April 20, 2008

Strategies

By MARK HULBERT

CONVENTIONAL wisdom recommends that investors start with a high allocation of stock in their portfolios when they are young and reduce it as they approach retirement.

That makes intuitive sense: In your 20s, you may be inclined to take bigger risks; in your 60s, you may feel a greater need to protect the wealth you have been able to amass.

But a recent study of real-world portfolio returns, which fluctuate significantly from month to month and year to year, has found that there is no particular advantage in this approach. You would do just as well, with no greater odds of doing poorly, by simply picking an allocation of stocks and bonds that you can live with for a long while and sticking with it.

That is the implication of “Hitting or Missing the Retirement Target: Comparing Contribution and Asset Allocation Schemes of Simulated Portfolios,” by Harold J. Schleef, an economics professor at Lewis & Clark College, and Robert M. Eisinger, an associate professor of political science at that institution. It was published last year in the Financial Services Review, an academic journal.

The professors performed elaborate computer simulations for hypothetical individuals investing for retirement. Each earner is 35 years old and trying to amass $1 million (in 2006 dollars) by age 65, in 30 years’ time. They differ in how they divide their portfolios between stocks and bonds.

They also differ in how the stock and bond markets perform during their decades of investing. For each year and individual, the professors picked randomly from the 80 years from 1926 to 2006. That means, for example, that the period over which an investor is trying to amass wealth could turn out to be like the 30 years beginning in 1929, a period when the market barely beat inflation — or like the 30 years beginning in 1974, a span when stocks provided stellar returns.

By running their simulations thousands of times, and by assuming the future will be like the past, the professors calculated the odds that any given strategy would succeed. Consider, for example, an investor whose portfolio at age 35 has 78 percent allocated to stocks and 22 percent to bonds, and that the equity portion declines gradually so that, at age 65, it is just 40 percent.

Such a scheme is typical of what many financial planners recommend, and is similar to what has been adopted by the so-called life-cycle funds, or target date maturity funds, that mutual fund families in recent years have created. Assume further that this investor contributes $11,000 each year to this portfolio. This would be enough to enable it to reach $1 million by the time he is 65 — provided the stock and bond markets each year perform exactly in line with their long-term averages.

Yearly returns aren’t the same as the long-term averages, though. Based on actual market returns, what are the odds that this investor will succeed? The professors calculate them to be quite low — only 29 percent. Furthermore, the odds aren’t that high that this investor will even get close: the probability of his portfolio being worth at least $750,000, or 75 percent of his goal, is just 62 percent.

Why such low odds of success? Because of market volatility; the order in which good and bad years occur makes a big difference.

These findings are sobering enough, but consider what the professors found upon studying another lifetime asset allocation scheme that was just the reverse. It calls for the equity portion at age 35 to be just 40 percent, and for it to grow to 78 percent over the next 30 years.

THE professors found that the odds of success were actually higher with this reverse scheme. In contrast to the 29 percent probability of hitting the $1 million target in the original scheme, this reverse scheme’s odds were 45 percent. The odds of hitting at least the $750,000 level also favored the reverse scheme: 70 percent, versus 62 percent for the original scheme.

The professors don’t recommend turning conventional wisdom on its head and increasing equity exposure as people age. Instead, they advise simply keeping asset allocations fixed — which would give you just as great a chance, if not greater, of hitting retirement targets as the conventional approach, while incurring no greater odds of falling short.

One big benefit of the fixed allocation approach, which the professors did not take into account in their calculations, is that it avoids the fees associated with schemes for automatically shifting asset allocations, like life-cycle funds. Some of Fidelity’s life-cycle funds, for example, have annual fees as high as 0.88 percent. Those fees can compound into a large sum over 30 years.

Professor Schleef said in an interview that he believes investors should set their equity exposure as high as comfort permits. He suggested averaging the declining exposures that conventional wisdom recommends over the decades leading up to retirement — that is, somewhere between the higher levels recommended for youth and the lower ones of the pre-retirement years.

Professor Schleef also stressed that he and his co-author are not recommending that equity exposures never decline. He pointed out that when the typical investor reaches 65, he is expected to live an additional 20 to 25 years. At some point during that period, he said, a declining equity exposure makes sense. When to start doing so, and by how much, is the focus of his current research.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.

Even with bailout, mortgage delinquencies will likely worsen

By Anna Bahney, USA TODAY

Not even one of the biggest government bailouts in history will immediately turn back the flow of home foreclosures and falling housing prices.

A proposed rescue plan that could cost up to $700 billion targets financial institutions and may ultimately ease a credit crunch that’s tightened mortgage lending. But housing experts say foreclosures are likely to remain above historical norms until at least next summer as mortgages reset and home prices in some areas of the country continue to fall. One worry: Delinquencies, already a growing problem for subprime borrowers, are rising among prime mortgage borrowers.

The “proposal is positive for the housing market to the degree that it shores up the banks’ ability to lend and prevents banks from closing their doors, that is key to finding stability for the housing market,” says Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School. “But it may not be enough.”

The hitch? The growing number of foreclosures. Nationally, foreclosures rose 12% in August from the month before and were up 27% from the year before, according to RealtyTrac.

“There is no sign of it abating,” Wachter says. “It is likely to worsen in the coming months. This has potential to drive down housing prices further.

“I do not expect a turnaround, unless prices stabilize, until 2010,” she says.

Proposals before Congress have included a provision for loan modifications for mortgages the government assumes, perhaps averting foreclosures.

“I would think that this fund when it acquires whole loans will be working with the borrowers to renegotiate the loan,” says Mark Zandi, chief economist for Moody’s Economy.com. “Given what we’re seeing the FDIC do, working with homeowners with mortgages from failed banks, this works to keep people in those homes.”

More than 2 million foreclosures on homes financed with subprime loans are anticipated from late 2008 to the end of 2009, according to the Center for Responsible Lending. An additional 40.6 million homes will drop in value because they are near foreclosed homes.

“The foreclosures will continue unless we do something right now to mitigate the numbers of foreclosures,” says Ginna Green of the Center for Responsible Lending. “We know it isn’t just subprime loans anymore.”

The number of delinquent mortgage holders grew in the second quarter, with 6.41% of payments late by 30 days or more, up from 5.1% the year before, according to the Mortgage Bankers Association. Prime loan delinquencies also rose in the second quarter, which drove the overall rate above the first quarter’s 6.35%.

Still, subprime-loan performance points to problems ahead: 18.7% of subprime loans were paid at least 30 days late in the second quarter, up from 14.8% the year before. The number delinquent by 90 days increased for all types of loans.

Another concern about the housing slump: high lending standards. While more money may become available for loans, the strict standards mean that fewer people will be able to qualify for a loan than a couple years ago, when standards were looser.

“There is no question that lending standards for the foreseeable future will be high,” says Jay Brinkmann, the MBA’s chief economist. “If a bank now has an easier situation because of its capital position, if they look to take on additional risk, perhaps they are willing to be a little easier with credit.”

Still, the government’s package will not change the fundamentals of the housing market, Brinkmann says. “You’ll still have too many houses in California, Arizona — way too many in Florida.”

Some of the greatest concentrations of subprime loans are in the areas that saw the biggest price increases through 2005 and the steepest drops since then. Those areas also have the most houses in some stage of foreclosure.

California led the U.S. in August, with a third of all foreclosure activity. Florida’s share was 14.5%, Arizona, 4.7%; and Nevada, 3.9%. Michigan and Ohio, two states in severe economic downturns, had 4.5% and 3.7% of all foreclosures, respectively, in August, according to RealtyTrac.

The rescue package may not solve all the housing market’s troubles, but the market would face an even bleaker outlook without it, Zandi says.

“The events that we’ve gone through, despite the government’s efforts, will hit the economy hard. We are in full-blown recession,” he says. “Layoffs are going to mount and it will be a tough six to 12 months. But the housing market will be the least affected part of the economy because of these things the government has done to shore up housing.”

RISMEDIA, July 3, 2008-The Phoenix housing market showed modest changes across all measures for the start of the summer season, consistent with prior years. Inventory is down slightly at 1.8% from the previous month. Month-to-month sales did show a noticeable decline though June data revisions may close that gap somewhat. The median home price continued to drop, posting a 1.5% decline since May. For 2008 to date, the median home price has dropped over 8%.

Market Hotspots

The market really is split into two halves-properties priced above $400,000 and properties priced below $400,000. Homes priced under $400,000 represent 88% of properties currently under contract. Looking at it another way, “absorption,” as measured by the percentage of available homes currently under contract, averages 17.4% for properties priced under $400,000. For homes priced above $400,000, only 7.3% of properties are under contract. Understanding these market differences and dynamics will help sellers to better position their properties for success.

Additional Highlights

Activity levels steady to slight dip consistent with onset of summer season.

Under $400,000 market segment makes up 88% of properties currently under contract and represents market hotspot.

Home sellers in the lower end of the market will have different strategies and tactics to sell successfully compared to home sellers in the upper end of the market.

Maricopa and Queen Creek still lead the market based on pending sales. Ahwatukee, Chandler, Gilbert, Tempe not far behind.

Local Luxury Builder Sees Silver Lining in Phoenix Housing Market - Phoenix Real Estate News Arizona Real Estate News

Phoenix Housing Market

(Scottsdale, AZ) - While the national subprime mortgage crisis has created a glut of single family homes for sale in the Phoenix metropolitan area, the situation is far from desperate for a segment of the real estate market relatively unaffected by the factors that are driving the current downturn in home sales. Affluent buyers are continuing to purchase existing luxury homes or building custom properties to suit their lifestyles here in the Sonoran high desert.

Christy Smith, president of Casas del Oso, a Scottsdale-based luxury home design/builder, believes the weakened US dollar has made buying luxury properties on both coasts as well as in high profile areas such as Scottsdale and Paradise Valley very attractive to wealthy buyers from Canada, Europe and Asia. “Many of the buyers we build for are purchasing their second or third home,” says Smith. “Lifestyle motivates them more than anything else, and they have the means to satisfy a desire to live in multiple locations.” Smith says their sales of custom built homes in the $3 million to $10 million price range have remained steady.

This caught my attention and it was published under a title called "Gurus’ strategies for positive cash flow".  I never have thought to call myself a Guru and I am not sure why because I feel I know a lot about real estate after being in this business for over 10 years.  I know some old timers have been around for 20 or even 30 years and I say good for them, hopefully they have learned to save and cash flow some real estate by now. 

Now that Mike Bosworth is posted all over the press I am very glad I did not call myself a Guru because it seems that Gurus are going to jail or being sued for $13 Million. 

I still like the philosophy of keep it simple. Below are some interesting tid bits from John Treed’s web site. I am going re-publish some terms that are relative to this great time of cash flow real estate.  I predict the next 6 -12 months will be a special time in history where investors can accumulate cash flow real estate, don’t be a spectator, act now.

The terms

Idiot’s statements
Liar’s statements are caused by a conscious attempt to mislead buyers. Idiot’s statements arise from ignorance. Beginners tend to ignore or overlook many expenses like vacancy and collection loss, management (or the value of your time if you plan to manage the property yourself), replacement of capital items like roofs and hot water heaters, repairs, and so forth. Because of their ignorance, they come up with operating expense ratios of 30% or less just like the liars. I have had a number of arguments about this with beginners. Several have contacted me a year or so later to admit, “You were right. I underestimated the expenses.”

Well, duh! There are only several dozen annual studies on the ratio. The real estate world has not been waiting for some beginner to come along and tell us how much it costs to operate an apartment building.

Gurus’ strategies for positive cash flow
Most real estate gurus are just salesmen who know little about real estate investment, but who want to part you from your money. The people they target are either beginners or relatively new investors. Relatively new investors have enough experience to know what I just said above, that almost all normal rental properties have negative cash flow. As a result, bad gurus often encounter the objection, “I do not want to buy your multi-thousand dollar information product because I will get negative cash flow if I follow your advice.”

How you achieve positive cash flow ethically in the real world
So how do you achieve positive cash flow ethically in the real world? You need to buy in the rare market where high cap rates are the norm. Such markets are usually severely depressed like Anchorage or Oklahoma City in the late 80’s. The reason tenants are willing to pay more to rent than they would have to pay to own in such markets is that they believe property values are falling or level, in which case not owning is a good idea in spite of the high rent.

I do not agree with the last comment, although i find this person very funny.  You can now cash flow property in Phoenix.  By combining our Rent to Own/Lease Option program, Credit Repair and Financing in the sale / Rental of real estate, you can cash flow your property while selling the property for a fair price and yielding profit.  I can show you over 20 examples of property that we are cash flowing today’s market.

Since Credit repair is a mystery to so many people I like to post article that are written by people that make sense.  Below is an article by John Mussi who has some great things to say about credit repair, but don’t be fooled, although credit repair is as simple as sending in a letter to the three credit bureaus it can be cumbersome and i highly suggest you let a respected professional handle the deed.

How Credit Repair Works
by: John Mussi

With personal debt at an all-time high, a number of individuals have found that they have overextended themselves and have become immersed in debt. As their debt grows, they can’t help but get more and more behind. and their credit score pays the price. If you are one of the many who have had problems with your credit in the past (or still have problems with it), you may be considering credit repair as a way to get back on track.

Before you sign up for a credit repair plan, you should make sure that you understand exactly what is involved in repairing your credit score. while there are a lot of credit repair agencies that are legitimate, there are also some that seek to prey on those who need help and perform services that are both immoral and illegal.

What Credit Repair Is

Obviously, the goal of credit repair is to improve your credit score and get you back on track financially after past credit problems. A variety of credit repair services exist, providing everything from credit counselling and debt negotiation to debt consolidation loans and budgeting advice.

When used properly, credit repair services can not only help you to get caught up with your bills and on the path to a better credit score but they can help you to avoid bankruptcy and set you up to avoid credit problems in the future.

Credit repair takes time, however, and should never be viewed as a "quick fix" for your credit.

If an offer claims that they can instantly grant you new credit, then it’s likely not only bogus but can also get you into legal trouble if you accept it.

Common Types of Credit Repair

As mentioned above, credit repair can take several different forms. Credit counselling services provide assistance with the budgeting and repayment of your debts, and offer advice on simple ways to improve your credit without additional loans. They also often provide debt negotiation, which is the working out of a settlement with your creditors so that you only have to repay a portion of your original debt within a certain timeframe.

Debt consolidation loans are also used for the purposes of credit repair, allowing you to take out a loan in order to pay off outstanding debts and leaving you with a single monthly loan payment instead of several different payments.

Budgeting assistance services are also available to help you get control of your spending and personal finances.

Avoiding Credit Repair Scams

Unfortunately, there will always be unsavory individuals who seek to make money off of those who are in need of assistance.

Any credit repair service that promises instant results or that offers to simply create a new credit report for you should be avoided. what they’re really creating is a business tax identification number, and any individual who uses one is in danger of being charged with fraud and possibly other charges.

Credit repair takes time; if an offer sounds too good to be true, then it likely is.

Repairing Your Own Credit

Of course, by paying off old debts and establishing and maintaining new lines of credit you can begin the process of credit repair yourself.

Request a copy of your credit report and check it for errors, and then focus on clearing the debts that appear as negative reports.

It may take years for all of the negative reports to expire, but by preventing new ones while increasing your positive reports your credit score will slowly rise on its own.

National Study of Real Estate Buyers and Investors debunks myths and identifies signficant opportunities in this vast underserved market

April 15, 2008 - Denver, CO and Phoenix , AZ

Most people think that real estate investors have contributed to destroying the housing market. This gives a very small number of individuals credit for an undue market effect by buying junk houses or pre-construction homes, and flipping them - adding no value - for vast profits. Have "speculators and investors" ruined the residential real estate market?

Real estate is considered an orphan investment that is shunned by traditional financial advisers because they view it as a non-traded asset - unlike stocks and bonds, where they earn fees for trading and advisory services. Recently The Tiger Group, a group of high net worth individuals, reported that almost 40% of their assets were in real estate.

Essentially real estate as a personal investment - the investor and the market for real estate investments - is misunderstood. This first of its kind professionally conducted study addresses these and dozens of other questions

Can you believe I had the relative of a Rent to Own tenant come into my office and say that the electric on the house does not support his R.V.  He said when he plugs it in that the power doesn’t really support the R.V. and it blows breakers.  Wow…then he said that it also affects the washer/dryer and the A/C.

I told him that if I go there and turn the A/C and the breaker doesn’t blow then I am going to charge him $75.  Then I said if I go there and I turn on the washer and dryer and the breaker doesn’t blow then i am going to charge him another $75. 

I asked him what time can I stop by …then the story changed.

The moral of this story is that Tenants or worse then Tenants, tenant relatives staying with tenants will always complain and always want something fixed.  Well, with our Lease Option tenants we only warranty major items such as Plumbing, Electrical and Roof which solves many of our immediate problems.

Below are some excerpts from an article I discovered written by Dan Melson at his web site

It wasn’t until recently I realized that we are experience a refinance boom.  To what extent, i am not sure but our corporate Mortgage Branch have been having record months.  This is all good to know considering many professionals are having a difficult time surviving let a lone having record months. 

Meslon says:

With rates having nose-dived in recent weeks, we’re experiencing a refinancing mini-boom. Now that rates have fallen by about a full percent from where they were most of the last year, people are waking up to the fact that refinancing now can save them some serious money.  Underwriting times are up to five business days - a full week. Unlike all of the recent refinancing booms, this time a lot more people have a couple extra issues.

Although a number of people are upside down in their home FHA has a program that will allow you to Streamline refinance for a lower interest rate regardless of how upside down you are in your house.  I receive calls daily from people that have hurt their credit and are upside down in a stated loan, unfortunately I do not have an answer for these people.