SC Business Review – Is Technology Coming to Real Estate?

Is Technology Coming to Real Estate?

Press Release: On June 16th, SC Business Review Host Mike Switzer interviewed Les Detterbeck. Their conversation of technology and real estate colliding has been interesting to say the least.

Click here to listen to the audio, and or please read the transcript below…

 

Mike Switzer: Hello and Welcome to the SC Business Review. This is Mike Switzer.

The majority of Americans’ wealth resides in the stock market and real estate. Over the past decades, technology has brought the cost of stock trades down to almost zero. The cost to buy and sell real estate, however, hasn’t much changed.

Our next guest believes that lower transaction costs in real estate are finally imminent. Joining us today is Lester Detterbeck who is a Chartered Financial Analyst® in Charleston, South Carolina and a member of SC Chapter of the CFA® Society. We’ve got Les on the phone right now. Les, welcome back.

Les Detterbeck: Mike, good to talk with you again today.

Mike: 
Les, how did this topic show up on your radar?

Les: Mike, the Economist recently ran an article on some of the changes impacting American real estate transactions. That got us thinking about how this might impact our clients and our business.
So we did additional research on the topic. We found that there is a whole new industry called property technology or Proptech which will likely have a huge impact on the real estate industry, much like technology has impacted stock trading over the last 50 years.

Mike: Is the liquidity the factor the main factor that makes it so expensive to sell real estate because, of course, it’s an illiquid investment?

Les: Mike, I think it is not only illiquidity but, it’s also the entire process of making a real estate transaction, which includes getting the house ready for sale, listing it, finding a buyer, negotiating the deal, the building inspection, re-negotiating the deal, and then having a closing.  All of this can now can be handled in part or in full by the property tech organizations. The result is that it could be that, with Proptech, real estate will start moving. Currently only 7% of American homes change hands every year. And we’re not suggesting that half the homes are going to change hands every year but perhaps the 7% may rise to 20 or 30% in another decade.

Mike: Could you give us an example of this property tech/property technology and what it’s doing to the industry?

Les: Certainly, Mike. There are three or four main categories. The first is pricing. Most of us are familiar with Zillow and their “Zestimates”.  They started in 2006 with an algorithm which used traditional metrics; such as number of bedrooms and baths, square footage etc. Today, Zestimate goes deeper and has become more accurate. Homeowners listing with Zillow upload pictures and provide additional detail information. The new Zestimate model has an error of less than 2% of the home’s actual selling price. So they have a pretty good idea of what the selling price should be for a home.

Prop tech has also sped up transactions. Discovering listings used to take days. Now Redfin (and others) notifies customers with its “Updates” faster than anyone else about new listings and price changes. Using just a couple of clicks on their smartphone, Redfin customers can “Book it Now” and request a home tour, almost like making an online restaurant reservation. Customers can view the property quickly.

The third item, Mike, is instant buying. So instead of waiting 90 days to sell the house you can now sell the house within a few days. Once it’s sold, there are people like Opendoor that take it one step farther. It buys and sells. Opendoor buys houses for cash and then takes that cash and helps you find your dream for the replacement. They can coordinate for you for the mortgage, appraisals and everything you need to get the new house purchased. So prop tech has knocked down many of the hurdles that have limited the number of housing transactions as we mentioned earlier.

Mike: So what are we looking at for reducing the cost from the standard 5, 6, or 7% real estate commissions? Are we looking at one or 2% or anytime in the near future?

Les: It seems very likely that commissions could be cut in half- that’s what happened to stock trades 50 years ago. For the agents, if they’re doing twice as many transactions using Proptech (and the rate of commission was ½) their total commissions for the year could be comparable to where they currently are now. But, they would be really focusing on what they do well-which is their highly personal touch.

Mike: Les, thank you so much for taking time to explain all of this to us today.

Les: It’s been my pleasure, Mike. I look forward to talking with you again soon.

Mike: Les Detterbeck is a Chartered Financial Analyst® and a member of the South Carolina chapter of the CFA Society.  He spoke with us today from his office in Charleston, South Carolina.

https://dwmgmt.com/

The Stock Market is not the Economy

The connection between the markets and the economy was likely forged by the Great Depression.  First, the markets plunged a huge 68% in 1929 and then the economy hit bottom for almost everyone.  Even in the 1950s and 60s, it was easier to connect the markets with the economy because the enormous payrolls of the largest companies fueled the expansion of the middle class.

In 1962, the two largest public companies, GM and AT&T employed 1.2 million people.  Today Microsoft and Apple together employ 280,000.  In 2015, about 600,000 U.S. companies had 20 or more employees. However, only 1% of those were publicly traded.  The S&P 500 consists of the largest 500 publicly traded companies.  Their financial strength makes them more likely to survive a downturn and prosper, even in very tough times.

While more than 50% Americans have investments, many of those have a minimal amount.  The Fed reports that 84% of all household stock ownership is controlled by 10% of American households, with 1% of the households owning 40%.  Stock ownership is heavily skewed to the richest parts of the population, who are less likely to feel the pain of an economic downturn.

Today, the gap between Wall Street and Main Street has never seemed larger.  The United States is possibly on the brink of the worst economic collapse since the Great Depression. 13% (20 million) of American workers are unemployed, higher than anytime during the 2008-2009 financial crisis.  109,000 Americans have died from the coronavirus with hundreds dying each day and no turnaround in sight.  Towns and cities across the country have been witnessing two weeks of protests against police killings of African-Americans.

Yet, stocks keep climbing.  The S&P 500 dropped 34% from February 19th until it hit bottom on March 23rd.  Since then, in just a little more than two months, the S&P 500 index has soared-turning positive for the year on Monday. The period from March 24 to June 3 represents the best 50 trading days since 1952.  The NASDAQ 100 index (made up of technology and healthcare companies) hit its all-time high on June 4.

Actually, though, the rising “tide hasn’t lifted all boats.” The five largest listed companies- Microsoft, Apple, Amazon, Alphabet and Facebook are up over 10% this year.  Yet, the other 495 companies in the S&P 500 are down about 10%.  A few key sectors such as technology, healthcare, communication and consumer staples have done exceptionally well.  Small-caps are down 7% year-to-date and international markets are down over 8% ytd. The biggest US/multinational stocks are the ones that have not only recovered, but are positive; whereas pretty much everything else is still negative.

In the first five months of this year big “growth” stocks grew 6% while small, low priced “value” stocks lost 25%.  This was the biggest gap between growth and value stocks in over 20 years.  The 50 most expensive stocks in the S&P 500 as of the first of the year have gone up an average of 11% in 2020. At the same time, the 50 cheapest stocks were down an average of 17%.  However in recent days, small and value stocks have begun to show signs of recovery.  For example, the value of American Airlines shares have nearly doubled in value in the last week once AA announced it would restore more flights to its schedule.

Wall Street is all about expected future earnings. In the five weeks nose-dive from February 19 to March 23, the markets incorporated the expected impact of the coronavirus on future profits.  What turned the markets around was the Fed’s declaration in late March that it would do whatever it needed to do to stabilize financial markets.  And, they’ve followed through with emergency loan programs and securities purchases.  At this point, investors are unwilling to bet heavily against a rising market when the Fed is bolstering it.

The consensus economic forecast for 2Q20, according to Bloomberg, calls for GDP to decline 30% and then gain 15% in 3Q20.   If that prediction is close to reality, the economy will be in bad shape overall in the fall, but the recession will be over.  The market is always forward-looking.  It is expecting good things ahead.  And current pricing, including huge valuations on the largest companies, is being “justified” by the prospect of increased corporate profits in the future and the current rock-bottom interest rates.

Of course, the facts are not all positive.  Tens of millions of Americans are still out of work and some stock prices are already quite steep based on standard metrics, like price to earnings ratios.  Trade with China is certainly an area that can flare up.  If there are further waves of COVID-19 infections and deaths or severe secondary economic damage from the current slowdown or any number of other problems, it could lead to a major decline in prices and the possibility that the recovery might not be shaped as a “V” but rather as a “W”.   Either way, prudent investors will stay invested in their long-term, risk appropriate, diversified asset allocation.

https://dwmgmt.com/

It’s the Perfect Time to Help Your Community

The Coronavirus crisis has decimated lives and livelihoods across the globe.  Charities are struggling to help the most vulnerable and are having a hard time keeping up, while many not-for-profits across the company are in precarious financial situations.   For example, there are now more than 36 million Americans unemployed; many of them without enough money for food or shelter.  The Food Bank network is distributing 100 times more food than normal, yet is currently receiving 50% less food from manufacturers.

Scores of charities across the country are sounding the alarm that they could go under if they cannot find alternative funding. Nonprofits large and small have shut down temporarily, cancelled essential fundraising events and watched helplessly as funds have dried up from both individual and corporate donors.  The reality is that many people who would normally donate are now in the need of help themselves.

Furthermore, even before the COVID-19 pandemic, donations to charity were declining.  20 million fewer households donated to charity in 2016 than did in 2000.  In the United States, the charity sector makes up for some 10% of the workforce; making it the third largest industry behind retail and manufacturing according to John Hopkins research.  Even as the economy starts to open up again and reports of potential vaccines are front page news, there’s deep concern that the contraction in giving to charity may last for years.

Fortunately, you readers of the DWM blog are generally in a financial position to make charitable donations and we expect that most of you do, particularly during fundraisers, giving days and at year-end.  We would like to encourage you to consider providing donations and/or your skills to a charity now.

The CARES Act signed into law on March 27th, provides incentives for giving.  Since 90% of taxpayers use the standard deduction, the CARES act provides a specific tax deduction in 2020 for up to $300 in cash contributions.  Furthermore, in 2020, you can deduct all of your contributions up to 100% of your adjusted gross income (normally 60% is the limit). Also, the CARES act eliminated Required Minimum Distributions (RMDs) for IRAs for 2020. However, if you are 70 ½ or older, you can take money from your IRA and make a Qualified Charitable Distribution (QCD) and, therefore, help the charity and not have to claim any income on the distribution.  Lastly, the CARES Act provided a $1,200 economic stimulus to taxpayers with incomes below certain levels. Some recipients of those funds, who don’t need it, are using that money for charity.

Another tax efficient way of giving are Donor-Advised Funds (DAFs), which we have spoken about before.  You fund DAFs and get tax deductions in one year and then “grant” the money to charities in future years.  This allows you to “bunch” your donations and to reduce income taxes in years when you are in high tax brackets. Furthermore, you can use cash for funding or appreciated securities and therefore eliminate the capital gains tax on the donated securities. Funds in a DAF can be invested and grow and there are no minimum distribution requirements.  DAFs are a great planning tool for both income tax and estate taxes.

DAFs have been stepping up grants during the pandemic.  Grants given in March 2020 from DAFs were 36% higher than March 2019.  Donor advised funds are really a sustaining factor at times like this because people have already irrevocably set this money aside for charity so at a time, like now, it can be used.

Here are a few other comments and ideas on how you might be able to help your community:

  • Support the arts. Across the U.S., institutions have closed their doors and many have had to lay off staff. The American Alliance for Museums estimates that museums are losing some $33 million a day and it predicts 30% of them will never reopen without help.
  • Don’t forget animals. Many animal shelters are facing reduced staff and volunteer support.
  • Donate blood. 13,000 blood drives were canceled in the first three months of 2020 resulting in 375,000 fewer blood donations.
  • Put your skills to work. Your organization may be putting together programs to help American families who are struggling. The Foundation for Financial Planning, for example, is raising $1 million and will be providing pro bono financial planning and advice to low-income workers and other groups. I’ve participated in that pro bono work and it is very fulfilling.
  • For those SC taxpayers, consider a donation to help “exceptional needs” students with dyslexia, autism, ADHD or physical and emotional needs. There are 90,000 exceptional students in SC, one out of 12 children. And donations to the ExceptionalSC.org, a 501(c)(3), provides a tax credit to SC taxpayers, up to 60% of their tax liability. As such, this amount is currently considered taxes for your federal tax return.

It’s the perfect time to help your community with your money and/or your skills.  Each of us have our favorite organizations and causes.  Please consider doing something now! In a time of significant need like now, it will definitely be appreciated.

https://dwmgmt.com/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Are Offices Becoming Extinct?

Berkshire Hathaway held their annual meeting on Saturday- via live stream from an empty arena.  For the event, Warren Buffet put on a tie for the first time in seven weeks. During the four hours of the presentation, Mr. Buffet questioned the need for office space and predicted a significant change in the supply and demand.

This week, the Economist’s Catherine Nixey put it more bluntly in her article titled “Death of the Office.”  Even before the coronavirus hit, office space use was changing.  A combination of the digital revolution, increasing rents and increased demand for more flexibility had resulted in over half of the U.S. workforce working remotely, at least some of the time.  Across the globe, working from home (“WFH”) has been increasing as well.  Now, COVID-19 has dramatically accelerated the trend.

Ms. Nixey believes the first large push into offices was started by the East India Company (founded in 1600 and dissolved in 1874).  Their offices, inside of buildings featuring Palladian pillars and marble steps, were not simply to get work done, but also to demonstrate East India’s profitability, strength and efficiency.  Large organizations, like East India and governments, required a lot of “paper to be pushed” and managing proved easiest when all the workers were in one spot.  The Industrial Revolution (1760-1830) produced an explosion in business and a huge increase in demand for office workers.  New steam team trains brought needed office workers into the city to sit behind desks to fill the growing needs of the developing professions of finance, law and retail.

Mary Beard, professor classics at Cambridge, believes that the amount of time our generations have spent in offices would have been unheard of in earlier societies.  Today, most of us spend more time working than at leisure.  For the Romans, it was the opposite- primarily leisure and only sometimes business.  Romans didn’t need to go to an office. Their tablets and styluses were very portable and the Romans were able to spend much of their time outside and never behind a desk.

Fred Taylor, who pioneered time-and-motion studies in the 1890s, determined that workers performed best when seated at lines of desks with flat tops.  He is considered the father of the “open-plan office.”  Fast forward 130 years, and current time-and-motion studies have found that office work not only takes up the bulk of our time, but the best part of it; when we are most alert.  Furthermore, most managers have been spending at least 20 hours per week in meetings.

It’s no surprise that writers including Balzac, Dickens, Flaubert, Melville and Kafka have satirized the office and office workers.  T. S. Eliot, who once worked in a bank, saw of the crowds of commuters crossing London Bridge similar to Dante’s vision of hell: “I had not thought death had undone so many.”  Walt Whitman sneered of clerks as men “of minute leg, chalky face and hollow chest.”

In the last few decades, to make the experience of an office worker more palatable, changes have been made.  There are many different new designs-office buildings shaped like beehives, baskets, rocket ships, and fish.  Inside there may be ping pong tables and other amenities; many of them brightly colored.  Some companies provide free food.  Designer Thomas Heatherwick suggests that the office building needs to be an inspiring “temple in which to toil, places of beauty that we can admire, even love.”

Love may be going a little far, but there are some key advantages of going to the office.

Lucy Kellaway, who wrote a newspaper column about the “absurdities” of office life, has written about the “great artificiality” we embrace when we step into an office.  We become professionals.  That’s not exactly how it feels at home; particularly if the children are there, you are unshaven in sweat clothes and living in chaos. Ms. Kellaway says that “putting on our business clothes and going to the office allows us to become a different person.”

The escape to the office has been out of reach for many for almost two months.  Online encounters are fine and save driving time.  But, it’s not the same as being together in the office. The relationships and collaborations we have in person, whether with family, team members and clients, are different than those by phone or online.  Yes, humans need offices.  Certainly, there will be changes in how companies use offices, but working from home, for many, is not feeling quite as great as they thought it might be.

The situation reminds us of Mark Twain.  When asked by a reporter about his obituary which was mistakenly reported in a newspaper, Mr. Twain quipped: “The reports of my death are greatly exaggerated.”  No one can predict the future, yet it seems that while office space and use will continue to change, offices will not become extinct any time soon.

https://dwmgmt.com/

The Coronavirus Hits Home-Now is the Perfect Time to Review Your Estate Planning

The Coronavirus health emergency is a huge reminder that life is fragile, precious and unpredictable. The daily increasing numbers of COVID-19 cases and deaths remind us that we are all mortal and we all need to be prepared. We continue to hope that you, your family and your loved ones are doing well through this pandemic that has turned the world upside down and changed our daily routines.  What better time than now to create or review your estate plan?

Here are some questions for you (and your spouse if you are married) to review:

  • Does your will or trust reflect your current wishes?
  • Are your digital assets covered in your estate plan?
  • Are your powers of attorney for property and health care up to date?
  • Who gets your money, when and how?
  • Who are the fiduciaries (executrix, trustee, other) who would handle your estate?
  • If you have minor children, who are your guardians?
  • Who are the beneficiaries of your retirement assets and life insurance contracts?
  • Is the titling of your assets up to date?
  • Will your estate avoid or minimize probate?
  • Are taxes minimized or eliminated?

Let’s spend some time on taxes.  Two keys points.  First, the current lifetime gift and estate tax exemption for federal purposes is $11,580,000 per person.  However, with the National debt already high and ballooning due to the economic stimulus, the government might look to estate taxes for much-needed revenue. Changes in your plan might be made now before the exemption changes.

The second point is state estate taxes, particularly for our clients and friends who reside or own property in Illinois.  In 2011, when the federal lifetime estate exemption rose to $5 million per person, Illinois “de-coupled” its state estate tax exemption from the federal exemption.  Since, 2013, a lower exemption of $4 million per person applies to Illinois residents.  Those with Illinois assets who haven’t updated their estate planning documents since 2011 could be subject to a potentially avoidable and unnecessary payment of Illinois estate tax.

Here’s an example from our estate planning attorney friends at Bischoff Partners, LLC in Chicago.  “If an Illinois couple passes with combined estates of $5 million with no trusts planning, the surviving spouse’s estate could owe an Illinois estate tax payment of $285,714.  If the couple had used trusts to plan for each of their $4 million exemptions, which essentially doubles their applicable Illinois tax exemption to $8 million, the couple’s tax of $285,714 could have been avoided entirely.”  Planning and continual review is so important.  The “bad result” above of owing Illinois $285,714 would be the result from no planning or planning that was done pre-2011 and not updated.

The Illinois estate tax rate is advertised as a graduated rate between 8% to 16% of assets over $4 million.  So, you would guess that the tax on a $ 5 million IL estate might be $120,000.  However, the fine print doesn’t work that way.  It’s 28% on the first $1 million taxable in Illinois.

Depending on the size of the estate, Illinois clients may want their attorney to review the advisability of an “Illinois QTIP Election” which can defer payment of the possible Illinois estate tax to the death of the surviving spouse.  In addition, it is our understanding the Illinois QTIP election allows couples to double the $4 million Illinois exemption to $8 million and still plan for using each individual’s Federal Estate Tax Applicable Exclusion as much as possible.

Lots to review and lots to think about.  Again, we say: “What better time than now?”

At DWM, clients know that we are not attorneys and don’t give legal advice. However, we have collaborated with estate attorneys on hundreds of estates in Illinois, South Carolina and elsewhere.  Part of our “Boot Camp” process for new clients is working with them and their attorneys to create or update their estate plan. This includes our review of the documents, preparation of an “Estate Flow”, a review of their titling and beneficiary designations and providing recommendations.  As a follow-up to this blog, we’ll be sending out existing “Estate Flows” to all clients to help kickstart their review process.  If you are not a client, please contact us and we’ll be happy to discuss how we can help you get started.

Conclusion:  Life is fragile, precious and unpredictable.  Yet, working with your attorneys and your wealth managers you can plan, implement, monitor, and revise your estate plan to prepare you and your family for the future. No time like the present to get it done!

https://dwmgmt.com/

Perhaps a Silver Lining – Time to Refinance?

The coronavirus has been brutal. There are now over 1 million cases and 54,000 deaths worldwide.  Left to itself, the covid-19 pandemic doubles every few days. Millions have lost their jobs. Most of America is on lockdown. We’re certainly in a recession right now. Worse yet- there continues to be a huge uncertainty as to when the coronavirus will stop its path of destruction and when we can all start to return to some form of normalcy.

We sincerely hope you and your family are safe and healthy. And, we hope all the other Americans and fellow citizens of Planet Earth that have been impacted will get through this crisis quickly and successfully.

At the same time, the equity markets have crashed since February 19th, ending an 11 year bull run. We were probably due for a pullback or correction after the huge run-up in 2019. The coronavirus seemed to provide the tipping point.  Economic growth in 2020 will certainly be less than 2019, though we don’t know how much less.

With all of this gloom, here is one possible “Silver Lining.”

With many investors running for safety into bonds and the Fed dropping rates, the fixed income markets are showing huge drops in interest rates.  10 year treasuries are near .6%.  30 year U.S. treasuries are at 1.25% interest.  These rates foretell less economic growth and lower inflation in the future.

The Mortgage Bankers Association is forecasting lots of business this year for new purchases and refinancings.  They expect $2.6 trillion in new mortgages this year, a 20% gain over 2019. Refinancings are the key drivers of the change and are expected to be up 37% in 2020.  Bloomberg reported yesterday that the average rate for a 30-year mortgage loan was 3.33%, down from 3.5% last week.

Because there are typically costs to refinancing, doing so makes the most sense for people who plan to stay in their house for some time and where the cost to refinance is less than the interest expense that can be saved.  In addition, if inflation will be lower in the future, then nominal investment returns should be lower as well.  For example, if your nominal investment return is 6% and inflation is 3%, then your “real” return is 3% (the amount above inflation).  If inflation is 1.5%, then a 4.5% nominal return produces the same 3% real return.

If you have a mortgage with an interest rate of 4% or more, you likely should be looking at refinancing it or paying it off.  Because of the increase in the standard deduction and the limitations on state and local income taxes, 90% of households no longer itemize deductions. If you are in that 90%, you get no tax benefit from your mortgage interest.

So, if it is time to look into refinancing, check around and keep your eyes open for low mortgage rates.  At this point, there is no reason to believe that rates will be going up anytime soon.  And, if you would like a second set eyes to help you determine if it is time to refinance, give us at DWM a call.  We are always happy to talk.  Stay well.

Stay safe and stay healthy during this pandemic. And, if appropriate, take advantage of one of the few silver linings of the pandemic by refinancing at a new low rate.

https://dwmgmt.com/

CARES Act Brings “Pennies From Heaven”

We hope each and every one of you and your families are safe and healthy. In response to the unfolding COVID-19 global pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act last Friday. This $2 trillion emergency fiscal stimulus package (“Pennies from Heaven”) was designed to help ease the economic damage caused by the virus. Below are some of the key provisions that can offer relief to individuals, families and businesses. In a number of situations, it’s important for you to act quickly. Items with time urgency are underlined. The objective is to provide short overviews of the provisions. If there are any questions, we at DWM will try to help.

Recovery Rebates. Perhaps 90% of Americans should receive some amount of Recovery Rebate. The rebate can be as much as $1,200 for a single, $2,400 for a married couple plus $500 for each child under age 17. The only limitation is your Adjusted Gross Income (“AGI”). Singles with AGI of $75,000 or less will receive $1,200 plus extra for eligible children. Married couples with AGI of $150,000 or less will receive $2,400 plus extra for eligible children. Incomes above that will get a lesser amount until completely phased out. The IRS will use the latest tax return filed to make their calculation. If your 2018 tax return has a lower AGI, wait to file your 2019 tax return until the rebates are made. If 2019 is a lesser year than 2018, get 2019 filed immediately. Please understand that the rebate will be “trued up” based on your 2020 return. So, if your income in 2018 and/or 2019 disqualified you from the rebate, you can still get the rebate in 2021 if your 2020 tax return shows you are below the $75,000 or $150,000 threshold. And, for those who received a rebate but ultimately had a larger income in 2020 that would have disqualified them-no worries. The IRS will not “clawback” any rebates. Checks and direct deposits are promised “as soon as possible” which hopefully will be in April.

Covid-19 Distributions from IRAs and Loans from 401ks. Distributions up to $100,000 from IRAs and $100,000 loans from 401ks can be made without tax penalty for those impacted by the virus. The income tax of the distribution can be split evenly over 2020-2022. Distributions are not subject to withholding and can be repaid (rolled back in) in 3 years, in a lump sum or installments which will produce a refund of the tax paid.   Loans from Company Retirement Plans can be made up to 100% of the vested balance up to $100,000. Repayments on the loan may be delayed for up to one year.

Required Minimum Distributions (“RMDs”) are waived and can be returned. RMDs for 2020 are specifically eliminated for owners and beneficiaries. Owners, not beneficiaries, that have already taken a 2020 RMD and would like to return it, need to act quickly. If the distribution took place in the last 60 days, you can roll the money back in (note, if withholdings were made, you’ll need to “gross up” the net distribution) and save paying the tax. If the 60 day window has passed, you can still complete a valid rollover for up to 3 years if you can show you were impacted by the coronavirus crisis.

Charitable Contributions. To encourage contributions to charity, Congress has provided that individuals can make and deduct contributions up to and in excess of 100% of their AGI. Hence, they could wipe out their taxes and even get a carryforward for 5 years. In addition, individuals who use the standard deduction (90% of taxpayers) can get up to a $300 charitable contribution deduction “above the line” in the addition to their standard deduction.

Relief for Student Loan Borrowers. Required payments on Federal student loans are deferred until September 30, 2020, during which time no interest will accrue. Furthermore, this period of time will continue to count towards any loan forgiveness. Hence, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt should immediately pause payments. Any payments made in this period will simply reduce principal and therefore are reducing a debt that will be forgiven. In addition, through the end of the year, employers who provide employees with up to $5,250 of student debt payments may exclude those payments from the employee’s W-2.

Additional Unemployment Compensation Benefits. Unemployment benefits have been increased from 26 to 39 weeks. Futher, Self-employed individuals will now be eligible. Plus there will not be the typical one week of “waiting time” for unemployed employees of self-employed individuals without work. Additionally, the weekly benefit is increased by $600 per recipient for up to 4 months. Since the average weekly unemployment benefit is about $400, this will increase the average benefit to $1,000 for those 4 months. Therefore, employees and self-employed individuals who have lost their job or don’t have work, could qualify for up to 9 months of unemployment benefits, with an extra 17 weeks of $600 payments – meaning, an average worker could get as much as $26,000 in the first 9 months.

Paycheck Protection and Forgivable Loans.  Businesses, including sole proprietorships, with less than 500 employees can apply for an SBA loan to help with economic suffering on their business caused by coronavirus. The loan is the lesser of $10 million or 2.5 times the monthly payroll costs over the past year and must be applied for by June 30, 2020. Loans will be made on a first come-first serve basis until the total maximum of $10 Billion has been loaned. So, a company with a 2019 monthly qualified payroll of $40,000 could borrow $100,000. And, as long as the business maintains the same number of employees, the loan will be forgiven for all payroll, rent, utilities and healthcare costs incurred in the first 8 weeks after receiving the loan. For example, if payroll remained $40,000 per month, rent was $6,000 per month, utilities $2,000 per month and health care costs $2,000 per month, virtually the entire loan would be forgiven. And, any debt forgiven is not included in taxable income for the year. For the portion of the loan that is not forgiven, interest on the loan will be at 4% or less over a term of 10 years and payments will be deferred for at least 6 months and no longer than one year.

Employee Retention Credit. Businesses who doesn’t qualify for the SBA loan above but suffered a reduction in quarterly revenues in 2020 to 50% or more for the same quarter in 2019, may qualify for a $5000 employee retention credit.

Deferral of payroll taxes. Most employers, other than those who receive the special SBA loans above, qualify to defer the employer portion of payroll taxes for over one year. Their 2020 employer payroll taxes can be paid half by December 31, 2021 and half by December 31, 2022.

Net operating loss rules are loosened. The CARES act allows losses in 2018, 2019 or 2020 to be carried back five years producing tax refunds that can be used now.

Conclusion. The CARES act provides significant funds, programs and tax benefits for individuals, families and businesses. Some of the provisions have time limits as outlined above. DWM will be individually contacting our clients who we think might be able to take advantage of these programs and get their rightful share of the “Pennies from Heaven.” We will also alert them to other financial and/or tax strategies, including Roth conversions and tax loss harvesting, given the CARES provisions and the state of the current markets. If you have any questions, please contact us.

We hope that you, your family and your community stay healthy and we all can get back to normal as soon as possible.

https://dwmgmt.com/

Technology and Real Estate Collide: Will we be trading homes like stocks in the next several years?

The total wealth of Americans is $113 trillion. The major categories are real estate, both homes and commercial, of $50 trillion and stocks and stock funds of $35 trillion.

Technology has had a huge impact on stock trading. 50 years ago, selling or buying company shares was opaque, illiquid and expensive. Now, technology has taken over more and more aspects of trading. Markets are transparent and liquid. The cost of equity trades is zero or close to it.

Real estate not so much. Of course, while every common share of Amazon is identical, no two houses are identical. Throw in emotion, 5-6% commissions and time delays and hassles in buying and selling and it’s no surprise that the real estate market has had low volumes and heavy transaction costs. As a result, only 7% of American homes change hands every year.

American homeowners traded property worth only $1.5 trillion in 2019, paying out about $75 billion in commissions. About $40 billion of stocks are traded each year with less than $10 billion in commissions, which are shrinking. The real estate transaction model is still opaque, illiquid, expensive and stressful. More owners are staying put and this is contributing to the decrease in homeownership in the US to 64%, lower than it was in the early 1990s.

In the last decade, technology has started to gain traction in real estate transactions providing more transparency, more liquidity, less cost and quicker and easier moves. The old real estate model may be replaced by a new one, with lower fees (on a percentage basis) but more turnover and more customer satisfaction. The last decade has seen the birth of a new industry- property tech or “prop tech.” It has attracted $40 billion in venture capital in the last three years. The four biggest firms, Zillow, Redfin, Compass and Opendoor have a combined valuation of $23 billion. Prop tech is fundamentally changing how the real estate sector operates.

Zillow’s “Zestimate’s” 2006 algorithm for pricing used traditional metrics; such as number of bedrooms and baths, square footage etc. Today Zestimate goes deeper and has become more accurate. Homeowners listing with Zillow upload pictures and provide additional detail information. The new Zestimate model has an error of less than 2% (of the home’s actual selling price) as compared to a 14% error back 13 years ago. The next wave of Prop tech could include more hyper-local automated valuation model (“AVM”) elements to their valuation models. Zestimate’s hyper-local AVM algorithm in Washington, D.C. has only a 1.2% error. Zillow’s AVM won’t replace appraisers for mortgages that are needed. However, Zillow believes it could transform appraisers from evaluators to fact-checkers.

Prop tech has also sped up transactions. Discovering listings used to take days. Now Redfin (and others) notifies customers with its “Updates” faster than anyone else about new listings and price changes. Using just a couple of clicks on their smartphone, Redfin customers can “Book it Now” and request a home tour, almost like making an online restaurant reservation.

Another trend is instant buying- or iBuying, offered by both Zillow and Redfin. Sellers can sell in a few days. The companies make prompt, algorithm-driven offers, pay in cash, and sell homes themselves- sometimes after some minor upgrades. Opendoor takes it one step farther. It buys using iBuyer and then resells through the Opendoor app, backing sales with a 90 day guarantee. Opendoor says home buying and selling can be “as easy as buying and selling cars.” Knock is another iBuyer who buys houses for cash and then helps sellers find their dream house. Knock even handles repairs and updates on the old house.

Prop tech may even provide a complete solution. (Think of Amazon meets real estate). Jen Chao, executive at Redfin sees prop tech heading towards such a comprehensive offering. She believes that the overall management of buying and selling a house, including finding the house, negotiating the contract, finding the mortgage, an attorney, a mover and more is a very big deal to many. So much so, that many just don’t move. Chao feels that Redfin can become a one-stop shop, providing a seamless home-buying (and/or selling) experience.

Chao says this automation will not do away with the work of agents and other real estate professionals. “Real estate is a highly personal business,” says Chao. Technology is being used to streamline and get rid of the tasks that software can do really well, to free up time for agents and others to focus on things that require the human touch.

Prop tech proponents believe the future of real estate is rooted in precision and personalization. At DWM, we believe our total wealth management process is very similar. We use technology to streamline and perform tasks that software can do and we use our combined knowledge, experience and communication skills to provide the personalization that is so important. In short, that is how value is maximized for our clients.

https://dwmgmt.com/

 

At 80, “Successful Ager” Jack Nicklaus Remains As Relevant As Ever

Golfing great Jack Nicklaus turned 80 last week. His drives aren’t as long anymore- Gary Player can now outdrive him.  Jack stepped away in 2018 from day-to-day operations of his companies which build golf courses all over the world.  You might think Mr. Nicklaus is slowing down.  But to hear Jack tell it, he got rid of the things he was tired of doing and is focusing on all the activities he likes; including public speaking engagements, occasional golf exhibitions, course design and fundraising with his wife.

Nicklaus started designing courses in 1969.  He’s completed over 300. He’s become a grandfather to the “kids” on the PGA tour such as Rickie Fowler and Justin Thomas. Rory McIlroy says that Nicklaus “has the best advice on how to play golf- not how to swing but how to play the game.”  Jack’s wife of 60 years, Barbara, is chair of the Nicklaus Children’s Health Care Foundation and together they have raised over $50 million for pediatric care in Ohio and Florida.  They just pledged to raise another $100 million over the next five years.  Yes, Jack Nicklaus remains relevant as ever and, by any definition, is successfully aging.

Much has changed since Social Security was started in 1935.  Back then, the average life expectancy was 61 years old.  In 1947, the poet Dylan Thomas encouraged the elderly: “Do not go gentle into that good night, old age should burn and rage at close of day.” It’s starting to happen. With greater longevity and medical advances, it’s no surprise that the term “successful aging” has grown in popularity over the past few decades.  Back in 1987, John Wallis Rowe and Robert Kahn published a book entitled “Successful Aging.”  They felt there were three key factors: 1) being free of disability or disease, 2) having high cognitive and physical abilities, and 3) interacting with others in meaningful ways.

Now comes a new NYT bestseller; Dr. Daniel Levitin’s “Successful Aging; a neuroscientist explores the power and potential of our lives.”  Today more people who are in the last quarter of their lives are engaged with life as much as they’ve ever been, immersed in social interactions, spiritual pursuits, hiking and nature, charitable work and even starting new professional projects.  Dr. Levitin remarks:  “They may look old, but they feel like the same people they were 50 years ago and this amazes them.”

Successful aging involves focusing on what is important to you, and being able to do what you want to do in old age. While successful aging may be one way to describe how well we age, the concept of meaningful aging might be another important way to consider how to age well.   Certainly, some of our faculties may have slowed, yet “seniors” are finding strength in compensatory mechanisms that have kicked in – positive changes in mood and outlook, punctuated by the exceptional benefits of experience.  Baby boomers and their elders may process information more slowly than younger generations but they can intuitively synthesize a lifetime of information and make smarter decisions based on decades of learning, often from their mistakes.

Combining recent developments in neuroscience and psychology, “Successful Aging” presents a novel approach to how we think about our final decades. The book demonstrates that aging is not simply a period of decay but a unique time, like infancy or adolescence, which brings forth its own demands, surprises and happiness.

Until about thirty years ago, older people in the workforce were forced/encouraged to retire; a tremendous economic and creative loss.  However, since the 1990s, the tide has been turning for seniors. Employers and organizations are awakening to the eastern idea that the elderly may not only be of some value but may provide superior enhancements to a group.   New medical advances and positive lifestyle changes can help us to find enhanced fulfillment that previous generations may not have been able to do.

Research now shows, for example, that fending off Alzheimer’s disease involves five key components:  1) a diet rich in vegetables, 2) moderate physical exercise, 3) brain training exercise, 4) good sleep hygiene, and 5) an appropriate regimen of supplements.  In addition, research shows that social stress can lead to a compromised immune system. We don’t need to be victims; we just need to take advantage of modern medicine and make some lifestyle changes.

When older people look back on their lives and are asked to pinpoint the age at which they were the happiest, what do you think they say? The age that comes up most often, according to Dr. Levitin, as the happiest time in one’s life is 82. And, that number is rising.

At DWM, we work with clients from 0 to 96.  As total wealth managers, we understand life cycle planning, financial and investment strategies and proactively provide value-added services.  Of course, we focus on making sure our clients have enough money for their entire lives.  In addition, and as important, we pay particular attention to helping them experience the best life possible with the money they have.  Their fulfillment is our fulfillment. Their happiness is our happiness.

Jack Nicklaus’s longtime PR man Scott Tolley says Jack still only operates at two speeds, “go and giddy-up.”  Gary Player calls retirement a death warrant.  It doesn’t need to be.  Successful aging is getting easier and more fun and fulfilling.  C’mon baby boomers- let’s giddy-up.

https://dwmgmt.com/