Sunil Sethi Real Estate & Mortgage Loan Team March 2006 Newsletter

March 18, 2006 Dear Friend, The nation as a whole has become obsessed with real estate, and prices have had a huge run-up the last 5 years. The papers love to write stories bringing up the possibility that we’re in a bubble, and if a correction might take place. My philosophy has been and still is that if you are buying for your personal residence, and you love the home, plan on keeping it for at least 5 years, and you can afford it, then buy it. You’ll get the enjoyment of owning your own home, and since we’ve never had a down market that lasted more than 5 years, you’ll be able to sell it for the same or most likely higher price. Best regards, Sunil Sethi Real Estate & Mortgage Loan Team

Real Estate – Volume-Down, Prices - Stable

Volume down, Prices Up, Inventory Up “Bay Area home sales tumbled in February for the 11th month in a row and prices rose at their slowest clip in two years as the region's real estate market showed further signs of easing after several years of feverish activity.” -SF Chronicle 3/17/06 There is still overbidding. This last Friday I put a bid on a fixer-upper in Hayward listed for $475K, which needed at about $70K in work, and if fixed would be worth about $550K. It got 8 bids, with the winning bid over the asking price. I’ve seen properties on the market for 90-120 days still selling for over asking price. I’d like to ask these buyers and their realtors why they are over-bidding. I find it hard to bid over asking price when a property has been sitting empty. However, in some markets like Atlanta, the number of days a property has been sitting on the market is not disclosed, simply because it could influence a buyer’s behavior. · New Rent Vs. Buy Spreadsheet (access from the homepage) If you know anyone still renting, I created a spreadsheet to analyze the rent vs. buy decision. It’ll help them run the numbers, so they can understand whether it’s better to continue renting or to buy. In their analysis, they have to input their assumptions for annual appreciation, rent increases, repair costs… · Investment Property Analysis (email me if you want a copy) I’ve created a spreadsheet that makes it very easy to analyze the cash flow, after tax gain on sale for 1-4 unit properties. · New $9,999 Flat Fee Selling (Listing) Service. This month Show and Sell Realty moved to a flat fee full service listing arrangement for properties priced under $1 million. A number of firms out there were offering a self-service for $6,000 where the seller was asked to interact with the buyers, and perform open houses. From a negotiation and convenience standpoint, we believe for a few dollars more, clients would benefit from getting the services of a true full service broker. · Quick and Free Estimate of Home Value There’s a new website called www.zillow.com which offers free automated appraisal of properties. You can even graph a 10 year appreciation chart. It’s a very useful tool to get a quick idea of what a property is worth. Word of caution when using it—it can be under or over the true market value. Call me for more accurate judgments. (Guru thanks for sending the site)

Interest Rate Watch – Continue to climb, Inverted Yield Curve

Prime Rate moved to 7.5% on January 31, 2006 Interest Rate Have Risen The Fed continues to tighten the money supply by raising the short term borrowing rate to banks. The next 0.25% Fed Funds Rate increase is expected to happen on March 31. Spreads are Tightening The spread between 30 year fixed terms and short term fixed ARMS has narrowed to about 3/8%. If you remember during the refinance boom, the spreads between fixed rates and ARMS were between 1-1.25%. Given the small spread, it seldom makes sense to choose an ARM, unless you really know that you’ll be selling within 5 years. Why Has the Spread Narrowed and What Does It Mean. The spread has narrowed because Treasuries are trading in an inverted yield curve (definition). That means short term treasuries offer a higher yield than longer term maturities. This is thought to occur when investors try to lock in longer term rates at today’s yields (even though they are lower than today’s short term yields). These long term investors are betting that long term rates will drop further. What does it mean for you? Historically, inverted yield curves tend to precede recessions. Our new Fed Chairman – Bernanke, doesn’t seem to think we’re in a recession. He thinks that long-term interest rates are low because of a global "savings glut", because much of the rest of the world would rather put their money into liquid US assets than invest it in other economies with underdeveloped financial markets. I don’t expect to see the housing market collapse unless the economy does, and the projection for GDP for 2006 is between 2.5-3.0%, with the Anderson Forecast being the most conservative out there at 2.5%. If we do go into a recession the silver lining is that interest rates will drop again. Other Noteworthy News: New Conforming Loan Limit is now $417,000. In 2001 it was $275,000. · Loan Comparison Spreadsheet (access from the homepage) Many of you have received emails from me comparing loan options, if you’d like to play with what scenarios on your own, now you can access the same spreadsheet from my home page.

Property Taxes Due by April 10, 2006
If you don’t receive it in the mail, get it online at http://www.sunilsethi.com/property_taxes.htm. For those of you, who purchased your home and haven’t received your supplemental bill, call the assessor’s office about when you can expect it or check for it online at http://www.sunilsethi.com/property_taxes.htm. There are very few accepted reasons for failure to pay on time.

Can I Claim Gain Exclusion on the Partial Sale of my Personal Residence?

Situation: I sold a partial interest in my principal home, which I’ve lived in since 1970. I bought it for $100K. It’s now worth $1M. I sell a 70% interest in the home for $700K. Section 121 General Rules Under section 121(a), a taxpayer may exclude up to $250,000 ($500,000 for certain joint returns) of gain realized on the sale or exchange of the taxpayer’s principal residence if the taxpayer owned and used the property as the taxpayer’s principal residence for at least two years during the five-year period ending on the date of the sale or exchange. Section 121(b)(3) allows the taxpayer to apply the maximum exclusion to only one sale or exchange during the two-year period ending on the date of the sale or exchange. Section 121(c) provides that a taxpayer who fails to meet any of the conditions by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, may be entitled to an exclusion in a reduced maximum amount. Regarding Partial Sales Per Reg. 1.121-4(e), taxpayer’s are allowed to claim the section 121 exclusion, on the Sales or exchanges of partial interests in their principal residence. However you are limited to claiming the gain exclusion just once per principal residence no matter how long between partial interest sales. Sales of partial interests in the same principal residence are treated as one sale or exchange.  Therefore, only one maximum limitation amount of $250,000 ($500,000 for certain joint returns) applies to the combined sales or exchanges of the partial interests.  In applying the maximum limitation amount to sales that occur in different taxable years, a taxpayer may exclude gain from the first sale of a partial interest up to the taxpayer's full maximum limitation amount and may exclude gain from the sale of any other partial interest in the same principal residence to the extent of any remaining maximum limitation amount. Therefore, you could sell partial interests in the home and utilize the exclusion.  The limitation is that until all of the interests in the principal residence are sold, the $250,000 (or $500,000) applies.  In the above example, (first, you would need to allocate the basis among the interests sold) the exclusion would apply and the first $500,000 would be excluded under Sec. 121.  Subsequent sales or exchanges of the other interests in the principal residence would be subject to tax. Research More Here: What to Do With the Empty Nest? Planned Giving for the Affluent Homeowner. · Always consult with your CPA to confirm how the facts and circumstances would apply in your case.

Find out Vehicle License Fee Paid for Tax Purchases
The Department of Motor Vehicles website will tell you the vehicle license fee you paid in 2005 on your vehicles. Go to DMV here. You need to know your car license and last 5 digits of your VIN to get the data.

Online Personalized Music – Pandora
	Do you like music, but not enough to want to buy an iPod? Try www.Padora.com. Just input one song you like, and the rest will follow.

Test Out Trading Systems on Historical Data
Fidelity has created a downloadable application that provides you with historic data, and programming strategies, to show you how they would have alerted you to buy and sell actions historically. The application can be overwhelming at first, but if are into trading, it’s definitely one to investigate further. www.fidelity.com.backtest

Real Time Traffic Info – call 511 or check 511.org
	Find out how traffic is before you head out at 511.org (www.511.org)

Politically Incorrect Humor
Looking for something to laugh at, check out JIBJAB (www.jibjab.com).

If you found this month’s newsletter informative, please forward it to your friends. 100% of my business is from word of mouth. This month my goal is to double my newsletter circulation. Please forward this newsletter to one person to help me achieve this objective. I always appreciate your confidence in me, and I will happily take great care of them.
	Sunil Sethi, Realtor, Broker-Owner, MBA, CPA Voted 2005 Best of the Tri-Cities – Mortgage Broker UCLA Anderson School of Business ’98 – MBA London Business School ’97 Finance & Strategy US F ’88 Accounting UC Berkeley ’88 Economics Show and Sell Realty/SMA Financing Voted 2005 Best of the Tri-Cities – Real Estate Firm (510) 793-8600 office
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