Jennifer Morrison's Contributor Profile - Associated Content
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Wednesday, September 1, 2010
Tuesday, March 16, 2010
Small Business Lending? Seek Out a Broker
With the 30 bank failures to-date 2010 and the number of banks under capital pressure, finding a financial institution to fund small business projects and small commercial real estate projects can be difficult. Small banks in particular were the life-blood of many local businesses and relationships are an important part of lending.
Why not seek out a commercial broker for your lending needs?
Commercial brokers are licensed, as required by the states, to seek out the best rates, the most flexible terms, and to extend the reach of entrepreneurs seeking funds. A good example is Lighthouse Commercial in Columbus, Ohio.
Operating for more than 10 years and surviving the unprecedented dislocation of the financial markets, Lighthouse thrives on relationship banking. They seek to bring together the most flexible lending terms with small businesses and entrepreneurs around the US. Lighthouse has the "reach" that most small businesses cannot gain from doing business locally. And, just as banks can hardly be thought of as particularly "loyal" to their customers, Lighthouse is not "loyal" to any particular funding source. Rather Lighthouse is loyal to their clients - they find the best available rates and terms and work for the client, not the banks or funding sources.
Lighthouse has SBA programs and other government funding sources available but also works with large insurance companies and other non-banks to broaden their clients' reach for funds. And Lighthouse can advise their clients on the new structures the market is creating as well as the financial conditions that have driven certain "players" in and out of the market.
Seek out Lighthouse Commercial at www.lighthouse-commercial.com and its affiliated business Lighthouse Mortgage Services at www.lighthousemortgage.cc.
Why not seek out a commercial broker for your lending needs?
Commercial brokers are licensed, as required by the states, to seek out the best rates, the most flexible terms, and to extend the reach of entrepreneurs seeking funds. A good example is Lighthouse Commercial in Columbus, Ohio.
Operating for more than 10 years and surviving the unprecedented dislocation of the financial markets, Lighthouse thrives on relationship banking. They seek to bring together the most flexible lending terms with small businesses and entrepreneurs around the US. Lighthouse has the "reach" that most small businesses cannot gain from doing business locally. And, just as banks can hardly be thought of as particularly "loyal" to their customers, Lighthouse is not "loyal" to any particular funding source. Rather Lighthouse is loyal to their clients - they find the best available rates and terms and work for the client, not the banks or funding sources.
Lighthouse has SBA programs and other government funding sources available but also works with large insurance companies and other non-banks to broaden their clients' reach for funds. And Lighthouse can advise their clients on the new structures the market is creating as well as the financial conditions that have driven certain "players" in and out of the market.
Seek out Lighthouse Commercial at www.lighthouse-commercial.com and its affiliated business Lighthouse Mortgage Services at www.lighthousemortgage.cc.
Thursday, July 16, 2009
Jennifer Morrison's Source Page - Associated Content
http://www.associatedcontent.comuser/456705/jennifer_morrison.html
Jennifer Morrison's Source Page - Associated Contenthttp://www.associatedcontent.comuser/456705/jennifer_morrison.html
Thursday, May 28, 2009
Be Prepared for the Credit CARD Act
On May 22, 2009, President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act (the Credit CARD Act) into law. The Credit CARD Act will be effective February 2010, bringing with it new consumer protections and particular challenges for credit card issuers.
The new Act comes at a time of particular stress for US credit card issuers. The rapid rise in delinquencies and charge-offs among their existing credit card portfolios has already cut into profits. Consumers and legislators have been consistently critical of the credit card issuers in this recession for cutting credit lines and raising interest rates on existing card borrowers in an effort to earn some returns in this environment, as well. Issuers like American Express are "paying the price" of their generous issuance practices 2 and 3 years ago with delinquency and loss rates that far out-strip the image of the American Express Card as a card held by only the highest credit-worthy borrower.
At the same time, the actions taken by the US credit card issuers since the onset of the recession portend improving metrics. Card issuers have actually reduced credit lines to their riskier borrowers therefore reducing the size of their future losses. American Express went so far as to offer $300 to certain cardholders to turn their American Express card back into the company. The higher rates of interest are also meant to help the issuers establish more of a financial reserve or cushion against future losses.
But the criticism has resulted in the Credit CARD Act. The Act largely mirrors actions already taken by the Federal Reserve to protect consumers against double-cycle billing, opaque cardholder rights, and the application of "universal default". The Congress chose to take the Fed's ideas and move up the timetable, adding more consumer protections along the way.
Among the changes, the Act prohibits the issuer practice of raising interest rates permanently on borrowers who are delinquent 60 or more days. If the delinquent borrower then pays on time for 6 straight months, the issuer must reinstate the lower rate. Along the line of interest rates, the Act also requires that initial low promotional rates must have a minimum 6 month duration and prohibits increased rates in the first year a cardholder has a new account.
A particularly good feature of the Act is the prohibition against issuers charging borrowers to pay by phone, mail, electronic transfer, or for online payments. The bill also features restrictions against issuing cards to individuals under the age of 21. This will effectively end the massive marketing effort by credit card issuers on college campuses. The scary trend has been the ever-increasing level of consumer debts some students have when they graduate college, on top of ever-increasing student loan burdens.
Credit card issuers may choose to adapt to the Act through a number of strategic changes. First, it will be likely that all cardholders will see an upward drift in interest rates on unpaid balances. Certainly before February 2010, issuers will try to establish some sort of baseline interest rate for the various tiers of credit risk they have in the card portfolio. It will also be likely to see fewer "no annual fee" cards. Because the Act prohibits some of the interest rate adjustments issuers currently have in their tool kit to adjust rates in line with changing cardholder credit risk, issuers will be more likely to seek alternative revenue sources.
Likely Page Break
It is also likely that borrowers will see their credit limits trimmed prior to the February enactment. Reducing credit availability in a recessionary period is tricky. It hurts retailers and fails to stimulate the economy, just when economic stimulus is needed. But it also reduces the upper limit for borrowers who are increasingly stressed by the same recession and helps cap potential losses for the issuers. It also may anger the same borrowers resulting in a backlash in the form of reduced repayment, even default. No one can say that the credit card issuers are not going to ultimately act in a manner that is most beneficial to their portfolio and shareholders.
Any new credit card issuance will likely be limited by more stringent underwriting. Again, driven by the need to reduce losses and expenses and due to the limitations the Act places on the ability of a credit card issuer to re-price risk as is done currently, card issuers will be stingier in their new issuance activity. That is probably good news if you hate all the credit card solicitation currently mass mailed to households across the US.
It is also widely expected that marketing and promotion budgets will be slashed in an effort to boost issuer profits. This includes rewards cards. It is widely expected that many of the most desirable benefits will be trimmed by many of the large issuers or will be limited to only the top credit scores.
While the Act has some strong benefits for cardholders, the Act will likely be a net negative for current cardholders who use their cards judiciously and pay their balances on time, in full each month. While these cardholders will likely not experience any of the negatives of a general rise in interest rates charged on the card (since they pay their balance monthly), these cardholders will likely see reduced cardholder benefits and the implementation of annual fees. These cardholders might even see their credit lines cut due the reduced spending activity seen across the economy due to the recession. The cardholders will not be rewarded for their responsible spending and prudence. Finally, these cardholders will probably see fewer promotions and less competition for their business. Ultimately, these borrowers will see the Act as a net negative.
At the same time, the prohibitions against marketing cards to college students without the means to repay is a strong positive in the Act. Further, there is some level of fairness within the Act that can make most cardholders (and Congressional voters) feel that the Act is a long-term net positive for the country.
The new Act comes at a time of particular stress for US credit card issuers. The rapid rise in delinquencies and charge-offs among their existing credit card portfolios has already cut into profits. Consumers and legislators have been consistently critical of the credit card issuers in this recession for cutting credit lines and raising interest rates on existing card borrowers in an effort to earn some returns in this environment, as well. Issuers like American Express are "paying the price" of their generous issuance practices 2 and 3 years ago with delinquency and loss rates that far out-strip the image of the American Express Card as a card held by only the highest credit-worthy borrower.
At the same time, the actions taken by the US credit card issuers since the onset of the recession portend improving metrics. Card issuers have actually reduced credit lines to their riskier borrowers therefore reducing the size of their future losses. American Express went so far as to offer $300 to certain cardholders to turn their American Express card back into the company. The higher rates of interest are also meant to help the issuers establish more of a financial reserve or cushion against future losses.
But the criticism has resulted in the Credit CARD Act. The Act largely mirrors actions already taken by the Federal Reserve to protect consumers against double-cycle billing, opaque cardholder rights, and the application of "universal default". The Congress chose to take the Fed's ideas and move up the timetable, adding more consumer protections along the way.
Among the changes, the Act prohibits the issuer practice of raising interest rates permanently on borrowers who are delinquent 60 or more days. If the delinquent borrower then pays on time for 6 straight months, the issuer must reinstate the lower rate. Along the line of interest rates, the Act also requires that initial low promotional rates must have a minimum 6 month duration and prohibits increased rates in the first year a cardholder has a new account.
A particularly good feature of the Act is the prohibition against issuers charging borrowers to pay by phone, mail, electronic transfer, or for online payments. The bill also features restrictions against issuing cards to individuals under the age of 21. This will effectively end the massive marketing effort by credit card issuers on college campuses. The scary trend has been the ever-increasing level of consumer debts some students have when they graduate college, on top of ever-increasing student loan burdens.
Credit card issuers may choose to adapt to the Act through a number of strategic changes. First, it will be likely that all cardholders will see an upward drift in interest rates on unpaid balances. Certainly before February 2010, issuers will try to establish some sort of baseline interest rate for the various tiers of credit risk they have in the card portfolio. It will also be likely to see fewer "no annual fee" cards. Because the Act prohibits some of the interest rate adjustments issuers currently have in their tool kit to adjust rates in line with changing cardholder credit risk, issuers will be more likely to seek alternative revenue sources.
Likely Page Break
It is also likely that borrowers will see their credit limits trimmed prior to the February enactment. Reducing credit availability in a recessionary period is tricky. It hurts retailers and fails to stimulate the economy, just when economic stimulus is needed. But it also reduces the upper limit for borrowers who are increasingly stressed by the same recession and helps cap potential losses for the issuers. It also may anger the same borrowers resulting in a backlash in the form of reduced repayment, even default. No one can say that the credit card issuers are not going to ultimately act in a manner that is most beneficial to their portfolio and shareholders.
Any new credit card issuance will likely be limited by more stringent underwriting. Again, driven by the need to reduce losses and expenses and due to the limitations the Act places on the ability of a credit card issuer to re-price risk as is done currently, card issuers will be stingier in their new issuance activity. That is probably good news if you hate all the credit card solicitation currently mass mailed to households across the US.
It is also widely expected that marketing and promotion budgets will be slashed in an effort to boost issuer profits. This includes rewards cards. It is widely expected that many of the most desirable benefits will be trimmed by many of the large issuers or will be limited to only the top credit scores.
While the Act has some strong benefits for cardholders, the Act will likely be a net negative for current cardholders who use their cards judiciously and pay their balances on time, in full each month. While these cardholders will likely not experience any of the negatives of a general rise in interest rates charged on the card (since they pay their balance monthly), these cardholders will likely see reduced cardholder benefits and the implementation of annual fees. These cardholders might even see their credit lines cut due the reduced spending activity seen across the economy due to the recession. The cardholders will not be rewarded for their responsible spending and prudence. Finally, these cardholders will probably see fewer promotions and less competition for their business. Ultimately, these borrowers will see the Act as a net negative.
At the same time, the prohibitions against marketing cards to college students without the means to repay is a strong positive in the Act. Further, there is some level of fairness within the Act that can make most cardholders (and Congressional voters) feel that the Act is a long-term net positive for the country.
Monday, May 4, 2009
Lessons Learned #1 - Diversification
In the coming weeks, I plan to write a series of thoughts on what we should have learned from the current financial crisis, keeping it direct and to the point. Lesson #1 is Diversification.
Diversification is defined as the process of reducing risk by spreading investment risks across various asset types and tenures. In the case of personal investments, diversification means, to use an old adage, "you don't have all your eggs in one basket". It essentially says a good investor does not get too greedy.
Asset types include stocks (equities), bonds, real estate, collectibles and antiques, and cash (or cash equivalents). A diversified investor has spread his/her invested dollars across many, if not all of these categories.
Diversification also speaks to the tenure or maturity of the investments. In the case of bonds or certificates of deposit, a diversified investor has "laddered" or structured his/her principal repayments so that all of the money is not repaid all at one time. This helps manage interest rate risk or the risk that the investor has too much of his/her money come due in the same period of rising or declining rates. In other words, you do not want all of your investments to re-price at the same time.
A diversified investor has also considered liquidity. Liquidity speaks to the time it takes to convert the asset into cash, particularly in the event of an emergency. A diversified investor has some less liquid investments like their home and some very liquid investments like cash in their portfolio.
Let's use the Madoff fund as an example. The investors reportedly obtained a near-12% return routinely, despite the regular gyrations of the stock and bond markets over time. Investors with Madoff often put all of their invested dollars with Mr. Madoff (or increased their concentration of investments with him) because of the high rate of return and its consistency. In the future, I will talk about the lesson that "if it appears too good to be true, it is", but as investors increasingly over-weighted their investments with Madoff due to his routinely high returns, the same investors were later burned by their lack of diversification. While sympathetic to the widows moving in with their children because their nest egg is now lost, the lack of diversification is in part a flaw in the victim's investment strategy that helped Mr. Madoff destroy all of his investor's net worth in many unfortunate cases.
Will diversification then lead to lower returns? It might in the short run. A mix of bonds and equities is desired in any investment portfolio. Over time, bonds have been outperformed by equities because there is greater risk associated with equities and therefore, at times, they pay higher returns (or else no one would buy a stock). Bonds pay lower returns because, in the case of a bond issuer's bankruptcy or default, the bondholders get repaid with any remaining funds in a business before equity holders. Therefore, the probability a bondholder gets nothing for an investment, even in default, is lower than the probability a stock goes to essentially $0. Bonds also pay interest, a form of return, unless the bond issuer defaults. Stocks may pay dividends, though dividends are not guaranteed.
Diversification should match your age group and/or your investment goals. A young person with 35-40 years of employment earnings ahead of him/her can take more risk because he/she can earn money lost in the markets over their remaining working lives. A person in retirement may have no sources of income outside of pension and social security and a shorter expected remaining lifetime. There might not be time to earn money lost in the stock market, even in a soaring stock market. I think of my in-laws who had a money manager who had them too focused on equities. Last fall, they lost a quarter of a million dollars in their investment portfolio because not only did he have them too focused on the stock market, but he also had them focused on bank stocks.
Not only should there be a mix of bonds and equity, but there should be a mix of different kinds of industries among the bonds and stocks an investor holds. Jim Cramer does a skit on his Mad Money show about "am I diversified?" While cartoonish, the lesson is a good one. If you own 5 stocks in your portfolio, each should represent a different industry - for example, a bank stock, an industrial company's stock, a tech stock, a healthcare stock, and maybe an agricultural company's stock. On a macroeconomic basis, the stock market will move up or down en masse often, however, there will be stocks that do better than others so the investor will get a range of outcomes.
Liquidity is also increasingly important today because banks are not lending. A main source of liquidity for many is their credit card(s). If you had a major bill, like an unexpected medical expense, you would probably pull out a credit card to pay. Given the recent moves by Congress to rein in a number of questionable practices by credit card issuers to adjust fees, interest rates, billing cycles, etc. in response to changes in a card holder's financial situation (or the issuers' assessment of the change in risk), credit card issuers will likely reduce their mass marketing of credit cards and/or will charge higher rates, offer lower credit lines, and will increase annual fees on a proactive basis in advance of the enactment of the legislation. Many consumers report having their lines cut already. Will you be able to turn to your credit card in an emergency? If not, do you have cash savings (or investments that you could and would sell to raise money) for an emergency? Most do not have 3-6 months of income saved for a "rainy day".
Liquid assets do not need to be cash - they could be "in the money" stocks, CDs, savings accounts, money market accounts, and other items that can be sold within a day or two. And some might be sold at a small loss - but that is a price for liquidity.
Real estate and collectibles are examples of non-liquid assets, for the most part. There is a market for real estate and there are places, like flea markets and antique dealers, where you can sell your grandmother's hutch for cash, but some planning is involved and a hurried sale could result in a greater opportunity for a loss on the investment. A "quick sale" is a method of selling a house in order to discharge part of a mortgage. This is an alternative to foreclosure but typically, because the sale is in haste, the sale amount does not cover the mortgage balance. A more deliberative sale could allow the seller the time to select the bid that more closely approximates the value the seller has placed on the home - even if it takes years.
One lesson learned from the financial crisis is diversification. A smart investor will regularly review his/her portfolio to ensure that all of the goals of diversification are met - no undue concentration in any asset type, in any tenure of investment, and in any investment sector - and a consideration of liquidity in investments. There is no one "right or wrong" answer for an investor but diversification should keep in mind possible losses and the remaining time the investor has to recover losses.
Post your comments/questions!
Diversification is defined as the process of reducing risk by spreading investment risks across various asset types and tenures. In the case of personal investments, diversification means, to use an old adage, "you don't have all your eggs in one basket". It essentially says a good investor does not get too greedy.
Asset types include stocks (equities), bonds, real estate, collectibles and antiques, and cash (or cash equivalents). A diversified investor has spread his/her invested dollars across many, if not all of these categories.
Diversification also speaks to the tenure or maturity of the investments. In the case of bonds or certificates of deposit, a diversified investor has "laddered" or structured his/her principal repayments so that all of the money is not repaid all at one time. This helps manage interest rate risk or the risk that the investor has too much of his/her money come due in the same period of rising or declining rates. In other words, you do not want all of your investments to re-price at the same time.
A diversified investor has also considered liquidity. Liquidity speaks to the time it takes to convert the asset into cash, particularly in the event of an emergency. A diversified investor has some less liquid investments like their home and some very liquid investments like cash in their portfolio.
Let's use the Madoff fund as an example. The investors reportedly obtained a near-12% return routinely, despite the regular gyrations of the stock and bond markets over time. Investors with Madoff often put all of their invested dollars with Mr. Madoff (or increased their concentration of investments with him) because of the high rate of return and its consistency. In the future, I will talk about the lesson that "if it appears too good to be true, it is", but as investors increasingly over-weighted their investments with Madoff due to his routinely high returns, the same investors were later burned by their lack of diversification. While sympathetic to the widows moving in with their children because their nest egg is now lost, the lack of diversification is in part a flaw in the victim's investment strategy that helped Mr. Madoff destroy all of his investor's net worth in many unfortunate cases.
Will diversification then lead to lower returns? It might in the short run. A mix of bonds and equities is desired in any investment portfolio. Over time, bonds have been outperformed by equities because there is greater risk associated with equities and therefore, at times, they pay higher returns (or else no one would buy a stock). Bonds pay lower returns because, in the case of a bond issuer's bankruptcy or default, the bondholders get repaid with any remaining funds in a business before equity holders. Therefore, the probability a bondholder gets nothing for an investment, even in default, is lower than the probability a stock goes to essentially $0. Bonds also pay interest, a form of return, unless the bond issuer defaults. Stocks may pay dividends, though dividends are not guaranteed.
Diversification should match your age group and/or your investment goals. A young person with 35-40 years of employment earnings ahead of him/her can take more risk because he/she can earn money lost in the markets over their remaining working lives. A person in retirement may have no sources of income outside of pension and social security and a shorter expected remaining lifetime. There might not be time to earn money lost in the stock market, even in a soaring stock market. I think of my in-laws who had a money manager who had them too focused on equities. Last fall, they lost a quarter of a million dollars in their investment portfolio because not only did he have them too focused on the stock market, but he also had them focused on bank stocks.
Not only should there be a mix of bonds and equity, but there should be a mix of different kinds of industries among the bonds and stocks an investor holds. Jim Cramer does a skit on his Mad Money show about "am I diversified?" While cartoonish, the lesson is a good one. If you own 5 stocks in your portfolio, each should represent a different industry - for example, a bank stock, an industrial company's stock, a tech stock, a healthcare stock, and maybe an agricultural company's stock. On a macroeconomic basis, the stock market will move up or down en masse often, however, there will be stocks that do better than others so the investor will get a range of outcomes.
Liquidity is also increasingly important today because banks are not lending. A main source of liquidity for many is their credit card(s). If you had a major bill, like an unexpected medical expense, you would probably pull out a credit card to pay. Given the recent moves by Congress to rein in a number of questionable practices by credit card issuers to adjust fees, interest rates, billing cycles, etc. in response to changes in a card holder's financial situation (or the issuers' assessment of the change in risk), credit card issuers will likely reduce their mass marketing of credit cards and/or will charge higher rates, offer lower credit lines, and will increase annual fees on a proactive basis in advance of the enactment of the legislation. Many consumers report having their lines cut already. Will you be able to turn to your credit card in an emergency? If not, do you have cash savings (or investments that you could and would sell to raise money) for an emergency? Most do not have 3-6 months of income saved for a "rainy day".
Liquid assets do not need to be cash - they could be "in the money" stocks, CDs, savings accounts, money market accounts, and other items that can be sold within a day or two. And some might be sold at a small loss - but that is a price for liquidity.
Real estate and collectibles are examples of non-liquid assets, for the most part. There is a market for real estate and there are places, like flea markets and antique dealers, where you can sell your grandmother's hutch for cash, but some planning is involved and a hurried sale could result in a greater opportunity for a loss on the investment. A "quick sale" is a method of selling a house in order to discharge part of a mortgage. This is an alternative to foreclosure but typically, because the sale is in haste, the sale amount does not cover the mortgage balance. A more deliberative sale could allow the seller the time to select the bid that more closely approximates the value the seller has placed on the home - even if it takes years.
One lesson learned from the financial crisis is diversification. A smart investor will regularly review his/her portfolio to ensure that all of the goals of diversification are met - no undue concentration in any asset type, in any tenure of investment, and in any investment sector - and a consideration of liquidity in investments. There is no one "right or wrong" answer for an investor but diversification should keep in mind possible losses and the remaining time the investor has to recover losses.
Post your comments/questions!
Thursday, April 9, 2009
Buy Now, By Now
Do I Buy Now ... or Wait?
Common sense tells us to buy low, sell high and that applies not only to the stock market but to real estate. What separates an investment in stocks from an investment in real estate is that real estate has "utility". Utility means that your home is more than an asset that may increase in value, it provides shelter (assuming it is not an investment property).
Everything is in place to spark a real estate boom ... mortgage interest rates are low, sellers are motivated, housing inventory is available. Everything is in place ... everything except buyers.
So, should you buy now?
Mortgage interest rates are at historic lows and the Fed has announced that it will continue to intervene in the markets, buying mortgage-backed bonds, in order to keep mortgage rates low for some time. That tends to tell buyers that they have time ... and can wait.
The availability of mortgage loans is not great right now, but if you are a conforming "buyer" - i.e., a buyer with 20% down, looking for 30-year fixed rate financing, most financial institutions can get you financed through Fannie Mae or Freddie Mac, taking no real risk on their balance sheet. Financial institutions should be willing to do this all day, all night. They sell the loan to the agency and maintain liquidity and take no credit risk.
Now, if you are a buyer who is "outside the guidelines", good luck. Jumbo mortgage financing is tough to come by. If you do not have money down, you might look at FHA, if you qualify. You might also try a credit union in your area. Many are lending, though most like conforming mortgages too. Most mortgage companies went out of business over the past 2 years so there's not a lot out there for you. No stated income products, no subprime mortgage products.
The availability of housing inventory is very high, particularly in areas where there have been a number of foreclosures. And despite the media, housing is regional and some regions have suffered more housing loss than others. The CA and FL markets have suffered the most, along with markets in and around Atlanta, Washington DC, Phoenix, and Las Vegas. And that inventory is cheap. Check the weekend newspapers (or their online sites) for public sale notices and go to a couple of auctions. You will get the flavor for how an auction works and for the distressed prices for homes in your desired area. You can also search websites that list foreclosed properties. You might also choose to work with a real estate agent who can advise you on home values (normal and current) and can give you good advice on the best neighborhoods, the best schools, the best resale values (normal), etc. Do your homework. This downturn in housing is not likely to resolve itself in the near term. You have time.
Which brings me to the problem with buying now ... and the hesitancy of many to jump into the market. The housing cycle is not due to recover in the near term. So why jump in now? Why hurry?
Deutsche Bank Global Markets Research and its Research Team, including analyst Karen Weaver, published at the end of March 2009 a round-up on the housing outlook across the US including a breakdown of the various regions of the country. Using affordability, Deutsche Bank had put together many publications on housing (Ms. Weaver called the housing bubble about 2 years before it burst) calling the continued rise in values unsustainable. Now, Deutsche Bank has augmented its analysis to include additional variables: unemployment, unemployment change, distressed inventory levels, and momentum.
Based on their analysis, a number of housing markets are ripe for a return to positive values. Markets like Dallas, Santa Barbara, Fort Worth, Kansas City, Nashville, Columbus, San Antonio, Pittsburgh, Louisville, Boulder, and Fort Collins show signs that real estate values are at or near a bottom, show signs that distressed inventories of housing are manageable, and show signs that job losses are flat. If you are looking at these markets, now might be the time to buy. Sure, values could go lower, but housing affordability measures tell us from the Deutsche Bank analysis that an equilibrium has been restored where a historic average number of homeowners in that market can afford a mortgage. Now, there are no guarantees but ...
It is also conceivable in markets with a large inventory of distressed housing, that it might also be a great time to buy. On www.cnbc.com on 4/9/09, there was an article featuring stories of new homeowners snapping up Miami condominiums. The report shows that there are bargains in many of these distressed markets. To buy these homes, you need to secure financing (and the cnbc.com article did a good job talking about the condo financing challenges) and you need to have a longer time horizon. If you think that the condo you bought for $85,000 that was $410,000 4 years ago will be $410,000 again, any time soon, you may need your head examined. But, if you love the place (and can put in a little or a lot of work) and plan to stay put for 3-5 years, buying a foreclosure is a great idea. It might also be a great idea if you are shopping for a second home. Many distressed properties are in traditional vacation locales - Miami, Ft. Lauderdale, Naples, Ft. Myers, San Diego, Hilton Head. Again, if you are looking for a second home that you might rent out for the next 5 years and perhaps move to in retirement, why not get a great deal today.
So, why are buyers still on the sidelines? Fear ... fear that they will lose their job in the near term. That tends to keep buyers' hands in their pockets and their hands holding tightly on their pocketbook. Fear that "things will get worse". A record level of cash is on the balance sheet of financial institutions right now. They are fearful to lend. A record amount of cash was pulled out of the stock market last fall and remains on the sidelines. Yes, a stock can go to $0 - you can lose all of your money. Housing will never go to zero as long as there is a piece of land, but recent history has shown that you can lose part of your investment. What if I buy a house and lose my job? What if I have to move to take a new job? What if I can't sell my house for what I paid for it when I have to move? These are real fears.
What will restore housing? In some markets, there is stability. There are buyers because the employment picture is relatively stable. The other pieces are generally there ... mortgage rates, housing inventory, desirable neighborhoods. We need to end the cycle of fear.
Buy a house.
Common sense tells us to buy low, sell high and that applies not only to the stock market but to real estate. What separates an investment in stocks from an investment in real estate is that real estate has "utility". Utility means that your home is more than an asset that may increase in value, it provides shelter (assuming it is not an investment property).
Everything is in place to spark a real estate boom ... mortgage interest rates are low, sellers are motivated, housing inventory is available. Everything is in place ... everything except buyers.
So, should you buy now?
Mortgage interest rates are at historic lows and the Fed has announced that it will continue to intervene in the markets, buying mortgage-backed bonds, in order to keep mortgage rates low for some time. That tends to tell buyers that they have time ... and can wait.
The availability of mortgage loans is not great right now, but if you are a conforming "buyer" - i.e., a buyer with 20% down, looking for 30-year fixed rate financing, most financial institutions can get you financed through Fannie Mae or Freddie Mac, taking no real risk on their balance sheet. Financial institutions should be willing to do this all day, all night. They sell the loan to the agency and maintain liquidity and take no credit risk.
Now, if you are a buyer who is "outside the guidelines", good luck. Jumbo mortgage financing is tough to come by. If you do not have money down, you might look at FHA, if you qualify. You might also try a credit union in your area. Many are lending, though most like conforming mortgages too. Most mortgage companies went out of business over the past 2 years so there's not a lot out there for you. No stated income products, no subprime mortgage products.
The availability of housing inventory is very high, particularly in areas where there have been a number of foreclosures. And despite the media, housing is regional and some regions have suffered more housing loss than others. The CA and FL markets have suffered the most, along with markets in and around Atlanta, Washington DC, Phoenix, and Las Vegas. And that inventory is cheap. Check the weekend newspapers (or their online sites) for public sale notices and go to a couple of auctions. You will get the flavor for how an auction works and for the distressed prices for homes in your desired area. You can also search websites that list foreclosed properties. You might also choose to work with a real estate agent who can advise you on home values (normal and current) and can give you good advice on the best neighborhoods, the best schools, the best resale values (normal), etc. Do your homework. This downturn in housing is not likely to resolve itself in the near term. You have time.
Which brings me to the problem with buying now ... and the hesitancy of many to jump into the market. The housing cycle is not due to recover in the near term. So why jump in now? Why hurry?
Deutsche Bank Global Markets Research and its Research Team, including analyst Karen Weaver, published at the end of March 2009 a round-up on the housing outlook across the US including a breakdown of the various regions of the country. Using affordability, Deutsche Bank had put together many publications on housing (Ms. Weaver called the housing bubble about 2 years before it burst) calling the continued rise in values unsustainable. Now, Deutsche Bank has augmented its analysis to include additional variables: unemployment, unemployment change, distressed inventory levels, and momentum.
Based on their analysis, a number of housing markets are ripe for a return to positive values. Markets like Dallas, Santa Barbara, Fort Worth, Kansas City, Nashville, Columbus, San Antonio, Pittsburgh, Louisville, Boulder, and Fort Collins show signs that real estate values are at or near a bottom, show signs that distressed inventories of housing are manageable, and show signs that job losses are flat. If you are looking at these markets, now might be the time to buy. Sure, values could go lower, but housing affordability measures tell us from the Deutsche Bank analysis that an equilibrium has been restored where a historic average number of homeowners in that market can afford a mortgage. Now, there are no guarantees but ...
It is also conceivable in markets with a large inventory of distressed housing, that it might also be a great time to buy. On www.cnbc.com on 4/9/09, there was an article featuring stories of new homeowners snapping up Miami condominiums. The report shows that there are bargains in many of these distressed markets. To buy these homes, you need to secure financing (and the cnbc.com article did a good job talking about the condo financing challenges) and you need to have a longer time horizon. If you think that the condo you bought for $85,000 that was $410,000 4 years ago will be $410,000 again, any time soon, you may need your head examined. But, if you love the place (and can put in a little or a lot of work) and plan to stay put for 3-5 years, buying a foreclosure is a great idea. It might also be a great idea if you are shopping for a second home. Many distressed properties are in traditional vacation locales - Miami, Ft. Lauderdale, Naples, Ft. Myers, San Diego, Hilton Head. Again, if you are looking for a second home that you might rent out for the next 5 years and perhaps move to in retirement, why not get a great deal today.
So, why are buyers still on the sidelines? Fear ... fear that they will lose their job in the near term. That tends to keep buyers' hands in their pockets and their hands holding tightly on their pocketbook. Fear that "things will get worse". A record level of cash is on the balance sheet of financial institutions right now. They are fearful to lend. A record amount of cash was pulled out of the stock market last fall and remains on the sidelines. Yes, a stock can go to $0 - you can lose all of your money. Housing will never go to zero as long as there is a piece of land, but recent history has shown that you can lose part of your investment. What if I buy a house and lose my job? What if I have to move to take a new job? What if I can't sell my house for what I paid for it when I have to move? These are real fears.
What will restore housing? In some markets, there is stability. There are buyers because the employment picture is relatively stable. The other pieces are generally there ... mortgage rates, housing inventory, desirable neighborhoods. We need to end the cycle of fear.
Buy a house.
Thursday, March 26, 2009
What's With the Bonuses Anyway?
Did you read the 3/25/09 Op-Ed in the NY Times "Dear A.I.G., I Quit!" Make sure you do. What a wonderful piece about the real scandal at AIG. The scandal that the few can make life miserable for the masses and that the masses (or the majority of employees at AIG) are completely innocent of wrong-doing!
The concept behind a bonus, or any kind of incentive pay system for that matter, is a combination of pay-for-play and reward. In this case, the staff in the AIG-FP department in this case was to be paid for their valued services to unwind and ultimately sell a part of the failed business. As the writer so eloquently stated, his department was immensely profitable and had hit profit targets year after year.
In most cases, a business that does not make its overall sales goals or profit goals should not pay out bonuses at all. I think we all get that. But what is buried in all this self-righteous posturing by Congress is that there are real people involved with real families and real responsibilities who, in good faith, negotiated deals with AIG to perform specific tasks for a reward. Now that reward is taken from them - and all because Cuomo in NY, Congress in DC, and various governmental talking heads refuse to dig into the details and refuse to honor contract law.
Believe me, there is no way AIG management (Mr. Liddy) thought that AIG would be profitable in March 2009 when the contracts were struck. In fact, I'm certain he was nearly 100% certain that AIG had substantial losses remaining. But he also knew that there were hard-working individuals who could contribute to repaying the taxpayers the monies borrowed by AIG sooner, as opposed to later. Retaining certain key individuals was infinitely beneficial to hiring anyone from outside - even if that outsider had the same skill set. It would take anyone hired from outside, assuming they could be quickly hired and acclimated, much longer to more ahead with the plans to sell off profitable AIG assets. Can anyone honestly say that those who contributed in this manner should not be rewarded?
Bonuses have always been about reward - bettering a sales target, profits in excess of plan, etc. Can anyone in Congress simply look at a dollar amount and say that those underlying individual payments are or are not warranted? No. Let's be serious. I doubt Congress as individual even understood the various business units that combine(d) to make AIG, the conglomerate.
We can all debate the merits of the steps Treasury et.al. have taken with regard to AIG. But what has been missed in all this is a corporation like AIG is made up of a critical and scarce resource: many talented people who gave 12 hour days to making their slice of the company successful. Let's all remember that when we condemn these high payouts ... one of those paid or not paid may be someone you know the next time. It might be you!
Send your comments and questions, as always!
The concept behind a bonus, or any kind of incentive pay system for that matter, is a combination of pay-for-play and reward. In this case, the staff in the AIG-FP department in this case was to be paid for their valued services to unwind and ultimately sell a part of the failed business. As the writer so eloquently stated, his department was immensely profitable and had hit profit targets year after year.
In most cases, a business that does not make its overall sales goals or profit goals should not pay out bonuses at all. I think we all get that. But what is buried in all this self-righteous posturing by Congress is that there are real people involved with real families and real responsibilities who, in good faith, negotiated deals with AIG to perform specific tasks for a reward. Now that reward is taken from them - and all because Cuomo in NY, Congress in DC, and various governmental talking heads refuse to dig into the details and refuse to honor contract law.
Believe me, there is no way AIG management (Mr. Liddy) thought that AIG would be profitable in March 2009 when the contracts were struck. In fact, I'm certain he was nearly 100% certain that AIG had substantial losses remaining. But he also knew that there were hard-working individuals who could contribute to repaying the taxpayers the monies borrowed by AIG sooner, as opposed to later. Retaining certain key individuals was infinitely beneficial to hiring anyone from outside - even if that outsider had the same skill set. It would take anyone hired from outside, assuming they could be quickly hired and acclimated, much longer to more ahead with the plans to sell off profitable AIG assets. Can anyone honestly say that those who contributed in this manner should not be rewarded?
Bonuses have always been about reward - bettering a sales target, profits in excess of plan, etc. Can anyone in Congress simply look at a dollar amount and say that those underlying individual payments are or are not warranted? No. Let's be serious. I doubt Congress as individual even understood the various business units that combine(d) to make AIG, the conglomerate.
We can all debate the merits of the steps Treasury et.al. have taken with regard to AIG. But what has been missed in all this is a corporation like AIG is made up of a critical and scarce resource: many talented people who gave 12 hour days to making their slice of the company successful. Let's all remember that when we condemn these high payouts ... one of those paid or not paid may be someone you know the next time. It might be you!
Send your comments and questions, as always!
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