November 27, 2007

That ‘Top One Percent’

By Thomas Sowell
People who are in the top one percent in income receive far more than one percent of the attention in the media. Even aside from miscellaneous celebrity bimbos, the top one percent attract all sorts of hand-wringing and finger-pointing.

A recent column by Anna Quindlen in Newsweek (or is that Newsweak?) laments that “the share of the nation’s income going to the top 1 percent is at its highest level since 1928.”

Who are those top one percent? For those who would like to join them, the question is: How can you do that?

But that’s only good for one year, you may say. What if they don’t have another house to sell next year?

Well, they won’t be in the top one percent again next year, will they? But that’s not unusual.

Americans in the top one percent, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring “class” — especially by those who have overdosed on the magic formula of “race, class and gender,” which has replaced thought in many intellectual circles.

At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.

Among the top one-hundredth of one percent, three-quarters of them were no longer there at the end of the decade.

These are not permanent classes but mostly people at current income levels reached by spikes in income that don’t last.

These income spikes can occur for all sorts of reasons. In addition to selling homes in inflated housing markets like San Francisco, people can get sudden increases in income from inheritances, or from a gamble that pays off, whether in the stock market, the real estate market, or Las Vegas.

Some people’s income in a particular year may be several times what it has ever been before or will ever be again.

Among corporate CEOs, those who cash in stock options that they have accumulated over the years get a big spike in income the year that they cash them in. This lets critics quote inflated incomes of the top-paid CEOs for that year. Some of these incomes are almost as large as those of big-time entertainers — who are never accused of “greed,” by the way.

Just as there may be spikes in income in a given year, so there are troughs in income, which can be just as misleading in the hands of those who are ready to grab a statistic and run with it.

Many people who are genuinely affluent, or even rich, can have business losses or an off year in their profession, so that their income in a given year may be very low, or even negative, without their being poor in any meaningful sense.

This may help explain such things as hundreds of thousands of people with incomes below $20,000 a year living in homes that cost $300,000 and up. Many low-income people also have swimming pools or other luxuries that they could not afford if their incomes were permanently at their current level.

There is no reason for people to give up such luxuries because of a bad year, when they have been making a lot more money in previous years and can expect to be making a lot more money in future years.

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

Most income statistics do not follow given individuals from year to year, the way Internal Revenue statistics do. But those other statistics can create the misleading illusion that they do by comparing income brackets from year to year, even though people are moving in and out of those brackets all the time.

That especially includes the top one percent, who have become the focus of so much angst and so much rhetoric.

In the real estate industry, there has been much talk and interest in the Baby Boomers that are now coming to retirement age. The Baby Boomers are approximately 78 million people that were born from 1946 to 1964. To put the Baby Boomers in perspective one only needs to look at the basic statistics that illustrate the immense size and power of this demographic. For instance, approximately 7,918 people in the US turned 60 each day in 2006.

The Bureau of the Census estimates that there will be twice as many persons age 65 or older in 2030 as there are today: 69 million (20 percent of the population) versus 34 million (13 percent of the population). Likewise, the Bureau’s population projection, from its middle series, shows 18 million persons age 85 or older in 2050 (4 1/2 percent of the U.S. population); now, there are less than 4 million persons in that age group (1 1/2 percent of the U.S. population).
- “Retirement Prospects of Baby Boomers - Statistical Data Included“. Family Economics and Nutrition Review. Wntr 1999. FindArticles.com. 26 Nov. 2007.

This is an introduction to an exciting new offer for Baby Boomers and those of us interested in the Baby Boomers. Boomer 411 is coming soon! It is a new search portal that is dedicated to the best thinking, reflections, discovery, solutions, innovation and pioneers in fields related to Baby Boomers. Financial Ambition is a trustee of the new search site (we are providing and tagging financial and real estate related content for Boomer 411). Currently, you can go the Boomer 411 blog and learn more. Enjoy the blog and much more to come as the search site will be live soon!

Thanks CraftyGoat for this photo.

We recently introduced you to Realius the fantasy real estate game. Because, Red Oak Realty is beta testing this new game, we were able to make an offering of the free beta in our previous posting. Now, Realius is offering prizes to play! 

Play and win! Price homes between November 21 and November 30 and you will be entered into Realius’s first Sweepstakes to win a $250 gift certificate to amazon.com. For every 25,000 points you score, you’ll earn one chance to win (up to 5 entries). The more you play, the better your chances to win - and bragging rights within the Realius community! The winner will be announced in December.

Click the link below for a free trial of the Beta version of the game. Click the Sign Up tab in the top right corner of the screen and register to enter yourself in the sweepstakes.

http://redoakrealty.realius.com/invite/ngz9g

NO PURCHASE IS NECESSARY TO ENTER OR WIN. Must be 18 or older and a U.S. resident. Begins November 21, 2007 at 12:00 P.M. (PT) and ends November 30, 2007 at 11:59 PM (PT). Void where prohibited. To enter, log on to www.realius.com, register, play the PRICE ME NOW game and follow the instructions to enter the Sweepstakes or, hand-print your name, address, city, state, zip code, daytime phone number, and email address on a 3”x5” piece of paper, mail in stamped envelope to: Realius, Inc., Attn: PRICE ME NOW Sweepstakes, 1625 Shattuck Avenue Suite 210, Berkeley CA 94709. Maximum five (5) entries per natural person per email address. Mailed-in entries must be postmarked by November 30, 2007, and received by Sponsor no later than December 7, 2007. Odds of winning depend on the total number of entries received. Sponsored by Realius, Inc. 1625 Shattuck Avenue, Berkeley CA 94709. See www.realius.com starting November 21, 2007 for complete rules and details.

Thanks Pete Southwood for this flag photo.
Lately, I have been hearing many realtor’s and other industry insiders speak about how the 2008 United States presidential elections are affecting the real estate markets. So, how will our pending presidential elections affect our struggling markets in the coming year? Will politics shift the tides in the real estate markets?

It is obvious that real estate will be a topic of conversation in the 2008 political elections. Just take a look at the Boston Globes article entitled, Democrats Offer Fixes to Foreclosure Crisis.

The more the crisis ripples through the economy, the more it will help Democrats make the case that Republican economic policies have spurned middle- and lower-income families, some campaign watchers said. - Marcella  Bombardieri at the Boston Globe

Why so much attention you may ask? Because our real estate markets have slowed from the bottom up. This leaves some areas like the Bay Area’s high end real estate market still appreciating while the middle and low end markets are suffering. The little guy has been most hampered by the liquidity crisis and kicking the little guy is never politically correct. Thus we are already seeing many new legislative bills that are aimed at creating a better buying and selling environment. Some of these bills are trying to get rid the IRS’s short sale phantom tax collections. Others are aimed at making the mortgage and banking industry’s actions more transparent to the consumer. The topic of real estate has even found its way into the discussion of the falling dollar value verses other world wide currencies.

The Matrix Blog has a great posting entitled, Housing Market Depreciates the Politics of Future Expectations. This article illustrates those political figures that are pushing housing concerns to the top of the political mountain. Personally, I am neither for or against any particular political reform to address our current housing cycle. Using my little voice, I am encouraging all politicians to focus on legislation spurring US economic growth as a whole and discouraging them from endorsing legislation that they believe will garner more votes.

One bet is for sure… Real estate and finance will be at the forefront of the 2008 elections, which illustrates how important real estate is for wealth generation and personal prosperity.

The first line of this is curious as anyone who is studying the finances of the baby boomers would not be surprised that the reverse mortgage market is hot.  The vast majority of boomers simply have not saved enough to pay for their retirement so they will be looking anywhere and everywhere for help to continue to pay for even their most basic needs.  Their home equity is one of those obvious places.  Also, lenders have seen a dramatic drop in their loan volume so they have every incentive to offer products to the baby boomers who need to use home equity.  This is no surprise at all if you know how to look at it. 

Reverse Mortgages: The Choices Expand By KELLY GREENE and VALERIE BAUERLEIN November 13, 2007; Page D1 It may sound hard to believe, but one part of the mortgage market is hot: reverse mortgages. And that’s giving older homeowners more options to tap the equity in their homes — but also opening the door to more confusion and mistakes. Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain-vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments or a line of credit. Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts. One lender has reduced the minimum age requirement to 60; others are making loans on second homes and vacation rentals. “Jumbo” reverse mortgages — for houses valued at as much as $10 million — are becoming more common. With a reverse mortgage, instead of the borrower making payments to the lender, the lender makes a payment or payments to the borrower. The borrower keeps control of the house and doesn’t have to pay back the money as long as he or she lives there. When the homeowner dies or moves out, the loan is typically paid off by selling the house, and any money left over goes to the homeowner or the homeowner’s estate. The product is evolving from meeting basic needs to fulfilling the desires of a new generation of retirees, from funding a vacation getaway or a recreational vehicle to renting a Paris pied-a-terre. The new options, though, mean more potential for confusion among consumers — and a bigger chance that they could miss out on getting the best loan for their situation. And as home prices fall around the country, some homeowners stand to be disappointed. “We’re seeing people apply for a reverse mortgage and find out their home is worth 5% less than they thought,” says Jeff Taylor, vice president of Wells Fargo & Co.’s senior product group in Greensboro, N.C. With so many competing offers to choose from, homeowners could easily wind up paying more in fees and interest rates than they should. Fees are typically steep — more than 5% of the home’s value — and most borrowing limits are capped based on where the homeowner lives. Fees are paid upfront or financed, while interest rates affect how much of your equity the lender ultimately takes. Reverse mortgage lenders traditionally have charged variable interest rates; now, fixed rates are available, but they may cost you more, says Barbara Stucki, director of the National Council on Aging’s home-equity initiative. Because of all the choices, homeowners need to be “a lot more strategic” in how they shop for a reverse mortgage, Ms. Stucki says, factoring in how they want to take the payments and how much money they want to take upfront. The boom in reverse mortgages helped Ronald Prast, a 74-year-old Phoenix retiree. When he first applied two years ago, he was told by a loan officer that he wasn’t a good candidate; government rules would have allowed him to cash out only a small portion of the value of his half-million-dollar home. But last November, when Bank of America Corp. introduced a reverse mortgage that allows homeowners to borrow as much as 65% of a property’s value, up to $10 million, Mr. Prast and his wife, Carolann, quickly signed up. The couple’s house, for which they paid $105,000 in 1981, was appraised at $540,000, Mr. Prast says. They used an initial draw of $208,000 to pay off their outstanding mortgage, home-equity loan, one year’s property tax and the loan fees, freeing up an extra $21,000 a year formerly used to make mortgage payments for travel and indulgences like paying for a granddaughter’s semester in Australia. They also have a credit line worth $75,000 that they are setting aside for medical expenses. “We were comfortably well off, and we wanted to release some of the funds we had tied up in our home,” Mrs. Prast says. Taking out a reverse mortgage to travel or spoil grandchildren is a far cry from just a few years ago, when such products generally were considered loans of last resort for seniors to avoid foreclosure or simply cover living costs, such as prescription drugs or hospital bills. In the past, the reverse-mortgage market has been constrained by having one main buyer, Fannie Mae. But a half-dozen investment banks, including units of Lehman Brothers Holdings Inc. and Bank of America, have started buying reverse mortgages in the past few years, with plans eventually to package and sell them. On Thursday, Ginnie Mae, the federal agency charged with making real-estate investment more attractive to institutional investors, said it’s rolling out a standardized government bond issue backed by reverse mortgages — a key step in creating a secondary market that could help lower borrowers’ costs and increase the loans’ availability. The result: The reverse-mortgage business is booming. Though reverse mortgages represent less than 1% of the overall U.S. home-loan market, valued at about $10 trillion, the number of federally backed reverse mortgages surged 41% in the year ended Sept. 30, according to the Department of Housing and Urban Development. Bank of America plans to expand its Arizona test of reverse-mortgage products nationwide within six months, says Colin McCormick, the bank’s top reverse-mortgage executive. In April, BofA announced it was buying the reverse-mortgage business of Seattle Mortgage Co., the third-largest reverse-mortgage lender by number of loans. The new products — and new bells and whistles — mean that homeowners considering a reverse mortgage are facing more homework than ever before. There are two questions they should ask first: What index does the loan use? It could affect your cost. Financial Freedom, the Irvine, Calif., reverse-mortgage unit of IndyMac Bancorp Inc., launched a product last month that bases its interest rate on the one-month London interbank offered rate, or Libor, index. Reverse mortgages traditionally have used the CMT index, which is based on Treasury bonds. Using the Libor index should lower interest rates “over the long run” for reverse-mortgage users, says Michelle Minier, Financial Freedom’s chief executive. But the borrower may have to give up “a small measure of cash, from 2% to 5%,” to get the lower rate, she adds. Still, consumers should investigate products that use the CMT index. Different products tack on varying amounts of extra interest to whichever index they use. One product might add 0.65 percentage point; another might add 2.00. What are the fees? Fees typically run up to 7% on government-backed loans — in which the Federal Housing Administration insures lenders’ and borrowers’ risk — but are as low as 2% on proprietary loans. If you’re seeking a lump-sum payout for a reverse mortgage on a high-value home, some lenders are willing to eliminate or reduce the upfront costs. And if you borrow less, you can often lower your fees, too. But you may pay higher interest rates in exchange for lower fees, says David Certner, legislative-policy director at AARP, the Washington-based advocacy group. For a 62-year-old Atlanta couple with a $500,000 house, for example, Financial Freedom’s proprietary product would provide up to $148,289, with a 7.79% interest rate. The homeowners would pay fees worth 1.4% of their home value, or $7,000. The same couple could get only $140,596 through a FHA-backed Home-Equity Conversion Mortgage, or HECM, from Financial Freedom. In contrast, the interest charged is only 4.93%. But they would pay a higher fee — 5.2%, or $13,262 — based on the federal lending limit for their county, which is $252,890. If a couple uses the money as a line of credit, though, the balances earn different rates of interest depending on the loan. For instance, the credit line for Financial Freedom’s proprietary loan would increase by 5% a year, compared with 6% for its HECM product. But those rates, being variable, are subject to change. Write to Kelly Greene at kelly.greene@wsj.com1 and Valerie Bauerlein at valerie.bauerlein@wsj.com2

There have been several interesting tech articles recently written about Realius. Realius is a real life real estate game. Currently they are getting ready to release their first game called, “Price Me Now”. Players of the game look at photos and MLS data on properties and try to guess their pricing. Their beta release has been made in conjunction with Red Oak Realty the firm where I work.

Our first game, a home pricing game, meets Jason’s requests. Players will see what the community thinks homes are going to sell for and how they fit into that community. Take a look at a partial screenshot from the game:

Players will also see what realtors think and will be scored on how close their guess is to the ‘crowd guess’.

Realius was recently featured on Tech Crunch and was shown in the Tech Crunch 40 demo pit. See the video below.

Below is link to play Realius’s first beta game! Enjoy playing and feel free to sign up under your own account and play!

http://redoakrealty.realius.com/invite/ngz9g

The bad financial news isn’t over on a national scale. On an individual basis, we advise clients to clean up their credit card debt. Credit card debt is a wealth killer as it saps real money from a borrower and it does so quietly when one only pays the minimum each month. At an interest rate of 18%, a credit card balance will double in 4 years.

U.S. Credit Card Debt Seen As Next Nightmare
2007-11-07 06:44am
Americans now owe nearly as much on their credit cards as the estimated $1 trillion subprime loan debt that has sapped the housing industry and put a squeeze on the U.S. economy.

Newsmax.com reported Wednesday now owe a record $915 billion on their credit cards alone. Worse, defaults and delinquencies in the credit card industry are beginning to mount.

Credit card companies wrote off 4.58 percent in payments between January and May, almost a third more than in the same period in 2006, according to Moody’s Investors Service.

As a result of that action lenders like Citigroup, Bank of America, American Express and others already in trouble from the subprime mortgage collapse are being further weakened.

The U.S. economy itself is in danger as well, since it depends on consumer credit spending. Seventy-two percent of the U.S. economy rides on consumption alone.

With oil and gas prices up and the U.S. dollar falling, some analysts see economic disaster looming on the horizon, Newsmax.com reported.