I found this article by Adam Davidson, published in the New York Times, interesting and informative. I hope you do too!
WHY DO WE STILL CARE ABOUT THE DOW?
"Imagine you know someone with pointed opinions, who is often wrong and always changes his mind. Would you ask him for financial advice?
One day in October 2006, my editor gave me the same assignment that hundreds of other editors were giving their business writers. He told me to go to a trading floor to witness the magical moment when the Dow Jones Industrial Average passed 12,000 points. He may have envisioned cheers, shouts, balloons, traders cutting one another's ties and (this being 2006) dousing one another in Cristal. Instead, the traders obliviously entered orders into their computers while I stood around looking for the story.
It got me thinking: Why do we still care so much about the Dow? It remains not only a rough measure of stock performance but also the most frequently checked, and cited, proxy of U.S. economic health. It's clear why we used to care. In the postwar boom of the 1950s, the economy was growing so fast, and the benefits were so widely shared, that following 40 large American companies was a solid measure of most everyone's personal economy. Back then, the U.S. was a largely self-sufficient country, so Asian or European economic troubles didn't matter much. There was less national inequality, and everyone's income tended to move in the same direction. What was good for G.M. really was good for the country.
By the late 1990s, however, the Dow stopped being an indicator of how our economy was doing. Instead, it became the driving force. During the frothing of the tech bubble, the hottest companies weren't making money by selling profitable products and services in the real world - they were selling fantasies to stock investors. The Dow's rise (along with that of its more unpredictable younger brother, Nasdaq) hid a historic fracturing: one lucky group, enriched in part by the instant wealth of the bubble, saw its income grow faster than ever while the middle and lower classes' share of national income was declining. The fortunes of a few top companies represented opportunity for a much smaller number of Americans.
It would be extremely convenient if there were still one number or index we could check to make sense of our economy, especially during times of chaos. But the stock market might actually be our worst option. Rather than being a useful indicator, it's an anxiety-amplification device. It reflects investors' own reactions, and often hysterical overreactions, as they progress through the turmoil. It's also not without intrinsic randomness. The Dow average, drawn out to two decimal places, may seem like some perfectly scientific number, but it's far from it. A small committee selects 30 big companies - I.B.M., G.E., McDonald's, Disney and so forth - and then adds up the price of their stocks. Then the analysts divide it by the Dow Divisor, a misleadingly precise-seeming number formulated to account for things like dividends and splits that right now is, well, about 0.132129493. The resulting figure is repeated throughout the country.
And those are the least of the Dow's problems. More troubling is that it ignores the overall size of companies and pays attention to only their share prices. This causes all sorts of oddities. Exxon-Mobil, for example, divides its value into nearly five billion lower-cost shares, while Caterpillar has around 650 million more expensive ones. Therefore ExxonMobil, one of the largest companies in history, pulls less weight on the Dow than a company less than a fifth its size.
The Dow doesn't adjust for inflation either. Passing 12,000 points, as it did in early 2011, is incorrectly considered the equivalent to that supposedly magical moment in 2006, especially because we were in a bubble then and are coming out of a recession now. The Dow is also reluctant to add or subtract new companies. (Apple, perhaps America's model corporation, is not a member. Microsoft, by some measures its predecessor, still is.) It also, by design, ignores all sorts of things that influence daily economic life. Large-scale layoffs, which can reduce cost, often move the Dow up; environmental concerns don't factor.
Yet the Dow's biggest fla, perhaps, is that it doesn't help us to make sense of an increasingly interconnected global economy - one in which what's good for G.M. isn't always good for the country. G.E., I.B.M. and Intel, for example, all make more than half their profits in other countries. And while this may be great for their shareholders, its means little for most Americans.
Still, some argue that the stock market reflects the overall wisdom of the world's investors. That may be true when looked at over months or years, but it's never quite clear what their wisdom is telling us at any given moment. Panic in Europe might have investors terrified about the next few months, sending stock prices down. But that downward move could be obscuring the fact that those same investors feel chipper about the economy 2 or 10 years down the road. Alternately, investors might feel badly about the long-term future of the U.S. economy but are excited because, say, that afternoon the Fed announced a low-interest-rate policy. A stock order doesn't contain a "reason" field.
None of these criticisms will come as news to finance professionals, most of whom use far more precise measures - like the S&P 500 or the Wilshire 5,000, which cover more companies more precisely - when making investing decisions. In fact, they might not even surprise Charles Dow, who created the Industrial Average in 1896. Dow observed his own index infrequently, says John Prestbo, the editor and executive director of Dow Jones Indexes, who also happens to play the role of in-house historian. Prestbo says the average investor should observe the Dow once a quarter or, at most, once a month. He also cautions against drawing broad conclusions about the overall health of the economy from any narrowly focused stock average. This is particularly true when, for the first time in a while, the economy is truly worth worrying about. And it's even more true when a twitchy financial system is being monitored by a twitchy index perfectly suited to a 24-hour news cycle. One thing is obvious: Charles Dow would have made a terrible cable-news editor.
This article appear in the February 12, 2012 edition of the New York Times Sunday Magazine.
Tuesday, February 28, 2012
Friday, February 24, 2012
What is my best advice to sellers of homes on the Vineyard for 2012?
The same as it always been – price-price-price! If you want to sell, price the home properly. The price reflects everything about the market and condition. Use a Realtor. Statistics show that most homes sell through a Multiple Listing Service and that the best price is realized within the first 30 days (currently 92-95% of asking). Owners realize a higher price when using a real estate professional.
Monday, February 13, 2012
What Does Wall Street Do for You?
This article appeared in the New York Times and is authored by Adam Davidson. I read it with interest, as I really didn't understand a lot of this and wanted to share it. How does it apply to real estate? I hope that's obvious - as investors confidence has a great impact on lending policies and after the major catastrophe in the lending arena that greatly impacted the economy in general, its important to have some basic understanding of how these things work.
What Does Wall Street Do for You?
Hating Wall Street is an American tradition that dates back even to the days when Thomas Jefferson cursed that money lover Alexander Hamilton. And for centuries, the complaints about it have largely stayed the same: It does nothing! It creates chaos! It's a parasite that sucks hardworking Americans dry! (Or something to that effect.) But these are distortions of a fundamentally beneficial business. The country's largest investment banks, commercial banks and a few big insurance companies (that we generally refer to as Wall Street) play the crucial role of intermediation - matching borrowers with lenders. Most of the time, the industry does this extremely well (though in the case of matching homeowners' debt to the global financial system, too enthusiastically). Perhaps the best way to really appreciate what Wall Street does is to imagine life without it.
THE POOR WOULD STAY POOR
In the U.S., we use credit cards, mortgages, credit scores, securitized loans and other Wall Street innovations to do the miraculous: to persuade some institution with a lot of money to hand it over to someone who doesn't have that much. This happens even though we have laws that allow borrowers to declare they can't pay the loans back.
Sure, we have too much household debt, but that's a better problem than what most nations face. Most people in the world don't have access to a modern financial system, and there is almost no way, other than through greedy loan sharks, for the surplus case of the very rich to get in the hands of the poor.
THERE WOULD BE NO MIDDLE CLASS
Or at least it would look a whole lot different than it does today. One of the most striking facts of life in countries without a modern financial system is the near total absence of upward mobility. The financial-services industry, however, performs a kind of fiscal time travel by pooling the nation's collective savings and transforming it into all sorts of loans. This allows people to spend money now that they won't earn until later. When spent wisely, this money borrowed from the future actually makes the future quite a bit brighter.
There is a lot of appropriate anger about excessive student debt these days, but student loans have largely changed America for the better. Countless working-class kids were able to have educations they couldn't otherwise afford. Many were able to start businesses because of easier access to credit. They were also able to sell their wares to other people who have ascended to the middle class.
LOTS OF AWESOME THINGS WOULD NEVER HAPPEN
Just about anything that makes you happy - whether it's a lifesaving drug or just the artisanal goat cheese at the shop around the corner - was at one point a risky project. As you read this, your money is being pooled with that of millions of other people and institutions to finance a risky project (farmers, shopkeepers, tech developers) that would freak you out if you were asked to lend to them. Your 401(k) takes your spare cash and links it to thousands of companies, many of which are making bets that you might find ridiculous. But by pooling so much capital and spreading out the risk, Wall Street creates a safe space for failure, which is an essential part of capitalism.
HOW DOES WALL STREET DO THIS?
Wall Street's core function is to perform a sort of financial alchemy, an incredibly complicated method of giving a lot of people what they want. Investors with extra cash want constant access to their money with little chance of losing any. Borrowers want to hold on to the loans for a long time and, sometimes, take big risks. Stocks, bonds, savings accounts and money-market funds are all ways of making twitchy, conservative lenders and dreamy, semi-reckless borrowers happy at the same time about the same pile of dough.
IS IT STILL O.K. TO HATE WALL STREET?
Absolutely. Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves. A variety of economists (including, notably, several at N.Y.U.'s Stern School of Business) have mounted strong evidence that, over the past decade or so, a significant part of Wall Street's business has shifted from serving the financial needs of the nation to profiting from "regulatory arbitrage" - making money by playing with the rules of the game. Reporting by my colleagues at NPR's "Planet Money" shows that a dollar spent lobbying in Washington can have a return on investment of thousands of dollars.
Another reason: Wall Street's central function is to make our financial system more robust and less susceptible to unexpected risk, but it did precisely the opposite while, maddeningly, avoiding paying the price. On the other hand, many of Wall Street's toughest economist critics do not condemn the bailouts and generous policies of the Fed and Treasury Department. Most know that Ben Bernanke, Henry Paulson and Tim Geithner (like central bankers and treasury officials everywhere) were following the hallowed advice that Walter Bagehot, onetime editor of The Economist, set down in 1873; during a crisis, a country must do everything possible to preserve its banks. And while that has resulted in making the rich even richer, our economy would be much worse off it if hadn't happened.
One lesson of this crisis is that regulation - no matter how well intended - cannot be trusted to rein in Wall Street. In fact, the largest financial firms have shown repeatedly an ability to take even the toughest regulations and turn them into profit centers. So perhaps the biggest reason to hate Wall Street is that it has made so many Americans hate such an indispensable system.
What Does Wall Street Do for You?
Hating Wall Street is an American tradition that dates back even to the days when Thomas Jefferson cursed that money lover Alexander Hamilton. And for centuries, the complaints about it have largely stayed the same: It does nothing! It creates chaos! It's a parasite that sucks hardworking Americans dry! (Or something to that effect.) But these are distortions of a fundamentally beneficial business. The country's largest investment banks, commercial banks and a few big insurance companies (that we generally refer to as Wall Street) play the crucial role of intermediation - matching borrowers with lenders. Most of the time, the industry does this extremely well (though in the case of matching homeowners' debt to the global financial system, too enthusiastically). Perhaps the best way to really appreciate what Wall Street does is to imagine life without it.
THE POOR WOULD STAY POOR
In the U.S., we use credit cards, mortgages, credit scores, securitized loans and other Wall Street innovations to do the miraculous: to persuade some institution with a lot of money to hand it over to someone who doesn't have that much. This happens even though we have laws that allow borrowers to declare they can't pay the loans back.
Sure, we have too much household debt, but that's a better problem than what most nations face. Most people in the world don't have access to a modern financial system, and there is almost no way, other than through greedy loan sharks, for the surplus case of the very rich to get in the hands of the poor.
THERE WOULD BE NO MIDDLE CLASS
Or at least it would look a whole lot different than it does today. One of the most striking facts of life in countries without a modern financial system is the near total absence of upward mobility. The financial-services industry, however, performs a kind of fiscal time travel by pooling the nation's collective savings and transforming it into all sorts of loans. This allows people to spend money now that they won't earn until later. When spent wisely, this money borrowed from the future actually makes the future quite a bit brighter.
There is a lot of appropriate anger about excessive student debt these days, but student loans have largely changed America for the better. Countless working-class kids were able to have educations they couldn't otherwise afford. Many were able to start businesses because of easier access to credit. They were also able to sell their wares to other people who have ascended to the middle class.
LOTS OF AWESOME THINGS WOULD NEVER HAPPEN
Just about anything that makes you happy - whether it's a lifesaving drug or just the artisanal goat cheese at the shop around the corner - was at one point a risky project. As you read this, your money is being pooled with that of millions of other people and institutions to finance a risky project (farmers, shopkeepers, tech developers) that would freak you out if you were asked to lend to them. Your 401(k) takes your spare cash and links it to thousands of companies, many of which are making bets that you might find ridiculous. But by pooling so much capital and spreading out the risk, Wall Street creates a safe space for failure, which is an essential part of capitalism.
HOW DOES WALL STREET DO THIS?
Wall Street's core function is to perform a sort of financial alchemy, an incredibly complicated method of giving a lot of people what they want. Investors with extra cash want constant access to their money with little chance of losing any. Borrowers want to hold on to the loans for a long time and, sometimes, take big risks. Stocks, bonds, savings accounts and money-market funds are all ways of making twitchy, conservative lenders and dreamy, semi-reckless borrowers happy at the same time about the same pile of dough.
IS IT STILL O.K. TO HATE WALL STREET?
Absolutely. Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves. A variety of economists (including, notably, several at N.Y.U.'s Stern School of Business) have mounted strong evidence that, over the past decade or so, a significant part of Wall Street's business has shifted from serving the financial needs of the nation to profiting from "regulatory arbitrage" - making money by playing with the rules of the game. Reporting by my colleagues at NPR's "Planet Money" shows that a dollar spent lobbying in Washington can have a return on investment of thousands of dollars.
Another reason: Wall Street's central function is to make our financial system more robust and less susceptible to unexpected risk, but it did precisely the opposite while, maddeningly, avoiding paying the price. On the other hand, many of Wall Street's toughest economist critics do not condemn the bailouts and generous policies of the Fed and Treasury Department. Most know that Ben Bernanke, Henry Paulson and Tim Geithner (like central bankers and treasury officials everywhere) were following the hallowed advice that Walter Bagehot, onetime editor of The Economist, set down in 1873; during a crisis, a country must do everything possible to preserve its banks. And while that has resulted in making the rich even richer, our economy would be much worse off it if hadn't happened.
One lesson of this crisis is that regulation - no matter how well intended - cannot be trusted to rein in Wall Street. In fact, the largest financial firms have shown repeatedly an ability to take even the toughest regulations and turn them into profit centers. So perhaps the biggest reason to hate Wall Street is that it has made so many Americans hate such an indispensable system.
Sunday, February 12, 2012
Good News on Martha's Vineyard
Foreclosures on the Island (yes, there are foreclosures here!) increased in 2011, for the fourth consecutive year, but predictions are that these will decrease significantly in 2012. 37 foreclosure deeds were recorded in 2011, as compared to 32 in 2010, and 29 in 2009.
A foreclosure deed recording is the final step in a long series of steps necessary for a lender to "repossess" a home. The initial step is an "order of notice", which is recorded at the Registry of Deeds and basically notifies all that there is a problem that could lead to a foreclosure. In 2011 the number of orders or notice filed totaled 60, as compared to 92 in 2010. It can take anywhere from 6 months to a year, sometimes longer, for a foreclosure to take place. With the recent settlement with 4 major lending institutions, which included restitution and refinancing, this number could decrease further.
As for home sales outside of the foreclosure or "short sale" arena, the numbers for 2011 are down in number of homes sold (319 in 2011) and the average price fell as well - down 10.9% in one year. Since 2007, the average price of a house on the Island fell 34 percent! These numbers closely follow national trends, although it took the Vineyard a bit longer to hit what is considered to be the low point.
Foreclosures do effect value, but most real estate professionals and appraisers discount/disregard these properties from consideration when evaluating market value. The Island is unique in that homes of considerable size and value are often within close proximity to those of modest size and value.
Mortgage rates continue to be at record lows and while you must have good credit to be approved for a mortgage, there is money available and homes at record low prices. It's time to stop "putting your life on hold" and jump into the market. Real estate, long term, is still a great investment and the only one you can sleep in!
A real estate professional is the best guide to buying your next home. Consult a professional!
Some of this information was gleaned from an article in the Martha's Vineyard Times - 2/2/12.
A foreclosure deed recording is the final step in a long series of steps necessary for a lender to "repossess" a home. The initial step is an "order of notice", which is recorded at the Registry of Deeds and basically notifies all that there is a problem that could lead to a foreclosure. In 2011 the number of orders or notice filed totaled 60, as compared to 92 in 2010. It can take anywhere from 6 months to a year, sometimes longer, for a foreclosure to take place. With the recent settlement with 4 major lending institutions, which included restitution and refinancing, this number could decrease further.
As for home sales outside of the foreclosure or "short sale" arena, the numbers for 2011 are down in number of homes sold (319 in 2011) and the average price fell as well - down 10.9% in one year. Since 2007, the average price of a house on the Island fell 34 percent! These numbers closely follow national trends, although it took the Vineyard a bit longer to hit what is considered to be the low point.
Foreclosures do effect value, but most real estate professionals and appraisers discount/disregard these properties from consideration when evaluating market value. The Island is unique in that homes of considerable size and value are often within close proximity to those of modest size and value.
Mortgage rates continue to be at record lows and while you must have good credit to be approved for a mortgage, there is money available and homes at record low prices. It's time to stop "putting your life on hold" and jump into the market. Real estate, long term, is still a great investment and the only one you can sleep in!
A real estate professional is the best guide to buying your next home. Consult a professional!
Some of this information was gleaned from an article in the Martha's Vineyard Times - 2/2/12.
Thursday, February 2, 2012
Income Tax Deduction Reminder
Technically speaking, April 15th is tax day. But for Americans who expect a refund - including many homeowners who want to cash in on real estate-related tax perks - filing sooner holds the promise of getting that check in hand, stat.
If you count yourself in that number, here’s a handy guide for 9 pieces of paper you should be sure to round up as you prepare to file, in order to reap every penny of the tax rewards you’ve earned by virtue of owning a home.
(If you haven’t received yours yet, most lenders that have online account management services also post the form digitally in your secure account on the web. Just login like you would to make your monthly payment, and look for a notice that says you can now download your 2011 Form 1098.)
Thanks to Trulia Real Estate
If you count yourself in that number, here’s a handy guide for 9 pieces of paper you should be sure to round up as you prepare to file, in order to reap every penny of the tax rewards you’ve earned by virtue of owning a home.
- Mortgage Interest Statement - IRS Form 1098. The meatiest real estate tax deduction on the books is the one that allows you to deduct 100 percent of the mortgage interest you paid in a year - including prepaid interest or points you might have paid at close of escrow, if you bought a home last year. By now, you should have received in the mail a Form 1098 from your mortgage lender that reports how much that interest totaled up to in 2011. If you itemize your taxes and claim a mortgage interest deduction, you must include this form with your tax form when you file.
- Property Tax Statements. In addition to deducting your mortgage interest, if you own a home you are eligible to deduct the property taxes you pay to your local city, county and/or state. You are not allowed to deduct some of the other miscellaneous expenses that some localities bundle up with the taxes they collect, like waste management and local assessments for things like street lighting, libraries and sidewalk construction. To get this deduction right, the best practice is to have your property tax statements at hand and make sure you’re only deducting what’s allowed.
- Uniform Settlement Statement (HUD-1). If you bought or sold a home last year, right after closing you should have received a form called the HUD-1 Settlement Statement (hint: it’s usually on legal-sized paper and contains an accounting of credits and debits for you and your home’s buyer or seller). That form documents a number of line items which might help you out at tax time, including prepaid interest, the prorated property taxes you paid at closing, and closing costs like original fees and discount points. Some states offer tax credits for buying a foreclosure; check with your tax pro to find out if any such credits apply to you. If so, this statement might be your ticket to lower taxes.
- Moving Expense Receipts. Moving expenses are tax deductible, if your move is closely related, both in time and in place, to the start of work at a new or changed job location and you meet the IRS’ time and distance tests. Long story short, your new home must be at least 50 miles farther from your new workplace than your old home was from your prior place of work, and you must work essentially full-time. So, if you bought or sold a home and moved in 2011, you’ll need to include receipts from expenses you incurred making the move (meals not included) in your tax prep paperwork.
- Cancellation of Debt Statement - IRS Form 1099. Homeowners who lost a home to foreclosure, or divested of one by negotiating a short sale or deed in lieu of foreclosure with their lender might receive some version of Form 1099 from their lenders, charging them with income in the amount of the mortgage debt that has been cancelled. You see, if you borrow money from someone, then they cancel the debt, that money you originally borrowed becomes income in the eyes of the IRS - and income is, as you know, taxable.
- Utility statements for home office. For the average everyday homeowner who works at their employer’s place of business, utilities are not deductible (sorry!). But if there is a part of your home that is “regularly and exclusively” used for business, you might be able to claim that portion of your home as a home office, and deduct some portion of your home utilities and costs of painting and repairs, as a result.Talk with your tax provider about what expenses are allowable to be claimed under your home office deduction, and whether or not you should take it.
- Income and Expense statements from rental properties. Some of you have elevated the art of home ownership to a business! If you are a landlord, your tax situation is more complicated than that of the average bear; you’ll need to have complete income and expense statements when you put your tax returns together. It might actually behoove you to consult with a tax professional to make sure you are appropriately depreciating the property over time and not taking deductions that will expose you to the risk of audits, as well as to begin cultivating a long-term tax strategy for your real estate portfolio.
- Contractor receipts from energy efficient home improvements. Under the Nonbusiness Energy Tax Credit, homeowners who have made improvements to their homes that fall within a list of energy efficient upgrades might be eligible to claim tax credits. If, during 2011, you installed energy efficient improvements such as insulation, new dual-paned windows and furnaces, you might be eligible for a tax credit of 10 percent of the cost of these upgrades, up to $500 - only $200 of which may be used to offset the cost of windows.
- Mortgage Credit Certificate (MCC). If you own a home you bought in the last few years using a Mortgage Credit Certificate issued by a local housing authority, that Certificate may entitle you to a pretty hefty tax credit, based on a percentage of the mortgage interest you paid - on top of your mortgage interest deduction. MCCs apply as long as you live in the home and have a mortgage on it, but they only apply to defray taxes you actually owe - you can’t use them to get a refund. In any event, your mortgage credit certificate, if you have one, is a must-have document as you start putting your tax prep plan in play.
Thanks to Trulia Real Estate
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