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Higher Capital Gains Taxes? 2 HUGE Effects On Real Estate & Mortgages

Family of four moving into house sitting on stairs with dogINVESTOR WITH 70 HOMES REFUSES TO SELL

I know an investor who owns over 70 single-family homes in California that he accumulated in the 1980s.

Almost all are rented at below-market rates** with minimal or no mortgages, and he refuses to sell any of them.

**Pro Tip: In my 27-year mortgage career, I have observed many experienced landlords accept below-market rents in exchange for stellar tenants who pay on time and maintain properties.

Anyway, the gentleman above refuses to sell b/c he does not want to pay capital gains taxes, which would be about 33% here in CA (13.3% state and 20% Federal).

And – THIS is why the markets shuddered yesterday when the Biden Administration proposed much higher capital gains tax rates (to go as high as 43.4% at the Federal level).

Investors holding assets among all classes (stocks, bonds, real estate, precious metals) will be much more likely to sit on those assets.

And that will slow down economic growth – which is why stock prices dropped yesterday while bond prices went up, resulting in lower rates.

HIGHER CAP GAINS: (1) LOWER INTEREST RATES; (2) LESS INVENTORY

SO – higher capital gains taxes are generally bad for the economy but good for interest rates.

The other thing higher capital gains tax rates are bad for is real estate inventory.

I personally have worked with dozens of investors over the years who own over 20 single-family residences, and there are thousands more of them across the country.

And ALL of them will be that much more likely to sit on that inventory if capital gains taxes are raised.

So, while I well understand the need to bring in more tax revenue at the federal level, I dearly hope the capital gains tax rates are not raised – even though I personally will benefit from the resulting lower rates (b/c they will spark more refi opportunities).

WHY DID RATES FALL WITH INFLATION LOOMING?

I borrowed this from Mortgage Industry Guru, Rob Chrisman: “Freddie Mac’s Primary Mortgage Market Survey showed the 30-year fixed rate declined to 2.97 percent for the week ending April 22, back below 3 percent for the first time in eight weeks. A year ago, at this time, the 30-year fixed mortgage rate averaged 3.33 percent. Don’t forget, in 1981, the interest rate on a 30-year mortgage peaked a whopping 18.63 percent.”

So, why have rates dropped in recent weeks when everyone is justifiably afraid of inflation; when actual inflation signals are surfacing everywhere, e.g. lumber and gasoline; and when the economy appears to be heating up in every way with improved employment and spending numbers?

There are many reasons of course, but this again shows how market watchers get things wrong so often b/c, as I repeat all too often, nobody understands today’s unique market conditions enough to make accurate predictions.

Here are two reasons though why rates have come down:

  1. Economic headwinds. Despite government stimulus, the easing of COVID concerns, pent-up demand, and other good news, there are still significant economic headwinds. These include an economy that may be addicted to stimulus, significant structural unemployment, a huge number of businesses permanently destroyed by the pandemic, a reeling commercial real estate market, and much else.
  2. Stronger than expected demand for bonds (Treasuries and MBS). While the Fed’s massive bond-buying ($120 billion per month) is no doubt helping to keep rates lower, demand from other investors has been surprisingly strong too. And, as I repeat often, stronger demand for Treasuries and Mortgage-Backed Securities usually results in lower rates. Demand may be stronger than expected b/c investors are concerned about the above referenced headwinds, and b/c investors, awash in cash, have no place else to park their money.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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