-income ratio (my total monthly debt payments). I would have to either reduce my debt payment obligations or increase my gross income in order to afford more house.

I am contemplating buying a cosmetic fixer upper, preferably a real estate owned one, in a desirable neighborhood where home prices are typically in the $350k-$400k range. I am staking the market for the right opportunity to show up.

Tracking Home Price Trends with S&P/Case-Shiller

The S&P/Case-Shiller Home Price Indices keep track of home prices in 20 major metropolitan areas. Data go back as far as 20 years for some markets.


I wanted to compare a couple of markets, one that is experiencing a bubble and one that isn’t. Los Angeles is a good example of a bubble while Atlanta shows no bubble whatsoever.



By placing a 10-year moving average on the charts, you can see how far prices in Los Angeles have moved from the average. For the past year and a half or so, prices have started to decrease, forming a clear downtrend. Because of this I would not be a buyer in the Los Angeles market. Granted, some neighborhood in Los Angeles might still be doing ok. But overall it is not an attractive market yet, not until prices have bottomed out and resumed an upward trend.



Atlanta home prices on the contrary are keeping steady with their 10-year moving average. The trend has been up for as far as the data go (January 91). For this reason I would consider being a buyer in the Atlanta market, but a cautious buyer. Considering that home price trends can differ greatly from one neighborhood to the next, I would check whether or not the neighborhood has experienced a healthy, unbubbly growth over the past 10 years.

Does anyone know any website with reliable historic home price data at the neighborhood level?