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Economy

How Has YOUR Dollar Done This Decade?

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Be afraid, my friends. Be very afraid. If you have no fear, click on the image above for a larger, clearer picture of what’s slouching toward Bethlehem.

That thing came in a report from my money managers today. It tracks the value of a dollar invested in my portfolio from June 30, 2000 forward.

Now, if you take a ruler and lay it horizontally across the page so that it passes through the start point on the left-hand side of the page and stays parallel to the x-axis, you will see something alarming. In all that long, eventful decade, only a tiny little nubbin pokes up above the top of your ruler.

That’s right. A dollar invested in my vast holdings was worth a dollar or more for two out of ten years, between third-quarter 2005 and third-quarter 2007. For the other eight years, it was worth less than a dollar. Sometimes significantly less. In third-quarter 2001 it was worth about 68 cents. At the end of June 2010, when this report was generated, that year-2000 dollar was worth about 85 cents.

Suspicions confirmed. Some time ago, it occurred to me that the amount in my investment account was about the same as the amount I recalled coming away with from the divorce, some 20 years ago. Statements from those days have been packed away, and offhand I couldn’t say where they are. They may even have been discarded. But the figure that sticks in my mind is…well, just about the figure on the bottom line of the statement that comes in the mail once a month.

Still think long-term investment in the stock market is the way to grow your savings? Read on…

On the phone with the investment guru:

“Is there a reason to believe keeping money I will need to live on for the rest of my life (which we may sincerely hope will be short) in the stock market is a good thing to do? Unless these funds grow or at least quit losing money, there won’t be enough for me to live on. I can’t keep on forever putting in 16-hour days, 7 days a week to scrabble together $15,000 a year, which is what happens when  you’re ‘self-employed.’

“Should we be considering some other investment strategy? Maybe we should take a chunk of dough and pay off that damn mortgage on the downtown house, so I don’t have to worry about where 10 grand a year is going to come from to pay for it. If M’hijito pays rent to me, then about $600+ a month would come from him to me, instead of me having to fork over $800 a month. After the kid moves on, I could probably rent that place for $1,000 a month. Or sell my house and move into it, banking $235,000 in the exchange.”

Well, of course, the very idea is anathema to an investment manager. Put your money in real estate, and he doesn’t have anything left to manage!

The conversation that ensued was eye-opening. The firm has moved large amounts of funds into income-producing instruments, which my guy says are returning 7 percent just now. So even though the apparent value of the securities appears to drop, they’re still bringing in cash.

Couldn’t prove that by me, but then you can’t prove much by me.

He then said that the consensus among his partners is that the future of investing is off-shore; that effectively the U.S. economy is done, and smart money is going to emerging economies. He believes China’s economy will surpass America’s within ten years. The jobs we have lost in construction and manufacturing—where the bulk of job losses have been—will never come back. Jobs in the service sector, which is where most of the remaining employment resides, are poorly paid and will never be anything but poorly paid.

If you thought the middle class in this country is disappearing, you thought right. A young person, he suggested, would do well to look for employment overseas. Americans are in demand in Hong Kong, he said, although given Americans’ reluctance to learn languages other than English, Canada or Australia is probably a better bet. He would, he added, seriously consider moving to Canada if he were younger (and hadn’t yet started his family and career) or older.

Not scared enough? Well, put on your 3-D glasses and look up your address on Zillow. For jacking up your adrenalin level, that beats any chainsaw movie.

My house, whose value held steady through the bubble-burst at $235,000, has suddenly dropped to around $200,000. The downtown house house is between $50,000 and $60,000 underwater. Real estate values have not stabilized; they continue to drop steadily. When I mentioned this to Investment Dude, he said yeah, his place also had fallen in value even more than it already had, which was plenty; he and his wife managed to get a refinance, but only because no appraisal was required—the lender accepted a recent valuation. If they’d had to have the house appraised, they could never have gotten a new loan.

So…how has your investment dollar been doing? Dollar, heck… Can you spare a dime?

How Middle-Class Are You?

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This is a guest post from Crystal of Budgeting in the Fun Stuff: A Personal Financial Blog about the Next Financial Step. It’s an open fiscal diary and a personal finance blog rolled into one that is looking to get as many people involved as possible.

This article at Yahoo Finance, How to Gauge Your Middle-Class Status, made my inner-financial competitor salivate. It’s chocked full of ways to compare yourself to others. I know that is a bad thing, but I want to spread the naughty.

According to the article, the typical two-parent, two-kid household:

  • Makes $51,000 to $123,000 with both parents working a total of 3747 hours per year.
  • Owns a home worth $231,000 that is about 2300 square feet.
  • Spends about $5100 a year on health insurance and non-covered expenses if their employer provides their insurance.
  • Spends $12,400 a year on two medium-sized sedans that were bought for $45,000.
  • Puts $4100 aside for college expenses for two kids (it seems to mean total…that’s a little low if you really want to help, right?)
  • Spends $3000 on an annual one-week vacation.
  • Doesn’t save at least 3.2% a year for retirement.
  • Spends about $14,200 a year on clothes, food, entertainment, and living expenses.
  • Has a typical head of household that has about 2 years of college under his/her belt.
  • Wants free time more than they want healthy kids, a strong marriage, or to be wealthy.
  • Has a net worth of about $84,000.
  • Spends about 18% a month towards debt.

Okay, so my husband and I seem to be doing very well comparably, but we don’t have two kids to contend with either. Here’s how we fall; we:

  • Make $78,000 with both of us working about 4000 hours total.
  • Own a home worth $130,000 that is about 1750 square feet.
  • Spend about $1500 a year on health insurance and non-covered expenses – my company provides insurance and hubby pays $75 a paycheck.
  • Spend $7000 a year (including his car payments) on two medium-sized sedans that were bought for $12,000 and $21,000.
  • Put $0 aside for college expenses (I know, unfair comparison, we suck)
  • Spend $1500 on an annual one-week vacation.
  • Save at least 15% a year for retirement.
  • Spend about $12,000 a year on clothes, food, entertainment, and living expenses.
  • Have two college graduates and one person in graduate school.
  • Want health and a strong marriage way more than free time or to be wealthy…although I want it all.
  • Have a net worth of about $125,000.
  • Spend about 19% a month towards debt (since we overpay our mortgage).

What do you think of the typical amounts?

Check out these other posts from Budgeting in the Fun Stuff:

The BFS Way To Diagnose Your Financial Health
Want a Raise? Got These Traits?
Determining Our “Allowances”

The Queen Is in Her Counting House…

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So now that the Dow is closing on 11,000 again, I spent part of yesterday evening counting up my shekels.

Some time back, I figured the crash of the Bush economy (oh, how i luv bugging my rightie friends with that one! 😉 ) had drained my retirement savings of about $180,000.

Things are looking somewhat better today. Thanks to ten nontaxable grand available from a whole life policy, I contrived to set things up so I could pay my share of the downtown house’s mortgage without drawing down from the big, professionally managed IRA. Landing a temporary loan modification helped, too: the reduction in monthly payments will draw out the number of months the $10,000 lasts.

Despite partially drawing down the cash in that policy, total retirement savings are now down “only” $95,400 from the all-time high in October 2007.

We know, of course, that stocks were hugely overvalued in October of 2007. And some say they’re overvalued now. Seeking a more realistic measure, I compared total savings today with the figure that appeared in January 2001, when I first started tracking the various accounts in Excel. In that scenario, over 9.4 years my savings have grown by $18,211.

Looks like a pretty poor return on investment, eh?

However, it must be remembered that I used some of my savings to pay off the loan on my house. I also used about 30 grand to copurchase the downtown house with my son. So, it could be said that some of the funds were simply reinvested elsewhere

That notwithstanding, there’s no question the crash did some serious damage. If we look at the amount that was in savings in December 2006, before the run-up had built any momentum, we see that today’s bottom line is down $55,716 off what might be regarded as a reasonable figure.

Well, it’s better than a $180,000 loss, anyway. Just depends on how you look at it, eh?

Checking net worth: Respectable, though down about $400,000 from the 2007 estimate. Net worth sustained a huge loss when the mortgage on the downtown house went upside-down. Equity in that property is now negative…to the tune of about –$60,000. However, my own house, the one that’s paid for, retained its value and may even have crept up a little. So, even though M’hijito and I took a bath in real estate, it could have been worse. A lot worse.

My net worth is still significantly stronger than most Americans’. A calculator at CNN Money suggests the median net worth for Americans my age is $232,000; mine is about three times that. For 65-year-olds in my post-canning income bracket, median net worth is $34,375; mine is about twenty times that. For those in my pre-canning income bracket, median net worth would be $301,475; mine is 2.2 times that.

Despite the fact that I moved a fair amount of cash from equities into real estate, I’m still none too thrilled at the piddling $18,000 ten-year growth in liquid holdings.

But on reflection, my sense is that a free-and-clear house may be more valuable than smoke-and-mirrors money in stocks and bonds. While the sale price of a house may rise and fall, the value of a roof over your head is pretty immutable. It’s hard to evict a person from a house that has no mortgage.

To rent my house would cost between $800 and $1,200 a month. At 4.8 percent, principal and interest for a traditional 20 percent-down mortgage on this house would cost about $995. So I figure owning the house outright represents a return on investment of about $1,000 a month. Though that’s only a 5% annual return on the house’s present sale value, the fact is that if I had to pay $1,000 a month out of my much-reduced “retirement” income, I could not afford to stay in my home! And since my home is nothing very extravagant, that would mean that when I was laid off I would have had to move into some pretty downscale digs.

Another benefit to owning the house: when I shuffle off this mortal coil, the house will pass directly to my son, giving him a pleasant place to live with very little overhead. He then can rent the downtown house for the amount of the mortgage (or, if things are better, sell it) and end up with a solid basis to build his own retirement savings.

Both of these advantages, IMHO, are huge.

How are things in your money bin? Are you seeing any improvement?

And the layoff beat goes on…

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Via e-mail from The Kid, now employed in a full-time editorial job in the precincts of Our (former, in my case) Beloved Employer:

So we all know that the GDU budget is currently a mess. There are a lot of rumors floating around the department and school about cuts, very similar to what we saw right before we got canned. I stay out of all of this. I’ve got other streams of income and won’t be affected as drastically.

Today I receive an email from the Dean of the Business School that there will be a town-hall style meeting to dispel some of the rumors and get some facts out there.

This is where it gets interesting: a professor chimes in that, in the spirit of Obama-esque redistribution of wealth, she as a faculty member suggests an across-the-board cut in faculty salaries to keep the staff in place and at their current pay rates. Imagine that?!? My supervisor replied that she too agrees with this plan. Now a stream of emails have flown back and forth with a number of positions on the budget. But the fact remains, some people actually may value our work and would prefer the take a pay cut than lose us. Unselfish in America? Never thought I’d see the day…

Another “town hall”? LOL! How many of those performances are the poor deans going to be made to put on? These little plays layer unrealistic optimism (shall we say…) with a light sprinkling of straight talk to try to plump up morale among the troops. The degree to which they work depends on the degree of the listener’s gullibility.

Voice of Experience to Kid:

How much you believe the rumors…well, it’s ambiguous. Some of the stuff is just hot air, some of it is kinda prescient, and a bit of it is even true. Don’t recall whether I shared this with you guys, but about 18 months before we were canned I was told in no uncertain terms that we would be gone by that fall. Hm…that would have put us on the street in September of ’08. A departmental chair told my friend La Maya, who is tenured on the West campus, that he had been to a university-wide meeting in which Capaldi told them, in “confidence” and swearing them to secrecy, that by September of 2008 all academic professionals would be let go.

That’s why I started searching for jobs that summer, and that’s how I came to get interviewed for a program director’s position at the Botanical Garden. After weeks of worry, it occurred to me that I happened to know a guy on that committee, one of my coreligionists. The university had posted the minutes of the meeting online, complete with attendance, so I knew Bill had been there. Called him on the phone and asked him point-blank if that was what Capaldi said. Without a pause to think about it, he said no, nothing even vaguely like that had happened.

There’s really very little you can do when rumors are blowing on the wind, other than try to ignore them. And always to be on the lookout for another job. Listening to that shit can drive you nuts. It’s probably good to know in general that something is up, but if you think too hard about it, it’ll make you sick.

What a place! Good lord, what a place.

How’s the economic stress level in your parts?

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Here’s a new money tool that’s entertaining or frightening, depending on where you live, and always interesting. The Associated Press has put together an interactive map of the U.S. measuring economic stress nationwide, by county. Mouseover your home county (or anyone else’s) and you see a “stress” index based on unemployment, foreclosure, and bankruptcy figures. The higher the stress index, the harder times are in any given place.

The thing is fascinating. As bad off as things are in Michigan, what with the struggles of the automotive industry, things generally are far worse in California. The Imperial Valley has an unemployment rate of 27.7 percent! That plus a foreclosure rate of 4.28 percent and bankruptcies at 1.14 percent add up to a stress index of 31.58, making my  home county look good, with a mellow stress index of 14.45. It’s interesting to observe the trends in various regions; the entire midsection of the country is relatively less affected by the deprecession. Possibly because fewer people live there? People in North Dakota are too busy shoveling snow to worry about the economy?

How does your part of the country measure up?

Image: Map of USA Showing State Names. Wikipedia Commons. GNU Free Documentation License.

Walking Away from a Mortgage: Is it immoral?

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Late last year, University of Arizona law professor Brent White stirred up some controversy by observing that underwater homeowners should feel no guilt about walking away from properties whose value has fallen way below the amount owed on them. Pointing out that the very lenders who cooked up questionable residential mortgages feel no compunction about walking away from underwater commercial properties, White pointed out that buying a residential property is no less a business transaction than buying a commercial one, and that mixing emotion and “morality” into the transaction has saddled homeowners with a disproportionate burden for the current real estate fiasco.

Cutting one’s losses when a property is no longer worth what you’re paying for it is called “strategic default.” Despite the clear fact that a real estate transaction is a real estate transaction, many people can’t get past the idea that individuals, as opposed to corporations, have some moral obligation to stick with a bad business deal. Others argue that what’s good for the corporate goose is good for the individual gander. Just check out some of the comments here and here and here.

The story’s not quite as simple as it seems on the surface. Depending on what state you live in, you may or may not be able to hand a property back to the bank without consequence. In some states, lenders can come after an owner who walks or does a short sale for the difference between the house’s selling price and the amount of the loan. Your credit rating, of course, will be trashed for several years to come. And if Soggy Bottom is not your primary residence, you’ll owe taxes on the amount you defaulted on.

IMHO, White has got something. If you’re stuck with a bad loan for your primary residence and you live in a state where a lender can’t sue you for a deficiency judgment (such as Arizona), it may be financially irresponsible NOT to walk. And there’s no reason to feel guilty or morally incompetent when the mess results from no fault of your own.

M’hijito and I copurchased a small house in mid-town Phoenix’s established, mostly middle-class north central corridor at a time when we believed the real estate collapse was nearing bottom. Our agent, a very smart older man with an MBA and many years of experience in business and real estate, thought the same thing. We estimated the house’s value would drop about $4,000 to $6,000, level out for a year or two, and then begin to rise at about 3% to 6% p.a., the historic rate of increase in that area before the bubble.

Neighbors were furious with our seller for unloading the house at what they thought was a rapaciously low price.

How wrong could we all have been?

The house is now worth (if you believe Zillow) $75,000 less than we paid for it and $51,000 less than we owe.

We planned to hold the house for five to ten years, with M’hijito living in it most of the time or renting it should he take a job in another city or marry and need a larger home. After no more than a decade, at which time I planned to retire, we expected to collect a small profit or at least break even, split whatever equity we recovered, and go on our respective ways.

Now M’hijito feels stuck in the house. Because we can’t even begin to sell the house for what we owe on it, he can’t move to another city in search of a better job (workers are famously underpaid in Arizona) or go out of state to pursue an MBA at a decent school. Having lost my job and seen my retirement savings plummet $180,000 when the Bush economy crashed, I’m in a different financial position (indeed) than I was when we bought the place.

Fortunately, we did have enough sense to get a loan through our credit union. Unlike the banks of recent infamy, the credit union has been willing to negotiate. But they resist even contemplating a cut in principal, which is what needs to happen.

In response to my layoff from ASU, the credit union arranged to prorate our payments over 40 years (instead of 30) and to cut our interest rate to 4 percent. This dropped the mortgage payments into a more affordable range—and to something close to what we could theoretically get in rent.

The deal is good for only a year, however. After that, the credit union will consider renewing it for another year or will give us the option to refinance.

Although of course I’m pleased to see our payments reduced to something almost within reason, I’m still unhappy with the underlying predicament: the house’s value has dropped so drastically that we may never recover our investment in it, and so money paid toward the loan amounts to money down the drain. In an optimistic scenario, it will be another ten years before the house’s value rises to what we owe on the mortgage—to say nothing of the healthy down payment we put down at the outset. And please: don’t even ask what it costs to renovate a 1950 cottage!

For the time being, M’hijito likes the house and is comfortable there. He rents one of the rooms to bring in cash to cover maintenance and repairs. And with the mortgage adjustment, the roof over his head is costing him no more than he would pay for a rental. But the point is, we’re both losing money on the property.

We did everything we could to make a responsible decision: purchasing a house that was certainly no McMansion, selecting a centrally located neighborhood ripe for gentrification and close to the much-ballyhooed lightrail line, buying within our means, avoiding shady mortgage instruments, and selecting a lender that was unlikely to rip us off. And we’re still behind the 8-ball.

A corporation’s board of directors would be remiss not to default under those circumstances. So…should a homeowner be held to a different standard? If so, why?

Image: Tennessee house, ca. 1933-36. Tennessee Valley Authority. Public Domain.