The Millennium Wave

By John Mauldin, November, 2008

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore 

Over the next ten to twelve years, we will see three recessions that will slowly move the average price-to-earnings ratio of stocks to historic lows. Rising oil and energy prices will be a main culprit of both the slowdown in the economy and an increase in inflation. Ever-increasing monetary inflation will, in fact, trigger a huge increase in all commodity prices, as well as a decline in bonds. Asset inflation will show up in the housing markets as home values continue to skyrocket. The dollar will continue to weaken against major foreign currencies. The current war will become increasingly unpopular, and the next administration will be forced to withdraw troops, under the guise of declaring victory. The American voting public will be split as never before, with major patterns in voting habits making a generational change. The newspapers will continue to write about how an Asian country will dominate the world economically in less than a few decades.

Following this period of malaise, there will be an amazing cycle of new technical innovation that will spark yet another major bull market. The new technologies will change the world in ways that simply cannot now be imagined and will lead to whole new industries, putting amazing new power and abilities into the hands of individuals and governments.

The preceding scenario would, in fact, all come to pass. Except that the year that was written was 1970, (more…)

 
Thanks H Dickens for this flickr photo. 

I have recently written about how the current volatile market has created many windows of opportunity for buyers and sellers in the real estate markets. Yet, I had not realized how the current market volatility had also created an opportunity for inner family wealth transfer. I just read an article in the Wall Street Journal, titled With Shares Tanking Think About Gifting, which illustrates this situation. When investments are down and the value is less, then there may be an opportunity to transfer these assets to family with the strategy of building wealth once the market recovers. Many wealth advisors are also speculating that congress will reform the gift and estate tax system. When you put all of this together the current volatile market may be an opportunity to pass an estate onto the next generation at a reduced cost.

This year I have had several clients take action to pass property and other assets to their children. There is great opportunity in change if you have a competent team to help you assess the different possibilities and then advise you on the prudent actions to fulfill on your ambitions. 
 

None are safe.  Today it’s the car company, tomorrow the hospital and very soon the States and Cities will begin to renege on their pension promises.
November 10, 2008
Some G.M. Retirees Are in a Health Care Squeeze

By NICK BUNKLEY
DETROIT — General Motors is living on borrowed time, spending more than $2 billion in cash a month and lobbying for a government bailout to keep it out of bankruptcy.

And for about 100,000 of its white-collar retirees, time is about to run out on G.M.’s gold-plated medical benefits.

To conserve its dwindling cash reserves, G.M. is eliminating lifetime health care coverage for its legions of retirees at the end of this year, leaving people like Ken Hewitt to fend for themselves in deciding how to cover their doctor’s bills and prescription drug costs. (more…)

November 8, 2008
YOUR MONEY - New York Times
Is It Time to Have a Money Talk, Child to Parent?

By RON LIEBER
The federal bailouts of the last few months raise a variety of thorny questions, including who benefits at whose expense. But the question that hits home the hardest is the one that isn’t getting enough discussion around kitchen tables:

Will we have to bail out our own family members?

It’s started coming up in asides I hear from middle-aged friends who are concerned about their parents ending up in the poorhouse. And I see it in e-mail from people in their 60s and 70s, who can’t believe their offspring got mixed up in funny mortgages and wallets full of credit cards.

But often, the grown children don’t know precisely how the devastation in the markets has affected their parents’ portfolio, and the older parents don’t know what their children’s monthly debt payments are.

None of this is fun to think about. And if you dare to open your mouth about it, relatives may take offense. Silence, however, is good for no one. You don’t want to be blindsided months or years from now by a family member in desperate straits, nor do you want to worry yourself sick when there’s no reason to.

So this week, please consider starting an intergenerational conversation about money, perhaps in writing, which might reduce the risk of a knee-jerk response that leads to an argument. I’ve suggested an approach below, for an e-mail message or letter to a parent and a possible reply, though you could easily tweak it if you’re initiating the chat with your child. (more…)

There is no doubt that we are in turbulent financial times. Yet in volatile markets are opportunities. Katie and I are committed to producing a competitive advantage for our clients to achieve their financial and lifestyle goals. We do this by designing effective strategies for our clients, taking into account their specific situation, wherewithal and ambition. With our team of financial, investment, mortgage, insurance and tax advisors, we are able to help our clients take advantage of the unique opportunities made possible by the current real estate market.

We believe the main stream media has overemphasized the threats and tragic stories of owning real estate. This is not a big surprise since the media’s job is to sell news and entertainment. Therefore sensationalism works. But in this approach the media disregards any financial benefit associated with real estate and masks the new opportunities that are now possible for buyers and sellers. For this reason, we thought it would be helpful to share with you some of our recent transactions that demonstrate our ability to create and implement strategic plans that opened major opportunities for our clients.

• Last month one of our clients was able to purchase a million dollar home in San Francisco with a 15% down payment. (If you are wondering, being able to buy at that price range with 15% down in this market is just short of a miracle.) Our client was able to finance the purchase with a 1st mortgage for approximately 75% of the purchase price at an interest rate of 5.5%. For the balance, we were able to get him a home equity line of credit (HELOC) at prime minus 1%! This is a concrete example of the superior help provided by our financial & mortgage provider who was able to accomplish this in a market where the common media is saying mortgage rates are close to 7% and HELOC’s do not exist.

• Other clients of ours recently acquired their dream home a $500,000 home on 5 acres with an apricot orchard. This same home would have sold for close to $800,000 in 2005. We put together a strategy where they could sell their current home or rent it and keep it as an investment. After exploring selling their current residence they decided to rent it instead. This has increased their investment capacity while they have acquired a replacement property at an opportune time when values of real property are artificially low due to the liquidity crisis.

• This month we formulated an uncommon strategy for one of our clients who was looking to move into a larger home to better care for his family. We found that the San Francisco market he currently lived in was not nearly as affected as the market he wanted to move to in Concord. We sold his 1936, 1,450 square foot home in San Francisco for $566 per square foot and helped him buy a brand new 3,856 square foot home in Concord for $272 per square foot. The 2 properties are only about 30 miles from one another, but have a difference in cost of $294 per square foot. This strategy helped our client transition to a new home with a significant profit. Volatility means there is more risk in the marketplace. It also means there is more opportunity. In order to take advantage of these opportunities, we have found that it is necessary to have a powerful team of financial, investment, tax and real estate advisors. We and our network of professionals have demonstrated our ability to help our clients to take advantage of the current market.

We thank all of our clients that have transacted with us in the past and we look forward to helping many of you in the future. Please contact us if you need assistance or if you know of anyone else who may need our services. It would be our pleasure to assist them with the same care as we have provided you.

So who can we trust to anticipate the future in the markets? It looks like no one.
The New York Times, October 26, 2008

ECONOMIC VIEW

But Have We Learned Enough?
By N. GREGORY MANKIW
LIKE most economists, those at the International Monetary Fund are lowering
their growth forecasts. The financial turmoil gripping Wall Street will probably
spill over onto every other street in America. Most likely, current job losses are
only the tip of an ugly iceberg.
But when Olivier Blanchard, the I.M.F.’s chief economist, was asked about the
possibility of the world sinking into another Great Depression, he reassuringly
replied that the chance was “nearly nil.” He added, “We’ve learned a few
things in 80 years.”

Yes, we have. But have we learned what caused the Depression of the 1930s?
Most important, have we learned enough to avoid doing the same thing again?
The Depression began, to a large extent, as a garden-variety downturn. The
1920s were a boom decade, and as it came to a close the Federal Reserve tried
to rein in what might have been called the irrational exuberance of the era.
In 1928, the Fed maneuvered to drive up interest rates. So interest-sensitive
sectors like construction slowed.

But things took a bad turn after the crash of October 1929. Lower stock prices
made households poorer and discouraged consumer spending, which then
made up three-quarters of the economy. (Today it’s about two-thirds.)
According to the economic historian Christina D. Romer, a professor at the
University of California, Berkeley, the great volatility of stock prices at the
time also increased consumers’ feelings of uncertainty, inducing them to put
off purchases until the uncertainty was resolved. Spending on consumer
durable goods like autos dropped precipitously in 1930.

Next came a series of bank panics. From 1930 to 1933, more than 9,000 banks
were shuttered, imposing losses on depositors and shareholders of about $2.5
billion. As a share of the economy, that would be the equivalent of $340 billion
today.

The banking panics put downward pressure on economic activity in two ways.
First, they put fear into the hearts of depositors. Many people concluded that
cash in their mattresses was wiser than accounts at local banks.
As they withdrew their funds, the banking system’s normal lending and money
creation went into reverse. The money supply collapsed, resulting in a 24
percent drop in the consumer price index from 1929 to 1933. This deflation
pushed up the real burden of households’ debts.

Second, the disappearance of so many banks made credit hard to come by.
Small businesses often rely on established relationships with local bankers
when they need loans, either to tide them over in tough times or for business
expansion. With so many of those relationships interrupted at the same time,
the economy’s ability to channel financial resources toward their best use was
seriously impaired.

Together, these forces proved cataclysmic. Unemployment, which had been 3
percent in 1929, rose to 25 percent in 1933. Even during the worst recession
since then, in 1982, the United States economy did not experience half that
level of unemployment. (more…)

There are a number of important tax law changes that take effect this year, including three changes that will affect some homeowners. There are also changes that impact business owners.

While you won’t see the impact of these changes until you file your returns early in 2009, it helps to know about them now so you can keep proper records and make the smartest decisions for your money.

Take a few minutes to review the changes so you can keep them in mind as you devise your 2008 tax strategies.

Changes for Homeowners

Homeowner’s Exemption: In the past, taxpayers have taken the opportunity to convert a rental property or vacation home into their primary residence and then later sell the property. This allowed them to take advantage of the Homeowner’s Exemption which allows a taxpayer to exclude up to $250K ($500K for married couples) of gain realized on the sale of a primary residence. An example of a common strategy has been:

• Taxpayer acquires rental property in 2000 for $100K.
• Taxpayer rents the property out for three years.
• In 2003, taxpayer moves into the property as his/her primary residence.
• In 2005, taxpayer sells the property for $600K.
• Taxpayer (married couple) avoids paying taxes on the entire gain ($500K).

(more…)

Following is an excerpt from John Mauldin’s “Thoughts from the Front Line” and a link to the entire piece. It’s lengthy but a great articulation of the current financial situation and proposed government intervention. It is in the form of a letter to Congressman Joe Barton, TX, a top Republican House leader. John Mauldin is a multiple NYT Best Selling author and recognized financial expert. He has been heard on CNBC, Bloomberg and many radio shows across the country. He is the editor of the highly acclaimed, free weekly economic and investment e-letter that goes to over 1 million subscribers each week.

It’s the End of the World As We Know It

Dear Joe,

I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don’t understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.

MORE

This is an interesting CNBC interview with Warren Buffet. He speaks about the urgency of the 700 billion dollar bail out, politics, Henry Paulson and his recent 5 billion dollar investment in Goldman Sachs.

NPR had an interesting podcast on the current economic crisis and the government bailout. If you want to give it a listen the link is below. It is interesting to note that the crux of the bailout is entangled in an assessment of value. It is coming down to what price will the government, and ultimately all of us taxpaying citizens, will pay for the bad debt that is currently on the balance sheets of those who created it in the first place.

Listen to the NPR podcast here.

One of the costs of living in the Bay Area, and California for that matter, is that you are much more likely to owe AMT (Alternative Minimum Tax) when you file your personal Federal Tax Returns. Other than an act of congress to change the tax law, there’s not much you can do about it. The silver lining on this cloud has to do with… your mortgage.

The original AMT established in 1970 targeted tax shelters used by a few wealthy households and was greatly expanded in 1986 to aim at a different set of deductions that most Americans receive. The AMT sets a minimum tax rate of either 26% or 28% on some taxpayers so that they cannot use certain types of deductions to lower their income tax obligation. Sounds reasonable, right? I mean, why should people who are making millions of dollars be able escape paying their fair share of income tax!? Well, because of the way the AMT is structured, welcome to the life of the rich and famous!

According to the Congressional Budget Office, “Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.” That will be over 30 million household.

But why are we Californians affected more than the rest of the population? First, incomes in the Bay Area are statistically higher than the rest of the country. But here is the more specific reason: two of the disallowed deductions through the AMT schedule are state income tax and real estate tax.

As of 2007, the highest rate of state income tax is that of California, with a maximum rate of 10.3%. Under the standard 1040 tax schedule, if you itemize your deductions, you are allowed to deduct what you pay in state income tax. Not so under the AMT schedule. Despite the real estate downturn over the past year, values in many places in the Bay Area have remained stable and are still one of the highest priced areas in the US. Property taxes are often a significant part of one’s housing expense, to the tune of 1.25% per year of the assessed value of your home. This too is excluded under the AMT. So what’s a newly rich & famous person to do?

Generally speaking, the interest that you pay on your mortgage for your home remains deductable under AMT. That’s a bit of a blanket statement, so don’t take it as gospel. I’ve discussed this with the brightest of CPAs and they still will say “well… there may be some other issues”. The point being talk with your CPA or Tax Advisor. Nonetheless, let’s go through an example of how this can remain a tax benefit of having deductable mortgage interest on the AMT.

Let’s say you have a $500,000 qualified mortgage and pay 6% interest (and for simplicity let’s say your mortgage payment is interest only). You would have paid $30,000 of interest over the course of the year. If you are subject to the 26% AMT rate and approximately 10% California tax rate, that $30,000 would give you an approximate $10,800 reduction in your tax liability. This basically means that because of the deduction (even under the AMT), that 6% interest rate is costing you about 3.8% on an after-tax basis. Not bad.

What the moral of the story? Tax Efficiency. In the words of Ben Franklin… “In this world nothing can be said to be certain, except death and taxes.” If you accept that premise, then it would be wise structure your mortgage and money to be tax efficient. It’s not too complicated but it can be complex. For the do-it-yourselfers, run through pro formas on your Turbo Tax or other income tax preparation programs. For the rest of us, get good help from a skilled CPA or tax advisor. You need to do this whenever you are buying, refinancing or messing with your mortgage. You could inadvertently make a move that would eliminate your tax benefits.

Fannie Mae and Freddie Mac were taken over by the US government on September 7th, 2008. This is result of the unprecedented changes that are occurring in the US financial and real estate markets. And there is no doubt at this point that the effects of our liquidity crisis will be felt worldwide. Yet, what does it mean for top 1% income earners that are also consumers of US mortgages? (If you’re wondering, you are in the 90th percentile of income earners if your annual household income is over $150,000; top 1% is above $250,000.) It has been almost two decades since the recession and real estate downturn of the early 1990s brought on by, among other things, the Savings & Loan crises. As we learned back then, top 1% income earners are not immune. I’d like to offer my speculation about the risks and opportunities available in the current volatile marketplace.

In the short term, I believe we will see falling interest rates as the US government touts increased liquidity and the international markets cheer the savior of their large investments in the US mortgage markets. This drop has already occurred as rates fell more than 1/2% in the last couple of days in treasury yields and certain conforming and so-called conforming-jumbo mortgages. This could be positive for a large group people currently holding US properties encumbered with interim fixed period ARM loans that are due to reset in 2009. I believe we are going to see a massive refinancing movement while these rates are low and this may act to lessen the blow of the second wave of foreclosures due to hit the US next year. Rates on many 30 year mortgage products are now at or below 6% which is extremely low in terms of historical averages at 9%. Note that many property owners will still not be able to refinance due to the drop in property values and the lack of their ability to get a satisfactory appraisal, as well as stricter underwriting guidelines. Yet, I think it is safe to say that this second wave of foreclosures is going to be less dramatic than the first wave that was primarily attributed to defaults of sub-prime mortgages. The first crippling wave of foreclosures during 2007 and 2008 was a product of highly risky sub-prime loans done in mass and then abruptly stopped as the markets collapsed.

Yet, it is my belief that unabashed glee is short sided. The takeover will shift Fannie Mae and Freddie Mac’s losses to US tax payers. If you are a taxpaying US citizen who does not own real property, then you are exposed to the financial burden without any of the benefits of owning real estate. Someone will eventually have to pay the piper for these losses and it now appears that this burden will be heaped on top of the US’s national debt that is already staggeringly high. Just like individuals cannot expect to heavily leverage themselves without consequence, neither can governments. Thus I speculate that in order for our government to strengthen its position in the global economy we will need to drastically cut debt and this translates into increased taxes and slashed government programs. We are already experiencing this issue of increasing taxes and reducing government programs at the state level as California once again struggles to pass a balanced budget. An increase in taxes means additional financial pressure that will have to be levied on US citizens at some point in time. This will be a destructive consequence to the US economy.

Now more than ever top 1% income earners who endeavor to capitalize on their existing assets and/or enter the real property markets need superior help. Questions such as whether or not to refinance existing debt, if to sell and/or buy now, trade up, what financial structures are most tax efficient, and so forth, are vital to answer in order to preserve and increase their wealth. The answers to these questions will significantly impact the profitability or loss in your real property transactions, whether for investment or for your personal residence. It is critical that your financial, real estate and tax advisors are able to make powerful interpretations of your current and future situation. When there is a disruption in the marketplace, such as our current economic situation, there is heightened risk and also amplified opportunity. Make sure that your advisors are capable of handling all of your concerns during this turbulent time. If you are looking for financial, mortgage or real estate assistance feel free to contact us for a free initial consultation so we can adequately assess your needs.

Trulia just released a new application, that will allow the user to get open homes and open house information on their iPhone. Check out the video demo. It looks interesting.

Being that I just purchased a BlackBerry phone, I have found e-mail and data on the fly is a very powerful tool. I wonder how many home seekers will use this new Trulia application? At first glance this appears to be a great tool for Sunday open house searchers. It would be great to turn your phone on and have all of the open house data in your vicinity. One question I have is, does this service have all the MLS listed homes on it? If not, how soon until your local MLS designs a copy cat service? 

Thanks JPhilipson for this flicker photo.
I have many times said on this blog that this is the best residential real estate buying environment I have seen in my career. I have also said, that rising rates would be devastating to buyers in this market. I just read a convincing article on the Behind the Mortgage blog that alludes to the negative effect rising rates can have for buyers.

First, this market is currently suffering from a lack of liquidity and the restrictive guidelines that mortgage banks are imposing on buyers. Buyers must now have higher credit scores, more down and the property they buy is under much more restrictive scrutiny from appraisers. This has led to many buyers being cut out of the housing markets, which in turn has dropped demand and thus lowered housing values.

Second, rates have until now remained relatively low. This means that qualified buyers are cleaning up in this market. I speak from experience in this market, while I am seeing buyers get some great deals on property, and also get great 30 fixed rates.

We all know that markets are constantly changing and drifting. The current market chatter alludes to rising rates as the economy rebounds and the Federal Reserve puts as much upward pressure as they can on rates to quell the potential inflation fears. As I wrote in my post, Buyers Could Get Caught Waiting For The Sky to Fall, the deals in the market may begin to vanish as the cost of capital increases. A risk for buyer’s now becomes that real estate prices have already been squeezed so rising rates will not necessarily drop property values in conjunction with increased cost of capital and the rising difficulties of getting approved.

Thomas Sowell provides an interesting and often counter-intuitive look at the economic issues facing the country.
Our Government Problem-Solvers
At election time, pols can’t help but “do something” — even if it makes matters worse.

By Thomas Sowell

We don’t look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating.

How did the government help create the current financial mess? Let me count the ways.

In addition to federal laws that pressure lenders to lend to people they would not otherwise lend to, and in places where they would otherwise not invest, state and local governments have in various parts of the country so severely restricted building as to lead to skyrocketing housing prices, which in turn have led many people to resort to “creative financing” in order to buy these artificially more expensive homes.

Meanwhile, the Federal Reserve System brought interest rates down to such low levels that “creative financing” with interest-only mortgage loans enabled people to buy houses that they could not otherwise afford.

But there is no free lunch. Interest-only loans do not continue indefinitely. After a few years, such mortgage loans typically require the borrower to begin paying back some of the principal, which means that the monthly mortgage payments will begin to rise.

Since everyone knew that the Federal Reserve System’s extremely low interest rates were not going to last forever, much “creative financing” also involved adjustable-rate mortgages, where the interest charged by the lender would rise when interest rates in the economy as a whole rose.

In the housing market, a difference of a couple of percentage points in the interest rate can make a big difference in the monthly mortgage payment.

For someone who buys a house costing half a million dollars — which can be a very small house in many parts of coastal California — the difference between paying 4-percent and 6-percent interest would amount to more than $7,000 a year.

For people who have had to stretch to the limit to buy a house, an increase of $7,000 a year in their mortgage payments can be enough to push them over the edge financially.

In other words, government laws and policies at federal, state, and local levels have had the net effect of putting both borrowers and lenders way out on a limb.

Yet, when that limb began to crack, the first reaction in politics and in the media has been to look to government to solve this problem because — as always — it was called the market’s fault, the lenders’ fault, and everybody’s fault except those politicians who created this dicey situation in the first place.

Markets often get blamed for conveying a reality that was not created by the market.

For example, the fact that “the poor pay more” for what they buy in stores in low-income neighborhoods is often blamed on those who run these stores, rather than on those who create extra costs through crime, vandalism, and riots.

If the store owners were making big profits, the big chain stores would be rushing in to share in the bonanza, instead of avoiding low-income neighborhoods like the plague.

Markets were also blamed for the Great Depression of the 1930s and New Deal politicians were credited with getting us out of it. But increasing numbers of economists and historians have concluded that it was government intervention which prolonged the Great Depression beyond that of other depressions where the government did nothing.

The stock market crash of 1987 was at least as big as the stock market crash in 1929. But, instead of being followed by a Great Depression, the 1987 crash was followed by 20 years of economic growth, with low inflation and low unemployment.

The Reagan administration did nothing in 1987, despite outrage in the media at the government’s failure to live up to its responsibility, as seen in liberal quarters. But nothing was apparently what needed to be done, so that markets could adjust.

The last thing politicians can do in an election year is nothing. So we can look for all sorts of “solutions” by politicians of both parties. Like most political solutions, these are likely to make matters worse.

— Thomas Sowell is a senior fellow at the Hoover Institution.

© 2008 CREATORS SYNDICATE, INC.

For those that thought the mortgage markets and the liquidity crisis was over, think again. Indy Mac Bank Corporation just posted a blog entry saying they will cease all wholesale mortgage operations and slash more than half of its approximately 7,200 employees. Below is an excerpt from their corporate blog.

As a result of the above, we have made the difficult decision, effective July 7, 2008, that we will no longer accept any new loan submissions or rate locks in our retail and wholesale forward mortgage lending channels, except for our servicing retention channel. We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks. While the managers and employees in these units have worked incredibly hard, these units are not currently profitable due to the continuing erosion of the housing and mortgage markets. At the same time, these operations take up significant balance sheet capacity and “feed” growth in the servicing asset, an asset we need to shrink given its size relative to our existing capital.

It is interesting to see that Wachovia just tightened its guidelines on its, “pick a payment” loans. This is especially interesting to me, because at the beginning of the year we had a presentation at our office from a World Savings executive that touted the flexibility of this loan. My opinion is well reverberated in Mike Mueller’s recent post on the Lenderama blog.

“Seriously, The Neg Am loan has a very valuable place in the finance world when properly used.  I believe Wachovia (world Savings) had the highest performing Neg Am Portfolio in the biz.”

These mortgage products do have there place in the financial world. I also agree with the executive that visited our office at the beginning of the year. These products are useful and powerful for the right individual situation. Maybe, the changes in Wachovia’s policy have more to do with their own business concerns and buying Golden West mortgage, then with the validity of the product that was successful for Word Savings for so many years. Just check out this CNN Money story that illustrates how 3.8% of Golden West’s pool of pick a payment mortgages went belly up after Wachovia purchased them in 2006.

The answer is that there are no bad loans in the marketplace. Loans are not people thus they can’t act good or evil. Mortgages are either placed by a person with the strategic knowledge to effectively care for an individual’s entire financial situation or they are not. I have many clients who have taken World Savings pick a payment loans and they have met their financial strategies without causing any despair or foreclosures.

I think the conversation in the marketplace needs to change from the loan product, to who is doing your loan. Are they competent to take care of your mortgage concerns with out betraying the other financial concerns that you have? Many banks and brokers have done mortgages with a blind eye to the customers financial situations and concerns. Often, you can’t even blame the person doing the loan, because they are not even competent to take care of their own financial concerns, let alone yours. Maybe contracting guidelines is not the answer for banks. Maybe, they should start to think about how they operate in regards to the knowledge of the people they have doing the loans. Maybe if they observed, assessed and acted to care for a clients mortgage in the context of their total financial situation they would have a huge stack of loans that could sell on Wall Street as mortgage backed securities. Warren Buffet eloquently explained the breakdown in the mortgage markets when he said, “In extreme cases, mark-to-market degenerates into what I would call mark-to-myth.”

Thanks Ocean Flynn for this flicker Photo.

Thanks to Todd Derick for this flicker photo.

I just read an article on the Blown Mortgage blog. It had a graph showing new and existing home sales. Of course in this market both are down. In fact, the Blown Mortgage blog is claiming that the volume of existing home sales is down 15% from last year.

First, it is important to note that just because the volume of sales are down, it does not mean that values of homes are dropping. In fact this can be quite the contrary in certain areas. This is the case certain segments of the Berkeley California market where many listings are still transacting with multiple offers. Just a month ago I saw a home get 15 offers and sell at a price way above the average median price for a home of this size and location.

Second, I found it interesting that the existing home sales have begun to diverge from new home sales. In this graph since January of 1994 existing and new home sales tracked each other fairly steadily. Yet, we can see in January of 2008 that the curves are fairly far apart with the number of existing home sales beginning to level off while new home sales volume is still plummeting.

I speculate this is because many developers have stopped projects that were in the pipeline if they could. We have seen this effect in the drop in new home permits as well. We are seeing that the average homeowner in an existing home is still transacting while the investor/speculator is not. This makes sense for many home owners must sell and buy in any market. For instance, life ensues in any market and homeowners are relocated to new jobs all the time.

Does this indicate the bottom of the market? I am not sure, but it does indicate what we can expect from our market without a large volume of speculated dollars being spent to drive up prices. The air was let out of the real estate bubble for more then one reason. The constriction of financial liquidity in the mortgage markets started the deflation. Once the mood was set, the exit of speculators and investors, drove the market down further. Now we are seeing buyers who were over leveraged get caught in the falling values and go into foreclosure. I suspect that when we see the developers begin to return to the market and banks begin to loosen their guidelines, we will see a more robust market again. I also speculate that we should see a return in existing home sales before we see it in new home sales, for the mechanics of the entitlement and permitting processes means that it takes time for developers to ramp back up into production.

Interesting news on he mortgage front in California is that FHA is now offering 3% down on loans up to $729,750. FHA also allows for a 3% credit towards buyers non-reoccurring closing costs. This means that buyers can be 0% down once again. I view this as a drastic loosening of the mortgage guidelines. One blockade down… So, where are those speculators?

I have written several postings in the past about all of the unimaginable things going on with real estate development around the world. Many of my posts have focused on Dubai where whole islands are being literally raised out of the sea.

Recently, I ran into a new concept that is in the process of being designed and building. Each story of the building actually rotates independent of the others. This means that the building is constantly in motion, so that it supplies every view possible to the occupants of each unit. What an interesting idea for a building that actually shifts its shape. It sounds as interesting for the people who view it on the street as it does for its occupants.

The renowned architect David Fisher is the visionary of this project. Of course Dubai is going to be one of the first cities to receive on of these animated projects. Check out the building in motion on the architects web site at: http://www.dynamicarchitecture.net/intro-high-resolution.html

For those of you whose plan is to work until you are 70, here’s a warning about that strategy.

For a Good Retirement, Find Work. Good Luck.

Bill Neugent, an engineer in McLean, Va., is doing his bit to ease the looming generational financial squeeze as the nation’s 75 million baby boomers begin to retire. He’s working longer.

Mr. Neugent, 62, plans to work full time until he is 65 and then part time for the Mitre Corporation, a federal research contractor that encourages older workers to stay on.

There are, it seems, too few such workers and employers. The average retirement age for men now is 63 and for women 62. But the emphatic conclusion of recent research into retirement policy and labor markets is that working another two or three years would have a surprisingly powerful impact on the retirement living standards of millions of boomers and on the economy.

The economic gains, according to a report published this month by the McKinsey Global Institute, a research group, would include increased household savings, higher tax collections and a reduction of the fiscal strain on Social Security and Medicare; together, that would add an estimated $13 trillion to the economy by 2025, or about a year’s total output of goods and services today.

“It’s the only answer, but don’t count on the story turning out that way,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College and co-author, with Steven A. Sass, of the book “Working Longer: The Solution to the Retirement Income Challenge” (Brookings Institution Press). “It’s going to take a lot of education and changes in policy and attitudes.”

The biggest obstacle, experts say, is that most companies are reluctant to retain or hire older workers. At the top of the corporate ladder, executive recruiters are routinely told not to seek anyone over 50, notes Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School.

Similar sentiments, Mr. Cappelli said, can be found across the job spectrum. He points to a batch of evidence. In one survey, one-fourth of companies said they were not inclined to hire older workers. In a research experiment a few years ago, thousands of made-up resumes were sent to employers; younger workers who had the same qualifications as older workers were more than 40 percent more likely to be called in for an interview than someone 50 or older. In an industry survey, a majority of technology companies candidly said they would not hire anyone over 40. (more…)