US Mortgage Rates Soar Slowing Down Home Sales

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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?

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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

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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

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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.

4 Things You Need to Know Before Investing in ICO’s

Rusty Tweed

Rusty Tweed

ICOs are the cryptocurrency form of crowdfunding. Crowdfunding provides an alternative method for companies, startups, charities, and individuals to raise money. In some cases, the crowdfunded projects go to a cause, such as wildlife preservation. In other cases, crowdfunding provides the buyer with an investment vehicle. An individual investor can research different crowdfunded investment opportunities until he or she finds one with a product and business model he or she believes will succeed.

Investing in crowdfunded business products gives average individuals the chance to become venture capitalists. Like the panel on Shark Tank does every week, the key is separating the winning opportunities from the losing opportunities. A product may be inventive, provide tremendous benefits to users, and be something the investor likes, but a great product is never enough. There must also be a plan for making and marketing the product at a price that allows for profitability. A solid business model must be in place, or the enterprise, regardless of its brilliance, will fail to generate profits, which means your investment will fail to appreciate and may even disappear entirely.

With the rise of bitcoin and other cryptocurrencies, entrepreneurs discovered that blockchain technology could be harnessed to create a more efficient method of crowdfunding. The company simply creates an electronic token using blockchain. Interested parties can then purchase the token and trade it to other investors, just like a stock.

ICO Mechanics

The initial sale of the tokens is called the Initial Coin Offering (ICO), which works much like an Initial Public Offering (IPO) of stock. ICOs, however, provide individual investors with significant advantages over IPOs. Before stock shares go onto the open market, they are sold to institutional and wealthy individual investors included in the underwriter’s inner circle. These connected investors make most of the money on an IPO because they are able to fully take advantage of any price increases. Individual investors who get in on the IPO too late miss out on the gains or even lose money. With an ICO, any investor willing to do some research can find opportunities to truly get in on the ground floor.

The Initial Coin Offering period usually lasts for a week or longer. During that time, the coin is available to all interested parties. The coin must be purchased using a cryptocurrency, such as bitcoin or Ethereum. The ICO issuer may have a funding goal or funding limit. When a goal or limit is employed, the price and number of tokens issued remain static for the ICO period.

Some issuers employ a changing funding goal with a static supply of coins. In that case, the more investment the ICO receives, the higher the token’s value. The issuer can also keep the coin price level and simply issue as many coins as demanded during the ICO period.

What Drives ICO Success

For an ICO to succeed, it must be based on strong fundamental technology, advises Antonio Madeira of Cryptocompare. For example, an ICO based on duplicating bitcoins provides no new innovation to provide value. With investors finding no reason to prefer the new ICO to bitcoin, the ICO is unlikely to become profitable. When an ICO based on an innovative technology with a broad market comes up for sale, it may be a great investment. For example, the ICO for Ethereum made investors big money.

Why Ethereum succeeded

Madeira points out that Ethereum, released in 2014, provided an innovative smart contract feature. The smart contract feature provides a way for buyers and sellers to exchange goods without fear of the other party failing to live up to its end of the bargain. It uses blockchain technology in a new way that makes cheating impossible.

In the future, Ethereum’s technology may become the most efficient way to do business, especially overseas. It’s easy to see the potential. This technology could make all the paperwork of business contracts obsolete.

Not surprisingly, Ethereum enjoyed record investor enthusiasm during its 42-day ICO, held between July 20th, 2014 and September 2nd, 2014. The ICO raised over $18 million. 60,000,000 coins were distributed. The profit rose to a whopping 3900 percent.

Where to find the next Ethereum

Blockchain technology expert Jean-Etienne Durand stresses the importance of making wise selections between the ever-rising number of ICOs. He recommends using ICORating and TokenData to research offerings. These services provide ratings and research material to help separate the winners from the imitators.

ICOs are issued to fund specific projects. When you find a project you believe in, before committing your money, Durand recommends researching the company behind the project. To do this, start by studying the ICO’s whitepaper. This will give you pertinent information about the company, its strategy, plan, and team members. A project needs to be backed by a solid company. It also needs a solid team, so Durand recommends researching the team members as well. Finally, Durand recommends checking on the company’s and project’s presence on social media, through outlets like Facebook, Reddit, Slack, and LinkedIn. Strong candidates publish extensive information about their products and services.