Buz Blog

Increased lending standards could impact real estate values

Buz Livingston, CFP®

www.LivingstonFinancial.net

Originally published in The Walton Sun, July 27, 2009

Ronald “Stormy” Smith was a plain-spoken, shoulder to the grindstone kind of guy.  He lived most of his life in the hamlet of Eldorendo (last syllable correctly pronounced “dah”) in northern Decatur County (GA). For comparison purposes Paxton would be a metropolis aside Eldorendo.  With an acetylene torch or electric welder Stormy was an artisan. He left this world a bit too soon and I regret not saying good-bye.  Once during harvest I was facing a dilemma; an unforeseen collision with a “lightered knot” caused the bars on my peanut shaker/inverter to be twisted like a pretzel and the parts house was closed.  “Can you fix it, Storm?  “Why hell, yeah” was the answer. “When I get it hot, hit it with that sledgehammer, right where I tell ‘ya”.  After a couple of ineffectual blows, “Get out the damn way and gimme that sledge.” 

In the early 80s while trying to arrange financing for his home, Stormy observed, “A bank won’t loan a fellow no money, les he can show ‘em he don’t need it”.  Rural banks were reluctant to provide financing unless there was sufficient collateral and/or adequate income.  Fast-forward two decades and banks were quite the opposite.  You didn’t just have to fog a mirror to get a loan, you could have fogged a mirror previously and someone would loan you money.  Those days are gone and they are not returning.  More stringent lending requirements will be the norm. 

Tightened lending standards will dampen the recovery of local land prices.  . Let’s be clear, even though there are hundreds of residential lots within easy strolling distance of my abode that will never surpass the boom time prices I like real estate – a lot. And still think real estate is a good place to invest.  A rental piece of property with a paid off mortgage or steady cash flow is hard to top.  Gulf front and bay front property; those are unique places.  Exclusive Walton County locations -some of the prettiest places in the world will be OK.  Just like after the dot.com boom Apple Corp has kept on clicking, along with Hewlett Packard.  Those two outfits are analogous to Watersound Beach or The Retreat.  Real estate investing means a long term commitment.   

What we experienced nationwide (more dramatically, here) was a real estate balloon popping.  Just like when a real balloon explodes, it’s a waste of time to keep blowing in it; you only get hot air. Even after the technology bubble blew up there are Dell Computer shareholders who still have profit even if the price is 15% of its peak.  Dell won’t see $50 bucks again and there are vacant lots from Pensacola to Port St Joe in the same predicament.  Some folks still have a profit (or maybe that’s their perception) because they bought land a years ago.  Depending on the location (think old town of Santa Rosa) those places won’t ever see the boom time values.  On my daily constitutional there are scores of lots in the same sad shape.    

In the feeding frenzy boom time days, properties appreciated rapidly.  Banks now have their “Come to Jesus” alter call.  If something sold for “X” dollars, lenders won’t be inclined to magically value it as “X+Y”.  Going forward banks will be more conservative.  Maybe we won’t have pony up for bailouts again.  Not such a bad idea.   My point is ignoring the impact that lax lending standards played in the nationwide real estate bubble could be a dangerous strategy.  

Today’s column is in memory of my old friend Stormy and Paul Hemphill whose New York Times obit appeared with a small error.  Growing up I cut my teeth on Mr. Hemphill’s Atlanta Journal columns.  He abandoned journalism in the 1970s but continue penning Southern genre novels and non-fiction.  Northwest Florida was the locale of his first novel, Long Gone-a story about a baseball team named the Graceville Oilers, sex and racial tensions in the Deep South. His memoir, Leaving Birmingham, was nominated for a Pulitzer Prize.  I wager Mr. Hemphill would be proud to share a memorial with a top-notch welding professional and to know a small southern weekly corrected the mighty New York Times.

An Investing Lesson from Mother Nature

Buz Livingston, CFP®   All Rights Reserved

www.LivingstonFinancial.net

Published in Walton Sun-September 26, 2009 

The snake did not hesitate and slipped into the cold water of Morrison Springs.  Fear is the default emotion when I see a snake but this was different. It was serene and beautiful watching the green snake glide across the stream. I steered the bow of my kayak around and showed the critter to Joe Wyatt, a naturalist for Hammock Bay.  Leslie Kolovich, 30A Radio, and Lori Ceier, Walton Outdoors had enlisted Joe to explain some of the local fauna and flora as part of their “Day at Morrison Springs”. 

Before you could say scat, Joe had the green tree snake wrapped around his arm.  “Skinny short snakes aren’t venomous; they have to constrict their prey. The exception being a coral snake.  Short fat snakes may be venomous since their venom can kill larger prey.” Snakes are a part of our ecosystem. You need to know the ones that will hurt you. The venomous snake of Eastern Diamondback heritage spotted crossing the Joe Baker Walkover in Blue Mountain Beach is one to avoid. 

On the way home through Red Bay, it dawned on me that annuities are like snakes; some will hurt you, others won’t.  The prior week I recommended a retiree use a portion of his deferred compensation to buy a single premium immediate annuity to bolster his retirement income but gave the opposite advice to someone else.  Why the difference? In the latter case the annuity in question was a variable annuity with annual costs coiled menacingly like a snake around 3%. 

The Journal of Financial Planning, August 2009 examined several different withdrawal strategies-mutual funds, immediate annuities, combinations of the two along with variable annuities with and without guaranteed withdrawal benefits.  There was no clear-cut winner.  

Guaranteed benefit riders are prevalent on variable annuity contracts.  This product appeals to investors who are wary of market losses.  However ignoring the fees is as dangerous as playing with snakes. “Wealth balance in the low fee scenario is roughly $184,000 higher” based on a $1M initial investment. 

Contrasted with variable annuities containing guaranteed benefit riders, a mix of mutual funds and immediate annuities “can generally provide investors with greater purchasing power”.   Also, a mix of mutual funds and immediate annuities yields “similar or even higher income flows than variable annuities with guaranteed minimum withdrawal benefits”.   It is pretty elementary. Variable annuities with guaranteed minimum withdrawal benefits assess mortality and expense charges along with fees for the withdrawal benefit rider on the entire portfolio.  These costs are absent from mutual funds.   

Even with this headwind under some circumstances a variable annuity with guaranteed withdrawal benefit may outperform.  Under some circumstances it makes sense to pick up a rattlesnake…most people would wisely defer though.  From the article’s executive summary: Mutual funds combined with immediate annuities “deliver solutions broadly similar to and even more flexible than a variable annuity with a guaranteed minimum withdrawal benefit”. 

Annuities are easy to understand-they provide a lifetime income stream.  If your annuity does anything else, you pay for it, each and every year.  Freedom from stock market fluctuation or guaranteed account balances are benefits you buy, sometimes dearly, and are often unnecessary. 

In certain circumstances an annuity with low annual costs may be appropriate for you.  But buying an annuity without understanding the product is not dissimilar from picking up a snake without knowing what kind it is.  In nature or investing what appears to be a good idea can turn out to be the opposite.  Joe told us that the chilly spring water could have killed the snake or shocked it so much a predator would have nailed it for Sunday dinner.

www.LivingstonFinancial.net

Buz Livingston,CFP® All Rights Reserved

Originally published in The Walton Sun August 22, 2009

Last month I pointed my vintage but still sporty Acura west on I-10 bound for Louisiana. The Cajun wing of my extended family had three good reasons to party. Aunt Mary had just retired from the Louisiana Department of Agriculture. She never could escape those north Florida farm girl roots. Uncle Bob, former head of LSU’s Food Science department, had just turned 84 and it was their 50^th wedding anniversary. Laissez les bon temps roulez!  

In most families those topics would be the highlights-au contraire not with my five aunts. Before all pleasantries could be exchanged I was facing a Sotomayor-like inquisition from my aunts. “What do you think about Blair’s friend Michael?” Like most fathers before me I answered the question incorrectly. I should have designated her great-aunt Eleanor as spokesperson (she knows more about this situation than me).

Mighty Mike (call him Michael, Dad!) is a home builder/developer in Houston and Austin. He is a bright guy not only because he dates our daughter but he focused his business on affordable homes-one segment of the housing industry that is showing some signs of life.

The Wall Street Journal recently reported on the dichotomy of the real estate market. Upper-end homes and second homes are near comatose while affordable homes are perking up albeit slightly. Lower priced-homes have been buoyed by the Obama administration’s stimulus plan. First time homebuyers can qualify for a tax credit of as much as $8000. Since this tax credit is limited to couples whose AGI is less than $150,000 (single-$75,000) lower-priced homes are the obvious target. Plus the Federal Housing Administration now guarantees mortgages for qualified buyers with as little as a 3.5% down payment. But this is of little value to the upper-end market, generally homes over $750,000, since these mortgages are above the limits set for FHA guarantees.

In addition, mortgages for higher priced homes exceed the limits for Freddie Mac and Fannie Mae which means borrowers end up with a non-subsidized “jumbo” loan. Rates on these loans have always been higher, To add insult to injury, the spread in interest rates between “jumbo” and conventional loans has widened. Borrowers for “jumbo” loans can face more scrutiny and often have to have larger down payments.

Real estate, like politics, is local and the Texas market has not been squashed like the local market. Local internet message boards tout local sales increasing but Blair’s friend is selling new homes-at his asking price and moving spec houses to boot. What is selling locally is homes that somebody paid too much for the first go-round.  I surmise that there are some local parallels with the Wall Street Journal report which pointed out in Las Vegas home sales were up 70% spurred by falling prices.

The upper-end market is not a good place to be and things will get worse. Overall home inventories are down to slightly more than nine months from over eleven months a year ago. For homes priced over $750,000 the inventory is more than seventeen months and still rising.  Ominously, the default rate on “jumbo” mortgages now surpasses conventional loans. As of May, the 60-day delinquency rate for “jumbo” mortgages was 7.4% versus 4.9% for their conventional brethren.

The Journal also points out that buyers may be abandoning the concept of stretching to buy the most expensive home they can afford. The idea of a big payoff when comes time to sell has turned into a disappointing mirage for many.

The worst thing about that Texas boy is his delusion that the powerhouse of football is The Big 12 and not the SEC. 

Planning for Unmarried Couples is Different

Buz Livingston, CFP®

www.LivingstonFinancial.net

Originally published August 2009 

The Garrett Planning Network holds our annual convention in Kansas City every August.  No one has been able to snare the most colorful writer award except me (no shock for Walton Sun readers) but this year I was surprised with another honor-MVP.  There was a three-way tie fortunately there was no sudden-death and a jump drive is preferable to a trophy.   

I woke up Sunday morning and attended a lively panel discussion about couples living together without the sanctity of marriage.  In the eyes of many unmarried couples living together means same-sex partners. Lo and behold, there are more heterosexual partners, either family members moving in with each other or people choosing not to get married.  All of these have specific planning options but there are some universal elements.   

Whether the relationship is going to move to marriage or not planning is imperative. This sounds commercial but the reality is that there are social norms and laws that surround marriage.  Marriage kicks in some legal definitions- a spouse is entitled to benefits that a partner does not have.   Assuming the relationship is going to have some permanence (not just hiking the Appalachian Trail) then the parties should consider putting a few basic things in writing.  I like the term little “c” contract-while that will irk a lawyer or two – it makes sense.  We are talking about basic money management – who pays which bills.  Tune into an episode of Judge Judy and you will see what happens if couples split up.  

Most of the time the law favors married couples. However Social Security benefits are an exception if the surviving spouse benefit is higher than your own.  Another benefit unmarried couples have is with Roth IRAs.  For single filers the Roth phase-out begins at $105,000 while married couples have a phase-out that starts at $166,000. 

How do partners blend their assets?  The key is communication and each situation is different.  That why they call what we do personal financial planning.    Make sure you don’t unintentionally disinherit a child or grandchild while trying to avoid an economic hardship for your partner.  One option is to buy equity in your partner’s home.  Paying rent is an alternative, too.   Don’t just stick a name on a deed willy-nilly.  For unmarried couples a will is essential if you want any assets to pass to a partner.  Without a will your partner can be left out in the cold.     

A side effect of the health care debate has been the increased focus on advanced medical directives like health care proxies and living wills.  While essential for everyone, advance medical directives are exponentially more important for unmarried partners. Health care proxies merely allow you to designate who makes medical decisions if you can not. Spouses have a voice regarding healthcare decisions while an unmarried partner will be ignored or even denied visitation privileges.  Before she decided health care proxies were a nefarious plot, former Alaska Governor Sarah Palin recognized their importance when she signed the following proclamation:  

“WHEREAS, the Foundation for End of Life Care in Juneau, Alaska, and other organizations throughout the United States have endorsed this event and are committed to educating the public about the importance of discussing healthcare choices and executing advance directives. WHEREAS, as a result of April 16, 2008, being recognized as Healthcare Decisions Day in Alaska, more citizens will have conversations about their healthcare decisions; more citizens will execute advance directives to make their wishes known; and fewer families and healthcare providers will have to struggle with making difficult healthcare decisions in the absence of guidance from the patient. NOW, THEREFORE, I, Sarah Palin, Governor of the state of Alaska, do hereby proclaim April 16, 2008, as Healthcare Decisions Day in Alaska”

Thanks but no thanks, Governor; you were right the first time. Health care directives are important.