How The US Deficit Is Impacting The Euro

Rusty-Tweed

A weak currency, worsening government finances, high political uncertainty, rising interest rates, are the statements that Rusty Tweed says that plague the U.S government. The U.S Treasury bonds were once regarded as risk-free assets, but now, they are shaky, and the alternative that is available for investors is the eurozone debt. Investors from all over the world and especially those from Europe are minimizing risk by avoiding the U.S Treasuries over the last few months. This is going on even though there is a huge interest rate gap between Europe and the United States.

The levels of the U.S debt as expressed as a percentage of the GDP are close to rising above the Italian debt which is one of the most indebted states in the world. Since the Trump administration is spending $300 billion for new plans and tax cuts of $1.5 trillion, the fiscal deficit of the U.S is widening sharply. By next year, the fiscal deficit might top $800 billion which is almost an additional $200 billion from the 2017 deficit that stood at $665 billion.

Federal Reserve

As we see the balance sheets of the Federal Reserve shrinking, the supply of the new bonds will rise sharply. This will risk higher interest rates that will make the bond market of the U.S government to become more volatile. Bond issuance and debt levels in the eurozone are falling contrary to the story in the U.S. Additionally, the states like Portugal and Spain which used to be hit by the crisis are now enjoying upgrades in their credit ratings.

Threats to the Euro

Study growth of the economy, existing threats to the euro, and continued low costs of borrowing are making investors invest more on Euro bonds. In March, Japanese investors purchased a staggering $2.7 billion Spanish bonds. We still need havens, and if the U.S Treasuries do not stand by their word, alternatives will spring up for investors, and the euro debt will be one of the best havens. This is evident and economic analysis and credit strategists are moving along these lines.

Although it is impossible to beat the liquidity and depth of the U.S Treasury, the once haven is not what it used to be. The U.S government bond market of $21 trillion is the largest in the world, and it is the most liquid. The three biggest states in the eurozone; Italy, France, and Germany have a total of $ 8 trillion in government bonds.

Borrowing Ratio

But when you look at how the US government is borrowing; it is the only developed economy whose debt-to-GDP ratio is going to rise in the next five years according to the predictions made by the IMF. The IMF project that the debt levels of the US will get to 108% by the end of 2018, and 117% by the end of 2023.

This kind of rise will bring about the downgrade of the credit rating which the S&P Global has already warned about unless the budgetary issues are sorted out. Economists like the CEO of Haidar Capital Management which is a macro hedge fund stated that the debt dynamics of the U.S are rising ar a dangerous place.

Rising Debt

As the debt rises, we are going to see private investment walking out as well as foreign interests. The debt-to-GDP ratio of Italy is projected to fall to below 117% from 130% by the end of 2023. The next government is projected to loosen the fiscal disciple in Italy. Generally, the broader spectrum of the eurozone is a good foundation unlike what is happening in Washington.

Additionally, the quarterly current account surplus of the eurozone averaged 1% of GDP for the three quarters that end in December; this is the highest that has been seen in the euro period. This means that more savings are exiting the zone which could boost flows in bonds.

The Change that is going to be seen

 

Euro zone’s debt has foreign demand that is supported by the appeal it has attracted in a currency-hedged basis. But investors are repositioning themselves because of stronger growth and rating upgrades. This means that in case a turmoil exists in the market, there are more options for safe-havens for investors than ever before. To have a clear picture, Rusty Tweed advises us to look at BAML analysis.

The Analysis by BAML

During the 2008 financial crisis, stock returns and Treasury correlations were negative, at a significant 60%. The Treasury became the safe haven after equity prices fell while Treasury prices rose. Now, since the negative correlation is at -28%, it implies that equities and Treasuries are not going to move in opposite directions.

Now, for a preview of the bond market of the eurozone, Italy, for instance, is viewed as a risky market. Although the perception is clear, not only did they hold their ground throughout the first quarter turmoil in the market, but their prices rose.

US Mortgage Rates Soar Slowing Down Home Sales

Rusty-Tweed

Rusty-Tweed

The list of things that affect homebuyers’ mood is quite extensive. In fact, anything from the state of the economy and home prices to politics can affect someone’s willingness to buy. One of the most obvious factors that determine how likely people are to take out a mortgage, however, is the interest rate. After all, the amount of money necessary to cover the cost of lending will usually be directly related to someone’s likelihood of taking a large loan. With that being said, how are the current interest rates in the United States affecting the housing market? Not well.

Growing Costs

Over the last seven years, interest rates on mortgages have constantly been increasing. In fact, some of the highest rates since 2011 were seen in May of this year. This means that the cost of taking out a mortgage is continuously growing. Given that the median home value is also slowly going upward and the recent tax law changes, homebuyers may lack the motivation to purchase.

The Direct Relationship

When it comes to financial decisions, there are always factors that are directly related to the choice one makes. For example, prices of gas are directly related to someone’s potential car purchase as gas will be a repetitive variable cost. When it comes to the housing market, mortgage interest rates have the same role. Just consider, for example, what will be the most important factors in determining if someone signs a 30-year long loan agreement. Undoubtedly, the interest rate is extremely important.

Given the compounding nature of mortgage interest rates, a minor difference of 0.5 percent could mean tens of thousands of dollars. For instance, if someone takes out a $100,000, 30-year mortgage at an interest rate of 3.5 percent, they will repay a total of $161,656. If that same loan comes at the interest rate of 4 percent, the total amount will accumulate to $171,870. Thus, more than an additional $10,000 will have to be invested into the loan due to a minor change in the interest rate. If the mortgage is greater, this is even more impactful, as the differences could be measured in hundreds of thousands of dollars.

Facilitating a Slower Market

With interest rates growing, buyers are not as likely to purchase. Given their lack of motivation, home builders will not exactly be eager to construct new homes. After all, it makes no sense for businesses to build homes that will not be sold soon. Thus, the supply becomes limited and causes the prices to go up. After all, when the number of homes in the market is limited, the buyers will have to outbid one another. In the long-run, such practice will cause the prices to increase.

Sadly, this could throw the entire market into a vicious cycle. The prices continue to go up, and buyers are forced to seek greater mortgages. Given the growing interest rates, however, those mortgages come at a very high cost. Thus, the buyers’ motivation diminishes further. Luckily, with the improvements in the economy and the low unemployment, the interest rate should slowly decline. If they do, buying homes will become a common practice.

Is LA’s Housing Bubble Surging Or Is It A Myth?

Rusty-Tweed

Rusty-Tweed

Given the mind-boggling financial crisis that happened in 2008, most people now tread very lightly when it comes to real estate investments. After all, the housing market bubble is one of the main reasons for the economic downturn that happened a decade ago. Thus, it should come as no surprise that investors are now very aware of the prices and keep a constant watch on median home values. In Los Angeles, however, this might be exaggerated to a point where myths are slowly clouding people’s judgments.

Current State

Undoubtedly, the housing market in Los Angeles is experiencing some growth. The prices have been slowly rising to a point where many investors believe that there is another bubble. Although their fears may turn out to be true, it is important to understand what one should know when analyzing a potential crisis.

First, it is essential to look at the current state of the real estate ventures. Given the popularity of Los Angeles, one of the main reasons for the increasing prices is the huge demand. Connecting that to the basic laws of supply and demand will explain why the prices are rising. After all, if a lot of people want to buy the same thing, the seller will have to narrow down the buyers by raising prices. Hence where the growing median home values in Los Angeles are coming from.

Historical Data

In 2007, the market crashed right after reaching some of the highest median home values ever. Since the numbers are slowly starting to remind people of that period, investors believe that another bubble is inevitable. The problem, however, is that their opinion is based on short-term data. Yes, if one only looks at the previous ten years, they may believe that these home prices in LA indicate a market bubble.

What they are failing to see, however, is the long-term perspective. Throughout the history, the home values around the United States have been on an upward-curving slope. Meaning, they sometimes go up and then come down. They always, however, grow in the long-run. For instance, the home value a century ago was nowhere near what it was fifty years ago or today. This is because there is a repetitive pattern of growth. For the Los Angeles market, that means that the current prices actually may indicate another historical increase.

Remaining Mindful

Even though everything mentioned indicates that a potential housing bubble in LA is a myth, remaining mindful is necessary. At this moment, the median home price goes north of $916,000. Just looking at the price, it indeed does raise some eyebrows because it beats most other markets in the nation. To that end, it is necessary that real estate investors pay close attention to how things play out in the upcoming months. If the price continues rising above everyone’s belief, another close analysis will be needed.

Ultimately, if the price ends up falling in the short-run, such result could indicate that a housing bubble indeed existed. Until that happens, however, investors should focus on locating lucrative opportunities and not worrying about potential crashes that are mostly based on myths.

Millennials and the Housing Market In 2018

Rusty-Tweed

Rusty-Tweed

Although millennials are associated with some negative terms, their buying power is hard to deny. A part of it has to do with buyers’ confidence levels running at a 15-year high and the economy performing well. Unfortunately, as many as 32 percents of all millennials in the United States currently live with their parents. Since these are individuals aged 20 to 36, their total number is around 75 million. So, there are presently almost 25 million young adults who still live at their parents’ homes.

Generally speaking, that number may not seem as impactful given the total population of the United States. It is, however, very impactful indeed. Having 25 million people out of the housing market indicates that there is a ton of untapped spending potential. Meaning, the overall economy is suffering because the housing market is not utilized to its full potential. So, what are some of the main reasons for this situation and how could it be fixed in 2018?

Employment Rates

Even without using empirical evidence, saying that the employment history has a lot to do with homeownership makes sense. Luckily, the United States is currently experiencing some of the lowest unemployment rates in the history. This indicates that the spending potential of young adults is amplified by the fact that most of them have jobs. Meaning, their power to purchase a home will steadily increase until they finally begin taking advantage of their financial abilities.

Interest Rates

Another factor that is undoubtedly motivating people, not just millennials, to buy homes are the low mortgage interest rates. Ignoring their short-run growth, current rates are low when compared to historical numbers. Adding the fact that a lot of experts believe how the average home prices will go up by 5 percent in 2019, the urgency to buy increases. Hence why it is reasonable to expect that millennials buying homes is just a matter of time.

Tax Laws

Although the previous two reasons are supporting millennials’ buying power, there are some issues at hand. The first one pertains to the tax laws that were recently changed. In 2017, President Trump facilitated a major tax overhaul in the last three decades. Doing so reduced the mortgage interest deduction, got rid of the moving expenses itemized deduction, and changed the tax property deduction. Although most of these are easy to understand, it will take some time for investors to get on-board. Meaning, those millennials that are in the real estate sector will need a few months to figure out ways around new provisions to maximize returns.

Low Supply and Rising Prices

Over the past two years, the supply of housing opportunities has considerably deteriorated. Given the high number of people that are not buying, many projects stopped, and homes are not getting constructed as fast. As a consequence, there are fewer homes than people want. When that happens, the equilibrium is shifted, and prices go up. The problem, however, is the fact that these prices are consistently rising. Although real estate investors love the trend, average buyers are not fond of it.

After all, when home prices are rising faster than workers’ salaries, they are unable to buy. Consider, for example, a market where the median property value went from $550,000 to $700,000 in 3 years. If somebody who lives there did not receive the same 27-percent increase in pay during those three years, they would not buy a home. Thus, low supply that causes prices to rise is another reason why millennials may be less likely to buy. Eventually, however, these trends should normalize to put the market back into equilibrium.

How The Housing Market Is Impacted By The New Tax Code

rusty-tweed

 

rusty-tweedIn 2017, the United States saw the most impactful change in tax laws since President Reagan. With the creation of the “Tax Cuts and Jobs Act,” things like tax brackets, deductions, and exemptions were completely altered. The brackets, per se, got pushed to help people avoid paying as much tax on their earned income. Similarly, the standard deduction got increased to compensate for the removal of the personal exemption. What a lot of people do not know, however, is that the tax law changes also impacted the housing market.

Unless one is a long-term real estate investor, they may not be familiar with all the tax implications of property transactions. These include far more than simple property tax rates and moving deductions. So, how exactly did the new tax code impact the housing market?

Reduced Mortgage Deduction Limit

In the past, homeowners were allowed to deduct interest on up to $1 million of debt used to buy a home. This means that married couples who took out mortgages going up to $1 million could deduct all of their interest on that debt. Doing so helped reduce taxes as this deduction almost always exceeded the standard deduction just by itself. Now, however, the most amount of debt that can be used to deduct interest on is $750,000. For those who are married filing separately, that deduction is only $375,000.

This indicates that the tax code reduced the amount of debt that is eligible for interest deduction by 25 percent. For homeowners, that means 25 percent less in deductions when the time for filing a tax return comes. Thus, if they used to take out $10,000 from their taxable income via mortgage interest, they will now only be allowed to take out $7,500. In the long-run, those numbers will impact homeowners as they will have to spend more on taxes. Consequently, the housing market may drag slightly as people work to compensate for this 25-percent loss.

Moving Expenses

In the past, taxpayers were allowed to deduct moving expenses in the form of an itemized deduction. This was done using a form numbered 3903, and it could add up to a substantial decrease in tax liability. As of 2018, however, it no longer applies to every taxpayer in the U.S.

Instead, this provision of the previous tax law was suspended until 2025 and only applies to military-related moving. Meaning, only those that are relocating as a consequence of their service to the armed forces will be eligible for the deduction. In turn, buying a home across the country may not be a light decision anymore, if it ever even was. People will now have to include moving expenses in the price of the home as they will not be getting any of those costs back.

Home Equity Debt Loan Deduction

Before the new tax code, those with large mortgages could treat $100,000 of their debt as home-acquisition debt. The only requirement in place was to use that amount of money for buying a new home or improving an old one. The old one, of course, had the be the first or the second residence that the taxpayer bought. If those conditions were met, people were allowed to deduct interest on that additional $100,000 as well. Although it was not as considerable as the deduction above the limit ($1 million) that was mentioned, it helped increase overall savings.

After 2017, however, this provision goes away as well. In translation, there will be no additional $100,000 that people can use to increase interest deductions. Thus, that could potentially put another strain on homebuyers who want to maximize tax relief.