REIT returns have been spectacular in the past five years. Real estate mutual funds, which invest mainly in REITs, have soared an average 139%, compared with 21% for the average stock fund and 10% for the Standard & Poor's 500-stock index.
All of which means that five years ago was a swell time to invest in real estate funds. But is it too late now?
Well, yes and no. If you're counting on booking a 139% gain in the next five years, REITs and real estate funds are likely to disappoint you. "Nothing is cheap," says Samuel Lieber, manager of the Alpine U.S. Real Estate fund.
"There's not a lot of upside here," says Alpine's Lieber. But there's not a lot of downside, either. REITs will probably raise their dividends in the next few years, making them slightly more attractive. Should the stock market turn down, those dividends will ease the pain.
Unless you plan to pick your own REITs, it's probably best to invest in a real estate fund. The top-performing real estate funds the past five years are in the chart. Right now, a $1,000 investment in a real estate fund will cost you less than a few days in a major city hotel.
Why not toss a mint on your pillow and invest the savings in a real estate fund? You'll get some decent income and save on aftershave, too.
One cannot help but get the impression that Obama's challenge to present an alternative caught the Republicans unprepared. It's great that they're going to present an alternative budget, but it's a bit disappointing to be promised a budget and to get a general statement of policies instead.
Republicans support leveling the playing field through policies that will provide tax incentives for millions more working families and small business owners to obtain access to coverage.
Instead of raising taxes on all Americans in the midst of a recession, Republicans seek to reduce the tax burden on working families and small businesses in order to create jobs and unlock private capital.
Instead of taxing all energy users with a new energy tax that will cost up to $3,128 per household, Republicans want energy independence with increased exploration and the development of new renewable energy sources, such as wind and solar.
Mike suggests that lower mortgage rates and the upcoming stimulus tax credit will prop up prices a bit compared to past levels, and that's possible. But mortgage rates are only slightly lower today than in 2000, and the effect of the tax credit is hard to judge. I'm just guessing like everyone else (and since I have a house I'm trying to sell I'd be delighted to end up wrong about this) but I'd keep my money on a further 20% drop.
It's not clear what caused this, since home prices are almost certainly going to keep falling another 20% or so. In fact, this might even be bad news in a way, since the faster we hit bottom and get back to trend growth, the faster we're likely to see the end of the recession.
Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60cents on the dollar.
The result has been a paralyzing impasse. Banks, unwilling to sell their loans at fire-sale prices, have had less capital available to make new loans. Mortgage investors, unable to leverage their investments with borrowed money, have been unwilling to pay more than fire-sale prices.
To break that impasse, the government’s crucial subsidy is meant to provide investors with the kind of low-cost financing that has been utterly unavailable in today’s credit markets.
The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.
Initial construction of U.S. homes unexpectedly surged in February, after falling for eight months, according to a government report released Tuesday.Housing starts rose to a seasonally adjusted annual rate of 583,000 last month, up 22% from a revised 477,000 in January, according to the Commerce Department. It was the first time housing starts increased since June, when they rose 11%.
In the aggregate this is troubling, as Shepardson notes:
"With new home sales still falling and the months' supply at a record, there is no reason for homebuilding to rise," wrote Ian Sheperdson, chief U.S. economist at High Frequency Economics in a research note. "This is a temporary rebound, not a recovery."
However, looking at the data by region, in the areas with the most overbuilt markets (the west), housing starts declined by 25%. This is a positive sign that confidence is returning and builders have decided it is time to take advantage of the huge decline in the cost of building materials.
Policymakers must be vigilant as move forward though, we cannot risk starting yet another unsustainable boom in housing. Part of this collapse of the housing market is unavoidable and really will be a good thing for long term economic stability.
Here's the big problem with almost all the current rhetoric about the housing crisis: It presumes that the goal should be to get house prices rising again. The problem with that idea is that, even after a 25% decline, house prices are still way too high.Even if there is a government mechanism that could stop house prices from plummeting and artificially pump them up again, therefore, it would just postpone the inevitable.
:The first of these at least attempts to make the argument from evidence. The author asserts that tax rates were higher under President Clinton than under President Bush, and there was a greater increase in net new businesses under President Clinton than under President Bush, so therefore my conclusion “just isn’t true.”
There are some problems with the analysis, but more fundamentally, with the logic.
First, the analytical problems. As the author notes, he is looking at “net increase in number of firms”, which is new formations less eliminations, so it does not actually capture new starts. I think that a much more direct analysis of this kind in regard to my assertion would be to compare government spending as a percentage of GDP (I referred in the article to current tax laws plus the rational expectation of future tax increases) to total dollars of new venture capital commitments (I described a venture-backed entrepreneur, and quoted the number of jobs created by venture-backed start-ups as evidence for the importance of the issue). I did this only as a response to some of these criticisms. You’ll find that there is a negative correlation with R-Squared of 0.28 between these two variables — that is, as government spending becomes a larger part of the economy, venture capital funding of businesses tends to drop.
Only that wasn't the only assertion he was making in the article. Edmund Phelps, who Manzi quotes, makes the argument that there is some correlation between an increase in government spending and a decrease in new venture funding. But Manzi quickly moves from that, to the effect of marginally higher taxes on an entrepreneur's willingness to make the leap. Furthermore, and Manzi admits this in his response, a 0.28 R-Squared is by no means conclusive (there are other lurking variables that explain the remaining 72% of variation).
He closes with:
I was carefully circumscribed about my claim:
That is, I didn’t claim that we would have fewer new company formations in the next decade than we did in the last. I didn’t even claim that the net effect of the overall Obama political program would be positive or negative for entrepreneurs.Higher tax burdens raise the price of entrepreneurship. When you raise the price of something, then, all else held equal, you usually get less of it.
It's interesting that you include 1992 as Clinton year, when he wasn't President, and 2000 as a Bush year, when he wasn't President. If you start with 1993 and 2001 respectively, and take the 5 Bush years which appear on your graph and the first 5 Clinton years, you will see substantially greater new business growth during the Bush years.
I have started 3 and sold 2 software businesses. Current tax rates had zero impact on my decision making process. Far more important: Could the business succeed, did I have a realistic chance of selling our services/products, was I willing to make the commitment in time/effort/money to make it successful, was there an achievable endgame? A few percentage points of tax rate really only drove what I took home as profit - with the higher rate, I would, as a commenter said above, look to ways to reinvest in the business instead of taking home everything.
Mark Cuban had a good post about this a while back, the line that jumps out at me:
"Entrepreneurs live to be entrepreneurs. I have never had a discussion with anyone about starting a business that included tax rates. Ever. If anyone that wanted an investment from me made a point of discussing tax rates as an impact on their business, I wouldn't invest in them. Ever."
For an academic macroeconomist, Nobel laureate Edmund Phelps can sound shockingly in touch with the real world. In a recent interview, he described the possible implications of the large government-spending programs in President Obama’s stimulus package: “There’s . . . a chance that the perceived increase in the role of government of this sort will have some unanticipated effects on the animal spirits of entrepreneurs.”Now, Phelps' statement clearly isn't definitive, and certainly doesn't mention taxes in any way. In some blogging jujitsu, Manzi uses the credibility of Phelps, who clearly wasn't making the same point, to support a diatribe about the Obama tax plans:
In fact, not only the stimulus package itself, but the higher taxes that it will require—both tax increases explicitly proposed in the president’s budget and the expectation of large future tax increases because we’re paying for all this spending with the national credit card—are likely to reduce the number of entrepreneurs in America.What evidence does he supply for making such a dramatic leap? Just an abstract thought study, using an engineer who has an idea to start a business. His point being, the deciding factor for an entrepreneur taking the leap to start a business is a calculation based on the success rate of businesses and the expected payoff:
But consider the prospective entrepreneur’s incentives as they exist the moment before she makes the leap. She multiplies her potential payout by the odds of success. Tax increases influence this calculation directly by reducing the size of the payout. The capital-gains tax that hits her when she sells her company is just the first thing for her to consider. Second and more important are increasing tax rates on dividends, interest income, and (again) capital gains—since she will invest the proceeds she gets from selling her company in a portfolio of stocks, bonds, and so forth, and rising taxes will reduce the present value of the after-tax consumption that the portfolio will generate in perpetuity.As an engineer, who has considered starting a couple different businesses, I will say this just isn't true. While the stakeholders providing the funding for a venture almost assuredly would factor in expected payoff, an entrepreneur is thinking very differently. First, they absolutely will not think 'their idea' has only a 20% chance of success, it's the "it can't happen to me" syndrome, although they will be aware that failure is a possibility. Second, how their life will change immediately after making the leap to being self-employed and what happens to them in the event of failure, is a much much larger consideration.
An Explanation of What Happened to AIG
Leisure Reading:
Lexington Makes a Great Point About Talented Immigrants
And this video was all over "the internets" today, but it hammers home the point that this blog will make many times in the future. You shouldn't get financial advice from cable news!
Today’s Must Read:
A Defense of Government Debt….For Right Now
Leisure Reading:
An Andrew Sullivan Reader Has an Optimistic Take on the Current Situation
ABC Blows It in an Article on Taxes for People Making Over 250K
A radio show I listen to had a conservative financial commentator on this morning, Jim Pethokoukis from US News. He was all worked up about the decisions President Obama was making, specifically running huge deficits, spending money on health care and raising taxes on the rich. After an over the top tirade, he was asked what we should do instead. His proposal was to invest a very small amount in infrastructure ("which is a problem") and then put the rest towards tax cuts, not mentioning how that will address the deficit he was previously so upset about. Backing up his argument, he referenced what Reagan did in 1981, which absolutely did stimulate the economy. If you want the basic argument, listen to the first radio show caller in this segment here. Anyways, this whole incident made me realize what a truly terrible job the press is doing in explaining the situation to the public. I decided that I could do better. Today I will explain why this argument is so off and then describe what the current President is attempting.
A quick history lesson is in order, the top tax rate in 1981 was 70% (yes, 70!), which Reagan’s cuts reduced to 50% (they were later reduced further under Reagan, and the top rate was 39% by the time President Clinton left office). In 2001, President Bush cut the top rate to 35%, an unprecidented tax cut during a time of war. As far as corporate tax rates go, they currently sit at the same 35%. You constantly hear they are the highest in the world, but there are so many loopholes in the tax code, that is a difficult factual argument to make (For example, look at Lockheed Martin’s actual 2007 tax rate of 30%). The corporate tax rate in 1981 was 46% and was also reduced reduced to 34% by Reagan's tax cuts.
So the Republican argument right now is that the deficit is out of control and we should stimulate the economy by cutting taxes across the board. Keep in mind that when you cut taxes while you are running a deficit, that IS spending. We will need to borrow the money from the Chinese to pay for them, just like we are going to do to pay for the stimulus bill. However, instead of the government deciding where to invest, they are just giving the money back to the public and businesses. That makes sense if the tax cuts go to people who will spend and invest that money wisely or when tax rates are so high that they stifle growth like in 1981. Yet after 8 years of doing exactly that (cutting taxes and running deficits), we have nothing to show for it: horribly inefficient healthcare, a deteriorating education system, volitle energy costs, and a dying infrastructure. This is because while running huge deficits, we were cutting aid to states for infrastructure, education, and healthcare programs. Clearly, the last 8 years have shown that there is a difference between a cut from 70% to 50% and cut from 39% to 35%. You should ask yourself why another cut from 35% to say 30% would change anything? Amazingly, the "conservative" leadership is literally saying, "Let’s do the same exact thing we’ve done since 2001" and all the commentators on CNBC are chirping right along. Hopefully the insanity of this clear, but it will become more so after the next paragraph.
Now the approach that President Obama is taking, is that our economy is fundamentally broken. I’m not just talking about the banking system, but the fact that business is being stifled, just like in 1981, but this time by skyrocketing healthcare costs and volitle energy prices. At the same time, looking to the future, the administration has recognized that our infrastructure and education systems are growing more and more inadequate every day. For example, our broadband availability is ranked 15th in the world and our water systems and energy grid were built decades ago. This makes it difficult to compete with China and India to attact business investment when they offer cheaper labor and are building entire cities with brand new infrastructures. So the President, has chosen to put the majority of money right now towards those four things, two that will free up business (energy and healthcare) and 2 that will position us for long term growth (education and infrastructure). At the same time, this money will create jobs immediately, and make us the world leader in energy technologies, technologies that developing countries like China and India will want. This isn’t bad or irresponsible spending, it is smart and targeted, and if executed properly, exactly what we need to do.
Now there are two caveats to this, first the banking system needs to be fixed for anything to work. Secondly, the deficit must be drastically reduced once we have stable economy again to ensure the long term strength of our currency and borrowing power. I’ll touch on those in future posts.
