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The Capital Gains Tax Scourge

Dec 28

Posted by admin in Real Estate

The combination of an ailing economy and a struggling housing market during an election year has created the perfect storm to once again bring issues concerning the federal capital gains tax rate to the forefront of the public’s attention. As our nation’s government continues to further empty its coffers in an attempt to protect and stimulate the economy, many political figures and members of the media are forcefully asserting that an increase in the capital gains tax rate is needed to offset the government’s proposed massive expenditures. Unfortunately, this theory is fatally flawed according to both economic principle and common sense. In fact, an increase in the capital gains tax rate during these difficult times will likely enhance the need for further government intervention and expenditures to remedy the damage that a rate increase would generate.

For clarification, the current federal capital gains tax rate of 15% does not pertain to ordinary income, but instead is applied against gains achieved through investments in real estate and securities such as stocks & bonds. Additionally, the state governments typically tack on additional capital gains taxes for their respective residents. Also understand that national residential real estate values have dropped by more than 35% over the past few years with an unprecedented amount of inventory still on the market for sale. The Dow Jones Industrial Average, our nation’s key stock index, decreased by more than 40% in the year 2008 alone.

By applying the fundamental economic principle of supply and demand it is easy to see that the supply of real estate and securities for sale drastically exceeds the consumer’s current demand to purchase. The inevitable result from such an unbalanced relationship between supply and the corresponding demand is a decrease in the perceived value of real estate, stocks and bonds. This is precisely why the federal government, economists and prominent members of the business world are constantly attempting to increase demand by acting to encourage the public to once again muster the confidence to invest in real estate and securities.

It is therefore unfathomable to suggest that the United States’ economy will be better served by increasing the capital gains tax rate for those that courageously make these investments. This is especially true at a time when confidence in investment is more direly needed than it has been for generations. The way to our economic salvation is undisputedly through reducing supply, so it is important that we don’t punish those individuals that could represent the much needed demand.

The very existence of a capital gains tax surely has Alexander Hamilton continuously turning in his grave. Our country’s founding fathers were generally of the mindset to tax primarily those activities that the public and the government wanted to discourage. Taxing the purchase or sale of foreign made goods, tobacco, luxury items and alcohol made sense to these brilliant architects of a new nation. However, the imposition of taxes on activities that directly promote the interests of the nation as a whole was certainly not what they had in mind.

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Real Estate Investment in a Recession

Dec 23

Posted by admin in Real Estate

Have you ever noticed how buyers flock to purchase property in droves when real estate prices are at their peak, yet buyers are relatively scarce when prices are most affordable? Notwithstanding the fact that this occurrence defies the generally accepted investment strategy to “buy low and sell high”, one can’t help but wonder why attending social gatherings during the real estate boom years of 2005 and 2006 would inevitably lead to engaging in a conversation about someone’s real estate investment and the promise of future profits to be derived from the venture. It’s not all that surprising that many of those recently boasting about their real estate exploits have softened their tone while seasoned investors, dormant for the past six or seven years, have begun to once again start purchasing lucrative investment property. Despite news about the recent real estate and financial industry tribulations that the public is seemingly bombarded with every day, the last few months of 2008 provided a relatively quiet, yet dramatic, surge in real estate sales.

The National Association of REALTORS® (NAR) has reported that residential home sales have increased by an astonishing 115% when the last quarter of 2007 is compared against the same period for 2008. Have the experienced investors purchasing all of this property been ignorant to the steady stream of media reports warning of declines in real estate values? The answer is no, they have simply been waiting for the right time to emerge like a small swarm of locusts to steadily reap houses for sale like crop. In fact, their buying presence has been so prominent that national housing inventories of homes for sale have significantly decreased during 2008’s final quarter, a reliable sign that demand is beginning to once again catch up with supply.

But how do these brave souls know precisely when they are buying at the bottom of the market? Do they throw caution to the wind and simply force themselves to muster the courage to purchase property despite the fact that values may continue to decline in the future? The simple answer is that savvy real estate investors do not purchase property with the expectation of immediate appreciation in value. Rather, investment real estate should be purchased based on the property’s potential for positive cash-flow. Positive cash-flow occurs when a property’s rental income exceeds the owner’s costs to maintain the property. Consequently, when a property provides a positive cash-flow, a decline in real estate prices is of little concern since the owner can simply enjoy the income his property generates until the market revives and the property can be sold for further profit.

During the real estate boom years our nation became blindly infatuated with the appreciation of real estate prices, which represents the amount of value that a property will gain over time. So called house “flippers” brazenly leveraged money to buy numerous properties with the expectation that their values would increase, thus enabling them to sell the properties for handsome profits in a short period of time. These novice real estate quasi-moguls, often addicted to HGTV and other television shows created to promote the industry like Flipping Out and Flip This House, regularly failed to consider property cash-flows prior to making their purchases. Why bother when real estate values will always continue to appreciate, thereby alleviating the need to hold properties for long? After the housing bubble burst, many of these speculators realized that they shouldn’t have built their investment houses out of sticks, and social gatherings became pleasant once again.

Seasoned investors build their investments out of bricks by carefully and conservatively analyzing a property’s cash flow potential prior to purchasing. The primary reason that these investors have been sitting on the sidelines for many years is that most real estate prices have been far too high to generate positive cash-flows and a reasonable return on investment. It hasn’t been until recently that both residential and multi-family housing prices have retreated to levels where rental income will cover monthly mortgage payments and other operating costs. Further, with the construction of new housing and apartments decreasing to a virtual halt, a still rapidly growing local population, and many families displaced from foreclosed properties, an investment property’s owner is free to choose from a tenant base that is now stronger than ever. One can clearly see why a decline in real estate sales prices typically accompanies an increase in monthly rental prices.

No matter what the year 2009 holds in store for real estate investing, it is essential to remember that investing in real estate should always be considered over a long term. Although the opportunity for a “quick flip” may present itself, the distinguishing benefit to sound real estate investments is their ability to provide income no matter what the economy throws your way.

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A New Direction for Senior Housing

Dec 21

Posted by admin in Real Estate

Home builders are currently facing a rapidly emerging demographic that has forced the housing industry to begin shifting away from traditional forms of real estate development into methods that cater specifically to the needs of seniors. According to the United States Census Bureau, 100 million U.S. citizens, or a third of the country’s population, will be 50 years or older by the year 2010. Many of these seniors and retiring Baby Boomers are now starting to transition from larger homes in which they have resided for years into more manageable accommodations. Consequently, real estate developers are currently scrambling to provide housing that meets the need of the Baby Boomer generation.

Home builders are not only adjusting due to the massive size of the senior population on the horizon, but also because of the significant purchasing power of this blossoming demographic. The younger generations that the housing industry has focused its efforts on in recent years have been relatively poor in saving their earnings and liberal with financing their homes. Conversely, seniors generally maintain strict personal finance principals whereby wages are saved and any debt is paid down as quickly as possible. Therefore, while many younger homeowners are using the bulk of their earnings to pay heavily leveraged home mortgages, many Baby Boomers are preparing to utilize their savings and the equity in their current homes to purchase the residences in which they plan to retire.

The housing industry is also embracing a shift away from the traditional assisted-living facilities into communities that offer seniors more independence and freedom. Boomers are frequently relocating into planned-unit developments (PUDs) and gated communities where regular dues are paid to a governing Homeowner’s Association (HOA) that provides for many of the amenities that they require. HOA’s will often maintain a homeowner’s yard, roof, and home exterior, while also providing for utilities, security and common areas that can include pools, clubhouses, golf courses, tennis courts, walking trails and community activities.

Other developments address many seniors’ desire to live near people with similar interests at a comparable stage in life by limiting homeownership to those over a certain age. These retirement communities also often offer a neighborhood grocery store, a pharmacy, restaurants, and more community involvement and activities that can help with the eventual transition to assisted-living facilities. Seniors have become increasingly attracted to communities that offer the convenience, mobility, amenities and freedom to maintain rich and active lifestyles as opposed to the institutional and more sterile environments provided by the more traditional models of senior housing facilities.

In terms of home features, a recent survey conducted by the Internet Home Alliance Research Council revealed that 63% of seniors have home offices in their new homes, while an amazing 70% have broadband internet access at home. The days of studio apartment-style senior living are on the wane as the vast majority of our aging population is looking to the increased square footage offered in homes with at least two bedrooms and full-sized kitchens. These findings clearly evidence the desire of seniors to maintain their connection with the world and further prolong their preferred lifestyles.

It is clear that seniors and Baby Boomers are expecting longer lives and better health and mobility than previous generations. As a result, the housing industry will need to continue to adapt in order to provide these very important segments of the population with housing that will foster the environments and lifestyles these groups require.

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New Home Sales: A Stunning Slide

Nov 15

Posted by admin in Real Estate

Sales plunged last month to their lowest level in more than 12 years, a grim testament to the problems plaguing the housing sector.

A Commerce Dept. report released on Dec. 28 showed U.S. new-home sales plunged 9%, to a 0.647 million unit annual rate in November, from a downwardly revised 0.711 million in October (from 0.728 million previously). Market forecasters had expected a more modest decline to 0.715 million. Following downwardly revised numbers for August and September, new-home sales are stuck in a steep downtrend.

New-home sales dropped by 19.3% in the Northeast, 27.6% in the Midwest, and 6.4% in the South. However, sales increased by 4% in the West. Over the last 12 months, new-home sales nationwide have tumbled by 34.4%, the biggest annual slide since early 1991, and stark evidence of the painful collapse of the once high-flying housing market.

The supply of homes for sale rose to 9.3 months’ worth from 8.8 (revised from 8.5). Whereas earlier sales and price data had suggested big price cuts by homebuilders were clearing inventory, this pattern has been reversed with the November data and revisions.
Stocks Retreat From Earlier Highs
The median price figures were surprisingly firm, according to Action Economics, rising to $239,100, vs. an upwardly revised $229,500 in October (previously $217,800). Prices are down 0.4% over last year, however. Bear Stearns economist John Ryding called the report “miserably weak.” “[The report] shows, once again, it is too soon to talk about stabilization in housing activity,” he wrote in a Dec. 28 note.

Treasury yields sprinted lower on Dec. 28 following news of the plunge in new-home sales. Stocks retreated from earlier highs, while the U.S. dollar edged lower vs. other major currencies. Fed funds futures prices climbed on the back of the worse-than-expected new-home sales data. Traders have priced in an 84% chance for a 25-basis-point rate cut by the Federal Reserve in January, which would put the Fed funds rate target at 4%.
Problems Likely to Persist
The housing market has been suffering through a severe slump following five years of record-breaking activity from 2001 through 2005. Sales turned weak as did prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their mortgages that eclipsed the worth of their home. Other homebuyers were clobbered as low introductory rates on their mortgages jumped to much higher rates that they couldn’t afford.

With credit now harder to get to finance a home purchase, the problems in housing have grown worse. Unsold homes have piled up, and the problems are expected to persist well into next year.

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My Neighbor Got A New Car

Sep 1

Posted by admin in Stocks Mutual Funds

I don?t know what kind it is, but I saw it
on TV running full speed along the shore (I don?t
live near the shore) throwing up spray or maybe
it was that one climbing up the steep mountain
trail thru the mud, rocks and snow. Very
exciting. (I don?t live near the mountains
either.) WOW! Just what I need.

But there are a few obstacles.

It costs about $28,000. (That?s close to the
average annual wage.) I have perfect credit and
they?ll give it to me for no money down. All I
have to do is make the monthly payments for the
next 5 years of only $541. Maybe it won?t be
that much because I?ll be trading in my car and
I have it almost paid for it.

I can see me now headed for the beach or
climbing that mountain in that shiny new car.

I tell my wife.

She says, ?So?.

I say, ?Waddayamean ?so???

She elaborates that our car is almost paid for
and hasn?t a scratch on it. It looks like new
when it is washed and waxed and runs great. She
whacks me with if I want a different car we can
have this one repainted and put on new slip
covers. The transmission and AC have both been
replaced and it has less than 100,000 miles on
it. She remembers the engine is rated for
200,000 miles and the tires are good for another
50,000 miles. How does she recall those
statistics? I can?t win for losing with this
woman.

There is a tone in her voice that I know
means finality when she iterates, ?You might want
a new car, but we don?t need one?. My reply is the
car might break down and may cost thousands to
fix?. Her lightning reply, ?Well, it won?t cost
$28,000 and our insurance bill won?t go up
either. If you want payments you can make an
extra mortgage payment each month. Better yet
let?s knock down that credit card debt.?

I hear the air hissing out of my balloon.
No beach. No mountains. Forget all that practical
stuff like saving for retirement or having some
extra cash put away for emergencies. Damn.

BUT – my neighbor has a new car.

Al Thomas\’ best selling book, \”If It Doesn\’t Go
Up, Don\’t Buy It!\” has helped thousands of
people make money and keep their profits with
his simple 2-step method. Read the first chapter
and receive his market letter at
http://www.mutualfundmagic.com and discover why he\’s
the man that Wall Street does not want you to
know. Copyright 2005

Writen By : Al Thomas

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Mortgage Modification Rejections Can Be A Good Thing

Jul 7

Posted by admin in Personal Finance

It’s just part and parcel of the mortgage modification process in 2010 – REJECTION! Lenders can’t deliver performance levels that satisfies anyone in spite of over two years of work and over eighteen months of financial incentives from the President’s Making Homes Affordable Modification Program (HAMP). Even well qualified applicants are getting rejected. Sometimes, more than once.

I’ve come to think that rejection is a good thing! Recently, I reviewed our files and in the past 6 months not a single mortgage modification was granted without first being rejected. Every one of the modifications I have completed for clients this year have been rejected before being accepted. Even when Trial Modifications were in place, rejection of the permanent Modification took place before finally getting approved. Several of the mortgage modifications I have successfully managed in 2010 were rejected as three times before being approved.

It’s hard enough to meet the challenging application procedures and follow-up effectively to keep your application on-track. To have to also escalate your rejections to supervisors, managers, Directors , Vice Presidents and CEOs and to contact your local congressperson, the regulatory agencies, the trade associations and even the press in order to get it done? This is tough stuff!

But, hey, quit with the whining! That is the way it is – so cope! You will get rejected for one of about two dozen common reasons. Sometimes I think they are posted as a type of “cheat sheet” on the computer monitors of new Loss Mitigation Agents. Things like “Your loan investor does not participate in modification programs”, “Failed the NPV calculation”, “Income too high”, “Your income is too low”, “You have too many assets”, “Your 4506-T has expired”, “Your Ratios are wrong”, “You did not provide updated docs”, “We need a note from your mommy (O.K., I made this one up!)”, and etc., etc., etc.

All of the reasons above can be valid. Sometimes they are. But, all too often, they are simply erroneous, and are the result of the lender having mismanaged the file or simply untrue statements that slow or end the application process if the borrower does not object. So, when you get rejected, press on. At least you’re not being ignored! Immediately demand (nicely!) an explanation of exactly why you were rejected. Go through several agents and escalate to a supervisor if you must to get the answer. Then, deal with it. Supply the missing document or sign the updated form or correct the data entry error on your income (No, it’s not $85,000 per month. It’s $850!) or do whatever it takes to get them back on track. You can request reconsideration when you submit the information or correction to the agent.If you have submitted a good and accurate application upfront, you will eventually be accepted and get the relief that the mortgage modification programs were intended to provide.

So, don’t be dicouraged when you get rejected for a mortgage modification. It’s significantly better than getting the dreaded “Your application is under active review and no further action is required of you at this time. Please call back in 10 days”. Oh, it’s even hard for me to write those words! Rather, take the rejection as encouragement that you are actually getting some traction and will likely get approved very soon. Takes a lot of perseverence, eh?

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The 2010 Real Estate Market in British Columbia

Apr 23

Posted by admin in Real Estate

The British Columbia real estate market had experienced a brief cooling off period. Now, this exciting and beautiful Canadian province has started to make a strong recovery. A distinct bounce back in consumer demand has turned a possible gloomy 2010 into a very strong year for home sales. The interior housing markets are also seeing vigorous demand because of stronger market conditions and current low mortgage rates that are boosting home sales. Vancouver, BC has recently seen a large jump in quarterly sales. According to figures released by the Canadian Real Estate Association, Vancouver is fast becoming one of the hottest real estate markets in Canada.

Real Estate developers are not only attracting retirees, but they are also attracting an innovative young work force. Many developers are responding to consumer demands for a private piece of paradise where people can enjoy the beautiful scenery, but still have access to a vibrant and culturally diverse city such as Vancouver. Whether you are looking for a cozy and private residential home or looking for new real estate investment opportunities, British Columbia provides many real estate options for the informed investor.

Investors and home buyers are recognizing these opportunities. For instance, the average annual MLS (R) residential price in the province is expected to rise 2 per cent. In 2010, many experts are also expecting to see another increase of 4 per cent in the price of real estate. More specifically, home sales in 2010 are projected to increase an additional 8 per cent. Many regions across the Province are now seeing strong home sales. For instance, home sales in the Fraser Valley and the city of Victorian have seen a rapid growth in home sales. In fact, sales in Vancouver, the Fraser Valley, and Victoria have boosted the province’s overall home sales total to almost record levels. In December of 2009, The British Columbia Real Estate Association reported that Multiple Listing Service (R) residential sales in the province have made a remarkable increase this past November.

However, it is important to note that the demand in these residential sales markets is expected to level off in 2010 as demand is exhausted and home prices begin to rise again. With the current low interest rates available on mortgages, many experts suggest that it may be a good time to look at the real estate investment opportunities in British Colombia. As the economy slowly rebounds, one may find themselves with a lucrative investment in a beautiful province.

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