High End Real Estate Market Goes Soft

The usual real estate market forecasters have been saying for at least a year now that the U.S. real estate market is due for a major correction. Their position seems to largely be based on the “fundamental” fact that average income is not keeping pace with the extremely fast-growing and high-flying prices of homes. In focusing on these “basics” these forecasters ignore all the big words and complicated theories that tell most economists that the real estate market is strong.

But it seems like things are starting to break up, after many months of warning the  forecasters clearly are seeing something going wrong in the high end real estate market.  The big players are still trying to play it cool, for example the Fiscal Times reports that the luxury real estate market is “cooling off.”

Coast to coast though, we seem to have a problem.  For example, we see “Billionaires Row” in New York, New York, headed for its first foreclosure.  We also see what the Wall Street Journal calls a “fraying” of the luxury housing market in Greenwich, Connecticut.

Meanwhile, on the West Coast, some are saying that San Francisco’s high-end real estate market has finally “peaked” after years of growth that is divorced from all economic realities…which created a market where a small “starter home” goes for $730,000.

  Folks on the lower end who do not live in the red-hot markets (SF, LA, Portland, Seattle, NY, etc.) never really saw much of a recovery after the 2007 crash.  Thus, if we see another real estate “correction” it stands to reason that people in fly-over Trump country will be hardest hit when their homes suffer another blow after never fully recovering from the last one.  A double whammy, ten years in the making.  Why should you care about the high-end luxury United States real estate market?  How would a crash in New York impact me in Omaha?  It’s simple: shit flows down hill.

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Massive Tax Increase Under Trump Tax Plan

The Trump tax plan will, of course, save the rich millions of dollars.  It will also help some people at the bottom by pushing them off the tax rolls.  The middle class, however, will get beaten over the head with a massive tax increase.  Essentially, Trump’s plan would eliminate the mortgage interest deduction that middle-class American homeowners depend on.  It would also eliminate other tax deductions middle-class Americans depend on such as the mortgage insurance deduction and state income tax deduction.  Translation: if you are in the middle class, be prepared for Trump to tax you heavily if his plan passes.

An example:

Take a single female who’s earning $65,000 a year and paying $1,000 a month in rent in Colorado. She decides to make a little higher monthly payment to become a homeowner. She puts 5 percent down on a $265,000 condo, which increases her monthly housing costs to $1,193 (principal and interest). That’s a common scenario for a first-time buyer like her, because while her costs go up, she now has a home of her own and the chance to build equity over time.

But under today’s tax code, her monthly costs actually go down, according to an NAR analysis, because when she claims all of the itemized deductions available to her as a home owner, she ends up with a net tax benefit of over $3,300, or roughly $275 a month, compared to what she would get by taking the standard deduction. When that $275 a month is factored into her monthly housing costs, she’s paying significantly less than she was as a renter.

Under the Administration’s tax plan, that advantage goes away almost entirely because she can only deduct her mortgage interest and charitable contributions Without the option to deduct real estate taxes, state and local taxes, and mortgage insurance premiums, her net tax advantage over taking the standard deduction falls to a little more than $150. Although that’s still a net gain, it’s just a shadow of her current benefits and not nearly enough to bring her monthly housing costs down to what she was paying when renting.

The bottom line is that for 95% of homeowners in America, the Trump tax plan will destroy the mortgage interest deduction.  The middle class bailed out the rich and the poor during the Great Recession–they bailed out the rich bankers who destroyed the economy and the poor who took out loans they couldn’t afford.  Looks like the middle class will be bailing out the rich and the poor once again.

Another Banking Crisis?

A few days ago the New York Times reported that people were starting to get nervous over the stability of the world’s biggest banks:

An unsettling trend has emerged from the heavy selling that sent global markets tumbling this year: Investors are getting nervous about the world’s biggest banks.

On February 10, 2016, however, European banking stocks had dramatic rises.  As of now, however, they have given back most of those gains as fears continue to simmer over the stability of the world’s biggest banks:

The banking sector staged a strong comeback on Wednesday,following sharp declines in recent sessions. Germany’s Deutsche Banksaw shares jump, closing up 10.2 percent, after a Financial Times report said the lender was considering buying back several billion euros of its debt, to soothe concerns about its funds.

Some experts say that the fears over the stability of global banks are overblown, and contend that banks are in far better shape than they were in 2008:

Analysts caution against doomsday scenarios, arguing banks are in much better shape than in

But today, February 11, 2016, stocks continue on their downward trajectory while investors look for a safe place to wait out the plunge:

Stock indexes worldwide tumbled on Thursday on fears over the health of the global economy, with banking shares slumping on both sides of the Atlantic, while safe-haven 10-year Treasury yields hit their lowest since 2012.

 

It does not seem like investors are buying the argument that the “fundamentals” are “strong.”  Full me twice, I suppose.

Meanwhile, concerns over just how bad the Chinese slowdown might get continue to grow:

A Chinese credit crisis would see the country’s banks rack up losses 400 percent larger than the hit U.S. banks took during the subprime mortgage crisis, storied hedge fund manager Kyle Bass has warned in a letter to investors.

A 401(k) Is Actually a Tax Loophole

The U.S. is one of the only first world countries that essentially ended pension programs–retirement programs funded by employers.  Pensions used to be a popular benefit in the U.S. to keep workers loyal to a company while at the same time making retirement decent and reasonable.  pensions were eventually replaced with 401(k)s.

What you may not know is that 401(k)s are not retirement plans designed by law.  They are actually derive from a loophole in the 1978 tax code which was never meant to be used as a retirement system for essentially the whole country.  As a result, must Americans have to save until the age of 70 and hope against a market crash in order to have a retirement.

Few people realize that what is now the most popular retirement savings vehicle in the U.S. was not seriously debated or discussed by the U.S. Congress.  Rather, it was created by a loophole of the law which a smart benefits consultant figured how to exploit in the 1980s.

Nobody has done anything to fix it since.  Meanwhile, pensions continue to decline and Social Security funding continues to dwindle.