Janet Yellen’s final meeting as Fed Chair was last week. The Fed decided not to raise rates. Jerome Powell assumes the position on February 3d. Expect a rate hike in March and probably 3 more in 2018. The days of cheap money are coming to an end!
Today, if you’re borrowing to finance the purchase a single family residence from a commercial bank, you can lock in an interest rate (15 year fixed) of 3.387% or refinance at 3.51%. Want a home equity loan (HELOC)? 3%, which is up .79 from a year ago. Hard money for “flips” is still at 8.5%. These rates are very attractive, with market values increasing 8% to 10% per year.
Why will the Fed increase rates, which will cause banks to increase borrowing costs? Remember – Low rates resulted from the Fed’s decision to stimulate the economy by dropping the Fed Funds rate to 0% in 2007-2008.
Today, the gains in employment are at 17 year lows – 4.1%. Household spending and capital investment are anticipated to increase because of the recent tax cuts. Therefore, labor markets will get stronger and the economy will expand. So, the enemy is inflation – check that by increasing interest rates.
Our advice is to lock in interest rates in the next 60-90 days.
If you’ve been contemplating selling your Malibu home, stop procrastinating and sell it now. For a number of reasons, the seller’s market could not be hotter.
Demand is very high. The DOW hit a record high in December – it was up 25.1% in 2017, while the S&P was up 19.4% and the Nasdaq 28.2%. People feel wealthy and liquid and the Tax Bill causes the affluent to be optimistic about their future.
Supple is historically low. As of year end, there were only 53 beachfront and 118 landside homes available for sale – a total of 161 homes. The norm is 250. So available home inventory is down 35%! Tht puats upward pressure on prices, which is great for buyers.
Interest rates are still at historically low levels. With 25% to 30% down, buyers can borrow the balance at 3.5% to 3.75%. That’s very attractive as many borrowers can earn more that their cost of funds.
Please call us so we can help you optimize the price of your home and sell it for you while the market stays hot.
TAX REFORM: Some Facts and Opinions
I have been a registered Independent for over 40 years. Although I voted for President, I did not vote for Trump or Clinton. I believe I am without bias.
I was Attorney-Advisor for Tax Policy to Treasury Secretary Simon during the Nixon Administration a Chair of the Tax Department at the 1200 attorney Paul Hastings law firm. I know a little about taxation and tax policy so I want to take this opportunity to objectively provide some thoughts on Tax Reform.
Tax Reform legislation will probably be enacted before year-end. It’s a very complicated (500 pages) transformational law – one that completely reshapes the tax code for the first time since 1986. As a Republican revision – it will probably pass the Senate with 51 or 52 Republican votes and no Democratic votes. No normative judgment, just the facts.
Public support at 32% seems low. That’s the same percentage as Trump’s approval rating. One reason might be that the legislation does very little for the “middle class,” with 62% of the economic benefits going to the top 1% of wage earners.
In 2018, tax savings will be low for most people - $1,000 to $2,000 – for the year. By 2019, the vast majority of people earning $200,000 or less will see their taxes increase. 6 of the 7 tax brackets will be lowered (including the top bracket from 39.6% to 37%) and the standard deduction doubled from $1,200 to $2,400, which will reduce the number of people itemizing their deductions from 19% to 5% thus “simplifying” the tax code. However, the “caps” on the deductibility of State and local taxes will offset the savings for individuals ($10,000), property taxes ($10,000), and mortgage interest ($500,000).
Individuals aside, corporate taxpayers will benefit from the tax rate reduction from 35% to 21%. This will create an “asset bubble,” as many large corporations are already cash rich from earnings and borrowing is historically inexpensive. The lower rates will dramatically facilitate the repatriation of warehoused earnings from abroad (eg. Ireland).
One provocative question is the deployment of this multi-trillion dollar hoard of capital. Will corporations reinvest it to expand business activities; raise wages; buy back stock; raise dividends; etc? And, why didn’t Congress take this opportunity to incentivize monetization to “Make America Great Again.” What use will do the most good?
Whatever your view on the above, Tax Reform has a cost. The estimates are between $1.5 and $2.4 Billion over the next 10 years, assuming the temporary benefits are allowed to expire. Just like the Bush cuts in 2001 and 2003, the will not expire.
According to the Congressional Budget Office, the national public debt is at $15 Trillion. That’s 77% of gross domestic product. Think about that. What if 3/4th of your pre-tax earnings went to pay your bills? Most people would not have any net income.
My opinion, for what it’s worth, is that this is a very bad law.