Economic update for the week ending December 16, 2017

Crude Oil  $57.36  -    Gold  $1,258.10 -    Silver  $16.10   -    EUR/USD  $1.175

Tax reform clears another hurdle as The Senate and House reconcile their bills and agree on a compromise bill - There still needs a final vote in the Senate and House, followed by a signature by President Trump, but both chambers announced Friday that they had the votes and would vote next week. The final bill has a reduction in the corporate tax rate from 35% to 21%. It also reduces all individual tax bracket rates with the top rate capping out at 37%, a 2.7% reduction. It doubles the exempt amount for estate tax and it lowers the amount of AMT (alternative minimum tax). The standard deduction for people that don’t itemize has been almost doubled to $12,000 for individuals, and $24,000 for married couples. To pay for the tax cuts many deductions have been cut back or eliminated. As it relates to real estate some are: a reduction in the mortgage interest deduction from the interest paid on up to $1,100,000 in mortgage loan amount to the interest paid on up to a $750,000 loan. (This applies to new loans. An existing loan up to $1,000,000 is grandfathered in). The deduction on state and local tax paid, which includes property tax will be capped at $10,000 a year. This has been unlimited since congress approved an income tax in 1909. Currently the ability to get a $250,000 per individual, or $500,000 per married couple tax free gain forgiveness on a primary residence sale requires that you live in the home for 2 out of the last 5 years. This is proposed to go to 5 years out of 8 years. Realtor organizations are still trying to get this change eliminated before a final vote. Unfortunately, many in high tax rate states like California will actually pay more in federal income tax according to experts, because of the $10,000 cap on the state and local tax deduction.

As a tax reform deal gets closer stocks continue to skyrocket - Stock markets continued to rise this week as Congress announced that they have finalized a deal on tax reform. Friday they said that they have the votes to approve it and will vote next week. The Federal Reserve raised its benchmark interest rates for the third time this year citing the strength of the economy. The Dow Jones Industrial Average ended the week at 24,651.74, up from 24,326.16 last week. It’s up 24.7% year to date. The S&P 500 closed the week at 2,675.81, up from its close last week of 2,651.50. The S&P is up 19.5% year to date. The NASDAQ closed the week at 6,936.58, up from its last week's close of 6,840.08. It is up 28.9% year to date.

Bond yields end week almost the same as last Friday - The 10-year Treasury bond closed the week at 2.35%, down from 2.38% last week. The 30-year treasury yield ended the week at 2.68%, down from 2.77% last week.

Federal Reserve raises overnight rates - The Fed announced that it has raised their key interest rates for a third time this year, citing that a healthy economy called for another rate increase. The Fed dropped rates quickly beginning in 2007 to try to stimulate the economy before and during the Great Recession. By 2009 they had dropped the rate so many times it got to 0% for the first time in the history of the Fed. It remained at 0% until 2015 when the economy had picked up and it was raised 1/4%. It was raised 1/4% two more times in 2016, and three more times this year as the economy has rebounded. The Federal Funds and Discount Rate now stand at 1.5%, still a historic low. The 10-year and 30-year treasury bond yield and the 30-year fixed rate mortgage interest rate actually dropped after the announcement, as raising short term rates lowers the risk of inflation, which affects long term rates.

Mortgage Rates slightly higher - The December 14, 2017 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 3.93% unchanged from 3.94% last week. The 15-year fixed was 3.36%, unchanging from 3.36% last week. The 5-year ARM was 3.36%, unchanged from last week’s 3.35%.

So you inherited a property. Now what? - It's inevitable. Sooner or later most of us will receive that dreaded phone call announcing a death in the family. And, amid your grief, you might also hear that you've inherited a property, perhaps the home where the deceased once lived. What to do? It's hardly an easy question to answer. Making the decision about what to do with an inherited house is a challenge on multiple levels. There are a lot of financial, legal, and technical issues to consider during a particularly difficult time. To help ease this decision-making process, here are the options worth considering, along with the pros and cons of each.

  1. Refuse the inheritance - This might sound nuts, but there are cases where taxes and liens on a property, combined with the outstanding mortgage and taxes, mean there isn't enough money in the deceased's life insurance policy or savings and investments to cover the difference. That means that you, as heir, are responsible for paying those debts, and to do so before the house is yours. You could wind up actually owing money on the property you inherit. If you find out that's the case, you do have a handy escape hatch. You can bow out and let the executor handle the creditors.
  2. Fix up the property and sell it - If you’re not sentimentally attached to the home as a place filled with childhood memories, selling it is certainly a way to wash your hands of it and make some money (thanks, Grandma!). Just take into consideration the condition of the place. If the property has not been well-maintained, as is often the case with inherited homes, it may behoove you to make repairs and pretty it up before you put it on the market. Hire a professional home inspector to make a detailed inspection, which will uncover any necessary repairs you'll need to make, like replacing the roof or water heater or repairing damage caused by termites, as well as how much these expenses will cost. Meanwhile, a real estate agent or contractor can also ballpark the money you should spend on a new paint job, kitchen updates, and other cosmetic tweaks that will help you fetch top dollar. From there, you'll just need to weigh the costs of these fixes with the amount you stand to make if you sell. If the expenses entailed are just too high, however, you do have other options. Read on...
  3. Sell the property as is - If you aren't up for investing the time or money to upgrade or fix up the home, this is an easier alternative. Selling a home "AS IS". The heirs pull everything that’s usable out of the cupboards and closets, sell all the belongings for whatever price they can get, then clear it out and take bids, often from developers or flippers who specialize in turning these properties around for a profit.
  4. Keep the property and rent it out - There are pros and cons to this option. This is a good choice if you wish to earn consistent income. The monthly rent increases the income for the family, and when the time comes that you decide to sell it, the market value could possibly be higher. But, Rentals require maintenance. So prepare to receive some late-night calls to fix the boiler, last-minute expenses for repairs, tenant problems, water bug invasions (gross!), and other headaches. Make sure to read up on what it takes to rent out a home before you become a landlord yourself.
  5. Keep the property and live in it - In the best-case scenario, the property is paid off and comes to you, the sole heir, free and clear. In that case, you’ll be personally responsible only for property taxes moving forward, inheritance taxes (if any), and any repairs and improvements you choose to make. However, if you’re not the sole heir and inherit the house with, say, your siblings, moving in will also mean compensating the other inheritors (and hoping they aren't gung-ho to live there, too).

Whatever decision you make, try to base it on a balance of emotional and financial factors. While you may have always dreamed of keeping the place in your family for eternity, if that's not possible, don't beat yourself up. Remember, the deceased had meant this inheritance to be a gift rather than a miserable weight on your life. So do what makes sense for you.

Quote of the week

Wi-Fi went down for 5 minutes,

so I had to talk to my family.

They seem like nice people!