Jack the Handyman, literally a Jack of All Trades, came over yesterday to lighten my bank account considerably. Lordy! Three hundred and fifty dollah to repair a foundation crack aggravated by some previous owner’s half-baked DIY patch job and ingress by water, to sand and paint an exterior door that Satan had bought with a white primer and never actually painted, and to climb up on the roof and repaint three sun-blasted gables, along the way prizing out some badly applied filler that was shot and replacing it with a new, longer-lasting product. Though I’m low on cash at this time of month, I didn’t feel too bad about his fee: he worked from around 10:00 a.m. until after dark, mostly doing hard physical work that takes some skill and know-how.
The damage on the west side of the house was a little alarming, and kind of odd given that the yard there is so xeric almost no water is applied to the cacti and there. We figure either rainwater is backing up against the foundation or someone in the past had a garden that they watered copiously. Since the pitch is away from the house and too little rain falls to eat into the concrete, it’s probably the result of someone’s ill-advised flower garden. At any rate, it looks like he did a decent job of repairing it, this time with concrete patching compound, not stucco.
Southwesterners love stucco.
I loved a number of posts around the web this week. Check out some of these:
• At Canadian Finance Blog, you’ll find a hefty dose of common sense about the commonly accepted buy and hold strategy.
• Speaking of common sense, here’s another shot of it at Sustainable Life.
• At A Gai Shan Life, Revanche is discussing her wedding plans with the family, and wonders if it’s OK to be married in a “borrowed” wedding dress—actually an offering from a friend.
• Budgeting in the Fun Stuff got into Free Money Finance’s March Madness contest—FaM entered too late to make the cut (gotta stay alert to this thing next year!). So go on over to FMF and vote for BiFS!
• And if this round-up had an editor’s choice, it would definitely be Steve’s outstanding post at Brip-Blap, “Why We Need Immigrants.”
Yesterday SDXB and I hiked to the top of a hill in a desert preserve park on the west side of town. In the fine, clear weather, we could see for miles in all directions. And what could we see? Sprawl.
Mile on mile on mile on mile of sprawl, most of it cheaply built housing for people who don’t earn much (the median household income in Arizona is around $47,000—not great, when you figure for most households it represents two people’s salaries). In square miles, the city is now larger than Los Angeles, the avatar of ticky-tacky sprawl.
When you consider the sheer size of the population, it’s amazing that the cost of living here is relatively low. The reason for this much-ballyhooed low cost of living is low wages. The business interests that control the local government see to it that right-to-work laws keep wages down. Phoenix residents earn well below national medians. In Arizona, for example, educators and librarians earn about $5.20 an hour less than than the median national pay in their trades. In the legal profession, hourly pay is $14.23 below the national median for comparable work. Healthcare practitioners earn almost $6 an hour less than their counterparts elsewhere.
What are all these people doing here? Today, hard to tell: the most recent figures I can find are dated 2005. Since then, many residents have moved away, as jobs have disappeared and homes have been foreclosed.
But in 2004, about 8 percent of greater Phoenix metropolitan area workers were employed in construction. If you added in those who working in “financial activities” (presumably in banking and lending) and in trade, transportation and utilities, you come up with 617,000 people: that’s 36 percent of the workforce.
So when Arizona was booming, over a third of its population was employed in building and selling houses. In other words, what we were doing was employing people to build and sell houses for people who build and sell houses.
The data above don’t count people who work for construction suppliers like Home Depot, lumber yards, masonry suppliers, plumbing and electrical supply houses, and the like; it may not include groups such as Realtors, interior designers, landscape designers, and nurserymen; and it certainly doesn’t include government workers engaged in building inspection, environmental oversight (such as it is), transportation planning, and tax collection. In 2004 the largest employer was the state of Arizona, followed, as a distant second, by Walmart.
Well, obviously, if the proper study of Man is Man, then the proper economy of humankind is serving other humans. Still, something seems oddly circular here, not to say unduly limited. Our problem in this state is that we don’t produce much. Through much of the twentieth century, our economy was based on the Three C’s: Cotton, Cattle, and Copper. All of those activities made something. Generally the manufacture wasn’t what you’d call environmentally friendly, and in fact these enterprises tended to siphon resources out of the state to the moneybins of vastly wealthy men back East. However, something at least came of it all.
Tourism, which arose in the early part of the century, eventually expanded to join the Three C’s as a major economic engine. And then: Construction.
To accommodate this fourth C, our august leaders made a conscious decision to rid the state of agriculture, reroute water to the cities and suburbs, and pave over the fields with asphalt, concrete, and stucco. What all the sprawl-dwellers were going to eat was never explained…we needn’t worry our pretty little heads about that, eh?
Yesh. Allegedly responsible civic and state leaders quite deliberately decided to create the vast, overweening, and ultimately disastrous fungus upon the land that anyone can see from the top of any of the low hills in the valley. It was as though they studied Los Angeles, identified everything L.A. did wrong, and then chose to do that.
An economy that produces nothing and does nothing other than feed on itself is doomed. IMHO, we’re seeing that doom, here as in Las Vegas and in other Southwestern cities. Our leaders took us down this path; our citizens didn’t seem to have the sense to realize where we were going, and now…here we are.
Speaking of the downtown house, as we were in a comment to yesterday’s post, late last week M’hijito and I finally came to an agreement with the credit union over the renegotiated mortgage on the downtown house. Though it’s not what we feel would make sense, it’s better than we feared.
As some will recall, when the Great Desert University canned me and all of my staff, we wheedled a loan modification from the credit union, whose loan officers temporarily gave us a 40-year term at 4 percent. This brought our payments down into the more or less affordable range, but of course it meant that each monthly check paid pennies toward principal.
Not that it mattered, because the house is some $56,000 underwater. One would prefer not to pay $206,000 (the amount owing on the loan) toward a house whose value is now, at best, $150,000.
The loan modification was only good for a year. This month, it came time to renegotiate.
We asked, as we pictured a committee of loan and credit-union executives rolling on the floor in helpless laughter, for a principal reduction. We did not expect to get it. And of course, we didn’t.
What we got was a 40-year loan (39, actually, with a year now gone) at 4.75 percent, with the same old balloon payment that comes due now in 12 years. We were not pleased with the balloon. M’hijito used the Male Voice to try to persuade them to drop that clause. Didn’t work.
So, there we are: if values stay flat until 2023, we will be screwed, screwed, ge-screwed.
However…
This arrangement drops our payment by about $300, lowering my share by $200 and M’hijito’s by $100 a month (he owns 1/3 of the investment). For him, it means he gets to live in a nice house for about what rent on a box in a people warren would cost him. For me, it means my 2011 income will cover my share with so much to spare that I can run the air-conditioning at 71 degrees all next summer!
🙂
What more could a person ask?
Actually, for me it means that I not only get to have a life, I also may be able to save enough to buy a new (to me) car in about two years. Should our payment arrangement continue past the time when I can no longer work, the present monthly amount will not require me to draw down an excessive amount from retirement savings.
It also means, I believe, that when M’hijito finishes graduate school and wants to return to San Francisco, we will be able to rent the house for enough to cover the mortgage payments. He can leave at any time, and when we have renters in there, I won’t have to draw down anything pay the mortgage.
What will happen in 12 years, when the balloon comes due? Well, we’ll have to deal with that when it happens. I’m not very worried, though. By 2023, we will have paid the principal down to around $177,000.
If the worst happens and the most pessimistic prediction comes true, the house will lose another 16 percent this year. Assuming it begins to rise after that, at a rate of around 3 percent, in 2023 its value will be $174,400, a shortfall of about $3,000—not an unacceptable amount to have to bring to the table to get rid of it.
If real estate drops 16 percent this year, stays stagnant a year, and then starts to rise at a modest rate, then in 2023 the house will be worth around $169,000. That won’t be good, but even then, it’s less than a $10,000 difference—not an intolerable loss. Over a 12-year period, we could easily set aside that much to buy ourselves out of the place.
Personally, I don’t think values actually will drop that far in 2011. My crystal ball says central-city values will drop about 6 percent this year, stay stagnant in 2012, and then start to rise at about 3 percent a year. Three percent is a pretty modest rate; in normal times, real estate here has appreciated at around 3 to 5 percent per annum, over the long haul. Averaging the annual home appreciation rates between 1980 and 2000 gives you a figure of 3.66 percent.
It’s going to take a long time for Arizona’s economy to recover, because jobs are gone and, with our dunderheaded leaders doing all they can to shoot every one of us in the foot, it will be several decades before employment returns. However, eight in ten Arizonans still have jobs.
Those jobs are ill-paid and getting iller-paid. Meanwhile gasoline prices are soaring—some stations are already selling gas at over $3 a gallon, and we’re told to expect $4 a gallon by next summer.
Think of that. If you earn $10 an hour, a pretty typical wage around here, you will have to work an hour to buy 2½ gallons of gas. The drive from my house to lovely downtown Tempe, not a long commute compared to the drive from the ghost suburbs of Litchfield Park, Laveen, and Maricopa, is 36 miles round trip. My car gets 18 miles to the gallon, and no, on $10 an hour I most certainly could not afford to buy a new vehicle. That means it would cost me 8 bucks a day, $40 a week, just to drive to work—not counting junkets to grocery stores, clothing stores, the kids’ schools, Home Depot, Costco… For a $10-an-hour worker, half a day of every work week will be consumed by the cost of driving to work. And if you lived in one of those bankrupt new suburbs, you could easily double that commute cost.
The legislature has targeted the public school system for destruction. Thus it won’t matter where you live—the local schools out by the White Tanks will be no better than the ghetto schools in the central city.
Everyone who still has a job is gunna want to live closer to work, preferably near the light-rail…which passes within walking distance of the adorable little house. In the past, that impetus has pushed up values in the central city, and it will again in the future.
So, I feel fairly confident that if values drop 16 percent anywhere, it will happen in the outlying suburbs, which all along have absorbed the worst of the real estate losses.
The problem with our downtown house is that there are four foreclosures within a block of it. The house across the street appears to be vacant and also probably has been foreclosed. That’s what’s driving down prices there, compared to other North Central neighborhoods, which have lost value but on a much lesser scale. Because of the neighborhood’s central location, the presence of the new lightrail, the proximity of a very upscale area, and the extreme cuteness of the midcentury houses (which appeals to both straight and gay DINKs), buying there during the bubble was highly speculative. A lot of flippers bought houses with no intention of living in them, and most of those speculators had no real funding behind them.
A half-dozen forfeited properties have already been practically given away by the banks. My guess is there’s no more than another half-dozen to go. They’ll be off the market in a year or 18 months. Give things another year to settle down, and then values will start to float back to where they were before the bubble started to inflate. If the rate of increase is anemic compared to normal real estate growth rates, it’ll be around 3 percent.
Over at Bargaineering, Jim asks his readers if they use a financial planner. After starting to scribble an answer, I realized I wasn’t writing a comment; I was writing a whole new blog post. So rather than hijack his comments section, here’s my financial adviser story:
Those of you who read Funny about Money may know about my financial advisers at Stellar Capital Management, and about their amazing revival of my life savings after the trashing by the most recent stock market collapse. Several decades ago, while serving on the board of the Phoenix Chamber Music Society, I stumbled upon the gentleman who is now the most senior of senior partners there. The group had a large endowment that funded its activities. This guy, who had been a financial adviser and a music lover for years, was also a member of the board, and in that capacity he managed the endowment.
Came a serious market crash, followed by a brief recession. Everyone we knew lost their shirts, ourselves included. But the society’s endowment not only didn’t LOSE money, it MADE money.
When I pointed this out to my then-husband, a corporate lawyer, he hired the man forthwith.
After we divorced, I continued to have our financial adviser handle the money I took out of the marriage. I dealt with my sole and separate property myself, mostly by investing in mutual funds and in one half-baked municipal bond.
The municipal bond and the American fund, neither of which performed well, were suggested to me by another financial adviser, a former wife of one of my ex-husband’s former partners, who advertised herself as specializing in women’s finances.
Well, while she was very kind, gracious, and certainly most encouraging to women on their own, her advice was just barely OK. The American Fund performed adequately but not brilliantly (it was not, we might say, “stellar”), and the municipal bond failed to keep up with inflation while it locked up my cash for a decade.
Meanwhile, back at the ranch… A few years after the divorce, my father passed away. Turns out he deeply disapproved of his 45-year-old daughter deciding what she should do with her life, and so, unknown to me, he contrived to disinherit me. He had told me that when he died, his then-wife would get the interest from his investments until she passed, and then the principal (about $90,000) would come to me. Trusting in this, I factored his promise into my long-term financial plans.
By way of delivering one last slap to the wayward child, he set up a trust that would disburse $1,500 a month to his widow, an arrangement that would drain the principal in about five years. He kept his money in a bank CD, whose return was so small as to be negligible. The widow, as he well knew, was the daughter of a woman who lived to be 102 years old, and so he expected she would easily outlive the money, which was passing directly from her bank account to her own daughter. To frost the cupcake, he made me his executor, so I would be forced to write her a check every month.
So I called my friend from the Chamber Music Society, and that was when I got wind of Vanguard Funds. He advised me to move all the money out of the CD and into a Vanguard short-term corporate bond fund. It was conservative enough that it posed no serious question about fiduciary responsibility, but it made a far better return than the laughable CD. In fact, for every dollar I had to fork over to the widow, the mutual fund returned 50 or 60 cents.
She outlived my father by about six years. Her health had been so exhausted, however, by having to care for my ailing father and by the questionable medical care she got at the life-care community where they lived, that she didn’t make it to the grand old age of 100. Far from it.
Thanks to my financial planner’s advice, even though she should have taken the entire inheritance away from me if things had gone according to my father’s plan, I managed to salvage about $40,000 of its principal. Additionally, my lawyer informed me that I was allowed to draw out an annual executor’s fee of about $1,200, which of course went directly into savings. All told, I rescued a little over $47,000 that would have disappeared without the advice of someone who knew what he was doing.
Having learned about Vanguard, I divided the rest of my non-tax-deferred savings evenly between Vanguard’s Wellington and Windsor II funds. These did moderately well over the years, while the financial adviser was managing the big IRA by investing in a wide variety of securities.
Contrary to our experience in previous bear markets, we lost a fair amount in the fall of the Bush economy, as everyone did. But in 2010 it came back, the rich getting richer as they do and bringing some of us along on their coat-tails. Total investments today are about five times what they were when I walked from the marriage, twenty years ago…not counting the paid-off house.
Along the way, I ran into another kind of financial adviser. At one point, the State of Arizona made a misstep, some charged as the result of corruption, that caused all its employee health-care insurers except Cigna to cancel coverage. None of my doctors would do business with Cigna, which was roundly hated in these parts. My dermatologist so reviled Cigna that he would not let me walk in the door, even after I offered to pay him out of pocket. It’s not easy to find competent medical care in this state, and so rather than discontinue a gynecologist and an internist whom I knew to be very good, I decided to buy private health insurance.
To afford this, I bought into an early health savings plan. In those days, such plans were few and far between, and you had to search out an insurance agent who could sell it to you. Well, after some digging I found one, and he did indeed sell me a health insurance policy.
Then he tried to make a move on my savings.
He told me that he was a financial planner and only sold insurance on the side. He could, said he, undoubtedly help me to earn lots more than I was earning with my present guy. All I had to do was tell him what my assets were, and for free he would draw up a financial analysis.
Right. Having no intention of moving a dime, I allowed the insurance agent to give me his pitch. What he presented was identical to the “analysis” prepared by the feminist CFP, only his style wasn’t as smooth.
I realized at that point that just about anybody can hang up a shingle as a financial “planner” or “adviser.”You don’t have to be a Certified Financial Planner to bill yourself as a financial planner. Nor do those letters after the name signify much more than that you have a bachelor’s degree, that you’ve passed a standardized test, that you haven’t murdered, raped, or embezzled from anyone, and that you’ve worked in the field for all of three whole years. At least the feminist had an MBA!
So. Do I use a financial planner? Yup.
Would I advise someone else to do so? Maybe. I would advise you to be very, very careful. Get references from people who have money—a lot of it—and keep a sharp eye on what your financial manager is doing. Find out, in full detail, how the person is compensated (they work either on commission or fee-for-service).
I review my financial statements in detail every month. Not once a quarter, not once a year, not whenever I feel so inclined, but every single month. I know where my money is invested, I get prospecti from those investments, and I know what those investments are doing over the short term and over the long term. Management of your life savings is not something you should blindly hand over to someone else, even if you think he (or she) can be trusted 100 percent.
Don’t expect to get rich quick, or to build capital without active involvement of your own. Never put all your eggs in one basket. And if an investment adviser comes up with something that’s too good to be true, run! As fast as you can, in the opposite direction.
