Sunday, August 30, 2009

Top 10 Best Places to Live

U.S. News & World Reportmagazine looked at areas with strong economies, low living costs, and plenty of fun things to do to identify this year's best places to live.

The editors reviewed more than 2,000 locations nationwide, considering such factors as sales taxes, housing prices, average number of children per square mile, proximity to healthcare, and the availability of educational institutions. Readers can use a database search to tailor the results to their own situation.

"Choosing where to live is a difficult decision for any family," says Brian Kelly, editor of U.S. News & World Report. "With U.S. News's Best Places to Live, we've crunched the most important geographic, economic, and educational data and provided the search tools to help make this decision a little easier for families."

The 10 cities honored as Best Places to Live are (listed alphabetically):

  1. Albuquerque, N.M.

  2. Auburn, Ala.

  3. Austin, Texas

  4. Boise, Idaho

  5. Durham, N.C.

  6. La Crosse, Wis.

  7. Loveland, Colo.

  8. San Luis Obispo, Calif.

  9. St. Augustine, Fla.

  10. Upper St. Clair, Pa.

Source: U.S. News & World Report (06/09/2010)

Friday, August 28, 2009

Many underwater homeowners are deliberately walking away from mortgages

A study finds that 26% of the defaults across the country are calculated economic decisions to bail out of loans by borrowers who could afford to make the monthly payments.

Reporting from Washington -- Would you, under any circumstances, default on your home mortgage, even if you could afford to make the monthly payments?

That's a trickier question than you might assume, according to new research from the University of Chicago's Booth School of Business and Northwestern University's Kellogg School of Management.

The study found that 26% of the record numbers of home mortgage defaults across the country are "strategic" -- that is, calculated economic decisions to bail out of loans by owners who actually have the money to make the payments but can't handle the negative equity they're carrying caused by local property value declines.

Nationwide, according to data from, 22% of all homeowners were underwater, with mortgage debts that exceeded their home values, in the first quarter of 2009.

In some parts of California and Nevada, more than half of all households have negative equity. In a few localities, the size of the equity deficit is staggering: In the Salinas, Calif., metropolitan area, for example, the median equity for people who bought their homes in 2006, near the peak of the boom, is now a negative $214,305, according to the study.
When researchers questioned two nationally representative statistical samples of households about strategic defaults, they found that moral and social beliefs play a constraining role, but negative equity and the frequency of defaults in local ZIP Codes have significant contrary effects.

Co-authors Paola Sapienza, Luigi Zingales and Luigi Guiso used interviews with 2,000 U.S. households in December and March to explore the "moral and social" dynamics of strategic defaults.

The two 1,000-person samples came from the Chicago Booth/Kellogg School Financial Trust Index, which monitors the level of trust households have in the financial system.

Their research not only represents the first attitudinal study of the phenomenon of widespread strategic walkaways from home loan commitments, but also has implications for federal policies seeking to limit the numbers of foreclosures -- which are on pace for a record 3.1 million filings this year, according to RealtyTrac Inc.

Among the study's sobering findings:

  • Moral precepts keep large numbers of financially struggling homeowners out of default, but only to a point. Fully 81% of household heads said they believed intentional defaults on mortgages to be "morally wrong." But that high percentage begins to crumble as negative equity grows increasingly larger.
  • When negative equity rose to $50,000, 7% of those who consider strategic defaults to be immoral said they'd walk away. At $100,000 negative equity, 22% would do so. At negative $200,000, 37% of those with moral objections would nonetheless default, and at $300,000, 38% said they would.
  • Among those who had no moral reservations, the percentages were much higher. At $50,000 negative equity, 20% said they'd walk away. At negative $100,000, 41% would do so, as would 59% at negative $200,000 and 63% at $300,000.
  • The researchers found that age, tenure of homeownership, the frequency of foreclosures in a person's ZIP Code and even politics influence an owner's willingness to bail out of a mortgage. Owners under age 35 are less likely to have moral problems with strategic defaults, as are self-described political independents, compared with Republicans and Democrats.
  • An important factor in walkaways, according to the researchers, is the level of foreclosures owners observe in their local community and their personal acquaintance with owners who have defaulted. In the latter case, owners who know someone who defaulted strategically are 82% more likely to default themselves, compared with owners who do not know anyone in that situation.
  • The higher the number of foreclosures in a given ZIP Code, the higher owners' willingness to walk away, the researchers found, suggesting what they call a "contagion effect that reduces the social stigma associated with default as defaults become more common."
  • High numbers of foreclosures also appear to create a "vicious circle" that increases neighboring owners' negative equity and greatly raises the probability of additional defaults, foreclosures and equity destruction in the area.
  • Although the authors offer no specific remedies -- they are behavioral researchers, not policy advisors -- they argue that the traditional assumption that borrowers default because they can't afford their monthly payments needs to be reexamined in light of accelerating foreclosures in some markets combined with plummeting equity.
  • The Obama administration appeared to take a step in that direction July 1 when it allowed refinancings of Fannie Mae- and Freddie Mac-owned mortgages in which owners have as much as 25% negative equity. Previously the limit was 5%.

(Source: Kenneth R. Harney)

Tuesday, August 25, 2009

Underwater Mortgages to Skyrocket by 2011

A new report by Deutsche Bank estimates that by 2011 nearly 50 percent of U.S. home owners with mortgages will owe more than their homes are worth.

This estimate of 25 million borrowers is significantly higher than similar calculations by other economic and real estate analysts. For instance, Moody’s projected that 17.5 million will be underwater by early 2010.

Currently, about 26 percent of home owners choose to walk away from their mortgages because their equity falls short of what they owe, according to a report by Paola Sapienza, a finance professor with Northwestern University, and Luigi Zingales, a finance professor at the University of Chicago. Their report suggests that situation could worsen if the percentage of underwater mortgage holders increases.

Not everybody agrees with Deutsche Bank’s analysis.

Tom Lawler, a well-respected independent housing economist, wrote that given the recent increase in home sales in many areas, “there is absolute[ly] no doubt that the DB ‘model’ forecast will show a huge miss to the down side on home prices.”

Source:, Les Christie (08/06/2009) and The Wall Street Journal, Nick Timiraos (08/07/2009)

Saturday, August 22, 2009

Here come the taxes!


The federal deficit for fiscal year 2009 is now projected for this year alone to be $1.8 Trillion dollars. The total federal deficit is currently $11.6 Trillion dollars (U.S. Department of Treasury). Every American household is now on the hook for $546,668 worth of debt (USA Today 5-29-09). This means an avalanche of new tax increases and taxes. Are you prepared for these?

Income Tax Problems
The current law provides for a rise in the top federal income tax bracket to 39.6%. The federal Health Care Surcharge tax is proposed to be up to 5.4% on top of the income tax bracket of 39.6%. That is a 45% federal income tax. To add insult to injury, they propose to reinstate the “itemized deduction phase out” for income earners with Adjusted Gross Incomes over $250,000. Thus, the few deductions still available to us on a Form 1040 will be phased out again.

Capital Gains Tax Problem
The current capital gains tax rate on long term gain is 15%. The proposals are to raise the capital gains rate to 20% and some suspect 28%.

Estate Tax Problem
The current law provides for the federal estate or death tax to rise from 45% to 55% at the end of 2010. The current law also provides for the federal estate tax exemption to be reduced from $3.5 million to $1 million at the end of 2010.


You could do nothing. You could complain. Or you could establish a plan. If it is plan, consider these options:

Income Tax Options

If you are fortunate enough to be earning money in this recessionary economy, retirement plans are still the number one way to reduce federal and state income tax burdens. 401K Plans allow $16,500 or $22,000 per year of savings. Profit Sharing Plans allow $49,000 per year of savings. Defined Benefit Plans allow over $150,000 per year of savings. Cross Tested Plans allow owners 80% plus versus 20% to employees.

Capital Gains Tax Options
Even if your gains have been reduced by the market, deferral at the time of sale is critical to the continued compounding and growth of your assets and even more important now to recover the recessionary losses. Consider 1031 deferred real estate exchanges, family partnership and installment sale approaches, to allow for sale of assets and deferral of gains to regain lost ground.

Estate Tax Options
Seize the day now while market values are at all time historical lows and estate discounts are still allowed to shift wealth to beneficiaries and heirs using family partnerships and irrevocable “Dynasty” type trusts. It is possible to reduce your estate tax burden by over 50% given current law and conditions. Both will change soon.


Friday, August 21, 2009

Can Buying Cheap Foreclosures Make You Rich?

Speculators are buying up an uncounted, but certainly significant percentage of homes for sale in cities where the meltdown has hit hardest. reports a 30- to 50-percent year-over-year increase in searches for homes in foreclosure-heavy states, including California, Michigan, and Florida. In these states, helping long-distance investors find and close on properties and close has become a burgeoning real estate specialty.

The investors run the gamut from international speculators seeking a house or two to venture capital firms that buy bundles of homes for 25 cents on the dollar — most in need of renovation and some with substantial tax liens.

Will these investments lead to riches? Possibly, if housing prices go back up and if investors are able to fix up and rent the properties out while they wait to sell, experts say.

Source: Smart Money, Anne Kadet (06/01/2009)