The December median for L.A. County rises 21.2% to $418,000 from a year earlier, but the pace of sales slows.
By Annette Haddad
Times Staff Writer

January 18, 2005

Home prices in Los Angeles and Orange counties set records yet again in December, though the pace of sales slowed as the supply of available houses dwindled, data released Monday showed.

The median price in Los Angeles County rose 21.2% to $418,000 from a year earlier but was essentially flat from the month before. In Orange County, the December median gained 18% to $551,000 and was up less than 2% from November’s $541,000, according to real estate firm DataQuick Information Systems.

For the full year, the price trends were similar. Both counties saw their median prices rise 24%, which was above the 20% rate of appreciation in 2003. The median is the point at which half of all houses and condominiums sold for more and half for less.

As for sales in December, the number of transactions year over year slipped 7.4% to 10,242 in Los Angeles County and dropped 10.2% to 4,214 in Orange County, DataQuick said.

For 2004, sales for all types of homes decreased 3.3% in L.A. County and 11.5% in Orange County.

“What this shows is that the sales numbers are off their peaks,” said John Karevoll, DataQuick’s chief analyst. “I’m not sure what more than that it means.”

Indeed, getting a handle on Southern California real estate trends hasn’t been easy lately.

“This market,” said Los Angeles real estate agent Brian Moore, “has been like riding a wild horse.”

Last year began with less than a month’s worth of homes available and prices appreciating at 25% year over year in L.A. and Orange counties. With high demand and limited supply, prices continued to hit records; by spring, Orange County’s median price had sprinted past the half-million-dollar mark.

Then in the second quarter, sales began to slow somewhat as mortgage rates crept higher.

At the same time, sensing a possible peak in pricing power, a growing number of homeowners rushed to plant “for sale” signs on their lawns in the hope of cashing out at top dollar.

By fall, the stock of homes had swelled to a 3.5-month supply, giving buyers more choices and more leverage at the negotiating table. That in turn prompted some sellers to pull their listings, and inventories shriveled.

At the end of December, inventory in Los Angeles and Orange counties stood at a 2.75-month supply as the average number of days on the market shrank to 41, down from a peak of 56 in the fall, according to Real Data Strategies, a Brea-based firm that analyzes regional real estate listings on a seasonally adjusted basis.

“What is interesting is that in 2004 people thought the bottom had fallen out,” said Patrick Veling, Real Data Strategies’ president. “That certainly did not come to pass.”

If anything, Veling said, prospective buyers who decided to wait for prices to fall might be out of luck. He predicts 18 more months of a hardy housing market, with prices rising albeit at a slower pace by 10% to 14% year over year but still above the rate of inflation.

“There’s a greater sense of normalcy in the market,” Veling said, “but I see it going nowhere but up.”

That’s worrisome to some experts. As prices increase, fewer house hunters can afford to buy, which is evident in the slowing pace of sales, said broker Jim Joseph, owner of Century 21 Grisham Joseph in Whittier.

Interest rates have ticked higher, putting pressure on the mortgage market. Combined with higher prices, Joseph said, those factors are causing “head wind that has taken buyers out of the market.”

Elsewhere in Southern California, the median home price in San Diego County was $491,000 in December, a 21.2% increase from December 2003, and was flat from the previous month, DataQuick reported. Sales fell 12% to 4,807.

For the full year, San Diego’s median increased 21% and sales rose 2.3% from 2003. Data for Riverside and San Bernardino counties are expected today.

DataQuick’s numbers comprise all recorded transactions in a given period and aren’t seasonally adjusted.

By TERRI CULLEN
Staff Reporter of The Wall Street Journal

From The Wall Street Journal Online

January 10, 2005 — When it comes to selling real estate, some homeowners prefer to keep it all in the family.

A growing number of family homes are being passed down to the next generation through sales, rather than inheritance, says Lawrence Yun, a senior economist with the National Association of Realtors in Chicago, as soaring prices and tight markets in many areas of the country prevent young families from affording a first home.

While he says it’s difficult to track “legacy home” transactions, Mr. Yun notes “we have been hearing anecdotal evidence that there has been an increase in sales between family members…especially in high-priced [real-estate] markets, where the parents plan to move to affordable retirement homes in areas like Florida and Arizona.”

A legacy home sale can benefit both parents and the children. But if not handled carefully, the parent or kid may end up with a significant tax burden - as well as some unwanted emotional baggage. This week’s column looks at a few ways to transfer a home with minimal pain from one generation to the next.

Pitfalls of a Family Fire Sale

Selling your home to a family member at less than the fair market value (FMV) is a common method parents use to help a child purchase a legacy home. Unfortunately, the Internal Revenue Service watches home sales to family members closely, says Mike Janko, chairman of the National Association of Financial and Estate Planning in Salt Lake City.

If you sell your home for less than what comparable homes have sold for in your neighborhood, the difference between the FMV of your home and the sales price will be treated as a gift to your child for tax purposes.

The IRS allows each taxpayer to make up to $1 million in gifts over the course of a lifetime. In addition to that lifetime exemption, a taxpayer can give away up to $11,000 a year, per person, to anyone tax free each year. (To learn more about gift taxes, see IRS Publication 950, “Introduction to Estate and Gift Taxes.”)

For parents selling a home to a child, here’s how gift taxes come into play: Say the home’s FMV is $650,000, and the parents decide to sell it to their son and his spouse for $350,000. In the eyes of the IRS, the parents just made a $300,000 gift. Now deduct from that gift each parent’s $11,000 annual gift exemption, for a total of $44,000 to the couple, and the total gift amount drops to $256,000. The parents then would need to report that gift by filing a gift-tax return on IRS Form 709. Generally, no taxes would be due, unless the parents have exceeded their $1 million lifetime exemption.

Also, consider capital gains. Roger Levine, a real-estate attorney with Levine, Furman & Smeltzer LLC in East Brunswick, N.J., notes there may be tax benefits for the parents by selling their home now if its value has increased significantly. Parents may be able to avoid capital-gains taxes by selling before the home appreciates much higher in value, he says.

To calculate capital gains, you need to subtract what you paid for the home, or the tax basis, from the sales price, he says. Each taxpayer is entitled to exclude up to $250,000 in capital gains, so if you’re married and the capital gain in your home is nearing $500,000, now may be an excellent time to sell.

If you have a significant capital gain on the home and would like for your child to eventually own the home but don’t feel any time pressure, it may be a better idea to simply leave it to the child in your will. When the child inherits a home, he or she is entitled to a “step up” in tax basis, so the FMV of the home when the owner dies becomes the new tax basis for computing future capital gains.

Fair warning: Tax rules involving family home sales can be extremely complex. I strongly suggest you work with a professional tax adviser.

Finance the Sale Instead

To avoid dealing with gift taxes, you may want to consider charging FMV and financing the sale of your home to your child instead. Have a legal, binding contract drafted that details the total sale amount, the monthly or quarterly installment payments due and the loan term. Though you will be required to charge interest on the loan at the IRS’s “applicable federal rate,” the rates are much lower than the child would be charged by a traditional lender. Currently, the AFR for loan terms longer than nine years is 4.7% annually. But beware: If you charge less than that amount in interest, the government will consider it a gift for tax purposes, says Mr. Janko.

Because you are entering into a legal agreement, have the contract drawn up by a real-estate attorney to ensure that both sides clearly understand the terms of the loan and the interests of both parties are protected. By securing a legal sale contract, the daughter or son will be able to deduct the mortgage interest payments on their taxes.

Again, parents can assist in canceling the debt over the years by making $11,000 gifts to the child and spouse (up to $44,000) each year. But to keep all transaction records clear in the event of an IRS audit, be sure to write separate $11,000 gift checks and have your child pay the loan installments by check as agreed.

In financing the sale yourself, the parents do take on an additional tax burden: You’ll owe tax on the mortgage interest you receive. But you may avoid sticky estate-planning and gift-tax issues, while moving a considerable asset out of your estate.

Now, the Really Hard Part

If you think the IRS is tough, try dealing with parents who won’t turn over the psychological keys to “their house.” Whether the house is sold to the child, or an outright gift, emotions run deep with family homes that hold memories.

“You have parents who feel like they can come visit you whenever they want because in their minds they still partly own the home,” says Tracy Todd, a licensed marriage and family therapist at the Brief Therapy Institute of Denver. Over the years he’s counseled homeowners in legacy homes who have battled with their parents about things such as redecorating a room to performing major renovation work. Ask a parent about to light up a smoke to step outside a home they’ve smoked in all their lives, and you’ll see some fireworks alright.

On the flipside, a child may feel a sense of indebtedness to the parents for the gift, and allow the parents too much authority over the household — which can lead to friction with spouses who are treated like visitors in their own homes.

Mr. Todd counsels homebuyers to respect their parents’ feelings and the financial gift they’ve given, while making it clear that you need to set boundaries. “Profusely thank them for the money, but then let them know that their attitude toward the home has become a problem within your own marriage,” he says. “Let them know that you’d like to work together to set limits so that everyone can get along as a family, and so that you can all continue to happy times together in the home.”