President Trump’s tax reform agenda is in trouble

That’s not news, but one proposal that his team has floated as a way, ostensibly, to cut taxes on the middle class is. According to the Associated Press, they’re toying with the idea of eliminating the payroll tax, which funds Social Security and part of Medicare, or cutting it drastically.

This is an absolutely terrible idea, partially because it smells like a back-door way of cutting Social Security benefits. It needs to be nipped in the bud.

This proposal is a Trojan horse,” the veteran Social Security advocate Nancy J. Altman told me. “It appears to be a gift in the form of middle-class tax relief, but would, if enacted, lead to the destruction of working Americans’ fundamental economic security.

To understand why, one needs to examine the history and mechanics of Social Security, something the Trump team hasn’t tried or doesn’t care to do. But we can.

This proposal is a Trojan horse … [that] would, if enacted, lead to the destruction of working Americans’ fundamental economic security.
— Social Security advocate Nancy J. Altman

The “contributory” nature of Social Security, through which beneficiaries pay for their eventual benefits via the payroll tax, dates back to its very origins in 1935.

The most commonly quoted defense of the payroll tax comes from Franklin Roosevelt, who called the feature “straight politics” and explained: “We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. … With those taxes in there, no damn politician can ever scrap my social security program.” But FDR didn’t say that until 1941, six years after enactment, when he was interviewed for a government study.

The real rationale for the payroll tax was more nuanced. FDR’s Committee on Economic Security, which drafted the program in 1934, had engaged in a spirited debate over whether to fund Social Security via general government revenues or from worker contributions.

There were several reasons to choose the latter. One was to make clear that Social Security wouldn’t be a welfare program, but a retirement insurance benefit provided by right. Inevitably, the committee reported, a “gratuitous” pension — one funded by the general budget, “must be conditioned upon a ‘means’ test,” which meant it would be delivered only to the poorest Americans and fulfill only the slighted needs.

“The gratuitous pension, in fairness to the legitimate demands of other needy groups, must hold all grantees down to a minimum standard,” the committee advised Congress. A contributory system that amounted to an annuity, “can be ample for a comfortable existence, bearing some relation to customary wage standards.” That’s essentially the Social Security retirement system we have today.

Social Security’s creators thought that the contribution system would not only ensure that benefits would be reasonably large, but that they wouldn’t get too large. The idea was that the strain on workers’ take-home pay resulting from too much expansion in the program would stay Congress’ hand. As it happened, Social Security proved to be so popular that the public remained on board through several expansions, including coverage of spouses and dependents, and the addition of disability insurance in 1956.

As FDR foresaw, endowing Social Security with its own revenue stream has protected it over the years from grasping politicians — mostly conservatives, who have aimed since 1935 to eviscerate the program. The weekly or bi-weekly payroll deductions that go to the program have given workers a proprietary interest in benefits that has been hard to undermine.

That’s why President Obama’s 2010 deal with Congress to cut the employee share of the payroll tax temporarily — to 4.2% of wage income from 6.2% — also was a terrible idea. (Employers pay another 6.2%, but their share wasn’t affected by the 2010 deal.)

The tax cut was a device to put a few more bucks into families’ pockets during the depths of the Great Recession. But although it was understood that the lost revenues would be made up dollar for dollar from the federal budget, the arrangement risked permanently undermining the system’s finances. Making it worse, the cut failed to steer the additional funds to the families who needed it the most. Every worker got the same tax break — billionaires got the same maximum $2,136 cut as anyone else earning the maximum $106,800 in wages subject to the payroll tax at the time.

Under the targeted Making Work Pay program that was replaced by the payroll tax cut after Republicans refused to continue the program, low-income families were entitled to up to $800 — any family earning $40,000 or less would have received more from Making Work Pay than the tax cut, while everyone else, including CEOs and members of Congress, did better under the new arrangement.

The full payroll tax eventually was restored after two years, but the erosion of the link between wages and Social Security has lived on; to this day, some people still think Social Security is financed by the federal budget, even though that’s not the case.

The Trump proposal potentially raises the manipulation of the payroll tax to a new level. The details reported by the Associated Press are sketchy and preliminary. But thus far, there’s no indication that Trump views this change as a temporary measure. If it’s designed as a permanent conversion of Social Security’s revenue stream from the payroll tax to general revenues, that’s a wide-open door to budget-cutting at the expense of retirees and workers.

Already, conservatives and budget hawks repeat as a mantra that the cost of Social Security is “unsustainable.” That’s their claim even though the program runs a surplus today and ensuring its fiscal stability for the future would require a modest increase in the tax rate or removal of the cap on taxable wages ($127,200 this year).

Scrapping the payroll tax would make it easier for Congress to cut Social Security benefits under the guise of saving the government money. And that’s just another way to funnel more money to the rich, at the expense of the working class. And who needs that, other than people who already have enough?

By Michael Hiltzik

Real estate agents look for new ways to gain edge in Toronto market

Buyers in the upper echelons of Toronto’s real estate market are moving decisively when they see the right property.

A grand Rosedale house sold for $6.398-million soon after it was listed with an asking price of $6.45-million

The traditional five-bedroom house at 40 Edgar Ave. sits on a large lot across from Whitney Park and just a few doors down from Gradale Academy. Listing agent Janet Lindsay of Chestnut Park Real Estate Ltd. says the property was purchased by a buyer who coveted the location.
“Being close to the school was important,” Ms. Lindsay says.

Causes of the United States Housing Bubble 2

“Many fear the Fed is behind the curve. The market is even further behind: This is clearly a dangerous situation.”

US government debt took another beating today. As prices fell, yields rose to new multi-year highs. The 10-year Treasury yield rose 5 points to 2.625%, the highest since September 2014, when it just briefly kissed that level. At this pace, the yield will soon double from the record low of 1.36% in July last year.

This chart shows the progression of the 10-year Treasury yield since late August (chart via

When yields were surging maniacally in November and December – broadly called the “bond massacre” or the “bond meltdown” or similar – I pontificated that eventually yields would fall back some, “on the theory that nothing goes to heck in a straight line.” And they did start falling back in mid-December. But that three-month breather has now been totally undone.

Two-year Treasuries took it on the chin too today, and the yield jumped to 1.40%, the highest since June 2009 (chart via

The 30-year yield rose to 3.20%, the highest since July 2015. When yields rise, bonds with long maturities lose the most value.

The 30-year Treasury Bond Price Index has plunged 14% since early October. Hence the “bond massacre” (chart via

The markets are coming to grips with a new-new normal, which replaced the old-new normal: a Fed worried about inflation and “over-extended” asset prices, with some segments, such as commercial real estate, being now officially mentioned as big potential risks to lenders. But the markets aren’t coming to grips with this nearly fast enough.

Steve Barrow, currency and fixed-income strategist at Standard Bank, in a note to clients, cited by MarketWatch, put it this way:

Indeed, it is interesting that, at a time when many fear the Fed is falling behind the curve given full employment, near-target inflation, and the likely easing of fiscal policy, the market is even further behind.

This is clearly a dangerous situation because it suggests that if the Fed has to scramble to push rates up, as the – likely – March hike suggests, the market needs to adjust much faster still.

This “adjustment” means that government debt would fall further, and yields would continue to rise.

There are consequence in the real economy, among them: Mortgage rates follow yields of mortgage-backed securities – of which the Fed bought $1.76 trillion to repress mortgage rates to artificially low levels. MBS yields follow Treasury yields with longer maturities. See above “bond massacre.”

And mortgage rates have risen every trading day but one since February 27! Today, the 30-year fixed rate, according to Mortgage News Daily, “is easily up to 4.375% on top tier scenarios with a growing number of lenders moving up to 4.5%.”

That’s the highest rate since April 2014. And it’s up over a full percentage point from the 3.34% low quoted last July.

For the median home price in the US, at $228,900, a full percentage point increase to 4.4% would raise mortgage payments by $1,560 a year. For a condo near the median price in San Francisco, it would raise mortgage payments by $8,256 a year.

And this is just the beginning. The Fed has nudged up interest rates only three little ticks from near zero over the past 15 months.

In a recent barrage of statements by Fed governors, the Fed has been explaining to the markets that rates will rise, not only in March, but several more times this year, and several more times next year.

Before the end of February, bond market participants had brushed it all off, expecting the Fed to start flip-flopping again, and backing off as it had done so elegantly before.

It used to be that the Fed followed the markets. It would timidly suggest that rates might rise, and the bond market just brushed it off, which then caused the Fed to back off in order to not cause the bond market to panic. Now the Fed is telling the market to get in line. The Fed is leading the bond market, rather than following it. That too looks like a new-new normal.

If the Fed hikes rates three more times this year, and a few more times next year, the ten-year Treasury yield could rise north of 4%, and mortgage rates north of 6%. The last time mortgage rates were anywhere near 5% was in February 2011. The last time they were in the 6% range was in November 2008!

But since 2011, home prices have soared, thanks to the Fed trying with all its might to inflate Housing Bubble 2 in order to bail out the banks and the largest institutional investors in the US. According to the S&P Case Shiller 20-city index, home prices have surged 40% over those years and have overshot the peak of the prior housing bubble that blew up so spectacularly.

In some cities, the increases were far larger. In San Francisco, the median house price skyrocketed over 100% since 2012. The median condo price tagged along. But in mid-2015, it encountered the rough waters of oversupply and lackluster demand hampered by high prices, and has started taking on water.

These higher mortgage rates come just in the nick of time, when the Fed’s ingenious monetary policies over the past eight years have inflated home prices in many markets to ludicrous levels, outracing by a wide margin the still languishing household incomes.

Answers are trickling in. Tough luck for New York, San Francisco, Miami… How Much Money Laundering is Going On in the Housing Market? A Lot…

By Wolf Richter

Hot Market? 3 Tips to Help Buy Property Low and Sell High

Real estate investing tactics are often focused on what is known as forced appreciation, which involves short sales, foreclosed properties and flipping. Other strategies focus on slow but …


Real estate investing tactics are often focused on what is known as forced appreciation, which involves short sales, foreclosed properties and flipping. Other strategies focus on slow but steady growth which involves rentals, mobile homes and apartment buildings. Even though growing your cash reserves and having a constant flow of income is crucial to many people’s incomes, it will not lead to significant wealth over time. Compounding is critical to harnessing the power of property investment, and this can only be done by working with the real estate cycle: buying low and selling high. Becoming familiar with the real estate cycle is beneficial to investors who want to purchase homes at bottom-barrel prices and sell to make a marginal profit.

  1. Understand the Difference Between Appreciation and Inflation

The price of a house may go up over the course of time, but it can be difficult to know if this is due to inflation or appreciation. Oftentimes, home values will not appreciate above the general rate of property inflation. This means that when you’re ready to sell your home, you won’t be making much in the way of real investment gains. When it becomes available to you, check inflation adjusted property value trends in an area to get a clear understanding of appreciation in the town or city you’re looking to buy.

There are many types of inflation on the real estate market, so being able to discern between them will improve your chances of buying properties at a low price and selling high. One particular factor that keeps affecting inflation is the growing size of the average American home. Houses in America just keep getting bigger, so it can be hard to know the difference of a home being more valuable because of its square footage or just because of its tremendous size.

  1. Warranties on Homes

Placing a home warranty onto a property will increase its value ten-fold. Warranties that are specific to homes protect the buyer from a myriad of problems that could potentially destroy their finances. Warranties will provide cash flow and budget protection against minor and major home repairs. Warranty companies provide their own service contractors, saving you the hassle of finding professionals. Even household appliances will be covered under a standardized plan, preventing individual replacement on items such as dishwashers, refrigerators and stoves.

If you purchase a home and put a warranty on it, you will be able to sell it at a higher price. The warranty alone will allow you to buy cheap and sell high, since the coverage will protect new buyers as well. The warranty is not just for the current resident of the home, but lasts for years beyond the initial start date of protection. Taking out a warranty can be an investment in the beginning, but it is well worth the money when you realize how much value it’s put onto the property.

  1. Understanding the Real Estate Cycle

There are three main cycles involved with real estate marketing. The first cycle is known as early downturn, and this involves the point at which the market has reached its highest peak. Occupancy is relatively high at this point, rental growth has often flattened out and cap rates are growing.

The second cycle is known as full downturn, and this encompasses the time when prices begin to fall. Rents are beginning to fall and property values start to pummel into a downward spiral. The third and most dangerous cycle of real estate is known as the bottom. This is when all property values are at their lowest and rents have virtually flat-lined. From here, the market experiences a series of recoveries. Early recovery, early stable and late stable all determine the best times to sell your home. The late stable stage is most recommended to sell your home because the property will have exceeded its net value.

Understanding the real estate market and purchasing cheap to sell high is your best defense against an investment dud. There’s nothing worse than investing your hard-earned money into a home, only to find that it’s decreased in value over time. Being aware of property trends and the area you’re looking to buy is crucial to success.

5 tips for starting your property portfolio

Lately I’ve had a number of people reach out to me feeling somewhat overwhelmed with all the information available out there and asking for some guidance on just where to get started when it comes to property investing.

I too, had little to no idea what I was doing when I first started my journey. I hope these five steps below will help answer those questions:

1) Get clear on your goals
I’m a huge believer in goals and it’s important you are clear on what you are trying to achieve from property investing. Be specific about the financial outcomes you looking to achieve from property investing, and in what time frame you want to achieve this in. Remember, property is just a vehicle to get you to the financial position to give you the lifestyle you desire – ask yourself,

“is it passive income, or a net equity position, or is it a combination, and when do you want to achieve this by?”

2) Get educated
We’re playing with large sums of money, and most often buying a property will be the biggest financial decision you will make in your lifetime. It still baffles me that some people spend more time researching a weekend getaway than they do buying a property. I use a variety of resources to ensure I’m ‘in the know’. There are some great online platforms including right here on Smart Property Investment, Australian-specific property investing books, podcasts, online forums, networking events, and free seminars (but always leave your credit card at home)!

3) It’s in the strategy
By now you will be getting a better understanding of property fundamentals, how investing works, and the types of strategies out there. So let’s take a look back at your goals – as I said earlier, it’s important to understand what financial outcomes you are trying to achieve from investing in property because this will dictate the strategy you adopt, and how passive or active you need to be. In addition, it’s important to assess your risk appetite dependent upon your situation. Some well-known strategies are buy and hold, renovation, flipping, development, and joint-venture to name a few. It might be a combination of these, however always be clear on what outcomes you are trying to achieve.

4) Build your dream team
Once you’ve created what you believe is the right strategy for you, I encourage you to start speaking to some property professionals and investors. Run the strategy through with them, bounce ideas off them, or simply use these conversations as your sounding board and a source of validation. This exercise will also help you build out your property dream team. The people I reach out to the most are my mortgage broker, other investors, builder/tradies, property manager, accountant, solicitor, and local real estate agents – all these people serve different roles and at different times.

5) Sharpen your ground game
There’s only so much research and analysis you can do in front of your computer screen. I’ve seen a lot of people miss out on great opportunities because they had analysis paralysis. The best way to get rid of this bug is to hit the ground and start going to property inspections. If you’re looking at buying interstate, I still encourage you to go to some local inspections in your neighbourhood. The more inspections you go to, the better you will get at sensing what a good property feels and looks like. It’s also an opportunity to network with real estate agents and to practice your information gathering and negotiation skills.

Needless to say, these aren’t black and white rules but more of a guide if you’re a little lost and not sure where to start. Following these five steps gave me clarity on my investing direction and confidence to start putting in offers. Let me know how you go with adopting all or some these steps. Please comment your thoughts below or reach out to me via my social media platforms. Happy hunting!

The 9 best quotes about property investing

Property investing is not always easy and it can take some time before you see any great returns, because of this it’s easy to get discouraged and lose focus over the long term.

Even in my short investing journey to date, there’s been plenty of sacrifices I’ve had to make, and plenty of times I wanted to throw in the towel.

I constantly find that I have to keep selling to myself that building a property portfolio is the right thing to do and that the payoff at the end will be significantly greater than any short-term sacrifice I’m making now. A quick and punchy way to remind me of this and to reaffirm that property investing is the best form of accumulating wealth over the long term is by reading quotes from successful investors whenever I need that extra kick of motivation.

It’s worked for me so I wanted to share with you my top nine favourite real estate investing quotes that keeps me sold on this game and focused on my goals.

1. “90 per cent of all millionaires become so through owning real estate… The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie (billionaire industrialist)

2. ”The rich buy assets. The poor only have expenses. The middle class buy liabilities they think are assets. The poor and the middle class work for money. The rich have money work for them.” – Robert Kiyosaki (author of Rich Dad Poor Dad)

3. “Never depend on a single income. Make investments to create a second source.” – Warren Buffet (investor and philanthropist)

4. “You will come to know that what appears today to be a sacrifice will prove instead to be the greatest investment that you will ever make.” – Gordon B. Hickey (researcher)

5. “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.” – Robert Kiyosaki (author of Rich Dad Poor Dad)

6. “Landlords grow rich in their sleep without working, risking or economising.” – John Stuart Mill (political economist)

7. “Real estate is at the core of almost every business, and it’s certainly at the core of most people’s wealth. In order to build your wealth and improve your business smarts, you need to know about real estate.” – Donald Trump (US President)

8. “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen (businessman and politician)

9. “Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity had devised. It is the basis of all security and about the only indestructible security.” – Russell Sage (financier and politician)

Mortgage Prepay and Other Terms You Must Know

In the event that you may have extra money in your budget at the end of the day, using it to pay off the mortgage is a good idea. This will surely reduce the loan that you have for whatever your purpose is and depending on the amount of the money you pay every month, this could lessen the time of payment to years or even months and the most important is that the interest rates in the principal loan will be reduced. But in paying, you should consider some factors such as mortgage prepay and other things that gives a negative effect to your loan.

Three Significant Commercial Real Estate Investment Safeguards


Investments in commercial real estate have become imminent and highly worthwhile area in the investment industry. To have a commercial real estates broker of your own additions always require safeguards to other business losses.

So Who’s Pumping Up this “New Normal” Housing Market?

America becomes “Landlord Land.”

“A housing recovery that is highly dependent on real estate investors is a bit of a double-edged sword,” explained Daren Blomquist, senior VP at ATTOM Data Solutions. “Rapidly rising home values have been good for homeowner equity, but also have caused an affordability crunch for the first-time homebuyers the housing market typically relies on for sustained, long-term growth.”

So the housing market is “starkly different than a decade ago,” said Alex Villacorta, VP of research and analytics at Clear Capital. “As such, it’s imperative for all market participants to understand the nuances of the New Normal Real Estate Market.”

They were both commenting on a joint white paper by ATTOM and Clear Capital, titled “Landlord Land,” that analyzes who is behind the US housing boom that drove home prices to new all-time highs, and in many markets far beyond the prior crazy bubble highs – even as homeownership has plunged and remains near its 50-year low.

First-time buyers are the crux to a healthy housing market, but they aren’t buying with enough enthusiasm. In 2012, buyers with FHA-insured mortgages – “who are typically first-time homebuyers with a low down payment,” according to the report – accounted for 25% of all home purchases. In 2013, their share dropped to about 20%, in 2014 to 18%. Then hope began rising, briefly:


However, in January 2015, FHA lowered its insurance premium 50 basis points, and there was a modest resurgence in FHA buyers – a trend perhaps indicative of loosening credit requirements or of a desire to re-enter the housing market for those displaced during the crash.

Their share of home purchases ticked up to 22.3%. Alas, “the FHA resurgence was short lived” and in 2016 eased down to 21.7%.

With first-time buyers twiddling their thumbs, who then is buying? Who is driving this housing market?

Institutional investors? Defined as those that buy at least 10 properties a year, they include the largest buy-to-rent Wall Street landlords, some with over 40,000 single-family homes, who’ve “picked up the low-hanging fruit of distressed properties available at a discount between 2009 and 2013,” as the report put it. That was during the foreclosure crisis, when they bought these properties from banks.

In Q3, 2010, institutional investors bought 7% of all homes. In Q1 2013, their share reached 9.5%. As home prices soared, fewer foreclosures were taking place. By 2014, when home prices reached levels where the large-scale buy-to-rent scheme with its heavy expense structure wasn’t working so well anymore, these large buyers began to pull back.

In 2016, the share of institutional investors dropped to just 2% of all home sales.

But as institutional investors stepped back, smaller investors jumped into the fray in large numbers, “willing to purchase in a wider variety of market landscapes and operate on thinner margins.”

To approximate total investor purchases of homes, the report looks at the share of purchases where the home is afterwards occupied by non-owner residents. In 2009, according to this metric, 28% of all home purchases were investor-owned properties. In 2010, it rose to 30%. In 2011, 32%. Then as big investors pulled out, it fell back to 30%. But by 2015, small investors arrived in large numbers, and by 2016, investor purchases jumped to 37%, an all-time high in the ATTOM data series going back 21 years.

The chart shows the share of purchases in a given year. Note the declining share of first-time buyers (blue line), the declining share of institutional investors (gray bars), and the surging share of smaller investors (green line). In other words, smaller investors are now driving this housing boom:


The pie chart below shows the share of properties owned by investor size. Among investors in today’s housing market, small landlords that own one or two properties own in aggregate the largest slice of the rental housing pie – 79%:

However, Wall Street landlords are concentrated in just a few urban areas. For example, Invitation Homes, the 2012 buy-to-rent creature of private-equity firm Blackstone, which owns over 48,000 single-family homes and has nearly unlimited financial resources, including government guarantees on some of its debt, is concentrated in just 12 urban areas, where it has had an outsized impact.

Whereas small investors own properties across the entire country, in urban and rural areas, in cheap markets and ludicrously expensive markets. They own condos, detached houses, duplexes, and smaller multi-unit buildings.

So when the industry tells us about low inventories and strong demand in the housing market, it’s good to remember where a record 37% of that demand in 2016 came from: investors, most of them smaller investors. And when the financial equation no longer works for them, they’ll pull back, just like institutional investors have already done.

By: Wolf Richter

Valentine’s Day: Falling in love with property investing

February is officially the month of romance, with retail stores and restaurants all decked out in pink frosty décor dotted with love hearts.

But while February is an ideal time to shower love and affection on your other half, it’s also the perfect opportunity to celebrate your passion for property.

After all, what’s not to love? Real estate investing has the potential to help you build your wealth and supplement your income in retirement. The secret to lasting happiness is to choose the right property to partner with on your journey towards real estate riches.

Head over heels for real estate

In many ways, falling in love is very similar to investing in property, in terms of the stages you go through:

Casually dating

The initial stage of dating is all about testing the waters and finding out what you’re really looking for. What traits or features do you like in a potential partner? Are good looks important, or are you happy to take on a fixer-upper? What turns you on and just as importantly, what turns you off?

You could ask all of these same questions of your would-be investment property when you’re browsing listings at the beginning of the process. What is your property criteria? Are you happy to invest extra in renovations, or do you want something ready to rent out? You’ll answer these questions again and again while you browse open homes, until you get a feel for the type of property you really want.

Narrow the field

Flirting and romancing your way through your 20s is almost an Aussie rite of passage. You can afford to take your time in your 20s while you play the field – but eventually, you’re going to want to narrow the field and make a commitment.

Just as you’ll need to pick one person to become your life partner, spouse and potential parent of your children, you’ll also need to narrow your search down to a short-list of properties that you’re serious about buying. Narrowing the field is when you go through that crucial period of transitioning between “I want to invest in property” and “I am now a landlord”.

Put a ring on it

As the beloved Queen Bey famously warned single men around the world, “If you like it then you shoulda put a ring on it.”

Translation: eventually you need to take action and actually take the plunge!

Falling in love with a property deal

If you’ve reached this point, and you’re ready to get serious about your love of investing by taking it to the next level, then it’s time to make a deal.

But it’s really important that you fall in love with the investment deal, not the property itself.

This means you need to be unemotional about the property, no matter how much you’ve fallen for the Hampton’s-style kitchen or beautiful backyard. You’re not going to live in it yourself, so take your love of property investing out of the equation.

You can achieve this by making your purchase decision all about the fundamentals of the deal, such as:

  • Is this type of property in demand with local tenants?
  • Do the returns work in your favour?
  • Is the property low-maintenance?
  • Will you need to invest in repairs or renovations?

In other words, fall in love with the facts and figures, and you’ll be well on your way to a lasting and loving relationship with your property portfolio!

Not sure what to do next or how to decide where to invest? Read on for tips on who to turn to for property investment advice >>