It sure seems that the fizz has left the bottle.  Commentators who really don’t know what they’re talking about are blaming high mortgage interest rates.  Really?  Right now, rates are at about 7.5% — kind of, depending on the borrower’s credit score, the down payment, and the actual type and condition of the property being purchased.  When I bought my house almost forty years ago, rates were at 9%.

What really happened, and what no one wants to talk about, is that just about five years ago, rates were really low...artificially.

Low rates naturally increase buyers’ purchasing power, which tends to drive up prices.  A lot of recent purchases were consequently done at greater than the actual value, being based on prior and subsequent market statistics.  Many folks have since found themselves upside-down because they owe more than their house is worth...but at least their payments are not supposed to be too severe.  Should they want to or should they have to move, they’ve got some serious things to consider.

Residing underneath this situation is the peril of government meddling with market-driven economic realities.  Had rates never been knocked down to around 3% by economically challenged politicians, there would never have been such a price bubble, and today’s market would be fairly normal.  But such is not the case, and a lot of homes are gathering dust on the shelf.  An agent I used to know would often say that there’s never anything wrong with a property that lowering the price can’t fix.

Another issue involves the tax on capital gains.  Many agents are rather poor at understanding the ins and outs of tax consequences, as is the public in general.  An old friend wanted to pick my brain before he went to sell some rental units that he had inherited from his mother.  He thought it unfair for an agent to charge about the same percentage commission on a particularly valuable property as on a fairly small house.  I told him that first off, it’s a lot more work marketing a tenant-occupied apartment building than it is to sell a nicely vacant single-family residence (SFR).  Also, he would get about a 20% discount on the commission — as well as all other costs associated with the sale, which are deducted from his capital gain basis.

Then someone else called me up to discuss his interest in selling his house for over 30 years.  He was unmarried and, thus, had only a $250,000 exemption from his taxable basis (married couples have twice as much).  I advised him to talk to a tax preparer, and he told me that he thought capital gains tax applied only to rental properties.  I explained that non-owner-occupied properties have no exemption from the taxable basis, but primary residences are still taxable should the gain exceed the exemption.  This reality is particularly significant for Baby-Boomers who’ve been in their homes for quite some time.  What has not recently come to the surface is Mr. Trump’s declaration during the late days of his first term that he desired to index the tax on capital gains to inflation, since a significant increase in the dollar amount of a property’s selling price as compared to the previous selling price is caused by the cumulative devaluation of money.

After some catastrophic wildfires and other recent major casualty events, insurance has also become a lot more problematic.  Except for the handful of super-wealthy folks who can self-insure, insurance can be considered a necessity, though for those who’ve paid off their mortgages, it has become optional.  Most likely, market forces will eventually push the insurers, the regulators, and the customers into a new equilibrium.  Rates may go up, and the size of settlements may go down.  The good news is that there are several different insurance companies, and their competition with one another may help resolve the current problem.

Lurking beneath this current affair is the little known component of a mortgage contract known as the acceleration clause.  Should the mortgagee fail to insure or remain current with his property taxes, the note becomes due and payable — right then and there.  Initially, a lender will obtain insurance from his own source and submit the bill to the borrower.  Should the borrower fail to cough up the necessary amount, then the acceleration clause kicks in, as it would if the borrower had failed to make the required monthly payments, and foreclosure will ensue.

Another major change in the real estate marketplace is the creation of public access databases, Zillow being one of the best known.  With this new tool, an estimated value for any property can be obtained by anybody.  Zillow, however, is a robot.  It finds comparable sales and square footages from the public record.  What is missing is particular local knowledge of the specific site being studied.  Unless comparable sales also reflect these, dozens of stair steps to the front door or brutal exposure to ambient freeway noise is omitted from the calculation, as would be severe depreciation.  Again, the result can be a property going on the market for way more than it’s worth, since its owner has an inflated opinion of its value...only to languish unsold, while taxes, insurance, and debt service continue.