Troy Stavros, Broker and Partner with the 865 Real Estate team states, “The old adage of supply and demand is at it again. Home prices are on the rise because the number of Knoxville homes for sale continues to dwindle.” According to the latest research numbers from the National Association of Realtors, the inventory of homes for sale dropped 8.5% from November, 21.6% from one year earlier, and is at the lowest level since January of 2001.

So why are we seeing inventory of Knoxville homes for sale drop? Here are the reasons:

* Many homeowners still owe more on homes than the current market value and are not willing to bring money to the closing table.

* Many homeowners who might typically be looking to “trade up” have lost the equity necessary to do so (home equity in a primary residence, built over time, is usually the main source of down payment funds in a trade up situation).

* Sellers, feeling the market and prices are still close to bottom levels, are waiting in hopes of selling at a higher price in the future.

* Investors (individual and institutional) are buying homes in bulk and renting them, instead of putting them back on the market for sale.

* Banks are approving more short sales and loan modifications, leading to smaller numbers of foreclosed homes hitting the market for sale.

* Tight lending guidelines for builders have limited the number of new homes hitting the market for sale.

No doubt the majority of buyers searching Knoxville homes for sale will need to secure a mortgage.  While lending standards have been strict it hasn’t slowed the Knoxville real estate market. The following infographic from mortgage lending services provider, Ellie Mae, shows us what it took to get a mortgage in 2012.

What the latest steps to avert the fiscal cliff mean to the Knoxville real estate market.

In order to avoid the fiscal cliff, a budget package was passed by the U.S. Congress on New Years Day. Implications for homeowners and the Knoxville real estate market include: tax rates remaining the same for most households and the extension of mortgage cancellation relief.

The “American Taxpayer Relief Act of 2012’’ that was passed by Congress extends current tax rates for all households earning less than $450,000, and $400,000 for individual filers. Households earning above these limits will see tax rates revert to where they were in 2003, meaning taxpayers in the highest bracket would pay taxes on ordinary income at a rate of 39.6%, up from 35%. The tax rate on capital gains would also remain the same, at 15%, for most households, but for those earning above the $400,000-$450,000 threshold, the rate would rise to 20%.

Troy Stavros, Broker and Partner with the 865 Real Estate team stated, “From a real estate standpoint, this could have gone in a bad direction and gladly did not. With the Congress keeping the provisions for the exclusion from taxes on the sale of a principal residence and important tax exemptions for homeowners, I feel housing can continue on it’s course of positive momentum.”

Good news from a homeowner’s perspective, the exclusion from taxes for gains on the sale of a principal residence of up to $500,000 ($250,000 for individuals) remains intact, so only home sellers whose income is $450,000 or above, AND the gain on the sale of their house is above $500,000 would pay taxes on the excess capital gains at the higher rate. Therefore there is no change for the majority of home sellers.

Extenders, which keep in place expiring tax provisions, are also included. Of most interest to the Knoxville real estate market, the “American Taxpayer Relief Act of 2012’’ would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender. This is typically seen in a short sale or foreclosure sale for sellers or a modification for owners. Without this extension, the debt forgiven would be taxable, adding additional financial burden to already underwater homeowners. Also extended are deductions for state and local property taxes and mortgage insurance premiums, which, along with the mortgage interest deduction, are important tax considerations for home owners and buyers.

Troy Stavros, Broker and Partner with the 865 Real Estate team stated, “As we look into our crystal ball at what we project 2013 to look like, it has positives and negatives for both buyers and sellers of Knoxville real estate. The good news for everyone is that, unless we fall of the fiscal cliff or the Mortgage Interest Deduction gets monkeyed with, the vision is one of a good year for housing.”

Vision #1: Home prices and rents on the rise.

We’ve already seen the lack of new construction raising the national and Knoxville real estate prices in 2012, and we can expect that trend to continue into 2013. Since the housing downturn, national new construction has been at 500,000 units or less for the last 6 years. Experts say construction of new homes and apartments need to be between 1.25 and 1.5 million a year to keep pace with population growth. This shortfall leads to a lack of supply which translates to demand, equaling higher home prices and rents.

Vision #2: Less foreclosure deals and more short sales.

Sales of foreclosed homes fell to approximately 11% of all sales in June 2012, down from about 28% in March 2011. The decrease is partly because the large government entities, along with banks, have been liquidating hundreds of distressed home loans in bulk to purchasers who agree to work out new terms with borrowers rather than foreclosing. Another factor for the drop looks back to our 1st Vision. Rising home prices have improved the equity position of thousands of buyers who were once upside-down.

Also reducing foreclosures is their alternative, the “short sale”. Short sales are deals in which a home sells for less than what the borrower owes on the mortgage, with the bank agreeing to accept the sale in lieu of going through an expensive and time-consuming foreclosure. Within the past few months, FHFA issued new rules on short sales for Fannie Mae and Freddie Mac reducing the documentation that borrowers have to show to demonstrate hardship. Also borrowers now aren’t necessarily required to pay the difference between what they owe on the mortgage and the final sales price. These changes will have national and Knoxville real estate seeing more short sales in 2013.

Vision #3: Higher home construction costs.

Even though levels of home construction are at record lows, costs of building materials like sheet rock, lumber, and copper are on the rise. The last few lean years in construction caused many construction workers to either migrate out of the country or into other occupations, leaving less qualified construction workers. Once again a low supply of workers means they can demand more for their services. Couple the higher material costs with the increased cost of construction labor and that equals higher home construction costs.

Vision #4: Higher mortgage interest rates but loosened lending standards.

The National Association of REALTORS predicts rates will gradually rise to 4% by the end of 2013. While this is still extremely low, economists believe that while we are currently witnessing historically low rates, there is only one way for them to go. Currently, the average credit score of a borrower looking to obtain a mortgage is 760. This is significantly higher than averages in the past, because of an overcorrection by banks coming out of the recession. Look for lending standards to loosen a bit as lenders try to compete for the business.