Before I Forget It. I try to carefully check most of what I post on this blog but I have to admit that an error slipped by me on my last post. In the section concerning taxes, I suggested that you check with an Enrolled Agent or CPA before taking any of my recommendations. My good friend, Ray Benton, who is an Enrolled Agent, did it for you. He called my attention to the fact that withdrawal of company stock from a company sponsored retirement plan allows you to pay tax at the capital gains rate rather than ordinary income. My post implied that you could do this with an IRA plan; however, this is wrong and the favorable tax treatment applies only to company sponsored retirement plans. While I knew better, the error got past me.
What the FED Says. Most of the time I warn people to forget what the FED says about interest rates since they only control short-term rates. Long-term rates are more strongly influenced by inflation and inflationary expectations. As part of the recent stimulus package, the FED started a program of buying long-term mortgage backed securities. During the last year, the FED purchased $1.25 worth of mortgages. This has kept a ceiling on mortgage rates and provided a stimulus to the housing market. Low interest rates, combined with tax credits to home buyers has resulted in keeping housing prices at higher levels than they would be without government intervention. This intervention is set to expire as the FED has announced that they would no longer be buying mortgage backed securities and the tax credit program is set to expire at the end of this month.
What Do We Expect For Home Prices? Do changes at the FED and IRS lead us to believe that we can expect another large drop in home prices. You can't say for sure since improvement in the economy and lack of new housing starts will provide some stimulus to replace the government withdrawal. One thing for certain is that the markets are not uniform across the country. and some areas will perform better than others. The Denver area has done better than others. After a 5.1% drop in 2008-2009 (one of the largest on record), prices increased 2.6% in 2009-2010. Out of the 20 largest markets in the area, less than half showed a gain during the past year. The average loss in these 20 top markets was 0.7%. While this is not outlandish, it is quite a bit in view of the large amount of government stimulus provided. My guess is that we will see little change in the Denver housing market unless the government comes up with more stimulus. While this isn't unlikely it would almost certainly be a mistake. It is my belief that the sooner prices are allowed to reach a level compatible with supply and demand, the better off we will be.
Should We Be Investing? I have been out of the housing investment market for some time but I believe we are finally to the point at which housing is a good investment. I believe we will be bouncing around this level for a year or so before starting to rebound. We have a relatively strong rental market and you can probably get more cash flow from a prudently structured real estate investment than you can get in either the stock or bond market. If you have an interest in this area you should probably talk to Jim Gerhart or Susan Storms at Westmont. Give me a call if I can help.
