Thanks to Todd Derick for this flicker photo.

I just read an article on the Blown Mortgage blog. It had a graph showing new and existing home sales. Of course in this market both are down. In fact, the Blown Mortgage blog is claiming that the volume of existing home sales is down 15% from last year.

First, it is important to note that just because the volume of sales are down, it does not mean that values of homes are dropping. In fact this can be quite the contrary in certain areas. This is the case certain segments of the Berkeley California market where many listings are still transacting with multiple offers. Just a month ago I saw a home get 15 offers and sell at a price way above the average median price for a home of this size and location.

Second, I found it interesting that the existing home sales have begun to diverge from new home sales. In this graph since January of 1994 existing and new home sales tracked each other fairly steadily. Yet, we can see in January of 2008 that the curves are fairly far apart with the number of existing home sales beginning to level off while new home sales volume is still plummeting.

I speculate this is because many developers have stopped projects that were in the pipeline if they could. We have seen this effect in the drop in new home permits as well. We are seeing that the average homeowner in an existing home is still transacting while the investor/speculator is not. This makes sense for many home owners must sell and buy in any market. For instance, life ensues in any market and homeowners are relocated to new jobs all the time.

Does this indicate the bottom of the market? I am not sure, but it does indicate what we can expect from our market without a large volume of speculated dollars being spent to drive up prices. The air was let out of the real estate bubble for more then one reason. The constriction of financial liquidity in the mortgage markets started the deflation. Once the mood was set, the exit of speculators and investors, drove the market down further. Now we are seeing buyers who were over leveraged get caught in the falling values and go into foreclosure. I suspect that when we see the developers begin to return to the market and banks begin to loosen their guidelines, we will see a more robust market again. I also speculate that we should see a return in existing home sales before we see it in new home sales, for the mechanics of the entitlement and permitting processes means that it takes time for developers to ramp back up into production.

Interesting news on he mortgage front in California is that FHA is now offering 3% down on loans up to $729,750. FHA also allows for a 3% credit towards buyers non-reoccurring closing costs. This means that buyers can be 0% down once again. I view this as a drastic loosening of the mortgage guidelines. One blockade down… So, where are those speculators?

I have written several postings in the past about all of the unimaginable things going on with real estate development around the world. Many of my posts have focused on Dubai where whole islands are being literally raised out of the sea.

Recently, I ran into a new concept that is in the process of being designed and building. Each story of the building actually rotates independent of the others. This means that the building is constantly in motion, so that it supplies every view possible to the occupants of each unit. What an interesting idea for a building that actually shifts its shape. It sounds as interesting for the people who view it on the street as it does for its occupants.

The renowned architect David Fisher is the visionary of this project. Of course Dubai is going to be one of the first cities to receive on of these animated projects. Check out the building in motion on the architects web site at: http://www.dynamicarchitecture.net/intro-high-resolution.html

For those of you whose plan is to work until you are 70, here’s a warning about that strategy.

For a Good Retirement, Find Work. Good Luck.

Bill Neugent, an engineer in McLean, Va., is doing his bit to ease the looming generational financial squeeze as the nation’s 75 million baby boomers begin to retire. He’s working longer.

Mr. Neugent, 62, plans to work full time until he is 65 and then part time for the Mitre Corporation, a federal research contractor that encourages older workers to stay on.

There are, it seems, too few such workers and employers. The average retirement age for men now is 63 and for women 62. But the emphatic conclusion of recent research into retirement policy and labor markets is that working another two or three years would have a surprisingly powerful impact on the retirement living standards of millions of boomers and on the economy.

The economic gains, according to a report published this month by the McKinsey Global Institute, a research group, would include increased household savings, higher tax collections and a reduction of the fiscal strain on Social Security and Medicare; together, that would add an estimated $13 trillion to the economy by 2025, or about a year’s total output of goods and services today.

“It’s the only answer, but don’t count on the story turning out that way,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College and co-author, with Steven A. Sass, of the book “Working Longer: The Solution to the Retirement Income Challenge” (Brookings Institution Press). “It’s going to take a lot of education and changes in policy and attitudes.”

The biggest obstacle, experts say, is that most companies are reluctant to retain or hire older workers. At the top of the corporate ladder, executive recruiters are routinely told not to seek anyone over 50, notes Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School.

Similar sentiments, Mr. Cappelli said, can be found across the job spectrum. He points to a batch of evidence. In one survey, one-fourth of companies said they were not inclined to hire older workers. In a research experiment a few years ago, thousands of made-up resumes were sent to employers; younger workers who had the same qualifications as older workers were more than 40 percent more likely to be called in for an interview than someone 50 or older. In an industry survey, a majority of technology companies candidly said they would not hire anyone over 40. (more…)

Notable & Quotable
June 19, 2008; Page A15, Wall Street Journal
Arthur Laffer speaking last month to graduates of Mercer University:

Pursuing your dream of prospering will benefit everyone . . . When I graduated from Yale University, we had a serious commencement speaker not like the one you are stuck with today. The commencement speaker was President John F. Kennedy. And the point I’m making today is the same point he made all those years ago. He said, “No American is ever made better off by pulling a fellow American down, and all of us are made better off whenever any one of us is made better off.” He concluded by using the analogy that “a rising tide raises all boats.”

Never forget or be ashamed of the fact that pursuing your own self interest furthers everyone’s interest. Without you, the poor would be poorer.

The press is not saying what it means for people to not have enough money and I think we can count on them never saying this.  The very people who are writing the articles for the major newspapers don’t understand what it means so they are incapable of saying.  Also, that won’t sell newspapers so that’s another reason they won’t tell the unhappy story of what will happen.  Not enough money at retirement means they will not be able to buy the products and services they need.  The drugs they need to stay healthy will be unavailable to them and no one is going to pay the bill for them.
A Few Final Thoughts On Planning For Retirement
By Martha M. Hamilton
Sunday, June 15, 2008; F01

I have spent the past two years focused on a subject that was almost an afterthought for most of my working life — financial planning for retirement. I knew when I started writing this column that the subject was vast and complex, but I had no idea just how complicated it was.

The new retirement landscape requires us to take on a job once handled by professionals. We now play a larger role ourselves ensuring that we will have adequate resources. That means saving and investing, often on our own, and trying to protect against such unknowables as how long we may live and what financial markets will be like in the future.

I’ve learned a lot in the past two years, and since today’s column will be my last for The Washington Post, I would like to emphasize the most important lessons.

· First and foremost, we need to pay more attention to our children’s financial education. It didn’t occur to me to talk to my daughter about money management when she was younger. It may have been because I thought she would pick it up automatically or because her teen years were so complicated that we never had the time. But she did stumble upon at least one principle. In her late 20s she called me, excited to have just learned about the magic of compounding from a friend in New Orleans.

I could have sworn I’d mentioned how compound interest multiplies, though she swears I hadn’t. It may just have been that talking to your kids about money is the same as talking to them about sex and drugs: They assume you have no personal experience, so they pay no attention.

I never did talk to her about the importance of beginning early to save for retirement. This year, though, she opened a Roth IRA with my encouragement. If you can, persuade your kids to start saving in a Roth when they take their first part-time jobs. With a Roth IRA, you pay taxes at the time you put the money into savings and take accumulated earnings out many years later tax-free. Most young people probably will be in a higher tax bracket as years go by, so a Roth is a better choice for them than a savings plan in which you pay taxes down the road.

On the positive side, Alec (also known as Sarah) inherited Scottish frugality from both sides of her family. Both her dad and I grew up in families that watched spending carefully. My dad was recycling in the 1960s, picking up neighbors’ yard trimmings to put on his compost pile. And my ex-husband’s family would stop the car and pick up produce that bounced off trucks in Texas — something we once did on the Eastern Shore, as well.

Since she is not a big spender, she has avoided a huge trap — the accumulation of crippling credit card debt.

· Second, although workers are increasingly reliant on their own savings, we are not saving enough or investing as wisely as we should. Health-care costs in retirement could be $200,000 to $300,000, or even more. Most of those who are lucky enough to have a retirement savings plan such as a 401(k) have less than half that amount. That doesn’t leave much to live on.

And many workers have no access to an employer-provided retirement savings plan.

Lower-income workers have a higher percentage of their earnings replaced by Social Security, which accounts for 90 percent or more of the earnings of 40 percent of all retirees. The lack of savings is going to hit middle- to upper-middle earners hardest, potentially resulting in a sharply reduced standard of living in retirement.

· Third, in addition to health-care costs, I have learned to fear inflation — and longevity. Inflation is way scarier to me than recessions are, because it virtually never lets up. And it can erode your savings the same way a trickle of water can carve a canyon, given enough years.

Even mild inflation is dangerous. Say you have $100,000. At an inflation rate of only 3 percent a year, it will be worth just a little over $50,000 in 20 years.

I remember the 1970s, when inflation rates rose to more than 14 percent a year. That was pretty scary.

As for longevity, a long life is less of a blessing when you outlive your savings. We all have a tendency to underestimate our longevity, myself included. For most of my life, I expected to live to about 90, based on family history. But now, with my mother going on 95 and with some experts saying you should add about five years to your life expectancy based on family history, I’m guessing I might live to 100.

I am fortunate to have a pension that will provide monthly payments for life, but it is not adjusted for inflation. As a result, I want to delay taking Social Security as long as possible. A large number of workers claim Social Security at age 62, or as early as they possibly can. That results in lower payments for life. I would rather wait and have the cost-of-living adjustment on the biggest base possible.

A growing concern that I have developed in writing this column is for the large number of workers whose savings will be inadequate in retirement. This could occur for any number of reasons: because they did not save enough or did not invest as wisely as professional pension experts, or because they used their savings to survive a break in employment or, unwisely, took the money out in a lump sum when they changed jobs and spent it. Fortunately, lots of smart minds are focused on this problem, coming up with suggestions to either improve retirement savings plans or to replace them.

I thank The Washington Post for giving me this opportunity to write about an extraordinarily important issue, and I thank the readers for their helpful feedback and column suggestions and for contributing to my continuing education. I am not leaving the subject: I will continue writing on retirement issues for the online AARP Bulletin.

Join Martha M. Hamilton and Teresa Ghilarducci, an economist at the New School for Social Research and author of “When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them,” at noon Tuesday for an online chat at washingtonpost.com.

A friend introduced me today to www.pandora.com.

If you like music, this is a great site for finding new music that is in the same genre as what you already like. The site is part of the Music Genome Project. I don’t know what that is but it sounds cool.

We write mostly here about very serious subjects because we take yours and our financial situations very seriously. Here’s something a lot lighter than what we normally serve up. Enjoy!

http://www.nytimes.com/2008/06/17/business/17fed.html

How do we pay for each additional day of living that we receive from medical advances?

Too much debt takes away people’s autonomy. They lose their freedom to work where they want and with whom they want, they lose freedom to change jobs or careers because they need the next paycheck. I worked with client’s personal financial situations for 7+ years and the biggest problem I saw was that people were unwittingly auctioning off their autonomy to Mastercard or to their mortgage provider. When I had this conversation with clients, many changed habits because they now had the facts and could see what their purchase of new kitchen appliances or that Mercedes would do to their freedom. Clients still purchased homes because of the history and hope for house appreciation we have seen in California. But, they usually told me they would hold off buying that next car or they could live awhile longer with their furniture all for the sake of keeping more of their freedom.

I think the answer continues to be knowledge about money, compound interest, saving and investing. The conversation needs to change to one of new virtues being no credit card debt and a bank account instead of the old virtue of having the nicest clothes, best wines, exciting and expensive vacations, Mercedes, a boat, plasma TV and huge house.

The New York Times
June 10, 2008
Op-Ed Columnist
The Great Seduction
By DAVID BROOKS

The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance and frugality. Millions of parents, preachers, newspaper editors and teachers expounded the message. The result was quite remarkable.

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

Sixty-two scholars have signed on to a report by the Institute for American Values and other think tanks called, “For a New Thrift: Confronting the Debt Culture,” examining the results of all this. This may be damning with faint praise, but it’s one of the most important think-tank reports you’ll read this year.

The deterioration of financial mores has meant two things. First, it’s meant an explosion of debt that inhibits social mobility and ruins lives. Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion. By last year, it was up to $937 billion, the report said.

Second, the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents.

The loosening of financial inhibition has meant more options for the well-educated but more temptation and chaos for the most vulnerable. Social norms, the invisible threads that guide behavior, have deteriorated. Over the past years, Americans have been more socially conscious about protecting the environment and inhaling tobacco. They have become less socially conscious about money and debt.

The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don’t have to work to build for the future. They can strike it rich for nothing.

Payday lenders have also played a role. They seductively offer fast cash — at absurd interest rates — to 15 million people every month.

Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they’ve found that they can make money off the young and vulnerable. Fifty-six percent of students in their final year of college carry four or more credit cards.

Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It’s only now become respectable to do so.

Wall Street has played a role. Bill Gates built a socially useful product to make his fortune. But what message do the compensation packages that hedge fund managers get send across the country?

The list could go on. But the report, which is nicely summarized by Barbara Dafoe Whitehead in The American Interest (available free online), also has some recommendations. First, raise public consciousness about debt the way the anti-smoking activists did with their campaign. Second, create institutions that encourage thrift.

Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

Divorce, or variations on that theme, is starting to look almost as certain as death and taxes… the national average seems to be holding with about 1 out of 2 marriages ending in divorce. Among my friends, family and clients, it seems the number of couples around me calling it quits has escalated over the past few years. I suppose it could simply be my age, the circles I travel in and living in California. With splitting couples, very often their home will be their single largest asset. They may even fight tooth-and-nail to keep the home and send their “ex” packing. Here’s the thing: this could be a huge financial mistake. Often the consequences are not realized until long after signing the settlement agreement. Generally there are three issues around real estate that come up that are often overlooked in a divorce.

The first issue has to do with the property as an asset class and liquidity. Let’s say a couple (Popeye and Olive Oyl) owns a home worth $1,000,000 free & clear, i.e. no mortgage. And in addition, they have $1,000,000 of cash and invested assets. They agree to split everything 50/50. But Olive Oyl wants the home. So she will give Popeye her half of the cash in trade for his half of the house. Though Olive now has a place to live, she has 100% of her assets invested in real estate with no liquidity (unless she sells or finances some of the equity out of the property). This is equivalent to having all of your money tied up in one single, privately held investment… not real consistent with Modern Portfolio Theory.

The next issue has to do with affordability and qualifying. Let’s say Popeye and Olive have a $500,000 mortgage. The payment on the house with property taxes and insurance is $4000 per month. Olive only has to give Popeye $250,000 of her cash to buy him out. So she has $250,000 left in cash plus the house with the mortgage. The first question is can she afford the payment? That’s a much bigger question than I can address here, so let’s say she thinks she can handle the payment. But Popeye doesn’t let her get off the hook so easy. Since both signed the mortgage obligation when they were married, Popeye will remain liable from the lender’s point of view even though he may not be on the title as an owner of the property. If Olive can’t qualify on her own either for a new mortgage or in assuming the current one, Popeye may be very reluctant to go along with this.

Last, and probably one of the most overlooked issues with taking the home, has to do with . . . taxes. Popeye and Olive bought their home for $500,000 a while back. Since the value has doubled, they would have a $500,000 gain if they sold the home today. Because it was their principal residence for two out of the last five years, they would be able to exclude all $500,000 of the gain from being taxed as a married couple (see IRS Publication 936 at www.opesadvisors.com/resource/links.html). But if Olive buys out Popeye and at some point in the future she sells the home, she will only be able to exclude $250,000 of the gain as a single person. This means she will take on about a $62,000 tax burden that she will realize when she sells the home (assuming the tax laws don’t change… so could be more!). Additionally, if Olive sells the property and pays a real estate commission, she will incur 100% of that expense, as opposed to splitting it with Popeye. This could easily be another $25,000 she would have otherwise not paid (50% of a $50,000 commission). Olive has now blown about $90,000, or 12% of the assets she received out of the divorce settlement, without even knowing it.

For those of you that are able, consider working to have your marriage not be the one-out-of-two that divorce. For the other half, seek out financial, tax and legal advice prior to settling the terms of your agreement. Your attorney may be very skilled in representing you legally, but unlikely to know all of the finance and real estate consequences to your decisions.

Copyright © Jeffrey T. Smith • (415) 464-9500 • jtsmith@opesadvisors.com Jeffrey T. Smith is a financial advisor and the Marin Manager for Opes Advisors, a Wealth Management Firm specializing in Mortgage Banking and Investment Management.