Hello? Has Anybody Seen My Home Equity?
There’s lots going on in the world these days — biggest natural disaster in the U.S. (oil that is… black gold), Europe’s massive debt issues, Wall Street reform, and so on — I want to focus on real estate for a minute. There is a bright spot: housing sales are up and loan delinquencies are down. Housing wealth is a big deal in this country. For most people, the family house is still the biggest asset we’ll have by the time we want to retire.
One startling factoid caught my eye this week: homeowners who owe more than what their homes are worth are opting to drop the keys in the mailbox and drive away forever. (Sounds like a Country Western song). These defaulting borrowers aren’t being forced out by the bank – they’re choosing to walk! What’s going on? Morgan Stanley reports those people are still paying credit cards, car payments, orthodontia, whatever but not their mortgages. And get this…1 in every 8 homeowners already in default would rather damage their credit than pay the home loan. Maybe they are all finding great deals on rentals and don’t plan to buy a home again for a long, long time. By the way, if you’re looking to buy a house that’s been foreclosed they sell at about 40% less than the asking price!
One in every four homeowners is now underwater right now with a house that is worth at least 20% less than the loan! What if you’re one of them ? I bet you’re wondering how long will it take to get back to 2006 prices? First American CoreLogic wrote that over the next 10 years, the average loan balance will decrease by an 3.3% a year while home price are expected to increase at a 3% a year over the next decade. So it will take about ten years for the overall real estate market to get back to 2006 levels. Typical homeowners with negative equity in really hard-hit areas like Las Vegas or Detroit or condo owners in Miami should expect more than 10 years to recover. In strong markets like San Francisco, maybe 5-7 years.
Nationally, home prices are now about where they were back in 2003. The only way you can find out for sure what your home is worth is to apply for a mortgage and pay for an appraisal. You could also ask a local realtor (friend) to give you a free appraisal or comparative market analysis (CMA). Don’t say you’re thinking of selling just offer up a few grapefruit martinis as a bribe. If you don’t want to go through that process or zing your credit score with a lender’s inquiry, visit zillow.com. This site is a pretty good too because Zillow relies on public records like recorded sales and actual mortgage documents. Trulia.com is good for a quick overview on real estate trends. Keep in mind, mortgage loan rates are still right around 5.3% fixed for 30-years. I nailed a 5.2% rate when I refinanced my house on the Cape last year and happy to have gotten that. Whew!
What can I do to ramp up my equity? Personally, I just opt to add money to my monthly principal payment in order to shorten the time it will take to pay off the house. This has a double effect on your equity because you not only reduce the principal amount, but since almost all the interest is paid first (front-loaded) by increasing your principal payment you are also reducing your total interest big time. There should be no penalty for adding to your principal every month but do check first. And Jack Gallagher my non-financial co-host has already paid off his mortgage in full. Show off!
Riding the Market
Why do smart people do stupid things with your money?
When it comes to investing, the herd mentality can bite you in butt. Remember last Thursday’s crazy ride in the market? Thank goodness most small investors didn’t caught up in the flash-crash drama. Most little-guy individual investors were working, playing bocce ball or doing something productive! Had they been glued to CNBC, they would’ve watched the dow drop 1,000 points in about ten minutes and the on-air talent running in circles trying to explain what just happened.
Maybe you didn’t even know about this mini-crash until the next day when it made front page headlines. After all, it was the biggest one-day loss in the history of the stock market! I was glad I was out walking Chloe because in the time it would have taken me to down my iced tea, the stock market had already gained back more than half what it lost. You’d have to be a hyper-trader or “high-frequency trader” to have gained anything from all that market action. Turns out, they still don’t know exactly what caused the spasm, but it had something to do with automated trading – - yeah, blame the computers! Something like 60% of all U.S. stock trading is computer-driven algorithmic trading.
Anyway, “they” need more time to figure out the problem so it can be fixed. I don’t think any of us “small investors” lost confidence or any money in that gut-wrenching episode – mostly because nobody was tuned in! What does this tell us? A lot! It shows that there’s logic in buying good quality companies at the lowest possible cost and holding onto ‘em for a really – really long time. If you want to gamble, that’s cool, but for the sake of your kids’ college funds, only use your mad money for wild speculations!
Sometimes when there’s chaos in the markets, investors try to make lightening-fast, very specific trades using special orders telling their brokers to only buy or sell at a set price as price protection. Anybody nuts enough to surf the rougue wave from last Thursday by attempting to trade stocks or exchange traded funds learned a big lesson – that something called a stop-loss order is not the way to go when the the stock is a moving target. In fact, there was so much action there wasn’t enough time to get a trade in, let alone out. You might have thought using a “stop-loss” order would protect you from getting burned. Not so. But just so you know, there is another (better) type of order you can place with your broker that will guarantee you will execute at a predetermined minimum or maximum price. That’s called a “limit order”. Here’s a great article that sums this up for all you traders out there. Me, I’m a buy-and-hold kind of girl with my serious money.
What Goes Down Might Go Up?
One financial news headline jumps right out at me today: “The VIX plunges 30% as stocks rally.” The VIX is the ticker symbol for the volatility index and it tells you how much volatility is expected from the overall stock market (as measured by options on the S&P index ) over the next 30 days. Nutshell, it’s really just a derivative that reflects overall market sentiment. Which is why traders call it the “fear index.”
Now over the past several months, the Dow has been in a nice steady climb but for ten minutes last Thursday, the Dow Jones Average plunged 10%. (Notice they didn’t call it a crash.) It wasn’t the biggest one-day drop in history but it’s the biggest and most dramatic since 1987 when stocks crashed more than 22% in one day. I remember that day because I was managing about 20 stock brokers and the whole episode was one of those “where were you when that happened” sort of events. But back to the future here, I want to focus on the VIX. Stocks were super turbulent by the end of last week mostly because of Europe’s credit problems and the SEC is studying all the trading activity around that 2:30-3:00pm timeframe. But back to the VIX, Thursday’s violent and sudden 1,000 point drop caused investors and stock traders to lose confidence and we saw the volatility indicator (VIX) spike 85%. By Monday, the VIX had dropped by 30% which signaled that traders had calmed down. The VIX is always quoted as a percentage rather than dollar value and on typically you’ll see the VIX trade in a15-30 range meaning the index is expected to move no more than 15-30% in either direction. Since 1928, the stock market’s moves (price change) around 15% annually – that’s the average.
Anyway, the stock market goes up and it goes down and the VIX moves in the opposite direction to those up’s and down’s. During the middle of crisis in 2008, the VIX was trading in the 60’s because fear ruled. After things calmed down the VIX dropped sharply. Maybe you don’t know which direction the market’s heading but you believe there’s a lot more volatility to come, you can bet on the VIX by purchasing an exchange traded note (ETN) and maybe make money from those movements, or just consider using the VIX as a hedge to protect yourself when the market’s falling. I would advise taking the time to understand the VIX and market volatility. You might find the whole notion of using this tool a waste of time because the VIX is not essential to use any options-trading strategy for your portfolio but what you’ll learn in the process will make you a much smarter investor.
Check out these articles and explanations about ETN’s and the VIX.:
http://www.investopedia.com/terms/e/etn.asp
http://www.investopedia.com/articles/optioninvestor/03/091003.asp
http://etfdb.com/2010/daily-etf-roundup-vxx-continues-higher-iwo-tumbles/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+etfdb+%28ETF+Database%29
