Markets correct themselves over time. After periods in which too much supply was dumped on the market, depressed prices lead to an increase in demand. This has been reflected from the fact that foreign buyers are buying properties with cash in the most distressed markets. And population growth has help absorb the excess inventory. Real estate is now in line with historical prices in many localities. This will help create a bottom in the market going forward.In most US markets, the excess inventory has slowly been getting soaked up over the last five years. If you were a homeowner during this span, you realize how painful it has been. On a more positive note, buying a home is very affordable. In the most distressed areas, it’s considerably cheaper than renting. This situation usually only occurs in distressed markets and the opportunity will not last forever. This good news does not imply that housing will immediately rebound and prices will start going up. They likely will go up in price over a long period of time. And real estate is a good long term inflation hedge. However, we are still in a period of deleveraging. This means that many consumers have too much debt and are slowly paying it down. This will be a drag on our economy for a while yet. Deleveraging is a process that takes years to complete. Deleveraging is the main reason why it takes such a long time to recover from a major financial crisis. The one thing that can speed up the deleveraging process is liquidation. Bankruptcies and foreclosures can clean up a person’s balance sheet quickly. Obviously, there is a huge drawback to this. If too many people liquidate at the same time, bankers and creditors will also suffer and perhaps go bankrupt. This creates a downward spiral and leads to financial crises and panics. Although liquidation gets us through the debt problems more quickly, the pain is much sharper. Record low interest rates make buying a home a great bargain for new homeowners. This is a big part of why buying is so much cheaper than renting in many markets. Low interest rates aren’t likely to last forever. They could be around for a while as it’s impossible to predict when they will rise. The Federal Reserve has announced that they will keep interest rates low through 2014. When inflation inevitably rises, they will have no choice but to raise them. Inflation will likely rise once we get to the end of the deleveraging cycle.
Monthly Archives: January 2012
Design is a huge factor in determining how successful your workday is. It determines how much you are able to get done as well as how effective you are at reaching your goals. Working smart is obviously much better than working hard.In a world of information overload, we are always multi-tasking and have too many things that are considered a high priority. The problem with this is that we can only handle a couple of high priority things at any given time. If you have more than a couple of projects that are considered high priority, then you cannot be effective at successfully achieving all of them. If your priority list is very long, you should kill a few projects or temporarily narrow down your list. In large corporations, workers are generally given too many projects. Each project is classified as being extremely important. An employee seldom says no even when he or she understands that it’s impossible to complete everything to his or her best ability. In this case, there are generally two choices. First, you can complete every project with none of them being great products. Or, you can do a great job on one or two of them with the rest either not getting done at all or finishing late. Your manager will try to squeeze every drop of productivity out of you, but there’s always a limit. Let’s say that you have two projects that are critical to your success. Anything else is either irrelevant or is just an action step toward achieving that goal. Large projects should be broken down into steps and milestones. This helps keep you on track. And successfully meeting objectives will help motivate you to go ahead and complete the next step. Your workspace should give you comfort and should not make you feel like you’re going to prison everyday. Cubicles are a productivity drain and are not human friendly. If you can design your workspace to have a degree of inspiration, the quality of your work would improve. Perhaps there’s a couple of tasks you generally find boring because they are redundant or require very little thought. In addition, you procrastinate on them because of this. You can take your laptop to a coffee shop and finish the task there. This will help because being at the coffee shop makes the experience more pleasant. Once you get a grasp on how to prioritize effectively, you need to allocate distraction free time to get it done. This can be really difficult. We have cell phones going off, email messages popping up, and people walking in the door assuming we’re working in a public place. The real issue lies with the fact that a single distraction will interrupt our flow. During a critical focus time, a single interruption can completely throw us off. Then, we have to spend at least 5 minutes or longer just to get back to where we were. Having said that, you need to figure out a way to get yourself some distraction-free time. For many people, this can be early in the morning. For example, if you get to work at 6 a.m., there are few, if any, other workers in the office. No one is there to distract you. When everyone else comes trickling in, between 8 and 9, you will already have 2 hours of productive work done. Compare this with the fact that most employees only deliver about 2 hours of quality work per day. This is because of things like distractions and meetings. Your coworkers simply can’t get as much done because they are only working during the day when meetings and other distractions are prevalent. By the time they arrive to work, you will have already equaled or surpassed what your coworkers will do for the entire day. The difference being a matter of discipline and workflow design.
The real estate market in Las Vegas continues its extended slump. S & P has reported yet another 8.5% drop in prices, this time covering a period that spans form October 2010 to October 2011. The Vegas area also has an unemployment rate of 12.5% with tons of underwater mortgages.
On a more positive note, those who have a mortgage owned by Fannie Mae or Freddie Mac may be able to refinance even with an underwater mortgage. You may not get the principal reduced, but you may be able to reduce your monthly payments considerably. See our video below.
Because the current market prices haven’t been seen since the 1990’s, home prices are now cheap from a valuation standpoint. Prices are now in sync with people’s incomes. Record low interest rates allow you to get into a home for a very low monthly payment. Because of low prices and cheap borrowing costs, buying has become attractive. It’s also important to note that this is one of those rare periods in which renting is more expensive.
Going forward, the economy appears to be merely muddling along. There is no strong recovery in sight for the Las Vegas economy. Vegas is still far too dependent on gaming and tourism. It will take years for new businesses to ultimately absorb the excess capacity of workers and grow the economy.
We’re simply not going back to 2007. Other state and local governments are struggling financially also. Many of them will attempt to boost revenues through more lotteries and gaming. This makes them a direct competitor to Las Vegas casinos. We have already seen that gambling revenue is an increasingly smaller share of casino profits. Casinos are forced to offer more in the way of shows, shopping, and dining to keep luring people to travel to Las Vegas.
In the long run, the Las Vegas economy needs diversification. The era of being dependent on a single thing are long over. On a positive note, Nevada is a very business friendly state. Barring any drastic change to the state’s tax system, Nevada should be able to attract many new businesses to the area.
The maximum amount on earnings subject to Social Security taxes has increased to $110,000 for 2011.
For business use of your vehicle, your deduction is 51 cents per mile for driving done before July, 1, 2011. You deduction is 55.5 cents per file for the mileage driven from July 1 until the end of the year.
For medical purposes and moving expenses, you mileage deduction is 19 cents per mile for miles driven before July 1, 2011. From July 1 until the end of the year, the standard mileage deduction is 23.5 cents per mile.
For all mileage for charitable purposes, your deduction is 14 cents per mile for the entire year.
Reporting Capital Gains & Losses
You must now use form 8949 to report your capital gains and losses. You totals will then get reported on Schedule D.
Alternative Minimum Tax (AMT)
Alternative minimum tax has increased to $48,450 for single individuals, $74,450 for married filing joint, and $37,225 for married filing separate.
The deductible amount for each personal exemption has increased to $3,700 for 2011 returns.
Federal Income Tax Deadline
The deadline to file your 2011 tax return is April, 17, 2012. This is due to the 15th being a Saturday and 16th being a District of Columbia holiday.
Medicare taxes have increased for high income earners. For an individual making over $200,000, he or she is required to pay an additional 0.9% tax for any wages earned over that amount. For married couples, the extra tax will be due for wages over $250,000.
Credits for energy efficient home improvements has dropped for 2011. The credit is now 10% of the item’s cost with a maximum of $500 (was 30% with a maximum of $1,500). In addition, you must be careful because there are lower limits on individual items.
The American Opportunity Credit has been extended until the end of 2012. This credit offers undergraduates tax credits up to $2,500 of the first $4,000 of education expenses. You may be able to receive 40% of this credit even if you have no tax liability. The credit is phased out for individuals making over $80,000 or married couples making over $160,000.
If you are underwater with your mortgage (doesn’t matter how much), you may be able to qualify for a refi. This is for loans that are owned by Fannie Mae or Freddie Mac. Even if you make a payment to your bank. The loan had to have been put in place before June 1, 2009. You must also be current on your payments.
If your bank still services your loan, it may NOT own it. In fact, banks often collect the payments and service the loans long after they sell the loan to Fannie Mae, Freddie Mac, or another investor. Don’t assume the company in which you make your payments to owns your loan. In addition, you’re better off not calling your bank directly because the customer service rep may be clueless about whether or not your loan is still in the original lender’s portfolio. Not to mention the fact that you’ll be on hold for a long time. This is why you need to look into who actually owns your loan to see if you can qualify. You can do this by checking the Fannie Mae and Freddie Mac websites.
Here are the links to the Fannie & Freddie websites:
Once you have done that, you can go on to the next step. If your loan is indeed owned by Freddie or Fannie, you can look at what your refinance options are. That is, you can calculate how much it would cost to do the refi and how much money you would save each month. If your loan is small (under $100k), you may not stand to save a whole lot as the fixed costs of refinancing would not make it worth it. The higher the loan balance, the more money you can potentially save.
HARP II could result in less foreclosures in distressed real estate markets such as Las Vegas. This will keep housing inventories lower in the short run as homeowners will be able to make lower monthly payments, which will keep them in their homes longer.
This doesn’t mean that the market will turn around in the near future, however. There are many foreclosures in the pipeline as many conventional loans will not qualify for refinancing. This program is set to begin in March and will have some impact on the market.
Although it won’t be a miracle cure, it will have an impact on keeping the shadow inventory lower for a period of time. Many of the homeowners that were on borderline as to whether or not they would walk away from their home will now lean towards staying in the home. This will be good news for the most distressed markets.
“When everyone thinks alike, everyone is likely to be wrong.”
— Humphrey Neil
Simply put, the best investors are contrary thinkers. It pays to be contrary. Investing with the trend only gets you caught up in financial manias and bubbles. Human nature is what causes us to replicate the thoughts and actions of others. Despite the achievements in technology, human psychology has remained constant. Because of this, we still have the boom and bust cycle which is no different today than what it has been throughout history.
It makes little sense to copy what everyone else is doing when it comes to investing. If everybody is chasing a single asset class, that asset class has to be overvalued. When everyone was buying dot com stocks, other assets, including precious medals and other commodities, were ignored. This demonstrates that the best time to buy something is when nobody is talking about it.
Over time, these cycles repeat. A bull market begins when savvy investors begin buying an asset that is unloved and has been forgotten about. The first stage of a bull market flies under the radar and gets little to no media attention. As that asset class gets more traction and eventually shows a track record of rising prices, it attracts more investors and more media attention.
Eventually, a third stage unfolds. The real mania begins once that asset price has passed it’s fair value yet investors keep pouring money into it. You see magazine covers showing it off and it’s on CNBC all day. When that happens, it is a bubble and you should lay off of it. The day of reckoning will eventually come and the price of that asset will usually drop by 70% or more.
If you’re like most people, reflect back at your own history with mutual funds. As the saying goes, mutual funds do really well until you put your own money into them. This is true among the best performing mutual funds. This is because a mutual fund’s assets are in that third stage when you buy it. Otherwise, it would not have had the track record of being a top performer.
A mutual fund that has a great ten-year track record most likely holds assets that were undervalued when the fund manager first bought them. Over time, they kept rising in price until they were overvalued. At that point, those funds are featured in every magazine, on every financial website, and other media sources. If you choose to buy that fund, you either think it can continue going up while holding the same assets. Or, you think the fund manager is savvy enough to sell one set of assets and invest in another while getting the timing right. History suggest this is highly unlikely.
One of the most frustrating things is knowing when a bubble has peaked. When you get to a point at which prices seemingly couldn’t go any higher, they double. This is usually how it goes. Meanwhile, you hear from family and friends who claim they are making tons of money. And you realize you’re wasting your breath by explaining that a bubble is about to burst. At the same time, you don’t have 100% trust in your own judgment and are tempted to jump in yourself. Prices never get so high to the point at which they can’t go higher. On the same token, no boom ever eludes a bust.
For instance, consider gold prices. Many of the talking heads in the media are declaring the end of the bull market for gold. How can they be so certain? In previous bull markets, gold prices dropped 30-50% at certain points. After that, the bull market resumed and then doubled or tripled in value. In real estate, many people were calling for a bubble as early as 2002. In many localities, prices more than doubled from there.
If only it were that easy to buy low and sell high. It’s such a simple concept yet so few can pull it off.