and
and
and
LOL! Mammas, don’t let your babies grow up to be academics.
The Incredible Lightness of Our Economy…
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.
Mortgage Mod
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.
That’s what my crystal ball says, anyway.
Image: Magic 8-ball. Mostlyrecords. Public Domain
Financial Planners: The Good, the Bad, and the Ugly
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.
What I Learned During the Year of Penury
Well, assuming all goes as planned (big assumption, I know!), according to my budgeting software this year I should see a combined earned and passive income of about $52,000. That’s only $13,000 short of my late, great full-time editorial salary, and $8,500 more than I earned teaching full-time. And it’s a far cry from what crossed my bank account’s threshold last year, about $28,000.
I learned a lot of things by trying to live on 43 percent of my pre-layoff salary, very valuable things:
• If you’re not in debt, you can live on a lot less than you think you need.
• If you are in debt, you’d better have a good stash of emergency savings to cover payments.
• You can live frugally and still be reasonably comfortable, most of the time.
• No matter what anyone says about the alleged tax advantages of carrying a mortgage, when you’re unemployed a paid-off roof over your head is your second-greatest asset.
• Your third-greatest asset is a paid-off car.
• Your greatest asset is good health, should you be so lucky to have it and keep it.
• Beans, rice, and pasta are splendid things to eat.
• Chard growing in the garden goes a long way toward putting a nice meal on your table.
• A stand of lettuce helps, too.
• With careful planning, it’s possible to stay out of stores for surprisingly long periods.
• Raising the deductible on your homeowner’s insurance comes under the heading of penny-wise and pound-foolish.
• When budgeting for irregular income, it may be good to create longer budgeting periods than a month. At times, two- or three-month budgets may work more effectively.
• When money is tight, that is when every unplanned expense in creation crashes down on your head.
Despite fears to the contrary, I managed to stay in my home and live without too much deprivation by budgeting carefully, stockpiling food, conserving energy, and putting less money in savings.
It’s surprising how little it takes to get by when you’re not working. I would have done OK on even less, had I been inclined to shop in thrift stores and low-end grocery stores. It’s also clear that I could have cut living expenses still further by moving out of my present home, which has relatively high operating costs, and going to Sun City, where taxes and insurance premiums are significantly less.
What kept me in my home was not having a mortgage. Some years ago I decided to defy conventional wisdom by paying off the mortgage I had on my last house. It occurred to me that each monthly mortgage payment I did not have to pay represented a return on investment of exactly that much. I owed about $70,000 on the house and was paying about $860 a month, which, when the alimony ran out, was more than half my monthly take-home pay. Less than $200 of the PITI comprised tax and insurance. My investments earn about 7 percent; 7 percent of 70 grand is $408. So despite the protestations of two investment advisers, it seemed to me that little would be lost by investing a chunk of savings plus an inheritance in residential real estate.
Over a ten-year period, the house’s value more than doubled, allowing me to buy my present house, a somewhat nicer place in a quieter part of the neighborhood, and pay for it in cash.
If I hadn’t owned the house outright, I can’t imagine what I would have done last year. Although the house has dropped $35,000 in value since I bought it, you don’t realize a loss until you sell, and because I didn’t owe anything, I wasn’t forced to sell or default. There’s simply no way I could have paid $10,320 out of a $22,000 net income and survived. It was extremely lucky that I made that choice all those years ago, and that I’d managed to accrue enough savings to pull it off at the time.
So, I learned that a smart decision can pay off a long time after you make it. And I learned that it is not a bad idea to pay off a residential mortgage.
Having a lot of savings rescued me from the potential disaster posed by the mortgage on the downtown house. I used the tax-free portion of a whole life insurance policy to pay my share of the monthly payments in 2010. Because we managed to get a temporary loan modification, a couple thousand dollars of that remain to help defray the 2011 PITI.
There were some difficult moments. The cost entailed in falling and hurting myself was a bit startling. It would have been even more startling had I consented to surgery that would have caused the loss of an entire semester’s pay. Living through the summer with the thermostat turned up so high that my friends wouldn’t come inside the house was uncomfortable, and I’ll be happy not to have to swelter like that come next July.
When I would run out of cash, not spending a dime for a week or ten days at a time was a challenge. And the summer months, during which income did not cover base expenses, were nightmarish. Even though I’d saved enough from teaching income, theoretically, to squeak through May, June, July, and August on Social Security, by the time fall semester started I was running out of money. Classes started sometime after mid-month, we didn’t get paid until the last of the month, and that was only a partial paycheck. The summer stipend didn’t help much, because most of it wasn’t disbursed until long after I needed it. Being paid for only two classes during the first eight weeks of the semester didn’t help things much, either.
By December, the money pile had not recovered from the effort to get through three and a half months with less income than outgo. Fortunately, though, the stock market had recovered. The strategy of delaying a drawdown from savings had worked, and my IRA and brokerage accounts had returned to something close to their pre-Crash levels. At that point, my financial adviser and I decided it was safe to start a 3 percent drawdown, which, until inflation kicks in, will guarantee enough in the checking account to pay the bills, exclusive of earned income.
In retrospect, I learned that I would have been better off if I’d put all my summer survival savings into my regular cash flow account at the end of spring semester, rather than setting the money aside in a savings account and doling it out to myself in monthly “paychecks.”
Instead, I should have treated the summer as one three-month budget cycle. This cycle should have contained three months’ worth of expense budget: three months’ worth utilities, insurance, etc., plus three months’ worth of spending money. On the credit side, it would have included all my spring-semester survival savings plus projected Social Security. Subtracting debits from the summer-long total, not from one month’s worth at a time, would have allowed me to see at a glance how much remained to get by on until salary started again. This would have relieved a great deal of worry engendered by fretting about how to get by from month to month. I still would have been in the red at the end of the summer…but I probably would have stressed about it only once, instead of three or four times.
It really would have helped not to have had a $165 palm tree trimming bill in June, a $30 copay to the Mayo in July, a $105 electrician’s bill in August, and a $120 plumbing bill in September. I suppose that when you foresee a financially tight time coming, you should add about $150 to your regularly budgeted expenses to cover Murphy’s Law.
The economy is improving. Eventually most of us will get jobs again, although probably not at what we used to earn. The Fall of the Bush Economy is not the last recession we’ll see. There’ll be more, and they may be worse. By way of preparing for those, I think, the take-away messages are as follows:
• Live within your means, even in good times.
• Within your means, live frugally, even in the best of times.
• Build savings. Don’t limit savings to your IRA or 401(k).
• Distribute savings wisely between cash and investment accounts.
• Pay off debt. That includes mortgage debt.
• Avoid accruing new debt. Use savings to help pay for big-ticket items in cash.
• Take care of your health.
• Expect the unexpected.
Cranky Old Bat vs. Newfangled Junk
You know you’re getting old when (among other things) you begin to feel that none of the gadgets, doodads, gizmos, and minor amenities that made your life comfortable exist anymore. Or if they do, the darn things don’t work anymore!
Case in point: The potholder.
What is it with those silicone things
These little frauds are a total mystification. They’re clumsy. They’re ugly. They won’t wrap around a hot pan handle. And contrary to what their admirers say, they don’t protect your hands from heat any better than a real potholder, which is to say, “a potholder made from several layers of heavy terrycloth.”
One consumer effuses, “I absolutely love these potholders!!!!” Exclamation point. Then she goes on to remark, “You need to be aware of the location of the hole in one corner of the potholder. I didn’t pay attention one day and got a nasty burn pulling a very hot pan out of the oven. If you are a bit of a klutz, like me, best to keep 100% aloe in the house just in case you do what I did.”
Uhm…. Doesn’t a hole in the potholder defeat the purpose of a potholder? The whole idea of using a potholder is to keep from getting burnt so you don’t need to have a bottle of aloe vera cluttering up your kitchen counter.
Another burbles, after allowing that they are a bit stiff and difficult to use, “They have a bonus use, as a very good way to get a grip on jars or similar items that are hard to open. (I use mine to unscrew the faucet water filter when it needs to be replaced.)” So…the tradeoff for the aloe on the kitchen counter is a hot pad that doubles as a rubber gripper. Why not just get a rubber gripper for those hard-to-open jars and opt the burned fingers?
Well, we—or more likely, a coalition of manufacturers and marketers—have decided that the silicone things are so wondrous that real potholders are getting very hard to find. The last time I searched in Williams-Sonoma, Bed Bath & Beyond, Sur la Table, and Target, I couldn’t find a real, terrycloth potholder, one that’s terrycloth on both sides, not one with a decorative scene stamped on useless cotton or one with a shiny, fake asbestos backing. All I want is a terrycloth potholder, terrycloth through and through. And I’d kinda like it not to be ugly.
After some traipsing through Amazon, I came across these Gourmet Classics terry Potholders
Red is the only color that’s not plug-hideous. They also come in pea-soup green, dungeon black, and apartment-house beige. What recommends them is their size: they’re 8 by 8, the size of a normal potholder.
However, here’s one that purports to be 8½ x 8½. It comes in blue, red, and yellow, and not only that, but it’s a few cents cheaper than the “gourmet” variety.
That Wedgewood blue doesn’t match the blue trim in my kitchen’s Mexican tilework, but what the heck. The things hang inside a cabinet, so no one’s going to see them when they’re put away. Truth to tell, with some exploration you discover that this model comes in many colors, from day-glo red to cobalt via moss green.
If nothing will do for your kitchen but metaphorical greenness, believe it or not they make an “organic” potholder.
We’re told these things are made of cotton “grown without the use of harmful chemicals, pesticides and fertilizers. The methods, materials and dyes used in organic cotton have a low impact on the environment and are certified by Skal International.” The only colors available are earth-tones. In addition to the brit-shindle above, there’s a kind of pinkish terracotta, a leaf green that verges on the minty, and maize yellow. That’s a better selection than any of the other offerings. This potholder, though, is an odd shape: 7¾ x 9 inches. But that might not be a bad thing.
Isn’t it ridiculous that you can no longer buy an ordinary, functional potholder at the corner grocery store or even at the mall kitchen shop? Well. If all else fails, you can make your own:
What products from the good old days do you miss the most?