Investing in Obama's Inflationary Economy

Andrew Snyder of Inside Investing Daily wrote this week that even though he didn't vote for Obama, the President's financial plans are not all that bad. And by, “not all that bad”, he means if you read between the lines, there are some investments—including real estate—that will benefit from the Obama inflationary management style. Snyder points out that the day after Obama's re-election -- the same day the stock market tanked -- gun sales soared.  I say this comes down to—for every action there’s an equal and opposite reaction--you just have to understand how to react.

On Nov. 7, the day after Obama’s reelection, the government recorded the highest-ever level of firearms-related background checks. This is the check that precedes a civilian gun purchase. We won't know for sure until the full figures for the month are calculated. But we do know there were 1.6 million background checks in October -- more than 20% over the same time last year.  These are folks who share two concerns, one is that they may—at some point—need a gun, and secondly they think the President may promote new regulations which will curtail citizens access to the purchase of guns.

A new acronym, called SWAGGR, is a term for an investment “bundle” that should be relatively inflation-proof.  The SWAGGR market is comprised of the investments that will most likely flourish during the time period of high inflation.  Guns, ammo and all the self-defense industry is all part of what we call the SWAGGR market. The letters in the acronym stand for Silver, Wine, Art, Gold, Guns and Real estate... all the things I've talked about in these columns. These are the things -- maybe even the only things – that will generate real, lasting wealth in the inflationary economy.

Of course I've been a proponent of real estate as a method to avoid the rampant inflation which is sure to creep into our daily conversations as the federal printing presses crank out mountains of paper money—money with no real value.  Leaving cash in a bank account today is a sure way to lose about 10% to 20% of your BUYING POWER each year.  And Wall Street is LasVegas in New York. Why would any sane person want to occupy Wall Street?

I have discussed real estate, silver and gold as appropriate alternatives to sitting on a bank account but SWAGGR also adds wine, art and guns—these are other investments that will also provide some security as the dollar tanks. I would also add fine jewelry (generally silver, gold and gems) as well as stocks in companies that will profit from the SWAGGR categories together with long-lifespan personal property (like home additions) together with expensive items that you plan to purchase or replace over the next couple of years.

These are the assets that can't be manipulated by a government gone wild. These unconventional investments lie outside the nation's zombie economy.

You may say you don’t need or want to own a gun. But that doesn't mean you can't take advantage of the nation's fear of future fire-arm regulations. And you may not have the funds it takes to bid on a high-end piece of fine art, but investments in companies that will profit from the sale of art—like Christies.  You might not have the kind of investment portfolio it takes to buy an orange grove or a waterfront lot. Again, that's fine.

There are alternative investments.

Sturm, Ruger & Co (RGR:NYSE), the gunmaker, just declared a special dividend of $4.50 per share. That payout is equal to nearly 10% of their closing price. Or for about $10 you can buy shares of Smith and Wesson (SWHC:NASDAQ). You can get into a Real Estate Investment Trust like Plum Creek (PCL:NYSE) for under $45. These are players in the SWAGGR market... and both will probably increase in value as the herd seeks safety.

It doesn't matter which political party you voted for, you can still take advantage of the Obama effect on our stock market. One leading financial magazine refers to the pending inflationary event as "a time bomb." In short, if your money is connected in ANY way to the stock market, I urge you to be in touch with a financial planner to reallocate it into investments that will be inflation protected. And do it soon. The tipping point will likely occur whether we go over the “fiscal cliff” or not—so think January at the latest. Before that all comes to pass you should have moved the funds you hope to preserve into some solid investments.

And don't be shocked by the plans that our government has in store for us. Tax increases for everyone are almost a certainty.  I would expect to see the home mortgage deduction (earned for us all by the constant efforts of the National association of Realtors) slip away together with many other deductions we have enjoyed over the years.

In inflationary times, cash does not have the appeal that we have given it over the years, because if everything gets more expensive week by week, then it’s smarter to spend cash today before the prices go any higher.  So the SWAGGR message says stop saving money and start investing in the things that you can profit from in the future, things that people will want, which due to inflation, regulations and shortages will likely increase in value (and therefore get more expensive over time relative to the dollar).

Dane Hahn is a real estate professional serving Florida’s Charlotte and Sarasota Counties, you can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com.

Tax Valuation of Homes

Sometimes people wonder how the County values their property for tax purposes.  When you look at your tax bill it’s clear the County changes the valuation every year and I for one am pretty satisfied that the appraisal team from Sarasota and Charlotte Counties are doing a good solid and creditable job—but how do they do it?

Bill Furst at the Sarasota Appraisers Office is happy to speak at group meetings, and to share exactly how the valuation is established, and why his team makes changes every year.  I have some experience in this arena, I have often been asked to value homes, sometimes to estimate a probable sales price, sometimes for a bank or mortgage company which may be considering a foreclosure or extending a loan and wants to determine the value of this particular asset.

But the county gathers a huge amount of data. In fact, I was surprised at the amount of effort to achieve accuracy they go through. As you can imagine, they have tons of data on the homes they send tax bills to, obviously they know what the home was worth last year and if there was a recent sale, they have that information from the clerk of the court records, (this is the data that Realtors also use) but they have even more. They can access various databases, foreclosure records, and they actually send out questionnaires to all new property owners, looking for information and condition on the property.

Highest and best use information comes from the judicial opinions, land use regulations and the building codes and ordinances.  This data helps create actual value for vacant lots as well as rezoned homes.  A house that backs up to commercial property may not be very appealing to a buyer, unless it has recently been rezoned commercial—that would increase its value measurably.

Income information is collected from landlords, so rental income will provide one of the variables in a rate of return equation helping to determine the value of an apartment or condo building.

Florida statutes require that at lest every 5 years a representative from the Appraisers office must visit each and every home in the county.  Of course they can visit every year if they believe the characteristics of the property have changed.  Arial photography is one method of determining if an addition or a new swimming pool has been added to a home without the benefit of a permit.  Unusual sales prices also will bring out questions, like why did a house we thought was worth $200K sell for $350K? But when permits are pulled, the Appraiser has the obligation to come see what’s new.

As Furst makes clear, they do not come out to your house to change the records, but to verify that the records they have are accurate.  If the landowner will not allow the Appraiser into the house to verify his data, the Appraiser has the right and power to estimate what “might” be inside the home.  In my experience, these estimates come in much higher than what the homeowner would like, and the only way to get the data corrected is to request the appraiser come back.  This is time consuming and usually results in at least one big tax bill before the corrections are made, so dealing with the appraiser from the start makes the most sense.

Some of the assumptions that an appraiser (who was not allowed into a home) might make would include lots of tile, the kitchen is new granite, and fully updated, if there is a chimney, then there could be 2 or three fireplaces, and the home’s measurements might include additional square footage under A/C.  It’s better not to have to do all this twice.

Dane Hahn is a real estate professional practicing in Sarasota and Charlotte Counties.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com

Housing Deductions

Housing never came up in any of the presidential debates, even though both candidates discussed the income tax changes they had in mind.  But just so you know, housing-related tax deductions, including home mortgage interest and real estate taxes, account for 49% of total itemized deductions. In fact for middle-income tax itemizers, 56% of deductions are housing-related, which means any discussion of capping itemized deductions would reduce tax benefits for the middle class. Naturally during the campaign anything that affects the middle-class would be taboo, but not so much today.

In listing what he did over the last four years, Obama didn’t mention any housing accomplishments. And, in listing all the problems that Obama failed to fix, Romney didn’t mention housing either. Both candidates carefully avoided discussing the mortgage interest deduction when talking about taxes. Romney suggested capping aggregate deductions at $25,000 without explicitly limiting any particular deduction, and Obama criticized Romney for not specifically calling out which deductions he would limit. Because the election is (thankfully) behind us, we can look back and wonder: now what? What if the administration decides to cut the itemized deductions on housing?

First of all, whoactually itemizes their tax deductions?  Remember if you don’t itemize, you can’t take real estate deductions.   The IRS says only one-third of tax-filers itemize, but this ranges hugely by income. Only 15% of filers with less than $50,000 adjusted gross income (AGI) itemize their deductions, compared with 96% with $200,000 or more AGI. Higher-income filers include a much higher average total of itemized deductions, too. A cap of $17,000 – which is what Romney suggested– is roughly equal to the amount that the typical itemizer with less than $50,000 AGI deducts, so many lower-income itemizers wouldn’t be affected at all by that cap. But even a higher cap of $25,000 would hit many people in the $50,000-$200,000 range and probably most in the $200,000-plus range.

Among all filers, 49%  of their itemized deductions is housing-related, which includes home mortgage interest, real estate taxes and a few other small deductions like mortgage points and qualified mortgage insurance premiums. 56% of the middle-income filers deduct housing expenses, more than the share for lower-income or higher-income filers.

Housing-related deductions are a larger share of overall deductions for lower-income and middle-income filers than for higher-income filers. A limit on these deductions would be a regressive tax. Here’s why. Higher-income filers pay a lot more in state and local taxes, and because tax rates often rise with income, these deductions account for a larger share of itemized deductions.

Among itemizers with $200,000 or more AGI, 36% of itemized deductions are state and local taxes, compared with just 18% for the middle-income filers and 8% for the lower-income filers. In fact, higher-income filers deduct more for state and local taxes than for home mortgage interest – in part because the mortgage interest deduction is limited to interest on the first million of mortgage debt, which would affect higher-income filers most.

At the same time, the home mortgage interest is, by far, the largest deduction for middle- and lower-income itemizers. Lower-income people also rely more on itemizing deductions for expenses that higher-income filers are more likely to get covered by insurance or their employer, including medical/dental expenses and unreimbursed business expenses.

Many middle-income folks itemize and deduct more than $25,000, so a cap at that level would snag many in the middle-class. There’s no question, though, that if a cap on deductions is low enough to affect filers with less than $200,000 AGI, the home mortgage interest deduction would be most affected. Together, the mortgage interest deduction, real estate taxes and other small housing-related deductions account for the majority of deductions for filers under $200,000 AGI, even though these housing-related deductions are a smaller share of what higher-income filers itemize.

Removing the mortgage interest deduction might lower home prices, particularly at the high end, which would hurt home sellers. High-cost areas with high homeownership benefit most from the mortgage deduction. Younger, higher-income households in expensive homes benefit greatly from the mortgage interest deduction. Here’s why: being younger and therefore in the earlier years of a mortgage, a larger percentage of their mortgage payments are interest rather than principal and therefore provide a larger deductible.

Also, higher-income households are in higher tax brackets and therefore benefit more from mortgage deductibility, and people in more expensive homes have larger payments to deduct. However, even in the absence of the mortgage interest deduction, homeownership today is still more affordable than renting. It’s 45% cheaper to buy a home than to rent a similar home today, assuming itemized deductions and that the resident is the 25% tax bracket.

But even without any itemizing, it’s still cheaper to buy than to rent in every large metro area.  Thus, even without the tax deduction, low mortgage rates and years of post-bubble price declines have made buying much cheaper than renting.

Dane Hahn is a real estate professional practicing in the Englewood/Sarasota area.  You can reach him at 941-681-0312 or at dane.hahn@gmail.com see him on the web at www.danesellsflorida.com.