Wednesday, January 24, 2007

Where Is Your Retirement Plan?

I am truly amazed at the number of folks I meet with who have either not started, or do not fully participate in a retirement plan. I am especially dismayed by those who fit this description and already have retirement in their cross-hairs. I understand its tough enough as it is to pay the bills, especially in the San Francisco Bay Area, and throughout most of California. Maybe it has been my saturation in the field of personal finance, but I feel like the cost/benefit evaluation of a qualified retirement plan should be as obvious today as the health risks associated with smoking.

OK, maybe I am guilty of hyperbolic analogy. But I'm here to help shed some light, and I want my point to be clear. YOU NEED to understand the time value of money, and the power of tax deferral. The United States government wants you to be capable of taking care of yourself financially when you retire, and so they have created some incentives to encourage you to save now, and not rely on social security. In case you haven't noticed, legislators believe we are critically under-prepared for taking care of the retiring baby-boomer generation; you DO NOT want to go through life relying on Social Security 100%. We call this 'whistling through the graveyard'.

If you work for a corporation, non-profit, are self-employed, or a contractor, there is a plan for you. 401(k), 403(b), IRA, Roth IRA, SEP, Simple, Solo 401(k), pension, etc. Don't get overwhelmed by the big picture here. Find your plan, and GO.

Small business folks have a great resource here. If your company offers a 401(k), here is some great resource as well. Did you know that your company now automatically enrolls you for a minimal contribution unless you opt-out? They're doing you a favor. Most companies match a portion of your contribution - depending on how its structured, thats a 50-100% return on your money in the bank! This is a no-brainer, folks.

You will often hear me say that 'the dollar you don't put in your 401(k) is likely the most expensive dollar you spend'. Others advise to 'pay yourself first'. It all starts here. I know the objections, and I understand them. Its time to get over it.

If you need some help figuring out how to make room for these contributions, contact me. Smart mortgage planning will make room for your financial priorities, and this should be one of your highest.

Mortgage Planners Going Too Far

I was reading an article about Reverse Mortgages the other day, and one tangent paragraph really caught my attention. It was discussing one of the problems with Reverse Mortgages being that it could put "a bundle of cash into a consumer's hands, marking an enticing target for financial product sellers to exploit." The fact that this is an inaccurate statement about Reverse Mortgages (Cash-out mortgages: yes; Reverse Mortgages: no) is obscured by the sentiment behind the statement - which is agreeably concerning. The article sites a California law that prevents mortgage brokers from selling annuities in the process of re-financing your debt. Yikes... Thank you Sacramento...

Any time you hire a professional to handle business for you - any sort of business - it is important that they know what they are doing. Too often we see people attempt to wear too many hats, and what happens as a result? They don't wear any of them well.

A Certified Mortgage Planner (CMPS) can help introduce you to concepts related to financial planning and how the mortgage relates to these interests (in fact, if they do not, you might be talking to the wrong one...). BUT, there is a fine line being crossed when this professional tries to do everything else for you. How can they possibly be an expert at mortgages, investments, insurance products, credit counseling, taxes, etc, all at once? Make sure your Certified Mortgage Planner (CMPS) is working with other professionals who focus on these areas, not trying to wear too many hats.

As a former financial advisor, I can testify that the Series 7 licensing and training involves quite a bit of focus on NASD rules and fiduciary responsibility in general. The licensing that allows a person to be a real estate salesperson, mortgage broker, etc has relatively none. CMPS has made some great strides to inject ethics and responsibility into the mortgage industry; make sure you are working with somebody who holds this important designation.

Thursday, January 18, 2007

SF Fed President Janet Yellen Speaks on Housing, Economy

I like the general sentiment in Janet Yellen's speech yesterday regarding the state of our economy. Since Economists are generally regarded as dry and boring, I don't expect you to want to read yourself - that's why I talk about it here. But if you're in the mood, feel free here. Lots of other stuff I am reading gets posted on this page as well.

I keep writing about the different vibes being given by credible sources on our economy, where we are headed, and what the implications are for the housing market. Yellen's speech yesterday gives some great insight into the mindset of the Fed right now, and what they are confident about and what they are uncertain about. The general idea is that we are seeing increasing evidence of the 'soft landing' scenario.

You get a great idea of how dynamic the economy is when reading this, as there are so many variables that play into the evaluation, and each one affects the others in direct and indirect ways. Along these lines, as many people are watching the economy to make predictions about housing, others are looking at housing to make predictions about where the economy will go. Sometimes its difficult to see which comes first.

We see analysis that suggest home equity borrowing has specifically contributed as much as 1% to the annual GDP growth. With a current rate of 2-3%, that's a significant portion! With the 17 consecutive rate hikes to the Fed Funds and Prime rates, consumer demand for dollars should drop, slowing spending, and slowing economic growth... Those cuts seem to be working....

A few months ago everybody thought that the Fed was impatient with their pace of rate hikes, and should wait longer to see the early part of the cycle make its way through to GDP figures (arguably a 9-24 month lag time). The fear was that they would slow us too aggressively and put is in recession. (Then we get rate cuts, go the other way to stimulate spending, etc... the so-called pendulum swinging back and forth...) But This side of the rate cycle is looking now to be one of the longest pauses at the top on record. This could change with a big miss either way in CPI, Jobs data, PCE, or other economic reports, but so far things are looking pretty healthy.

Look at this quote from Yellen's speech: "...it looks as if the economy is pretty close to the 'glide path' I mentioned before - growth has slowed to a bit below most estimates of the economy's long-run potential, while the risk of an outright downturn has receded." So much for the pendulum getting ready to swing the other way... its on a nice slow drift into place.

We still expect to see corrections in the yield curve, but the threat of inflation needs to be fully contained first. Still a glimmer left... As I like to say, there are a lot of moving targets out there. The sentiment can change quickly. But for now, it looks as though the big picture is in a fair amount of control.

Sunday, January 14, 2007

Are We Going To See A Soft Landing?

The news media has covered the real estate market in the last few years with close attention. As prices have soared to historic highs, some economists have speculated that the value growth has been unsustainable, and that we are headed for a painful value correction. Fear of what the implications of this scenario would look like has fueled the media coverage - remember, they love to keep you on your toes.

Going a little beyond the scope of the nightly news, you might be able to get a more credible view on where we are headed. After all, there's a million Economists out there getting paid a million dollars to research, digest data, and speculate as to where we are headed, but they are often not as 'exciting' as your 11 o'clock news anchor... Because of the immensely dynamic national and world economy, these Economists are all over the board with their predictions. And when the consensus gets scattered, we get that feeling of uncertainty that might make the American consumer take pause (for what it means to the economy when the American consumer takes pause, consult your local Economist... I told you: dynamic!!). There are a lot of contradictory opinions floating around out there - I know, because I read the boring Economist stuff. As a Mortgage Planner I keep a pulse on these things and make recommendations that respect your financial objectives within the context of the mortgage landscape and the economic environment at the time - and going forward.

You can get an idea of what these pundits are looking at to make their assessments of our economy, and register their opinions. It may not be exciting stuff to everybody, but it helps to know where they are coming from. Here are a few items that they are watching to see if we are in fact headed for a "soft landing". In general, inflation concerns bring higher rates, and make housing less affordable.

RETAIL SALES Report: This comes out monthly and shows the mood of the American consumer. Strong sales indicate that businesses are making profits, and that the economy should keep cooking. Too strong a report suggests too much money floating around, and an environment where inflation can run too high - that can lead to higher interest rates. Sharp declines in this report suggest that the opposite. A precursor to a "hard landing" might be a sharp downturn in this report.

TRANSPORTATION COMPANIES: When companies like FedEx and UPS lower their outlooks or speak of declines in activity, it suggests the American consumer is slowing spending.

DURABLE GOODS Report and BUSINESS CAPITAL EXPENDITURES (CapEx): : Shows when businesses are spending (and growing or looking to grow) and expand capacity for production. The report gives an indication of upcoming manufacturing activity, and when this slows there can be inflationary pressure.

ISM INDEX: Manufacturing index of industrial companies that signals expansion and contraction in this sector.

MORTGAGE FORECLOSURE Rates: When these pick up, it suggests lending guidelines will tighten and shrink the pool of buyers. This lowers demand, and can accelerate a decline in housing activity.

AUTO SALES: A recession predictor, the economy often flows in the same direction as Auto Sales.

Hey, wake up! If you made it through all of that, you might want to consider a career as an Economist - we could use some help figuring out if we are in fact headed for a "soft landing" or not.

Friday, January 12, 2007

When does an Alternative Mortgage Make Sense?

The recent rise in short term interest rates has brought financial strain to misguided and mismanaged mortgage consumers. The media has of course spotlighted this issue and used it to fuel the negative sentiment toward and resentment of Mortgage Brokers. Don't get me wrong - those who know me well already know I agree with much of the critique of my own industry - but I also think the media likes to make examples in extreme cases.

The case for the traditional 30 year fixed (FRM) has always been safety from interest rate risk exposure. In other words, lock in now for 30 years, and you never have to worry if rates go up. You can refinance if rates go down. But even Alan Greenspan thinks this strategy can be wasteful for some consumers. What if you know you will move in a shorter period of time? Or at least think the odds are good? How about if you expect major changes to your income in the next few years? Have near-term financial goals outside of the home, like funding a college education or retirement plan? Statistics tell us that getting to the mid-way point in a 30 year mortgage is highly unlikely. Average loan duration is around 5.1 years.

Mortgage Planning explores alternative types of mortgage financing so that you can adjust the structure of your largest liability to make room for other goals. This may mean lower payments now, and higher payments later. It may mean less certainty in the future, or greater interest rate risk. It may also mean the difference between living 'house-poor' and achieving more of your financial goals. When weighing these risks, you need to also explore the probability that they would even matter. And what do you risk by being too safe?

For a more sterile example of why alternative mortgage products might make sense, see this short essay by the San Francisco Federal Reserve, especially the section titled: "Some motives for choosing alternative mortgages".

Everybody is different. Make sure you have proper guidance so you can fit your mortgage plan within your financial plan - and your life plan.

Wednesday, January 10, 2007

Interest to Remain Moving Target in 07

The rolling economic data is keeping Ben Bernanke and the Federal Reserve on their toes. And in return, the Fed is keeping the investment community on their toes. As recently as 3 months ago, the futures market had a probable interest rate cut predicted as soon as December 06. By the time December rolled around, those odds had faded, and now, nothing is expected until the third or fourth quarter - if at all.

The Fed is still eyeing inflation as their greatest concern. They have continued to suggest that the "extent and timing of additional firming" will depend on this incoming rolling data. The bias is in fact on a tightening as the next move, but its a pretty modest one at this point.

Through the eyes of Real Estate Finance and Mortgage Planning, this has rates continuing to stay in a narrow range, and they are expected to do so through much of the year.

Wednesday, January 03, 2007

What Happens when Everybody is Talking About Housing?

"Housing Decline" was the most talked about news item of the year in 2006, according to a recent AP article. This probably comes as a surprise to nobody. But to what extent does consumer sentiment about housing have an impact on the underlying values? Or is it just a good way to get a barometric reading on the financial aspects of the market?

Back in 1999 when I was working as a financial advisor, I remember reading several articles that discussed the relationship between news reporting frequency of key terms and the financial performance of the related commodity. Back then, all the talk was about the stock market, and mutual funds, which had become so prolific that they outnumbered the number of individual stocks listed in the US Market. Inexperienced investors were being drawn to the stock markets in droves, and prices were flying with the influx of new money. On occasion, even hip-hop music - historically boastful about financial prowess - made mention of mutual funds amidst its more commonly urban references.

The significance of this was that the more there was mention of a sentiment in the news media and pop culture, the more likely it was that momentum was being driven to an unsustainable level. We saw it come in 2000, when the stock market hit a major correction. The worst of the decline was felt in the NASDAQ, where most of the new investors had been drawn to the recent fast-paced technology company returns.

We saw it again last year in housing, when everybody seemed to be talking about buying houses, with 'no money down' and making 'positive cash-flow' from the start. All of these infomercial testimonials with the 'average couple' sitting by a pool at a resort in Orlando, discussing how much passive income they received in the previous month... it was a sign that the market was over-heated.

Charles Kindleberger notes in his famous anatomy of a crash Manias, Panics and Crashes that "when the world is mad, we must imitate...", capturing the essence of the fuel that is the consumer in pursuit of ROI. Even when we know something is too good to be true, there can be an urge to get involved. If you don't, you risk getting left behind. To this end, the American consumer has the ability to self-fulfill its own prophecy, but it typically leads to excesses, and the last guy in gets left holding the bag. So far the 'housing decline' seems to be moderate in most markets - but not all. Its going to be easy to see in retrospect where the market got overheated. I've discussed it here before, and I will continue to as we cycle through this market.

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Heres a link to some economist sentiment for 2007