The Correlation of Real Estate Markets and the Foreign-Exchange Market

Many new investors may be surprised to hear that an incredibly strong correlation exists between real estate markets and the foreign-exchange (FX) market. The primary driver of both real estate markets and the FX Market is risk. When investors are willing to take risk the real estate market appreciates a swarm of buyers enter the market. In the FX Market, when risk is present, investors will buy currencies that carry a high yield and sell currencies that have a low yield.

But as we all know very well from the Global Credit Crisis of 2008, when risk exits the market, and risk aversion, or an unwillingness to take risk, enters the market, then real estate values fall as there are more sellers than buyers, and currencies that have a high yield are sold and, generally, the U.S. Dollar is bought, since it is seen as the safest place to place capital during times of economic uncertainty.

Let’s take a look at a chart that depicts the movement of the U.S. Dollar before and during the Global Credit Crisis.



As you can see in this chart, the U.S. Dollar holds an inverse correlation with the Real Estate Markets. As the real estate market was booming throughout 2005-2007, due to low interest rates encouraging property speculators, the U.S. Dollar fell consistently. However, when Crisis hit in 2008 and the Sub-Prime Mortgage Crisis unfolded, the U.S. Dollar staged a remarkable bull rally as investors all over the world liquidated risky assets and put their capital in the low-yielding, but safe U.S. Dollar.

No as the economic recovery continues in the United States and around the world, it is becoming very apparent that the recovery is going to take longer than initially expected. Several months ago, in the beginning of 2010, the Federal Reserve actually began raising the discount rate in order to return to somewhat normal monetary policy. But as the recovery has continued, it is beginning to hit major roadblocks. Therefore, during the Federal Open Market Committee Notes that were released during the 2nd week of July, the Fed downgraded growth prospects in the United States, and instead of talking about when to enter a monetary tightening cycle, they actually began talking about when they may have to loosen policy again.

Much of this lagging growth in the U.S. recovery is to due to the housing sector, or the real estate market. Home values are still far off their HI’s. The housing sector did actually rebound quite nicely after the economy bottomed out in March of 2009, but the rebound was due in very large part to the economic stimulus the government had injected in the form of the $8,000 tax credit for first-time home buyers.

That tax credit was extended during the fall of 2009, but it was finally removed permanently in the Spring of 2010. Since the stimulus has been removed from the housing sector, economic figures are beginning to strongly disappoint the market. New housing starts are falling dramatically without the stimulus. This is causing the economic growth to lag in the U.S. and it is actually beginning to bring a bit of strength to the U.S. Dollar. This correlation is not perfect, and sometimes it is difficult to time the movement perfectly, but as a generality, when the housing market declines, on forex charts, the U.S. Dollar will be rising. If we continue to see a falling U.S. housing market, look for the U.S. Dollar to continue rising in the coming months.

Are you aware that Roth IRA conversion could put you into a deadly trap?

The IRS has introduced Roth conversions to the people but does not target any specific income group and also given an option for three years in 2010 to pay taxes on the conversion.
The investors or hoarders are showing a lot of interest of transferring traditional individual retirement account into Roth IRA. But they should be cautious and smart before converting their account, as there are many traps associated with it. So the investors should update him regarding Roth IRA conversion before applying for it.

But the media is not highlighting the flaws of Roth IRA conversion like the involuntary tax traps and the monetary problem that an individual might come across.

This article would shed some light on the snares laid down for you by the IRA conversion plan. And it would also help you to reconsider whether you should convert, how much to convert, or if you should convert at all. For best results consult a financial advisor.

Beware of the IRA pitfalls:

•Tax is not split but the income:
The taxpayer does not have to incorporate any conversion income on the tax return of 2010 if he converts in the same year. He can split his income into two parts one conversion can be included in 2011return and another in 2012 return. The income can be split over two years but the tax can not be split evenly as it is beyond your control as it depends on the tax rates and over all income of a person.

•Failing to meet 60 days rollover:
Trustee to trustee transfer of account is the best way to shift money from an IRA to a Roth IRA. But many companies do not support the idea of direct rollover rather they straight away address the account owner and hand over a check to him.
In this case you have to shift the fund within 60days into another retirement account that also includes a Roth IRA. But if you fail to roll over into another account within the time limit of 2 months then you are penalized. The amount becomes a taxable fund but it would not be eligible for a rollover program.

PLR as per the retirement expert have termed the private letter ruling can only settle this problem. This is an expensive and time consuming method but it does not guarantee that the Internal Revenue Service would work in your favor.

•Higher Medicare cost and Social security taxation:
If you do a Roth IRA conversion then you might have to pay higher Medicare premiums or social security payment comes under the tax. The benefits of social security are not included in the net income of a tax payer so it does not come under tax. The social security income can be included in gross income if it starts from 50% all the way up to 85% compared to other incomes then it would fall under tax.

•Fail to get a college financial aid:
While granting a financial aid for a student, the college does not keep in account a retired parent’s assets.

Income is one of the crucial areas schools keep a vigil on and if your income includes the Roth IRA conversion then it might trudge your income. But this kind of income is irregular and does not signify your typical income level. And in this way you can lose a valuable financial aid as they would find that you fall under a stable income group.

•A new beneficiary form with each new account:
It is very important to plan your savings properly so that the inheritor of the account does not face a problem after you die. When it comes to IRA and Roth IRA estate planning becomes vital as it ultimately decides who gets the account after the death of the account holder. With every new account you open you have to submit a beneficiary form absolute completed and presented. This task is quite tedious as you have to follow it with every change in the account.

•Avoid the trap of rolling to an IRA in midway:
If you decide to convert as well as roll your 401(k) plan into IRA in the same year then try to avoid this trap. If you are converting IRA, other than IRA assets no additional assets are taken into account for a pro-rata rule.

•Only eligible funds are converted into Roth IRA:
If you take Roth IRA for granted and think that anything can be converted into it then you are wrong. According to the tax code only eligible distribution can be shifted to Roth IRA.
Things that cannot be converted are as follows: hardship distribution, 72t payment, deemed distribution and so on.

•An account that can not be converted:
If you do not have a spouse and you are a beneficiary of a certified plan then you are eligible for an inherited Roth IRA conversion. This transfer must be done directly as 60 days roll over is not possible by a non spouse beneficiary. But if you have a certified plan then you can roll into an inherited Roth IRA. But if you have an IRA plan then you cannot transfer it into a Roth IRA.

•25% penalty charge:
All kinds of IRAs like SEP IRAs and SIMPLE IRAs are qualified to be converted into Roth IRAs. The traditional IRA can be converted any time and that too without the penalty charge but SIMPLE IRA comes with trap.

The SIMPLE IRAs has a catch as there is a holding period for two years and this time frame varies for each individual. The time is counted once the person makes his first contribution. The fund over here cannot be rolled into Roth IRA other than into a SIMPLE IRA for at least two years. And it also falls under taxable distribution for two long years.

So these are the traps that a person needs to be aware before conversion. If you shield yourself then you won't ensnared in this program.