Think about stock. You buy stock in the morning and sell it in the evening. You flipped the stock. Does anyone care? No.

Think about a foreclosed property bought from a lender, a REO (real estate owned by a lender). You buy this morning and sell this afternoon. Does anyone care? Maybe. Here’s why.

Foreclosure Flipping

First, a trail of quick sales for a single property often suggests illegal activity such as faked appraisals, false documentation, and fraudulent closings and settlements. If a home is bought for $200,000 at 10 AM, sold for $225,000 at noon and re-sold for $250,000 at 3 PM you have to wonder what caused the sudden increase in value.

Second, to protect against illegal flipping the FHA and many private-sector lenders have long had a rule which says that they will generally not finance a property which has been sold within the past 90 days. In January 2010 HUD suspended the FHA 90-day anti-flipping rule for a year, meaning that you can buy a property today, a buyer can purchase tomorrow, and the buyer can get an FHA loan. For specifics and the latest details please speak with lenders.

To protect yourself when dealing with foreclosures and quick sales, be sure to keep good records of any repairs as well as before-and-after photos of the property to document why a higher price could be justified.

Is Foreclosure Flipping Legal & Legit? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The government is now trying to stop this problem by requiring lenders to get necessary paperwork up front. This is a smart idea — and it also leads to an important point: Borrowers always want to know what paperwork they’ll need for a loan application so here’s a quick and handy list.

Consumer Debts

You plainly need a list with account numbers, current balances and required monthly payments for all debts, including but not limited to student debts, car loans, credit cards and other outstanding obligations.

Assets

You must show all assets including but not limited to savings accounts, mutual funds, stock, partnership interests, real estate and other assets.

Income

Below is the income documentation list that HUD is requiring for borrowers who are seeking to avoid foreclosure through the government’s making Home Affordable program. While the requirements below may not work for every lender, the list is an excellent start and shows what lenders are likely to require when you apply for a mortgage.

Employment Income

Copies of two recent pay stubs, not more than 90 days old at time of submission, indicating year-to-date earnings.

a. Servicers may accept pay stubs that are not consecutive if, in the business judgment of the servicer, it is evident that the borrower’s income has been accurately established.

b. When two pay stubs indicate different periodic income, servicers may use year-to-date earnings to determine the average periodic income, and account for any nonperiodic income reflected in either of the pay stubs.

c. When verifying annualized income based on the year-to-date earnings reflected on pay stubs, servicers may, in their business judgment, make adjustments when it is likely that sources of additional income (bonus, commissions, etc.) are not likely to continue.

Self-employment Income

The most recent quarterly or year-to-date profit and loss statement for each self-employed borrower. Audited financial statements are not required.

Other earned income (e.g., bonus, commission, fee, housing allowance, tips, overtime)

Reliable third party documentation describing the nature of the income (e.g. an employment contract or printouts documenting tip income).

Benefit Income (e.g., social security, disability, death benefits, pension, public assistance, adoption assistance.

Evidence of:

(i) the amount and frequency of the benefits such as letters, exhibits, a disability policy or benefits statement from the provider, and

(ii) receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If a benefits statement is not available, servicers may rely only on receipt of payment evidence, if it is clear that the borrower is entitlement is ongoing.

Unemployment Benefits

Evidence of the amount, frequency and duration of the benefits (usually obtained through a monetary determination letter). The unemployment income must continue for at least nine months from the date of the application. The duration of benefit eligibility — including federal and state extensions — may be evidenced by a screenshot or printout from the Department of Labor UI benefit tool, which is available at http://www.ows.doleta.gov/unemploy/ben_entitle.asp.

Rental income

Rental income is generally documented through the Schedule E –Supplemental Income and Loss, for the most recent tax year.

a. When Schedule E is not available to document rental income because the property was not previously rented, servicers may accept a current lease agreement and bank statements or cancelled rent checks.

b. If the borrower is using income from the rental of a portion of the borrower’s principal residence, the income may be calculated at 75 percent of the monthly gross rental income, with the remaining 25 percent considered vacancy loss and maintenance expense.

c. If the borrower is using rental income from properties other than the borrower’s principal residence, the income to be calculated for HAMP purposes should be 75 percent of the monthly gross rental income, reduced by the monthly debt service on the property (i.e., principal, interest, taxes, insurance, including mortgage insurance, and association fees, if applicable.

Alimony, Separation Maintenance, and Child Support Income

Borrowers are not required to use alimony, separation maintenance or child support income to qualify for HAMP. However, if the borrower chooses to provide this income, it should be documented with:

(i) copies of the divorce decree, separation agreement or other legal written agreement filed with a court, or a court decree that provides for the payment of alimony or child support and states the amount of the award and the period of time over which it will be received, and

(ii) evidence of receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If the borrower voluntarily provides such income, and that income renders the borrower ineligible for a HAMP offer, the servicer is allowed to remove that income from consideration and re-evaluate the borrower for HAMP eligibility.

20% Threshold for Passive and Non-Wage Income

Notwithstanding the foregoing, passive and non-wage income (including rental, part-time employment, bonus/tip, investment and benefit income) does not have to be documented if the borrower declares such income and it constitutes less than 20% of the borrower’s total income.

Non-Borrower Income

Servicers should include non-borrower household income in monthly gross income if it is voluntarily provided by the borrower and if, in the servicer’s business judgment, that the income reasonably can continue to be relied upon to support the mortgage payment. Non-borrower household income included in the monthly gross income must be documented and verified by the servicer using the same standards for verifying a borrower’s income.

Association Fees

If a borrower has indicated that there are association fees, but has not been able to provide written documentation to verify the fees, the servicer may rely on the information provided by the borrower if the servicer has made reasonable efforts to obtain the association fee information in writing.

What Paperwork Do You Need To Get A Mortgage? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The Dow has just announced that the Travelers Companies, Inc. (TRV) and Cisco Systems, Inc. (CSCO) are replacing Citigroup, Inc. (C) and General Motors Corp. (GM) on the list of 30 bellweather companies as of June 8, 2009.

“The parlous state of GM has left us with no choice but to remove it from The Dow. A bankruptcy filing immediately disqualifies a stock regardless of a company’s history or its role as a cultural icon,” said Robert Thomson, managing editor of The Wall Street Journal and editor-in-chief for all of Dow Jones. “We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake. We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion — Citigroup is a renowned institution, not only in this country, but around the world.”

Misleading Indicator

In fact, changing the DJIA does very little for the country. People watch the Dow daily, it’s a fixture of the news, but it doesn’t make for a very good benchmark because we keep changing the 30 companies it tracks. In other words, it’s not an apples-to-apples comparison because the list of companies is constantly in flux.

For instance, if we continued to keep GM on the list then the Dow would fall. Why? The company is bankrupt. Citigroup is with us today only because the government has chipped in some $45 billion in direct federal funding as well as billions more in programs that buy assets of suspect value — if the value of such assets wasn’t suspect then there would be no need for the government to buy them.

Meanwhile, stockbrokers keep telling folks that stocks are a great investment, certainly better than real estate. The evidence? Well, have you seen how the DJIA has risen….

With houses the story is different. We know not only average values on a local, state and national basis, we can see what happened with a specific home over time. Such information is typically as close as your nearest real estate broker or local property tax office. When the value of a home goes down we don’t remove it from average.

Prices Don’t Always Go Up!

One of the financial theories which got so many people in trouble — and so many lenders — was the idea that real estate values always rise. They don’t. That’s plain today, but for some folks not obvious until the bottom fell out of the real estate market in most areas.

Real estate. It’s great for tax benefits and sleeping indoors. Sometimes, but not always, it’s also a great way to build equity — but not a sure way.

Stockbrokers should say as much about the stuff they sell.

Why Stocks & Houses Don’t Compare As Investments is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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I wanted to study journalism because it gave me an opportunity to travel and to meet interesting people. I have been a correspondent on Capitol Hill and at the White House, I have lived on an offshore drilling rig in pursuit of a story, I have spoken to an endless number of business leaders, senators and representatives and I have traveled to just-about every state.

There is also another aspect to journalism, the idea that reporters, columnists and the media in general are uniquely equipped to watch the government, corporations and institutions at work — and to freely report when such entities do right or wrong. The usual expression is that journalists should comfort the afflicted…and afflict the comfortable.

Jon Stewart is generally referred to as a comedian. His “Daily Show” is typically seen as entertainment. So-called serious journalists often look down their noses at Mr. Stewart.

They’re fools.

Every journalism school in the country should be studying the conversation between Jon Stewart and Wall Street commentator Jim Cramer. And so should every borrower, investor, senator, representative, regulator, shareholder, saver, and homeowner.

The Interview

Steward did exactly what journalists are supposed to do, he asked tough questions, in public, based on research and common sense. He took Cramer and the financial network, CNBC, to task for failing to fully tell the public of the risks and follies being pursued on Wall Street. Stewart essentially said the business media in general had been handmaidens and enablers of the banks and brokerages, largely repeating the what they said, doing inadequate research and rarely giving time or attention to the red flags which were so obvious.

Cramer, who is loud, bright and often insightful, had an open opportunity to defend his position. Look at the uncensored video of the show and judge what he said for yourself.

Everyone Was Responsible

At this point the claim is usually made that “everybody” is responsible for the current financial meltdown. Lenders loaned too much, borrowers borrowed too much, regulators regulated too little and journalists could only cover current events which, for several years, saw little but rising home values and stock prices.

The unstated point, of course, is that if EVERYONE was responsible than no one was specifically responsible.

This is junk.

You didn’t have to be a soothsayer to see what was coming.

Most community banks and credit unions refused to offer so-called “affordability” mortgage products, the loans with negative amortization, huge prepayment penalties and high-cost back-ends. Most homebuyers bought responsibly and borrowed no more than they could afford. They fully documented their income.

Many states wanted to halt rapacious lenders but could not because the lenders acted under the authority of the federal government and the federal government said the states could not over-ride federal authority, an authority established by the National Bank Act and confirmed by the Supreme Court in the 2007 Watters case.

Oh, and when was the National Bank Act enacted? That would be 1864.

The Real Issues

The real issues are very simple:

First, without exception every loan is supposed to be underwritten according to baseline program standards. This is the lender’s responsibility and a lot of lenders either repeatedly and routinely got it wrong or purposely failed to stop loans that should never have been made, highly-profitable errors that produced large executive bonuses, fat paychecks for loan officers and grossly overvalued stock.

Second, the Federal Reserve, under the Home Ownership Equity Protection Act (HOEPA), legislation passed in 1994, has the right under Section 129 to ban “unfair and deceptive acts or practices (UDAP).” In other words, had the Fed simply said that option ARMs, interest-only loans and stated-income loan applications were “unfair” and “deceptive” we could have prevented the current mortgage meltdown. It doesn’t matter what any other branch of government did or did not do, the Federal Reserve had an opportunity to stop the financial crisis and it absolutely failed to do so.

Third, in 2003 five federal agencies announced that they had “a plan to identify and eliminate outdated, unnecessary or unduly burdensome regulations imposed on insured depository institutions.” An official from the Office of Thrift Supervision brought a chainsaw to rip through mounds government paperwork. Could anyone miss the symbolism? Could any lender not understand that the new government policy was hands off, anything goes?

On The Record

I have repeatedly told readers since as far back as 2004 that “nontraditional” loans and practices were dangerous. Not just for borrowers but also for lenders and their shareholders.

I wish I had been wrong.

Every time I have written about rip-off mortgages I have gotten numerous emails from lenders telling me I didn’t “understand” the system.

High credit scores, they said, were a substitute for the lack of documentation. But credit scores are history, they don’t tell us what happens when mortgage payments rise 50 or 100 percent. They also didn’t say that lenders and loan officers got more money when they sold a loan with a stated-income loan application.

“Nontraditional” loan products simply reflected a new understanding of financial instruments, they said. You have to know about the secondary market, derivatives and mortgage-backed securities, I was told. And you have to look at the rates and the ability to provide financing for just about any buyer. Of course, more loan volume means more commissions and profits, something not usually mentioned.

You can see the uncensored Jim Cramer interview on the Daily Show by pressing here.

And to Jon Stewart, my congratulations — journalists ought to be ashamed that you had to do their job for them.

Mortgages, Foreclosures & The Disgrace of Journalism is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Unfortunately, you’re likely to notice that even with a bigger number on your paycheck money somehow does not go as far. What you’ve seen is right — and how right you are may be surprising

Falling Wages

The Federal Reserve says between 2004 and 2007 — boom times for the American economy — that “the share of family income attributable to wages and salaries fell 5.2 percentage points.”

Huh? Wages fell? If the country was doing so well how is it possible that families were earning less?

The answer is that while the country was doing well during the past few years — at least on paper — not everyone did equally well. Indeed, many fell behind.

For instance, the IRS reports that the nation’s 400 richest taxpayers are actually getting richer. The average filer in this group earned $263,306,000 in 2006 — that’s up from a mere $74,709,000 in 1996. The percentage of all income earned by our top 400 represented 1.31 percent of the total gross income in 2006. In 1996 the top 400 filers earned .66 percent of all income.

In other words, the income of the very rich doubled relative to everyone else’s in a ten-year period.

Wage Trends

Okay, what about workers? If you look at real hourly wages — how much people earn corrected for inflation — you can see that income remains about where it was in the early 1970s, more than 30 years ago. The chart below by Stan Sorscher, which was posted originally by WashingtonPolicyWatch.org, shows how wages have fared over the years.

• Smith makes $100,000 in profit from the sale of a prime residence owned at least two years. The federal tax? Zero. Notice that there is no Social Security tax on real estate profits.
• Jones starts the Whatever Corporation. The company develops a new way to change TV channels and gets a patent for the idea. Jones sells stock in the company 14 months after he started the firm for $100,000. His tax? Because the money is a long-term capital gain from the sale of an asset he pays 15 percent, or $15,000. Again, notice that there is no Social Security tax on capital gains profits.
• Green has worked at the North company for 15 years. By working overtime he has an adjusted gross income of $99,950. The tax? $21,971 — PLUS Social Security taxes.

What you’re seeing here demonstrates the value of lobbyists and PAC contributions. People don’t pay smaller taxes because they’re virtuous or saintly, they pay less because they have more power in Washington.

Inflation

There is little doubt that you earn more than your parents. Indeed, even if you have the same job and the same skills as your parents there’s no doubt that you are earning more — at least in cash terms.

However, the real measure of wealth is not how many dollars you have, it’s what those dollars buy. A few years ago I was in Romania and had a dinner which cost roughly 500,000 old Leu. While 500,000 is a huge number, the cost of the dinner in terms of dollar values was about $13.

We need more dollars today in part because inflation over time has made money less valuable. For instance, imagine that someone made $20,000 in 1980. Today you would have to make $54,910 to have equal buying power at the start of 2012.

What To Do

Your real financial goal is not so much to have more money, though that would be nice, as it is to have more buying power. There are several steps you can take to advance your personal finances.

1. Save. You cannot buy a home or stock or anything else without savings. Moreover, you need savings if you lose a job or have a sudden expense.
2. Get as much education and training as possible — these are resources which can never be taken from you.
3. Even if it means a lower salary, look for jobs with benefits. You’ll be grateful after just one medical bill.
4. Buy a home with a fixed-rate mortgage. See if you qualify for FHA financing or, if you have military service, for a VA loan.
5. Get married. Seriously. A good marriage is one of the keys to financial success.

Are You Keeping Up With Work & Wages? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 30, capital gains, employment, income, inflation, IRS, jobs, real estate, rich, stable, steady, stock, taxes, wages, years

Almost, but not quite enough.

You remember the stock market — that’s the financial setting where there’s been a, er, correction. Let’s look at where Wall Street has been and where it’s at:

According to The New York Times, between March 24, 2000 and July 18, 2002 U.S. stock values fell from $17.25 trillion to $10.03 trillion — a drop of more than $7 trillion. (See: The Incredible Shrinking Stock Market, July 21, 2002)

At $200,000 each, $7 trillion could have bought 35,000,000 homes. Now that’s a bubble.

What’s disturbing about the recent stock market decline is that so many well-paid people just didn’t see it coming. You might think that securities analysts, those bright people who closely follow companies and trends, the people quoted on TV and in lots of newspaper articles, would have told investors to get out when the market was peaking. Nope.

According to The Washington Post, some 99 percent of analyst recommendations in 2000 advised investors to buy now, buy often and buy more. (See: The Market Scholars’ Star Turn, November 15, 2002)

Okay, so mistakes were made. Maybe your analyst was among the fewer than 1 percent who got it right and said sell.

But you have to wonder, why were so many bright, hugely compensated, quotable folks utterly wrong, wrong to the point that investors who took their advice lost vast sums of money?

If a stock brokerage was fighting for a piece of an IPO you can understand how an analyst might be more friendly to the company — and, in fact, there sure seem to be a bunch of e-mails suggesting that some analysts said one thing in public and thought something else privately. Or you might find an analyst or two who were pressured to give strong recommendations for questionable companies. So much for relying on the famous “Chinese Wall” which supposedly separated stock brokers and investment bankers from analysts in the same company.

But what about the analysts who thought Fannie Mae, Freddie Mac, Enron, WorldCom, and the rest were great buys even when their brokerages were not getting underwriting fees? What was their incentive to recommend such financially-sound entities after they had carefully investigated all the charts and SEC data? After they had spoken at length with company officers and leaders in given industries and fields? How could such educated, well-informed and highly-paid analysts go wrong?

Such questions have been raised by James Cramer, a former hedge-fund trader, co-founder of TheStreet.com, and the author of You Got Screwed: Why Wall Street Tanked and How You Can Prosper.

Writing in New York Magazine, Cramer explains that among analysts “while there was corruption behind some of these buy recommendations, I think stupidity played a much bigger role. Either they thought that stocks would keep rising and they didn’t want to rock the boat or they genuinely believed in the promise of the New Economy.” (See: “Bubble Boys,” November 25, 2002)

So there’s one answer. It’s not thievery. It’s not fraud. It’s stupidity. It’s not that analysts as a group lied (well, okay, maybe some did), it’s that Wall Street told the public that analysts with their charts, projections, and reports knew what was going to happen in the future, an assurance which
defies common sense.

What’s curious about the current surge of real estate “bubble” stories is how often they quote stock analysts as authority figures. But if so many analysts were wrong about Wall Street trends, what suggests they will suddenly be right about real estate?

The next time you see an article, commentary or news report which relies on the words and wisdom of a Wall Street analyst to justify fears of a housing bubble, do the right thing and send a note along these lines to the editor or the program manager:

Sirs:

If we are to believe your article of the 28th (“Real Estate To Plunge, Says Esteemed Wall Street Thinker”) it might be useful to have more information regarding the font of wisdom you quote at such great length:

• What percentage of all stock recommendations made by Mr. Smith in 2005, 2006 and 2007 — just before the greatest financial decline in history — advised securities investors to sell?
• Is Mr. Smith now selling his home and moving into a rental unit, tent or cave to beat the coming real estate decline he advidly predicts?
• If Mr. Smith could not see the securities bubble, and if Mr. Smith is not selling his home, why should readers follow his advice?

As the expression goes, inquiring minds want to know….

————————
Published originally by Realty Times on December 17, 2002 and posted with permission.

What Some Folks Really Know About Bubbles is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: analysts, decline, fall, Fannie Mae, Freddie Mac, predictions, real estate, stock

There are 30 companies which comprise the DJIA, but not the same companies all the time. New companies are added to the list from time to time, which means old companies are removed and DJIA movements up or down continue to be reported as if nothing has happened.

But that’s not the case. Each and every time Dow membership changes it makes sense to wonder if we are still comparing apples with apples.

Started in 1896 with 12 stocks, the DJIA has risen from a first-year close of 40.45 to 12,650.36 as of December 31, 2007. Over a period of 111 years, that’s an average annual increase of 5.31 and a fabulous argument for the joys of compound interest.

But within that general average are a series of ups and downs. The DJIA hit 41.22 in 1932, essentially back where it began in 1896. The benchmark 300 recorded at the end of 1928 was not seen again until 26 years later when the Dow closed for the year at 404 in 1954. The yearly close didn’t top 500 until 1958 and it wasn’t until 1972 that the year-end average finally reached 1000.

Between 1896 and 1981 the Dow grew by an annual average of 3.68%, but between 1982 and 1999 the measure increased at year-end from 1046 to 11497, an average growth of 15.14%.

The catch, of course, is that while the percentages and numbers above are accurate, what they measure has shifted over time.

As it happens, the modern Olympics also began in 1896. Thomas Burke of the U.S. won the 100-meter race in 12 seconds flat. In the 2008 Olympic races held in China, Usain Bolt of Jamaica covered the same distance in 9.69 seconds.

It’s possible to compare the efforts of Burke and Bolt because there’s a common measure: 100 meters is 100 meters. We know with total assurance that Bolt is astonishingly faster than Burke.

Alas, the Dow averages from 100 years ago, 20 years ago, and even five years ago track stocks that differ from the ones we watch today, thus comparing results with one period or another requires a whole bunch of asterisks and caveats.

To faithfully track stock movements from 1896 or within any period we need a consistent measure. The catch is that the only stock from 1896 found on today’s DJIA is General Electric. One can only guess how the average would look at this time if the DJIA still accounted for American Cotton Oil, Distilling & Cattle Feeding, and U.S. Leather.

And that, of course, is the core point. Companies come and go, investing preferences evolve, and if we are to track marketplace trends then we should not ignore either the great successes or those firms which have become less favored.

For instance, whatever happened to such DJIA stalwarts as U.S. Cordage (added in 1896), Standard Rope & Twine (1896), Federal Steel (1899), Central Leather (1912), Studebaker (1916), Corn Products (1920), Woolworth (1924), Paramount Famous Lasky (1925), Remington Typewriter (1925), Nash Motors (1928), Postum (1928), Victor Talking Machine (1928), and Hudson Motors (1930)? If we are to fully reflect the path of American commerce, then surely we must account for the direction, destiny, and descendants of these firms. (For a look at the companies which have composed the DJIA over the years, see the Dow Jones Industrial Average History.)

In recent years such new-economy giants as Intel, Microsoft, and Home Depot were added to the list, while Sears, Goodyear, and Union Carbide were dropped. The new firms are surely significant, but how many people no longer shop at Sears or reject tires from Goodyear? Did these firms suddenly disappear from the pantheon of corporate America?

On September 22, 2008, Kraft Foods Inc. (KFT) replaced American International Group Inc. (AIG). Where would the DJIA be if AIG had remained on the list? AIG shares were at $2.33 on October 10, 2008 — down from 52-week high of $69.91.

To have a consistent set of benchmarks we need a consistent DJIA so why not evolve a series of DJIAs? In the same way that Super Bowl XXXI inevitably follows Super Bowl XXX, why not acknowledge that the DJIA of the moment is not measuring the same body of information or companies as the DJIA from 2007, 1995, 1930, or 1900? All good years — but all different.

And so a modest proposal. Let us anoint today’s DJIA as “DJIA-1.0″ When next we add or subtract company members because they merge, fail or somehow become less interesting, we can move on to “DJIA-2.0″ Older DJIAs with different corporate members can be named DJIA-X1 or X2 — with X1 being the most recent before the advent of the DJIA-1.0. To have a clear and consistent accounting of what it is that we’re measuring, we can then post the averages for each index each day and easily compare one period with another.

Unless, of course, we are against clarity and consistent measures.

————————
Published originally by Realty Times on 2001 and posted with permission.

Do We Need A Dow 2.0? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 1896, accuracy, accurate, bonds, companies, composition, consistency, DJIA, Dow, history, measure, stock, Wall Street

You want to know the answer to this question because it may explain how plunging stock prices are impacting the economy — and whether you will have a job next week or be able to sell your home.

Speaking at a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming last Friday, Federal Reserve Board Chairman Alan Greenspan said that while much attention has been paid to rising — and falling — prices on Wall Street, “movements in the prices of some other assets in the economy — changes in house prices, for example — have been steadier, less dramatic, but perhaps no less significant.”

“Over the past year and a half,” Greenspan points out, “home values have appreciated, whereas equity values have contracted significantly.”

Generally, says the Fed Chairman, we spend about 90 percent of our income for consumer goods. So as incomes rise one can reasonably expect an increase in consumer spending. This is important because personal consumption represents almost 69 percent of our gross domestic product.

One catch is that wages and such do not account for all personal spending. About 20 percent of what we spend comes from wealth — increases in value over time.

A second catch is that we do not spend all wealth in the same way. Generally, says Greenspan, we likely spend 3 percent of stock gains on consumer spending whereas “the amount of personal consumption expenditures generated from realized capital gains on the sale of homes, financed through the mortgage market, represents approximately 10 to 15 cents on the dollar.”

This is all very nice but what does it mean in real life?

Until March, 2000 there was no doubt rising share values were the nation’s most visible source of new wealth. Huge profits were made from IPOs, employee stock options, and rising share values. But such appreciation was converted into spending at relatively low levels.

Meanwhile, home values have continued to rise over time and at a pace which has generally been greater than the rate of inflation — meaning that additional spending power, real wealth, has been created. And real estate wealth, says Greenspan, is several times more likely to be spent for consumer goods than profits from stock sales.

In an expanding economy it’s nice to have the additional consumption which new wealth on Wall Street represents. It means additional jobs and growth throughout the county.

But what happens if stock prices fall? What’s the impact?

Greenspan’s statement implies that declines on Wall Street, while not good, have less impact on the national economy than housing declines of equal magnitude.

Greenspan seems to be making these points:

• Consumer spending is the bedrock of our economy. This explains why the business sector can contract and yet the economy does not go into an automatic recession — or worse.

Profits from real estate and securities are treated differently by consumers. Real estate profits tend to result in more consumer spending.

• Reduced profits from stock will have less impact on the economy than declining home prices.
• Falling home prices are a precursor to tough economic times. Declines on Wall Street may be tolerable, but a widespread fall in housing prices would reflect substantial economic problems.
• Politicians now in office are unlikely to do well in a contracting economy.

It never happens that the head of the Federal Reserve offers policy suggestions to the President and Congress in plain language. Instead there is a need to parse sentences and divine meanings, but in this case the message is clear: If we are to have an economy which does not needlessly plop into a recession it would be wise to support the housing sector. In practical terms, that means don’t fiddle with mortgage interest deductions and adopt policies which encourage construction and ownership.

————————
Published originally by Realty Times on September 4, 2001 and posted with permission.

Greenspan Speaks — Housing Beats Wall Street is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: decline, Greenspan, housing, impact, stock

Imagine that a home was bought for $300,000. Add 5 percent appreciation and sure enough the price a year later is $315,000.

But did anyone buy a home for $300,000 — in cash? Some people, sure. But most homes, most of the time are financed. If you bought with 10 percent down ($30,000), your cash investment was up 50 percent.

What about those pesky monthly mortgage payments, taxes and insurance? They’re just a form of economic “rent” — vaguely what you would pay if you didn’t own, what you might collect if you rented the property, and an “opportunity cost” you might lose if you bought for cash that could have been used in other ways to produce income.

According to Charting Real Estate’s Biggest Winners (July 18, 2004), The New York Times asked James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, to compare stocks and real estate from 1980 through March 2004. To get his results, Dr. Hughes used data from the Dow Jones industrial average and the Office of Federal Housing Enterprise Oversight — now the Federal Housing Finance Agency (FHFA).

“In 1980, the Dow was at 830,” Dr. Hughes said. “In 2004, it has been running between 10,000 and 10,500. Rounded off, that’s about a 1,100 percent gain.” Home prices in New York State over the same period, by comparison, increased 400 percent, according to the federal data.

“So, on the surface, it looks like you would have done better in the stock market,” Dr. Hughes said. “However, that does not take into account the ability to leverage your initial housing investment.”

In other words — keeping the numbers simple — assume you bought a $100,000 home in 1980. “By 2004, it would have increased to $400,000 in value,” Dr. Hughes said. “Thus your gain would have been $300,000.”

“However, assuming you only made a 10 percent down payment on the home — or $10,000 — that means your initial $10,000 investment grew to $310,000,” he said. “That’s a gain of about 3,000 percent, which is far better than the stock market. If you had invested the $10,000 in stocks, it would have grown to $110,000 in the same 24-year period.”

“So that indicates the effect of leveraging your initial housing investment into a much larger value through borrowing.”

There are, of course, other factors to consider in comparing housing leverage and capital gains. “Obviously, you have to pay the mortgage each month over the 24 years,” Dr. Hughes said. “However, that is generally not appreciably different from what you would have paid in rent if you hadn’t bought the home.”

And so, finally, someone agrees with the idea that real estate returns should be valued on the basis of the cash actually invested and not just sale prices, that leverage counts, and that monthly ownership costs are simply a form of economic “rent.”

Where I disagree with the good professor concerns the Dow Jones average.

To say that the Dow Jones industrial average rose from 830 in 1980 to 10,000 or so this year would be a far better compassion if we were looking at the same bundle of 30 stocks. However, that’s not the case.

DJIndexes.com provides an excellent history of the oft-quoted average — including company changes since 1980. For instance, during the period from 1980 through 2004 the Dow replaced a number companies from the index including such well-known names as Johns Manville, General Foods, Owens Illinois, Inco, Westinghouse, Texaco, Bethlehem Steel, Woolworth, Goodyear, Union Carbide, Sears, AT&T, and International Paper Company.

What these changes suggest is that the difference between real estate and stock investments — even when leverage and economic rent are included — is still undervalued. Why? Because the bundle of stocks the Dow once represented has changed — even though many former Dow components continue as functioning, solid businesses.

In other words, to have a fair comparison between the Dow Jones stock index and real estate, lets look at the stocks that were included in the 1980 version of the index. That the 1980 version of the index differs from the 2004 version is to be expected — different companies are included each year. Alternatively, a house built in 1980 with three bedrooms and two baths on a given lot is substantially the same.

As to what real estate or stock will do in the future, no one knows. As they say on Wall Street, past performance does not guarantee future results. But then, they also say that on Main Street.

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Published originally by Realty Times on July 20, 2004 and posted with permission.

Which Is Better: Real Estate Or Stock? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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My interest in real estate and money began in high school. I worked during vacations for a real estate management company located near New York’s Wall Street and was greatly impressed by what I saw: Each morning piles of envelopes stuffed with rent checks would be delivered. The checks were credited to each tenant, sorted by property ownership, bundled with rubber bands, and then dropped into a large brown grocery bag. Bag in hand and with me tagging along, one of the owners would then go to several banks each day to make deposits. After a round of banking it was then off to lunch, through the eyes of a teenager a great way to make a living.

Since then I’ve managed to meet a range of people who have amassed substantial real estate wealth — ranging from those who have owned a few houses, to folks who have controlled thousands of apartments, and on to those who have vast numbers of commercial properties and measured their personal wealth in terms of eight, nine, and perhaps even ten figures.

What are the secrets?

The barkers on late-night television argue that you can make millions in real estate without cash or credit, but my conversations with those who have made it suggest otherwise. I think they would likely agree with the following principles:

• Start early. Real estate fortunes are generally made over a period of years, decades and generations. The earlier you start, the more time you have to accumulate property and benefit from appreciation.
• Live long. A little appreciation each year multiplied by many years can produce enormous wealth. Some real estate entrepreneurs have succeeded because they bought in their 20s and 30s and are still alive in their 80s.
• Save. One mogul, who built a realty empire that included dozens of shopping centers and more than 100,000 acres of land, once explained that “the hardest thing in life is to accumulate the first $10,000. After that, it’s easy.” His point, corrected somewhat for inflation, is that you can’t invest if you can’t save. Forget about fancy cars and big houses — at least at first.
• Listen to others, decide for yourself.
• Risk is real. Not every investment pays off, and some are absolute flops. But tomorrow is another day.
• Honor commitments — even if the result is a loss or something less than the best deal. Contracts and lawyers are nice, but your word is what counts and the only way to establish long-term business relationships.
• Never take the last penny from the table. When the another person prospers, you prosper.
• Book learning is great, but street smarts can’t be ignored. One gentleman, whose bank — the story goes — had to be sold to pay the estate taxes when he died, bought a piece of Florida land that was largely underwater. You can bet that a few people laughed. He and a partner filled it in and that piece of dry land today includes a major shopping center and thousands of apartments.
• Live simply. Someone who owned dozens of New York buildings lived in a modest two-bedroom apartment. Curiously, the Florida developer also lived in an apartment that many mid-level managers could likely afford. In both cases, each owned only one car.
• “You can only eat so much,” Perry Bass told The New York Times (“The Break-Up of the Bass Brothers,” Nov. 24, 1991). “You can only wear so many clothes. I’ve got some nice paintings. Now I’m not buying any more. I don’t have a place to hang them.”
• Keep quiet. For reasons of modesty, privacy, and personal safety you would have a hard time finding many of our richer citizens. But if you look carefully, you might see that some folks seem to travel more, own their own businesses, and generally live well but not extravagantly.
• Help others. Donations — sometimes prodigious sums — should be quietly provided to help various causes. Perhaps the most famous case involves Julius Rosenwald, an early builder of Sears Roebuck. Rosenwald helped establish more than 5,000 minority public schools and some 4,000 libraries for minority students in 15 states before his death in 1932, a contribution needed because public funds were hardly available for such efforts. (See: Shaping an American Institution, Robert E. Wood and Sears, Roebuck by James C. Worthy)
• Have values. Money is great, but money is not a substitute for friends, family, good health, leisure, personal decency, and the other markers which define a truly successful life.

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Published originally by Realty Times on November 24, 1998 and posted with permission.

Secrets of Real Estate Wealth Revealed By Masters is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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