Tax Break for Short Sellers at Risk
What is it and why is it important to the overall health of our housing market?
A short sale is when you sell your home for less than market value and the lender holding your mortgage accepts less that what you owe them. The IRS considers this a taxable gain…the forgiveness of a portion of your debt. But, President Bush and Congress passed a provision back in 2007 that gave homeowners an exemption on having to pay taxes on this type of transaction as a way to help the housing market emerge from the slump at that time.
So the above is the “What” and now we address why its important. The number one headwind for the housing market are not mortgage rates (which are very, very low), its not employment (which is tight and stable), its available inventory. There simply aren’t enough single family homes available for sale. Part of that reason is that a lot of homes are tied up in a “shadow” inventory held by banks as a result of defaulted mortgages. Part of the reason is that many are still “under water” on their homes…owing more than it is worth. Short sales are a way of getting those under water homes back on the market and providing the much needed new inventory.
Although eight years have passed since the housing crisis began, some 13.4% of homeowners remain underwater, meaning they owe more than their homes are worth, according to Zillow, a real-estate information company.
Technically, the tax break expired at the end of 2014, leaving homeowners in limbo for 2015. Although it is widely expected to pass, if it weren’t renewed, homeowners who received some relief this year could now take a hit when they file their taxes next year.
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.50 MBS) lost -24 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
We had a holiday-shortened week that really only saw two trading sessions with any meaningful economic data.
Jobs, Jobs, Jobs: We had a couple of reports that put the labor market in a positive light. Initial Jobless Claims fell once again and neared a 42 year low as labor market conditions continue to tighten. Personal Income rose more than expected and continued a eight month trend of solid wage gains. The Consumer Sentiment report was stronger than expected and one of the reasons was an increase in favorable expectations of the job market. So, overall it was a good week for the labor sector.
Durable Goods Orders were much stronger than expected due to a nice surge in automobile orders, and the 3rd QTR GDP (3rd release) was a tick better than expected due mainly to inventory levels.
Inflation? Not here. The headline PCE reading had a net monthly change of 0.0% and the Core PCE was 0.1%. But the reading that the Fed pays the most attention to is the YOY (year over year) Core PCE which remained at 1.3% which is well below their target rate of 2.0%.
So, basically we had a week of positive economic data while seeing no threat of inflation and that is a welcome combination.