General Personal Finance | Bay Area Real Estate Finance

Are You Ready for the 2.XX% Mortgage? Are You Sure?

15 year mortgage sets record low — 15 year mortgage rates break the 3% barrier

Ahh…

It seems like only yesterday that I was shaking my head in disbelief about mortgage rates heading below 4 percent. That was many mortgage moons ago, way back in September of 2011.

When Mortgage Rates Broke 4.00%

The catalyst at the time was the Federal Reserve announcement about Operation Twist, a program designed to press down on long term interest costs, namely 30 year mortgage rates. It did not take long either; the average rate on a 30 year mortgage fell below 4% in late 2011, and has remained in the 3.XX zone for most of the year so far.

This time, it’s all about Europe.

Mortgage Rates Now Break Below 3.00%

According to the latest survey data, the record low on 30 year fixed rate mortgages was established two weeks ago, and then maintained through last week. But stealing the show last week was a fresh new record low on 15 year mortgage rates. Now officially below the 3% mark at a survey average of 2.97%.

That is an eye-popping number.

Source of the Data

We’ve discussed the Freddie Mac mortgage rate survey before, and it can be a little misleading if you’re trying to get a live rate quote. However, when viewing the week by week trend in the numbers, you do get an accurate depiction of the market.

click here for a free, live rate quote

Is it Worth Committing to a Faster Payoff?

Applications for shorter mortgages, such as the 15 year, are on the rise. With the quicker payback schedule of a 15 year mortgage comes a higher payment than with a 30 year mortgage. This is despite the 15 year’s relative discount in the rate. And because 15 year mortgage payments are higher, qualification for a new 15 year loan is actually more difficult than it is for a 30 year loan.

So it may be the case that in order to break the 3.00% mortgage barrier, you’ll need to take out a smaller loan. Is it worth it? Sometimes there’s more to it than just the rate on the loan. For each consumer evaluating this decision, a different set of unique variables will apply.

We can help. Click here to check rates on 15 year and 30 year loans

Should You Fix Up Your Home Before Selling?

According to this report from Hanley Wood, who is “the number 1 media company covering construction”, the short answer is “Hell no.”

There are a few key takeaways from this Remodeling Cost vs. Value Report. I viewed the Pacific region, but it looks like they offer much more granular city/area specific reports. You can drill down into San Francisco, Los Angeles, San Diego etc.

The only investment in remodeling that suggested a lower cost to build than implied increase on sale price of the home was to replace the front door to the house. This is for mid-range value property. At the high end, nothing paid off.

In fact, some of these look terrible. A bathroom addition returns 53% of the cost at resale. A home office remodel returns 46%. Why bother? I wonder how accurate this data is. It’s not like they sell the same house with and without the improvements, and compare the outcomes. They are going off averages and comparables here.

But notice also how each of the categories has shown a decline in the percentage that is recouped as compared to prior years. Makes sense, because home values have fallen over that time frame. So naturally, the averages are all lower. But if the input costs were also falling, the year over year changes would be more mixed.

In other words, labor plus materials to do these remodel projects has not fallen as fast as the value of the product they produce.

This is an interesting subtext of markets in transition. I don’t believe for a second that there are not some remodel projects that, when done with cost efficiency to the right property at the right time, can bring on better than 100% return on investment. If this weren’t possible, it would imply that you couldn’t make money building a house. I don’t think we’ve come that far.

But if you are looking to sell a not-so-pretty property, wondering if you should do some cosmetic repairs – or more – you really do have to wonder about this climate. It could be throwing good money after a not-so-pretty asset. Best bet, talk to your real estate agent about it, and get their opinion on this report, and the topic in general.

If you could use an introduction to a real estate agent who can have this conversation with you, contact me through the form below.

SF Supervisor Sends The Bank “Jingle Mail”, Oakland Mayor Takes A Pay Cut

door key photo © 2010 woodley wonderworks | more info (via: Wylio)What do you make of this? San Francisco Supervisor Malia Cohen has entered strategic default, allowing her home to be foreclosed on not necessarily because of hardship with making the payments. It’s referred to as “jingle mail” to euphemistically represent the idea of sending your keys back to the bank by mail. The article doesn’t mention whether she demonstrated that level of courtesy.

I am sensitive to the times we live in. There is financial wreckage all around us, I understand survival instincts, and am sympathetic to the many who have been screwed, whipsawed, and browbeaten by the markets. There’s a million places to point the blaming fingers. At the end of the day, there is damage, on a wide scale and at the individual level.

But there’s also a spectrum here. And some people are in dire straits, losing their homes. And there are others who are financially stable, but are letting go of investments that didn’t work out. These cases introduce an interesting moral quandary in a paradoxical situation: what’s good for the individual is not good for the collective.

Meaning, at the individual level, default makes sense when you’re upside down. Or at least it might. We do the math, sometimes it says let go, sometimes it doesn’t. But strategic default isn’t just about you and some big evil corporation. It affects your neighbors. And neighborhoods. And collectively, the entire fabric of the US housing market. And then the broader economy. There’s a ripple effect here. More defaults lead to more defaults, when you think it through.

So what moral obligation does one have when addressing this equation individually? I first wondered about the fading social stigma associated with strategic default back in December of 2009.

What if that individual is in a position of public service, like a city supervisor? Does it change? What do you think? As an interesting juxtaposition, the first link under the article is to a story about Oakland mayor Jean Quan, another public servant across The Bay, and how she took a massive pay cut.

I’m going to leave it at that. I only wish to introduce the topic. Tell me what you think?

15 Tips To Avoid Being Madoff’ed

A recent post from Bary Ritholtz about 10 Lessons of Madoff’s Ponzi Scheme reminded me of a fairly recent presentation made by Ken Fisher at The Commonwealth Club, called How To Smell a Rat: The Five Signs Of Financial Fraud.

In actuality, there’s overlap between the two lists. But Barry’s post is a digest, and Fisher’s presentation runs an hour long, and gives a lot of great context. Good general advice for being smart with your money.

The FDIC also has a consumer advisory page about detecting scams.

Rewind: Retirement Overconfidence, April 2006

In April 2006, I was in Chicago preparing to give a best man toast at a wedding. I jotted down some notes on something I had with me for reading material. And this morning, cleaning out some stuff in my office, I came across the notes, turned them over to see what I had written on.

“Workers have Retirement ‘Overconfidence‘”

Wow. This was 3.5 years ago, and the study that the above article references indicated that 68% of workers surveyed reported that they were confident about their retirement savings. It also suggested that 53% of them had less than 25k saved for retirement.

That sounds like a horrible mis-match, but to me, that’s only ~21% that are delusional for certain (assuming the 32% NOT confident are all in the group that has less than 25k saved so far.)

But 77% had less than 100k saved for retirement. When we retire at ~67, and live to 78 (78 is the US life expectancy as of 2007), that 100k isn’t going to provide much of a Winnebago budget if it has to last for 11 years.

SIDE NOTE- And at least one prominent US doctor believes the first person to live to age 150 is currently a man in his mid-50s. Read that again. Do you still want to plan to retire in your 60s?

So where are they now? I’d love to see what the current survey says. How many are confident about their retirement planning now that we’ve passed into this era of economic crisis. How much has it affected confidence? (How much has it affected savings?). And how will it shape our expectations, planning, and savings habits going forward?

Slideshow of 100 Abandoned Homes in Detroit

This is a view of disaster through an artistic lens. There are some downright gorgeous shots in here, every one of them representing a story of tragedy, loss, failure, and hurt. A sign of the times, Detroit has had as many headlines as any other city as a representation of the worst economic conditions in our nation in ‘The Great Recession’.

Remember the mood only 6 months ago? While I think the recovery rally cries are a bit premature, it certainly does not feel as likely as it once did that we could see a full wide-scale meltdown or economic collapse.

We’ll come back, and the beginning of that long process is underway. I’d love to see these same 100 photos updated in a few years.

Stevie Ray Vaughan Called; He Wants His Social Security Back

According to The Tax Foundation for 2007 (most recent data):

the top 1% of tax filers paid 40.4% of all Federal taxes (up from 39.9%)
the top 1% of tax filers made 22.8% of total reported adjusted gross income
$410,100 income required to be considered top 1%
top 5% paid 60.6% of all Federal taxes on 37.4% of adjusted gross income
$160,000 income required to be considered top 5%
top 10% paid 71.2% on 48% of all income
$113,000 to be in the top 10%
bottom 50% of all filers paid 2.9% of the total income tax bill

What If You Could Set Your Own Tax Assessment Value?

Here in California, Prop 13 puts limits on periodic tax assessments, but in many other states the values change up and down with the county assessor’s opinion of the value of the property. There is an inherent conflict here where the county wants maximum tax revenue, and homeowners don’t want to have to deal with a bureaucratic protest every year when their tax bill feels like an insult.

Paul Kasriel recalls a concept for a solution to this conflict, as discussed by a former Fed official, and how it might relate to current challenges we are facing with “fixing” the economy. Specifically, he is looking at the “bad bank” concept currently being mulled over, and how current banks and the bad bank would theoretically agree on a value for the “bad assets”.

But backing up a step, I found the basis for the analogy more interesting. The self-assessment theory works as follows:

Let the owner of the real estate place the value on his property.
The taxing authority has the right to purchase the property at the owner-decided value.

Owners are deterred from placing too low a value on their properties, and no incentive to place too high a value on their properties. An efficient system for maximizing and fairly taxing the property in the county. The alternative, which is related to the cringing sounds you hear from economists watching government regulation, intervention, and inter-mediation in this broken-down marketplace, is one where there are more rules, regulations, loopholes and inconsistencies.

It’s a very thought-provoking piece. 2 pages of your time…

401(k) Seizure? Time for a Dose of Reality

Another vein of panic running through the foundation of the economic and financial stability – whatever amount of it is left – is a concern over an impending seizure by the government of 401(k) balances to be used for some nationalized program used for bailout funds. The Wall Street Journal ran an editorial on Friday, allowing this widespread concern to proliferate.

You can disregard any fear over this – it ain’t gonna happen.

According to George Miller (D-CA), who is chairman of house Committee on Education and Labor, this is nowhere near the intention or goal of Miller, or anybody else in congress.

Miller’s hearings on 401(k) legislation have the following objectives:
1. Expose excess fees that Wall St middlemen take from workers accounts
2. Bring young and low wage workers into the system
3. Ensure that retirement accounts have diversified investment options with low fees
4. Ensure workers have access to reliable independent investment advice
5. Reduce vesting periods and portability of 401(k) accounts

Congressman Earl Pomeroy (D-FL), member of the House Ways and Means Committee, says he is against anything of the sort, and suggests that this concept was born out of political gaming, pushed by conservatives as a threat of what a Democratic leadership landscape might bring.

Speaker of the house, Nancy Pelosi, says “we would never even consider a proposal to seize retirement assets.” in a statement issued to Ric Edelman, financial planner, when asked specifically about this topic.

One of the voices pushing this concept, Teresa Ghilarducci of New York’s New School for Social Research, who is referenced in the Wall Street Journal piece, even claims in an interview with Edelman that her comments were taken way out of context. However sour on the concept of 401(k)s, she admits she was never suggesting that the government take the funds under control.

If you want more information about participating in 401(k) plans, please contact your plan administrator at work, or your financial planner. If you would like a referral to a financial planner, please contact me.

Feedback Loops – I Raise My Hand And Ask, "Is There Homework?"

Scientists must be folding their arms and shaking their heads at the financial industry. The financial media and economic discourse of the day has adopted the term “Negative Feedback Loop”, a term that originated in scientific labs, to describe the downward spiraling momentum of our economy (housing values go down, more people are encouraged to sell, foreclose, etc, and that causes values to go down further, and round and round we go…).

The market action systematically feeds its result back into the force that caused it to do what it just did. A feedback loop. Have you ever stood between two mirrors, and looked at your reflection, and then the infinite reflections of your reflection behind it? Its like that.

Problem is, we’ve got the name wrong. This may sound like I’m picking on a technicality here, but I think it points to a bigger problem.

A “Negative Feedback Loop” sounds like the right way to describe what we are seeing in the economy. But a true Negative Feedback Loop is one where the output of the system works against the system, causing it to lose momentum, and return to equilibrium. What we have here is a Positive Feedback Loop, or one where the output reinforces the input. The result is an increasingly negative impact on our economy, so its easy to understand the confusion. We had another Positive Feedback Loop that fed the mania side of the cycle as well.

A snowball rolling downhill, growing in weight, causing it to keep rolling, is a Positive Feedback Loop.

Why do I split hairs here? The widespread adoption of an erroneously illustrated concept just begs the question of who is doing the thinking out there, and who is doing all the talking. The mainstream media just takes it in on one side, spits it out the other, no regard for accuracy or perspective. All of the talking heads, the so-called experts, the pundits, the authorities, they’re all confused like the rest of us about the big picture.

And it’s a tough issue to figure out, so confusion is understandable. But our electable leaders and policy makers would serve us all well to admit what they don’t know. Seems to me they feel a need to convince us that they do know, and the next thing you know, they’re acting on their contrived and false sense of confidence. And let’s face it, since 8 out of 10 Congressmen have no formal education in economics, most of these folks are expert at one thing, and one thing only: getting votes.

The bomb has gone off in the markets, and there’s a lot of dust flying around. Those of us who slow down and focus while everyone else runs around screaming, are going to be the first to see what the new landscape looks like.