From California’s Office of the Attorney General we get the following tips to avoid being scammed.
- DON’T pay up-front fees. Foreclosure consultants are prohibited by law from collecting money before services are performed.
- DON’T ignore letters from your lender or loan servicer. Responding to those letters is your best bet for saving your house.
- DON’T transfer title or sell your house to a “foreclosure rescuer.” Beware! This is a scam to convince homeowners they can stay in the home as renters and buy their home back later. It might also be part of a fraudulent bankruptcy filing. Either way, a scammer can then evict the victim and take the home.
- DON’T pay your mortgage payments to anyone other than your lender or loan servicer. Mortgage consultants often keep the money for themselves.
- NEVER sign any documents without reading them first. Many homeowners think that they are signing documents for a loan modification or for a new loan to pay off the mortgage they are behind on. Later, they discover that they actually transferred ownership of their home to someone who is now trying to evict them.
Source: http://ag.ca.gov/loanmod/
Inventories are still high.
Low priced homes went higher in the bubble and have been crashing down faster. The following is the Case-Shiller break down for L.A. Lower priced homes are expected to hit their price bottoms sooner than the more expensive homes. While low priced homes have around 9 month of inventory on the market (with current sales volumes), high priced homes have more than double that amount of inventory (because of lower sales volume).
In real terms the Case Shiller index baseline is 125 (i.e., 100 adjusted for inflation). The current national level is 140, so prices are still 10% above the historical norm.
This graph shows that while foreclosures have been holding relatively steady, this is mostly a delay in recognizing the pain. There is a building inventory of mortgages in arrears.
According to a report from Deutsche Bank, as of Market 31st 26% of home mortgages are underwater and that is expected to grow to 48% by 2011.
My guess is that housing prices drop a little more and then will start to oscillate up and down in various markets as it drifts the rest of the way back to normal. A big question mark is whether ruthless defaults on home mortgages become socially acceptable.
While much of the economic attention has been at the federal level, the states are not all suffering equally. California has been grabbing the healines, but it is not the only state suffering.
This graph shows the current unemployment by state (red segments) and the high and low unemployment rates since 1976 (blue bars). This shows that a number of states are poised to have their unemployment rate exceed the highs of the early eighties.
Mary Daly of the Federal Reserve Bank of San Francisco provides the following map of State budget gaps (i.e., how much their revenues are below their budget). States like California are likely to lead the way in cost cutting and revenue raising measures. Expect increased municipal bond volatility in the distressed states as their administration and legislative bodies wrestle with closing the budget gap.
There has been some talk of federal aid to the states, but with the current level of partisan politics, I see this as unlikely.
Source: FedViews, by Mary Daly, FRBSF [Charts]
Microsoft has put Richard Feynman’s physics lectures online.
Yale has partnered with iTunes U to put up 13 complete course lectures.
The amount of high quality material online is becoming truly staggering. With education costs continuing to grow much faster than incomes, I truly believe there is going to be a radical shift in the way college education is pursued in the next 10 to 20 years.
From Ron Griess of The Chart Store we get this wonderful graphic demonstrating just how abnormal historically the last 15 years have been. Valuations are now the best they have been in over 15 years which means long term expected equity returns are also looking more favorable, but there is clearly room for more downside if sentiment gets sufficiently bad. Historically, the most real stock prices have dropped from these valuation levels is 56% so be wary of painting too happy a face on the current situation.
Defined benefit pensions are a dying breed. While they are still common in federal and state government jobs, they are quickly disappearing in commercial companies. So if a person wanted to create their own pension how much would that cost?
Let’s take a quick look at the Federal Employees Retirement System (FERS).
With 20 years of service the full retirement age is 60. The pension amount is %1/year of service X high 3 average pay. So 20 years of service results in a pension worth 20% of the person’s high 3 salary. This pension then increases with inflation (with 1% lag when inflation is over 3%).
So to duplicate this deal, how much would you need to save?
Assumptions:
- Salary increases 1% faster than inflation
- Bonds average 2% real return
- Equities average 7% real return (historical, the projected rate is closer to 5% real return)
- An inflation adjusted annuity at age 60 costs $20 for each $1 of income desired (source: AIG).
So in 20 years a $50K salary would grow to around $61K (in today’s dollars). 20% of that is $12,200. We would need $244K in savings (in today’s dollars) to purchase an inflation ajusted annuity that pays $12,200/year.
If we only invest in bonds (to achieve the same level of confidence as a government pension) we would need to save a little over 18% of salary for 20 years. If we assume a risker investment stance (e.g., 50% equities/ 50% bonds), the savings requirement drops to 14.5%.
If you run these kinds of calculations on state and corporate pensions you discover that most state pensions fall in the 15% to 20% equivalent savings while corporate pensions tend to fall into the 10% to 15% equivalent savings. If you factor in lower equity premiums or lower risk (i.e,. few equities), the percentages go even higher.
With the national savings rate only recently recovering from 0% to almost 7%, it is clear that most Americans have not been savings anywhere near these rates.
Healthcare reform has entered the limelight again this year and already people are trying to frame the problem as government versus marketplace solutions dividing along traditional liberal/conservative lines. Unfortunately, this comes at the problem from the wrong direction.
From the Congressional Budget Office (CBO) Growth in Health Care Costs report we get the following graph. The simple projection shows that healthcare costs will consume the whole federal budget and all of GDP in the next 70 years.
Clearly that won’t happen, but it does spell out that large fundamental changes to the way healthcare is apportioned and delivered in the US will occur whether by design or market place adjustments.
The US currently currently spends 15.4% of GDP on healthcare including both government and private . With that it gets 2.6 doctors per 1,000 people, 3.3 hospital beds and its people live to an average age of 78.2.
Here is how some other developed nations compare.
- UK – spends 8.1% of GDP, gets 2.3 doctors, 4.2 hospital beds and live to an average age of 79.4.
- Canada – spends 9.8% of GDP on healthcare, gets 2.1 doctors, 3.6 hospital beds and live until they are 80.6 yrs.
- France – spends 10.5%, 3.4 docs, 7.5 beds and live until they are 80.6
- Spain – spends 8.1% , 3.3 docs , 3.8 beds and live until they are 81.
- Europe (in aggregate) spends 9.6%, has 3.9 docs, 6.6 beds and live until they are 81.15.
Clearly there is room for the US to improve both quality and coverage without significantly increasing cost.
Employers should not be the primary providers of health insurance and pensions
As a financial planner I often see first hand the grief this linkage causes. Here is a list of just some of the problems.
- Preexisting conditions can prevent an individual from changing jobs or starting their own business.
- People who left the workforce because of a chrnoic illness (e.g, AIDs) and who are on Medicaid cannot reenter the workforce because it risks leaving them without health insurance.
- People who want to slow down by working fewer hours (before age 65) often can’t do so because of the loss of health benefits ti would cause.
- A company that must provides health insurance is potentially at a competative disadvantage to those that don’t.
- Varied coverage — Employer coverage is very uneven; some offer none, some offer minimal plans and some offer luxury plans.
Government’s Role in Health Insurance
If you start the process by asking the question “what healthcare should every citizen have covered”, you have already gotten into trouble. That is like asking a home buyer what home features are a must have before they have set a budget and examined the housing landscape. Unfortunately, this is how Medicare, Medicaid and US health insurance in general are currently structured and you can see the unsustainable cost increases that result.
Healthcare wants are virtually unlimited. The first question to ask is “how much of our GDP/budget should society dedicate towards providing basic healthcare for everyone. Only after that question has been answered can we begin the incredibly arduous process of determining how to best spend that money. By expliciting controlling the amount we spend on healthcare, we force improvements to come through improved efficency (efficacy/$). This will cause a natural restriction to administrative bloat (public or private). I am somewhat ambivilant about whether universal healthcaare should be run by the government or private industry.
If private insurers are used, there clearly needs to be a mandate for everyone to carry medical insurance (otherwise people don’t participate until they need it) and eliminate medical underwriting (i.e., insurer can’t deny enrollment).
Having the federal government admister the program gives you all kinds of operating efficiencies, but it creates a one size fits all program for the country. Sometimes you may want coverage that is more regionalized. For example in a coal mining state you might prefer to cover black lung issues, where in Utah they might prefer to put more dollars to fertility issues.
Lastly, I have had a high deductible plan with health savings account for my family for the last five years and it has been quite educational. Soon after my family switched, my youngest daughter had a cold and was wheezing for a while. The doctor prescribed some medicine to help with her breathing. When I went to the pharmacy the total came to $750! I paid it, but then went home and did some research. I discovered that a drug that was 99% as effective could have been had for $40. Needless to say, from then on I always discussed drug costs with doctors and am often amazed at the non chalance by doctors of prescribing a drug that is 10 times more expensive just because it has been slightly tweaked (and therefore back under patent). This has clearly demonstrated to me the need for health insurance plances to have cost sharing provisions (with caps).
If I had to put a stake in the ground, I would have the federal government act as the major medical insurer and then have states or private industry provide the supplemental insurance, but a lot of hard thinking is still needed in this area.
Pimco 1-3 Year U.S. Treasury Index Fund (TUZ) will have an expense ratio of 0.09%. This compares favorably to iShares Lehman 1-3 Year Treasury Bond ETF’s expense ratio of 0.15%.
This is the first of seven ETFs that PIMCO has in the pipeline. I am esspecially looking forward to the ETFs that allow greater maturity management with TIPs.
- Pimco 3-7 Year U.S. Treasury Index Fund
- Pimco 7-15 Year U.S. Treasury Index Fund
- Pimco 15+ Year U.S. Treasury Index Fund
- Pimco Broad U.S. TIPS Index Fund
- Pimco Short Maturity U.S. TIPS Index Fund
- Pimco Long Maturity U.S. TIPS Index Fund
Gail Cunningham of the National Foundation for Credit Counseling provides the following information on FICO scores.
- Paying your bills on time — 35 percent of your FICO score.
- Ratio of credit available to credit used (using under 30% is good) — 30 percent.
- Longevity of credit accounts (longer is good) — 15 percent.
- Applications for new credit (fewer is good) — 10 percent.
- Using a range of credit, from fixed payments like a house note to open-ended payments like credit cards — 10 percent.
Problem Moves to Prime Mortgages
To date foreclosures have been concentraded on the lower end of the housing market. And the lower end could reach a price bottom by next year. The upper end however is only just now starting to work through its problems.
In the chart on the right you can see that prime loan delinquencies are now becoming the dominant problem. And this trend has grown in the first quarter.
Beware of watching the median house price index. As prices start to drop on the high end and more sales start to happen there, this will cause the median price to rise (due to the change in mix of houses sold rather than rising prices). So keep your eye on the Case Schiller Index rather than median prices to know where the market is going.
Months of Supply
With months of supply over 10 and all the new homes that will still be coming into the market from foreclosures over the next year, there will still be intense pressure pushing prices down further.
Once this goes below 8 months (and more likely 6), that will signal that home prices have stabalized. It will still be a very long time before prices go back up to their previous highs.
Recasting of Option ARMs
On this graph pay attention to the yellow Option ARMs and see how many of those mortgages will recast in late 2010 and 2011. Option ARMs are typically negative amortizing loans (i.e., person is paying less than the interest being incurred) or interest only and when the loan gets recast it turns into a normal amortizing loan with the required much higher payment. These are problematic because the payment goes up even if interest rates stay low. And with prices down it is unlikely these owners will be able to refinance into another option ARM.
Sources: