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If You Are Considering Buying A House, Read This First | Zero Hedge

If You Are Considering Buying A House, Read This First | Zero Hedge.

In September of 2011, when looking at the insurmountable debt catastrophe that the world finds itself (which has only gotten worse in the past several years) we warned that “the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world’s financial asset holders: the middle-and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path.”

Two years later, the financial asset tax approach, in the form of depositor bail-ins, was tried – successfully (as there was no mass rioting, no revolution, in fact the people were perfectly happy to accept the confiscation of their savings) – in Cyprus, further emboldening the status quo, in this case the IMF, to propose, tongue in cheek, that the time has come for the uber-wealthy to give back some (“it’s only fair”), and to raise income taxes through the roof (which of course would mostly impact the middle class as the bulk of current income for the 1% is in the form of dividend income, ultra-cheap leverage extraction on assets and various forms of carried interest).

And now, a new tax is not only on the horizon but coming fast and furious to allow the insolvent global regime at least one more can kicking: one which will impact current and future homeowners across the world.

But first, let’s step back.

Last week, the IMF did what only the IMF could do: come to the realization that we proposed in 2009, and even the Davosites discussed earlier this year: namely that the middle class is effectively an endangered species, and rapidly on its way to wholesale extinction, and that the polarity between the rich and poor has never been greater. The IMF concluded, with the panache that only this comical organization is capable of, that income inequality “is weighing on global economic growth and fueling political instability.”

The WSJ reports:

The International Monetary Fund’s latest salvo came Thursday in a top official’s speech and a 67-page paper detailing how the IMF’s 188 member countries can use tax policy and targeted public spending to stem a rising disparity between haves and have-nots.

IMF Managing Director Christine Lagarde has made the issue a high priority for the fund, warning—along with some of the fund’s most powerful shareholders—that inequality is threatening longer-run economic prospects. Last month, Ms. Lagarde said the income gap risked creating “an economy of exclusion, and a wasteland of discarded potential” and rending “the precious fabric that holds our society together.”

The IMF’s solution? The same as that of socialists everywhere: redistribute the wealth… because apparently socialism works every time, all the time, with stellar results.

“Redistribution can help support growth because it reduces inequality,” David Lipton, the fund’s No. 2 official and a former senior White House aide, said in a speech Thursday at the Peterson Institute for International Economics. “But if misconceived, this trade-off can be very costly.”

“There’s a sense that the burdens of the crisis have been unevenly distributed, that the middle classes and the poor have footed more of the bill of the crisis than the economic elite,” said Moisés Naím, a senior economist at the Carnegie Endowment for International Peace and Venezuela’s former trade minister.

Oh is there a sense? Is that why the Fed has halted its QE program which takes from what little is left of the middle class and gives to those who already have more money than they can spend in several lifetimes. Guess not.

So how does the IMF suggest going about this wholesale, global socialist revolution? Simple: the way we explained nearly three years ago.

The IMF’s latest paper doesn’t prescribe country-specific measures, but it does offer several proposals that are likely to be controversial. Most notably, the IMF says many advanced and developing economies can narrow inequality by more aggressively applying property taxes and “progressive” personal income taxes that rise as incomes increase.

The median top personal income-tax rate across the globe has halved since the 1980s to around 30%. But the IMF says “revenue-maximizing [personal income tax] rates are probably somewhere between 50% and 60% and optimal rates probably somewhat lower than that.”

We wouldn’t be too concerned about income taxes. After all, one needs to have a job to have income, and as everyone knows by now, jobs also are on their way to extinction, and every central bank everywhere will merely print the money needed to cover the income tax shortfall, leading to that “other” alternative to fixing the debt problem: global hyperinflation (with a little precious metals confiscation on the side: just like FDR did in the 1930s).

But going back to the original point, here is why those in the market for a house should be worried. Very worried. From page 40 of the IMF’s paper on “Fiscal Policy and Income Inequality“:

Some taxes levied on wealth, especially on immovable property, are also an option for economies seeking more progressive taxation. Wealth taxes, of various kinds, target the same underlying base as capital income taxes, namely assets. They could thus be considered as a potential source of progressive taxation, especially where taxes on capital incomes (including on real estate) are low or largely evaded. There are different types of wealth taxes, such as recurrent taxes on property or net wealth, transaction taxes, and inheritance and gift taxes. Over the past decades, revenue from these taxes has not kept up with the surge in wealth as a share of GDP (see earlier section) and, as a result, the effective tax rate has dropped from an average of around 0.9 percent in 1970 to approximately 0.5 percent today. The prospect of raising additional revenue from the various types of wealth taxation was recently discussed in IMF (2013b) and their role in reducing inequality can be summarized as follows.

  • Property taxes are equitable and efficient, but underutilized in many economies. The average yield of property taxes in 65 economies (for which data are available) in the 2000s was around 1 percent of GDP, but in developing economies it averages only half of that (Bahl and Martínez-Vázquez, 2008). There is considerable scope to exploit this tax more fully, both as a revenue source and as a redistributive instrument, although effective implementation will require a sizable investment in administrative infrastructure, particularly in developing economies (Norregaard, 2013).

And there you have it: if you are buying a house, enjoy the low mortgage (for now… and don’t forget – if and when the time comes to sell, the buyer better be able to afford your selling price and the monthly mortgage payment should the 30 Year mortgage rise from the current 4.2% to 6%, 7% or much higher, which all those who forecast an improving economy hope happens), but what will really determine the affordability of that piece of property you have your eyes set on, are the property taxes.

Because they are about to skyrocket.

If You Are Considering Buying A House, Read This First | Zero Hedge

If You Are Considering Buying A House, Read This First | Zero Hedge.

In September of 2011, when looking at the insurmountable debt catastrophe that the world finds itself (which has only gotten worse in the past several years) we warned that “the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world’s financial asset holders: the middle-and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path.”

Two years later, the financial asset tax approach, in the form of depositor bail-ins, was tried – successfully (as there was no mass rioting, no revolution, in fact the people were perfectly happy to accept the confiscation of their savings) – in Cyprus, further emboldening the status quo, in this case the IMF, to propose, tongue in cheek, that the time has come for the uber-wealthy to give back some (“it’s only fair”), and to raise income taxes through the roof (which of course would mostly impact the middle class as the bulk of current income for the 1% is in the form of dividend income, ultra-cheap leverage extraction on assets and various forms of carried interest).

And now, a new tax is not only on the horizon but coming fast and furious to allow the insolvent global regime at least one more can kicking: one which will impact current and future homeowners across the world.

But first, let’s step back.

Last week, the IMF did what only the IMF could do: come to the realization that we proposed in 2009, and even the Davosites discussed earlier this year: namely that the middle class is effectively an endangered species, and rapidly on its way to wholesale extinction, and that the polarity between the rich and poor has never been greater. The IMF concluded, with the panache that only this comical organization is capable of, that income inequality “is weighing on global economic growth and fueling political instability.”

The WSJ reports:

The International Monetary Fund’s latest salvo came Thursday in a top official’s speech and a 67-page paper detailing how the IMF’s 188 member countries can use tax policy and targeted public spending to stem a rising disparity between haves and have-nots.

IMF Managing Director Christine Lagarde has made the issue a high priority for the fund, warning—along with some of the fund’s most powerful shareholders—that inequality is threatening longer-run economic prospects. Last month, Ms. Lagarde said the income gap risked creating “an economy of exclusion, and a wasteland of discarded potential” and rending “the precious fabric that holds our society together.”

The IMF’s solution? The same as that of socialists everywhere: redistribute the wealth… because apparently socialism works every time, all the time, with stellar results.

“Redistribution can help support growth because it reduces inequality,” David Lipton, the fund’s No. 2 official and a former senior White House aide, said in a speech Thursday at the Peterson Institute for International Economics. “But if misconceived, this trade-off can be very costly.”

“There’s a sense that the burdens of the crisis have been unevenly distributed, that the middle classes and the poor have footed more of the bill of the crisis than the economic elite,” said Moisés Naím, a senior economist at the Carnegie Endowment for International Peace and Venezuela’s former trade minister.

Oh is there a sense? Is that why the Fed has halted its QE program which takes from what little is left of the middle class and gives to those who already have more money than they can spend in several lifetimes. Guess not.

So how does the IMF suggest going about this wholesale, global socialist revolution? Simple: the way we explained nearly three years ago.

The IMF’s latest paper doesn’t prescribe country-specific measures, but it does offer several proposals that are likely to be controversial. Most notably, the IMF says many advanced and developing economies can narrow inequality by more aggressively applying property taxes and “progressive” personal income taxes that rise as incomes increase.

The median top personal income-tax rate across the globe has halved since the 1980s to around 30%. But the IMF says “revenue-maximizing [personal income tax] rates are probably somewhere between 50% and 60% and optimal rates probably somewhat lower than that.”

We wouldn’t be too concerned about income taxes. After all, one needs to have a job to have income, and as everyone knows by now, jobs also are on their way to extinction, and every central bank everywhere will merely print the money needed to cover the income tax shortfall, leading to that “other” alternative to fixing the debt problem: global hyperinflation (with a little precious metals confiscation on the side: just like FDR did in the 1930s).

But going back to the original point, here is why those in the market for a house should be worried. Very worried. From page 40 of the IMF’s paper on “Fiscal Policy and Income Inequality“:

Some taxes levied on wealth, especially on immovable property, are also an option for economies seeking more progressive taxation. Wealth taxes, of various kinds, target the same underlying base as capital income taxes, namely assets. They could thus be considered as a potential source of progressive taxation, especially where taxes on capital incomes (including on real estate) are low or largely evaded. There are different types of wealth taxes, such as recurrent taxes on property or net wealth, transaction taxes, and inheritance and gift taxes. Over the past decades, revenue from these taxes has not kept up with the surge in wealth as a share of GDP (see earlier section) and, as a result, the effective tax rate has dropped from an average of around 0.9 percent in 1970 to approximately 0.5 percent today. The prospect of raising additional revenue from the various types of wealth taxation was recently discussed in IMF (2013b) and their role in reducing inequality can be summarized as follows.

  • Property taxes are equitable and efficient, but underutilized in many economies. The average yield of property taxes in 65 economies (for which data are available) in the 2000s was around 1 percent of GDP, but in developing economies it averages only half of that (Bahl and Martínez-Vázquez, 2008). There is considerable scope to exploit this tax more fully, both as a revenue source and as a redistributive instrument, although effective implementation will require a sizable investment in administrative infrastructure, particularly in developing economies (Norregaard, 2013).

And there you have it: if you are buying a house, enjoy the low mortgage (for now… and don’t forget – if and when the time comes to sell, the buyer better be able to afford your selling price and the monthly mortgage payment should the 30 Year mortgage rise from the current 4.2% to 6%, 7% or much higher, which all those who forecast an improving economy hope happens), but what will really determine the affordability of that piece of property you have your eyes set on, are the property taxes.

Because they are about to skyrocket.

oftwominds-Charles Hugh Smith: After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects

oftwominds-Charles Hugh Smith: After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects.

The fundamentals of demographics, stagnant household income and an overbuilt retail sector eroded by eCommerce support only one conclusion: commercial real estate in the U.S. will implode as retail sales and profits weaken.

 
The first installment of our series on U.S. real estate by correspondent Mark G.focused on residential real estate. In Part 2, Mark explains why the commercial real estate (CRE) market is set to implode.
 

In the early stages of the sub-prime mortgage crisis it was widely believed that US commercial real estate (CRE) would manage to dodge the bullets. In the end CRE was found to be as vulnerable as anything else.
© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. http://www.rcanalytics.com Used by permission.

These three graphs of relative prices show that in CRE the “core” is doing better than the “periphery”. The gap in relative price performance of major metro CRE over smaller cities and towns has approximately doubled from where it was in 2008.

And as with residential real estate, some CRE sub-sectors and cities are obtaining far greater benefit from bailout, stimulus and quantitative easing programs than other areas:


© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. http://www.rcanalytics.com Used by permission.

Commercial real estate has a more complex structure than residential real estate. There is greater specialization in function. For instance strip shopping centers and indoor malls are generally not exchangeable with warehouse facilities.

We can simplify this a bit by classifying CRE by consumer sector and function. Industrial real estate will not be considered in detail. Current industrial construction spending is near a record high. But the value of current industrial CRE can still be depressed due to existing plant obsolescence and rapid shifts in activity location.

This leaves us to consider consumer retail and consumer service CRE.

Consumer Retail Spending & Retail CRE

The value of commercial real estate is driven by the revenues and profits earned by the businesses occupying CRE. This relationship is similar to the relationship between residential real estate prices and average household income.

The Two Drivers of Consumer Spending: Population Size and Average Household Income:

These two parameters show continuously increasing population size and declining average household incomes. The subsequent data shows this is resulting in a small increase in total consumer spending and also large shifts in spending patterns.

Real inflation adjusted total retail spending has increased slightly over its peak in 2007.



Essentially all of this increase has occurred in food spending. (A smaller portion has gone into clothing). And this is the only reasonable expectation given the twin conditions of an increasing total population and a declining average income per consumer. We can also note that “food” is a minuscule part of eCommerce. The retail food trade occurs almost entirely in neighborhood groceries, markets and convenience stores. The other non-food retail sectors are flat to declining. But within these sectors there is a large zero-sum game being played out between eCommerce and local bricks ‘n mortar stores:

The Rise of eCommerce

Since 2008 eCommerce retail sales have nearly doubled. But as we just saw, the entire increase in total consumer spending since 2008 is accounted for by the increased food sales which occur at local markets. “eCommerce” is therefore taking sales away from other local retail sectors. And the biggest single loser is:

Local Retail Department Stores

This macroeconomic data is well-supported by the current financials of both Sears and JC Penney. Sears’ trailing twelve month (ttm) earnings per share are – $14.11. This loss will increase once Sears reports its fourth quarter earnings at the end of February, 2014. Sears is widely expected to lose one billion dollars in 2014. J.C. Penney meanwhile is currently reporting ttm losses of -$7.32 per share.

One or both of these chains will be in bankruptcy by 2015 even if the current “recovery” continues. And outright liquidation of one or both companies is at least as likely as reorganization. There is little reason to believe either of these companies would be more viable following mere debt reduction.

The third major department store chain is Macy’s, which is still reporting profits. Oddly enough Macy’s management celebrated their 2013 holiday season by announcing 2,500 permanent layoffs from their local retail department stores. This was paired with a mid-December announcement of an increase of 1,500 employees in a new eCommerce fulfillment center in Oklahoma.

In these circumstances it is unsurprising that retail CRE prices are showing weak recovery.


© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. http://www.rcanalytics.com Used by permission.

The Coming Implosion of the Regional Indoor Shopping Mall
(and adjacent strip shopping centers)


There are approximately 1,100 indoor shopping malls in the USA. Sears has about 2,000 stores. JC Penney’s has almost exactly 1,100 stores. There are very few malls that don’t have at least one of these chains. The vast majority of malls have both as major anchor stores. Macy’s is typically the third major anchor now. A regional department store chain or two round out the large anchor stores.

A virtual stroll down the typical mall concourse will reveal plenty of other money losing chain retailers with names like Radio Shack et al. Adjacent strip shopping centers
This should not be surprising. The regional indoor mall is a middle class income institution. It grew up with the post-WWII rise in average incomes. As middle class incomes now disappear so are the former favorite shopping venues of the middle class.

Every time a mall store closes shoppers lose another reason to go to the mall. “Dead mall” syndrome will soon afflict most of this sector.

In addition to decaying tenant revenues the mall owning Real Estate Investment Trusts are dangerously overleveraged with low-cost to free ZIRP and QE funding. Now that the Federal Reserve is tapering QE their financing costs will be rising as commercial balloon mortgages come due and have to be rolled over. And since the typical commercial mall mortgage does carry a large balloon payment at the end they have to be refinanced. Assuming honest loan underwriting a higher risk premium will also be attached due to the deteriorating retail fundamentals of the tenants.

General Growth Properties (GGP) is probably in the best condition. This is because GGP just exited a Chapter 11 reorganization in 2010. It was placed into involuntary bankruptcy in 2009 by two mortgagors holding matured recourse balloon mortgages. GGP was understandably unable to refinance these balloons in the spring of 2009.

This entire sector will collapse when the next recession appears.

And since history hasn’t ended, the next recession will appear at some point. It may be appearing already. At the beginning of October, 2013 the analyst consensus for retail profit growth for the strongest October – December holiday quarter was 5.5%. At the beginning of the reporting cycle in January expectations were down to 0.5% profit growth. That is a 90% reduction in analyst expectations in just three months.

Barring a turnaround, many retail chains still reporting profits will be reporting quarter-on-quarter profit declines in April. And by the end of the third quarter more will start reporting outright losses.

Part 3 will examine the other major part of local consumer oriented CRE. These are consumer services like neighborhood banking, investment, insurance and other services. Experience to date demonstrates that in the next few years the internet, expert software systems and robotics/automation will eliminate 50% and more of the jobs formerly associated with these businesses. These same trends will also shift most of the surviving positions away from the traditional storefront strip center and local office park locations.


 
Thank you, Mark, for this comprehensive analysis. We look forward to reading Part 3.

The U.S. Debt Ceiling Has Been Suspended | project chesapeake

The U.S. Debt Ceiling Has Been Suspended | project chesapeake. (source)

The U.S. Debt Ceiling Has Been Suspended

Posted by 

By: Tom Chatham

When is a debt ceiling not a ceiling? When it has been removed. That is the solution that was enacted on Wednesday night to fund the government for the next 90 days. This will last from Oct. 17, 2013 until Feb. 7, 2014. This has some very dangerous implications for Americans. It means as of right now there is no debt ceiling and the federals can spend as much as they like. With all of the previous spending by DHS, and the impending economic crash that we face in the near future, it is terrifying to think what the federals might buy in the next 90 days that they can use against American citizens.

With this scenario in place the writing is on the wall and foreigners can read it well even if Americans cannot. The dumping of treasuries will likely increase substantially over the next few months as the collapse becomes evident to everyone but Americans. This is the end game and most people don’t even know they are in it.

With the debt ceiling removed even temporarily, the government has the ability to overspend and when the ceiling is reinstated in 90 days any new debt over the current limit will not be debatable. The limit will automatically have to be raised to that amount. That is why President Obama answered “no” when asked if there would be a renewed debt debate next year. He knows he can bypass it. When the time comes for the House to raise the debt limit they will either have to raise it to encompass the additional spending or not raise it and possibly trigger a default. Either way the Democrats can blame the Republicans for the additional debt increase or a default.

It could go something like this. The government decides how much extra money they will need until after the elections next year and borrow it now. The money is dispersed into the usual slush funds until needed to avoid any new debt debates before the election. The Republicans will lose the ability to stop uncontrolled government growth next year and the Democrats will deprive them of any debt debates before Nov. This will give the Democrats a big edge in the elections and could allow them to take some seats in the house. Not that changing from one party to the other will change anything, it will just determine how fast we collapse.

By this time next year I suspect the Petrodollar will be on life support if not completely dead and high inflation will be rearing its’ ugly head. The governments answer to this will be price controls which will lead to shortages. Then things go downhill fast from there. That’s if we actually make it to next fall without a serious incident in the U.S. before then.

These are truly perilous times for the U.S. and everyone should prepare as they deem appropriate. The west line has shifted and we are now on the trailing edge of history. If we are to survive as a nation and prosper again we must learn to operate with a smaller more efficient economy as others before us have done. This will entail a smaller more localized economy with more small producers and a stable medium of exchange. The only alternative is to become a failed third world nation with no future.

 

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