Affluent Households Not Interested In Increasing Real Estate Investments
From Realty Times:
Affluent Often Don't Boost Realty Investments
The booming second home market is helping the greater housing market continue rolling like thunder, but most affluent investors are adding quieter investments to their portfolios.
Last year, the median price of investment homes increased by 24 percent -- twice the rate of resale homes, more than three times the rate of new homes and easily more than many other non-real estate investments -- but most affluent investors aren't adding property to their portfolios.
Apparently they have good reason.
Among the 42 percent of affluent households looking to make net increases to their investment portfolios in the next three months, only 21 percent of them will increase real estate holdings, according to Phoenix Marking International.
(If my math is correct, that means only 8.8% of affluent households are interested in increasing holdings of real estate at this time -grim)
Much larger shares are going to retirement accounts, deposit accounts, mutual funds and stocks, according to Rhinebeck, NY-based Phoenix, a marketing research and consulting firm.
Affluent Often Don't Boost Realty Investments
The booming second home market is helping the greater housing market continue rolling like thunder, but most affluent investors are adding quieter investments to their portfolios.
Last year, the median price of investment homes increased by 24 percent -- twice the rate of resale homes, more than three times the rate of new homes and easily more than many other non-real estate investments -- but most affluent investors aren't adding property to their portfolios.
Apparently they have good reason.
Among the 42 percent of affluent households looking to make net increases to their investment portfolios in the next three months, only 21 percent of them will increase real estate holdings, according to Phoenix Marking International.
(If my math is correct, that means only 8.8% of affluent households are interested in increasing holdings of real estate at this time -grim)
Much larger shares are going to retirement accounts, deposit accounts, mutual funds and stocks, according to Rhinebeck, NY-based Phoenix, a marketing research and consulting firm.
Almost as interesting.. Does this mean that 58% of affluent households polled are not looking to make net increases, or are decreasing, their current investment holdings?
Caveat Emptor!
14 Comments:
Seemed relevent given the argument about wealthy renters that took place the other day.
grim
Heads up.
Looking for either a tax professional or someone with in-depth knowledge of the AMT to help me out. I'm trying to explore the potential impact of AMT on the North Jersey housing market.
The premise is that if the AMT isn't eliminated or reindexed to inflation, the tax benefits of homeownership are going to be significantly reduced in the future.
While quantifying the impact is well out of the scope of this, I'd like to at least explore what the potential impact might be.
grim
Regarding AMT, it definately reduces the values of your larger itemized deductions - primarily interest and real estate taxes.
One other little tax detail (I'm not a cpa but this is what I have been told) - interest on mortgages above 1 million is not deductable (again - I am not a cpa - this could just be a false rumor). As a result, each additional dollar of debt on higher costs more that the amount below the threshhold.
In my opinion, this, along with the overall conceptual issue of spending a million plus on a mediocre home, will help limit future price growth.
$30,000 price drop:
MLS 2253798
29 Rosedale Ave, Millburn
$549,000 => $519,000
Days on Market: 39
Grim,
This is an excellent article... and excellent find... the wealthy are of course going to go with the market... not against it... it just the way it works... if real estate is trending down, why invest in that particular asset or category? the trend is your friend...
I do think that article misses one big point - in the high end real estate mkt, the wealthy often "invest" (for tax purposes) for reasons other than absolute return.
Historically (I think the new bankruptcy law changed this), a number of states like florida protected primary homes in the event of bankruptcy. This would be one non return driven to buy (and, if the law has changed ) , one reason for people to pull back from buying.
Also, there is a lot of status realty buying and selling - ie. if joe shmoe is selling his house, his business must be hurting so i better not rely on him, while having properties for use in entertaining can help business the other direction.
I am not saying the two above reasons are big parts of the market, but I think the article omits them and relies too much on the straight asset allocation argument.
The AMT is not material unless your Adjusted Gross Income is approaching 200k. See form 6251 and the instructions regarding AMT preference items.
Anon @ 1:18,
I didn't think that was the case at all, in fact, I personally know people that were hit with AMT this year that make significantly under 200k.
For example:
AMT Faq
The Treasury Department expects that more and more people will be paying the AMT over the next few years.
Income - 2005
$75,000-$100,000 14.7%
$100,000-$200,000 16.1%
$200,000-$500,000 34.0%
14.7% of people making between 75-100k are getting hit with AMT, and 16.1% of those making from 100-200k.
And those folks get hit by the following:
In calculating the AMT, you cannot take itemized deductions for state and local income tax, real estate taxes, and personal property taxes, even though these were deductible on your regular return.
or this one, which puts a damper on the HELOC party:
Home mortgage interest claimed as an itemized deduction is only deductible for the AMT if the loan proceeds were used to buy, build or improve your home.
grim
grim,
Agree that plenty of wealthy- top earners- have the money to buy but are gladly waiting.
Remember even four years ago hearing a guy who chose to buy further West of mid town direct towns saying "If I am going to spend a million dollars on a home it better LOOK like a million dollars." I am sure he wouldn't be in the market today....
Also heard a woman this week at the park talking about recently putting her house on the market and having little traffic and certainly no offers. Evidently she has a smaller home in Summit and was saying she thought the "lower end" would always be strong. She was talking about getting a St Joseph Statue...I felt badly for her. When talk of things slowing is hitting the playgrounds.....the mania is over.
Higher interest rates of course even more severely impact larger mortgages- so buying bigger is getting even less desirable. Money(debt)is no longer cheap.....
Annon 12:33
There are many traders and sell side guys or SMART business people that are reluctant to buy too big of a house for status. Clients, who often live in the same town, will start to wonder how much of that new house they are paying for.
grim:
If you want AMT help, I work with a CPA. You can pick her brain gratis [we all owe you - tons]. The only caveat is that Monday is the "deadline", and she is a little strung out at this point, especially with all these last minute crazies dumping stacks of paper on our doorsteps. A couple days of booze and sleep will help her re-charge her batteries. Her sister works in real estate at the shore which is a plus. She would probably be willing to have her brain picked toward the end of next week.
chicago
Home mortgage interest claimed as an itemized deduction is only deductible for the AMT if the loan proceeds were used to buy, build or improve your home.
grim:
Most people routinely ignore this item through their own creative accounting methods. They will also pick a fight with their their tax preparer if they are called on the carpet. Funny how that IRS doesn't give a whit what your excuse is, if they catch you, you pay. Regardless, it hasn't stopped people from buying their BMWs and Benz.
Fear of Filing
April 15, 2006; Page A6
The mere mention of today's date on the calendar gives the shakes to millions of tax procrastinators. So we're sorry to report that this filing year the complexities of the tax code got a whole lot worse -- especially for the record number of Americans who will be ensnared by the dreaded alternative minimum tax, or AMT.
You know the tax code is headed toward a train wreck when Republicans and Democrats on Capitol Hill -- who don't agree on much of anything these days -- have both concluded that this shadow tax system must be scrapped. The AMT was originally designed by liberals in 1969 to snare a few of the nation's super wealthy who had stashed their fortunes in tax shelters. But it has evolved into the tax version of the blob that will soon swallow up nearly one of every three tax filers -- most of whom are not rich at all. (See the nearby chart.) Americans are expected to cough up $1.2 trillion in AMT payments over the next decade, or more than the entire income tax now collected in a year. Within 10 years, the AMT may be collecting more revenue than the regular tax code.
Our biggest objection to the AMT is that it is patently dishonest. First Congress uses the tax code to gain political credit by offering tax write-offs for social and economic behavior it wants to reward: buying a home, rearing children, driving a hybrid car, donating to the Salvation Army, caring for senior parents, creating savings accounts, and on and on.
But then the same politicians use the AMT to snatch those benefits back, since the AMT typically hits taxpayers who claim many of these credits or deductions. Taxpayers who have many children and live in high-tax states are especially vulnerable. We don't favor using the tax code to influence behavior in this way, but millions of families make decisions in part because those tax credits exist. The AMT is an enormous revenue bait-and-switch.
Even the very name is fraudulent. The AMT should really be called the mandatory maximum tax. Filers must first tally their tax liability under the migraine-headache inducing standard IRS tax forms. Then when they're done with that delightful exercise, they must fill out the AMT forms and figure their liability under that system. It is by no means an "alternative" (which connotes a choice) and also isn't a "minimum" tax -- since you have to pay the maximum of the two.
So what is to be done? Some say scrap the AMT altogether, which would be fine by us. But if one of the two tax systems has to go, why not abolish the standard tax code? Any rational person looking at these two tax systems side by side would conclude that it is the standard IRS code with its multitude of loopholes and complexities that should be tossed into the garbage heap. Including its implementing rules, the standard tax code is now estimated at 60,000 pages.
Last year six out of every 10 tax filers were so intimidated they had to hire a professional tax preparer to figure out how much they owe. Things are so bad that some psychiatrists are trying to get "fear of tax filing" designated as an official medical disability. The Tax Foundation calculates that all of this complexity imposes an enormous deadweight loss on the U.S. economy of some $250 billion a year, or almost 20 cents of compliance costs for every dollar raised. Tax compliance this year will cost more money than is paid in income taxes by every resident of California.
And despite political promises of simplification, the tax-code tinkering gets worse every year. President Bush's tax-reform commission reported that, since the 1986 reform, Congress has added 15,000 new and mostly special-interest provisions to the code. Another deadweight cost of all the carve-outs and dodges arranged by Washington's corporate lobbyists is that tax rates have to be roughly twice as high to raise enough revenue to operate the government. These high tax rates are fiscally self-defeating because they distort and discourage economically productive behavior and thus shrink the tax base still further.
The current AMT with its 12-line worksheet and 55-line form is no walk in the park either, but its fundamental structure roughly resembles that of a flat tax. There are two rates: 26% and 28%. There are virtually no allowable deductions except for the first $45,000, which is not taxed. And the eight pages of instructions are much simpler than the hundreds in the "how-to" manual for the standard code.
So how about this idea for creating a comprehensible and pro-growth tax system? Don't scrap the AMT, fix it. Lower the AMT rate to 20%. Exclude all income from saving and investment that has already been taxed once. Simplify the form so it fits on a postcard and resembles what Steve Forbes and Dick Armey have proposed with their flat tax. And then abolish the standard IRS code and hold a bonfire celebration in front of the Capitol to burn the tax forms, instruction manuals, and IRS documents.
Or if this is too radical, at least create a genuine "alternative" tax code with real taxpayer choice. Convert today's AMT into a postcard tax form and then give every taxpayer the option of using this system or the 1040 forms. For those who want to keep their home mortgage deduction and their child credits -- by all means let them stick with the current system. But giving taxpayers a flat tax option would create a genuine alternative minimum tax. The lower tax rates on work and investment would do enormous good for American businesses and workers. And it might even make April 15 just another pleasant spring day.
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