December 22, 2007 :: Mark Lederer

Christmas Tax Gift From Uncle Sam

Uncle SamFirst, I must say sorry for the lack of my writing as we get closer to the end of December. It has been a busy season for us, which is counter intuitive to what the media is saying about the marketplace. Don’t believe all of the hype. There are many areas in the East Bay that are still transacting fairly smoothly. As the year closes, I would say that pricing is the name of the game. This implies that buyers are still in the Bay Area marketplace. They are just looking for reduced prices. This is in correlation with the mood that the media has instilled in this market. Don’t get me wrong, there are many California cities that are currently at a standstill. One only has to drive through places like Antioch or Stockton to see the rows of for sale signs.

Well it appears that just in the nick of time for the Holidays, the US government has issued a tax reprieve for those that will be trying to endure short sales in 2008. The California Association of Realtors stated it best.

Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.

One thing I think we can count on is for the government and the Federal Reserve to do all they can to try and lessen the blow of our slowing real estate market. I find it interesting that this market change has brought so much political concern. The changes have been dramatic, but I speculate that much of the media coverage and political interest is generated, because this market deteriorated from the bottom up. The entry level buyer seeking out the American Dream was devastated by the changing mortgage guidelines coupled with dropping real estate values. All the while the top 1% income earners are still able to get loans at fantastic rates under the current mortgage structure. Thus, we are now seeing the political bail out of the bottom of the market. It seems to be the current politically correct bandwagon that Capitol Hill is riding into an election year. How far will this go?  Should we be using interest rates and tax cuts to stabilize our markets or should we let this market wash out and recover on its own? I see much debate erupting in the blogosphere over this very topic. What do you think?   

Thanks kaneda99 for the photo of Uncle Sam.



December 10, 2007 :: Curt Van Emon

200

200 is the number of financial institutions that have gone out of business since the “credit crunch” of early August. Many, many more have gone out of business but they are too small to make this list. Losses at the major financial institutions are expected to top $100B. Although this seems like a lot of money, it’s a drop in the bucket compared to the US GDP of over $13 trillion in 2007. See Source.

The problem as I see it is the real cost in financial losses and suffering for American families who will lose their homes to foreclosure. No government program or loan alteration plan is going to save most of these people, they will have to suffer the consequences of the loans they took. Yes, I believe many were steered into loans they could not afford and who is responsible for this is a hotly debated topic. The reality is that the borrower is going to suffer the negative consequences in the vast majority of these situations. The plans I am hearing about will delay the inevitable for many and may save a few from losing their homes but the consequences will eventually come to most. They took on loans they did not understand and could not ultimately afford.

The lesson is that you need to understand what you are signing when dealing with financial institutions. Get yourself educated and find good, competent, trustworthy help. One axiom I have heard is that the more complicated the program is, the more dangerous it is to your financial health. This certainly turned out to be true for Option ARM’s.



December 3, 2007 :: Curt Van Emon

The Millionaires Who Don’t Feel Rich

Dear Readers,

I didn’t comment on this when it came out in August as I was on vacation when it was published and I just never circled back to it.  The author of this article is a journalist.  Remember this.  He’s writing to sell newspapers, not educate you.  His job is to entertain you.

There is an assumption here that those that already have a few million are working to keep up with their neighbors but this is not how I see it.  For example, if Celeste were to retire today with $5M capital at work, current accepted financial thinking is that she could safely withdraw 4% of her money to live on.  This is a $200,000 gross income annually to support her current lifestyle.  I am very sure that this is not enough.  So Celeste is probably not hustling to work to keep up with her neighbors, she and her husband need more capital at work to produce a higher income so she can sustain her standard of living through a long period of unemployment (commonly called retirement).  It isn’t politically correct to say that $5M isn’t enough but that doesn’t make me wrong.

http://www.nytimes.com/2007/08/05/technology/05rich.html

 



:: Curt Van Emon

Check your 401(k) fees - they matter over the long run

The fees you pay matter over the long run so you may want to take a look at what is happening with your 401(k).  If the fees are too high, send an email to your human resources department and make a complaint.  It may help if they hear from enough employees.

December 3, 2007
Editorial

Better Savings Plans

Take two savers, one at Company A and one at Company B. They each have $20,000 in the same investments in their respective 401(k) plans, which they leave untouched for 30 years, earning 7 percent. But the employee at Company A ends up with $132,000 and the employee at Company B ends up with $99,600.

The difference is the result of fees paid along the way, which reduce an employee’s return. At Company A, the annual cost for the 401(k) comes to 0.5 percent of assets. The cost at Company B is 1.5 percent.

Is the employee at Company B paying too much? Probably. As a personal finance rule of thumb, an employee should not pay more than 1 percent for a given fund in a plan. But when it comes to specific plans, costs can legitimately vary, based on the size of a plan, its level of administrative support and other factors. The problem is that it is exceedingly difficult to tell how much is being charged and whether those fees are reasonable.

A bill recently introduced in the House to fix the lack of meaningful fee information in 401(k)’s should be a high priority when Congress returns this week.

Under current law, 401(k) providers, such as mutual fund families or insurance companies, are not held to any consistent standard for disclosing fees. As a result, employers often have insufficient information when they make decisions about a 401(k)’s options and services. For instance, money management firms routinely list administrative fees, which are generally paid for by employers, as “zero.” But in truth, administrative costs are generally covered by charging higher investment fees, which come out of employees’ account balances. The bill would require 401(k) providers to break out all costs.

The House bill would also correct current law, which does not require that employees be told about fees that reduce their investment returns. Opponents of the measure, mainly 410(k) providers, argue that more information would be more confusing. It could certainly be made that way, full of legalese and equations. But it need not be. Fees are a major determinant of how much money one has at the end of a lifetime of saving. It’s ridiculous to maintain that savers should be kept in the dark.

Last year, Congress took a giant leap forward in helping Americans save for retirement when it allowed employers to automatically enroll employees in 401(k)’s, rather than requiring workers to sign up. (Employees are free to opt out.) The next big 401(k) challenge is improving employees’ investment returns. Full disclosure of fees is the logical place to start.