ANOTHER FANTASTIC MORTGAGE DEAL.

Here it is again folks. A fantastic deal just waiting for you call. I saw this advertisement when I pulled up my e-mail. At the bottom of the screen were several silhouettes showing people dancing around some text that said "$510,000 mortgage for less than $1,698 per month." Being a curious sort of fellow, I got my trusty HP 12C calculator out, put in the numbers and came up with in interest rate of 1.25%. Reminds me of the TV commercial that offers a mortgage that's the "Biggest no-brainer in the history of Earth." I never knew there were lenders out there who would loan home buyers money at a rate less than the US government pays. Some lenders even advertise those as "30-year fixed." How can they do that? The secret is that the payment is fixed for five years...........Well, not exactly fixed but it escalates at a fixed rate of 7.5% per year. Still sound like a good deal? Look at your loan balance. It goes up every month, not down.

Another "fantastic deal" is the 50 year loan. With a half million dollar principal, it saves a borrower $365 per month over a 30 year loan (assuming the same interest rate). The worst thing about those advertisements is that they claim the payments on this loan are even lower than interest only loans. Think about it. How could a loan with any principal payments whatsoever have lower payments than an interest only loan? (Again, assuming the same interest rate). Another mathmatical mystery. Maybe some of my clients with an MBA in finance can send me an e-mail answering this question.

We continue to watch the real estate markets. It appears that most commercial real estate is overpriced relative to the income it produces. We have yet to see much weakness in this area. The housing market is another story. If you look hard enough it is possible to buy houses at lower prices than a year ago. The high foreclosure rate, along with overbuilding, is putting downward pressure on home prices. All this at a time when the rental market is growing stronger. We may be approaching a point in which rental housing is becoming more attractive relative to other investments. We are not quite ready to recommend jumping into the market at this time. When the current excess inventory begins to diminish, we will be ready to scour the markets for buying opportunities.

WE HAVE MET THE ENEMY......

..........AND HE IS US. That old expression came from the comic strip known as Pogo which was a popular satire piece over 30 years ago. Never has it been more appropriate than in our current energy and political environment. Part of the reason for the Middle East crisis is our addiction to foreign oil. In importing so much high cost oil from the middle east, we are providing the funds for our enemies to continue to attack us. Not only do we have to bear the cost of our own military action, we are paying for that of the terrorists as well. What else could we do? We could certainly exploit our own sources of petroleum by drilling in locations presently forbidden. While this will have some environmental consequences, these could be managed. We do things every day that have environmental consequences and total elimination of these is impossible. All of those unsightly windmills supposed to be a clean source of electricity take a huge toll on the bird population. We view the use of nuclear generated electricity with disdain because of the environmental consequences but some European countries derive as much as 40% of their electricity from nuclear power. One of the biggest culprits in the whole picture are speculators who drive up futures prices, increasing the cost of raw material to refiners who pass those costs to the consumer. The bottom line is that we have plenty of options for generating energy that are less ambitious than converting our entire fleet of automobiles to ethanol. If you are upset about the ups and downs of gasoline prices, don't blame those "evil oil companies" or the president. Its much more complex than that and you might just take a look in the bathroom mirror. There are a number of things we can do as consumers and investors to keep energy prices from getting out of hand. By looking to blame others for our plight, we ignore the possibilities that are within our own control.

Its been a busy week for us since our return to Texas for the winter. My "fishin' buddy" from across the lake died, the rain sank my boat and overwhelmed our septic system, and I am inundated with leaves which are just now starting to fall. The one bit of good news is that the defendant in the jury trial I served on received 508 years for molesting 20 boys. That is one less person able to run free and harm our children.

GREETINGS FROM NEW MEXICO

Here we are in Raton New Mexico. I am at the Holiday Inn express, using my laptop on their high speed internet to check the markets, e-mail and make a quick post. I am on my way to Texas but I still am able to manage my money and that of clients. Some people complain that the current generation will be the first to not have a standard of living equal to their parents. I guess I'm part of the parent generation that they don't think they will have a standard of living equal to. When I was 30 something, you couldn't have a computer equal to this one without several rooms of climate control space, a card punching machine, and hundreds of thousands of dollars to purchase the computer and peripheral equipment. You couldn't buy a cell phone because they weren't invented yet. Likewise microwave ovens and GPS devices. Of course, it was easier to figure out how to use a Royal typewriter than this damn thing. At least I knew how to get it to make a new paragraph. I will be in Texas off and on throughout the winter and I will be able to manage our money and communicate with you. Even if I can't figure out how to make a paragraph on this blog.

PET PEEVES

High on my list of pet peeves are mortgage advertisements. Have you noticed the large number of ads telling you its time to refinance your ARM mortgage to a fixed rate? Weren't these the same guys who advised you to get the ARM mortgage in the first place? Granted, we have seen a number of borrowers who probably should refinance their adjustable rate loan but many of them can't afford the higher payments of a fixed rate or the closing costs necessary to obtain the new loan. The fact is, the only way they could get into the home the wanted was with the aid of a higher risk adjustable mortgage. While we did encourage some borrowers to incur adjustable mortgages, we spent a lot of time making sure they were familiar with the risks and had an exit strategy in place in case rates escalated. We never used ARMs to help borrowers purchase homes they couldn't afford. Speaking of closing costs, do you see those ads that offer no closing cost loans and tell borrowers how they are getting ripped off by unethical lenders who charge enormous closing costs. They promote their no-cost loans as "The biggest no-brainer in the history of Earth." Could that statement be a huge exaggeration? What they fail to mention is that their no-cost loans bear interest at 1-2% higher than closing cost loans. Virtually any lender can offer these no cost loans. The key is that borrowers need to be informed of the trade-off between rates and closing costs. This allows them to choose the combination that fits their situation. There is no "one size fits all" mortgage. The bottom line is that the most important factor in the mortgage lending process is choosing the loan that fits your needs. The lowest rate in town could be the wrong deal for you if it is not the right product. Call our office if you have a question in this area.

SNOWBIRD READY TO FLY.

It's turned cold in Colorado. The low temperature overnight was 35. I'm ready to go back to our Texas lake house as soon as I can take care of some real estate details here. We bought our lake house almost 11 years ago and the main question now is how long we should continue our "back and forth" lifestyle. Seems like when you are looking for something it is always at the other house. Betty had to fly back there at the beginning of summer to get our income tax files so we could file our taxes here in Colorado. One thing I can tell anyone not yet retired looking to buy a "vacation home" now before prices increase, is that there is no hurry. In some years we only spent two weeks at the lake house. We could have had two weeks in Maui for what that cost. There is no hurry. Although I thought we got a great deal, my perception of a what a great deal was changed after I became more familiar with the market in that area. Another thing is not to count too much on rental income. After you put your furniture and personal possessions in the property, you lose your appetite for letting strangers come in. We have yet to receive the first dollar in rental income from that house. Obviously, the benefits of owning that second home are not financial. My main benefit is my wife's enjoyment of the woods and waters that surround the property. I couldn't sell it if I wanted to. Will Rogers said, "There are two theories on how to argue with a woman........Neither works!

BUY WHEN THERE IS BLOOD IN THE STREETS

That is a horrible title but a common saying in the investment arena, particularly in real estate. In Colorado, there is a high foreclosure rate and a number of homeowners have become reluctant investors because they can't sell their houses. The supply definitely exceeds the damand. I have become a reluctant investor recently because I had to take over a property, I loaned money on a few months ago. When I inspected my new acquisition I was discouraged. The interior was a mess; however, that is something I can fix. The biggest problem is the exterior and, since it is a condominium, that can only be done by the property owners association which is something I have little control over. The homeowner dues are high, the association insolvent and many, if not most, property owners are delinquent in their dues. There are a whole host of foreclosures in the community. if this isn't blood in the streets, I can't imagine what is. You can buy these units for $50-70 per square foot and it may get worse before it gets better. Its a great location, near shopping and light rail and I am tempted to put together a group to buy more units. The key to success is being able to buy enough units to get control of the homeowner association so you can put money into the exterior. The luxury apartments across the street are renting for $1.50 per square foot per month. These units would provide a good return on investment at much lower rents. The question is: Am I ambitious enough to attack such a major undertaking? I doubt it but I will do some more research before reaching a decision. I'll keep you informed.

REAL ESTATE AND NEGOTIATING SKILLS.

Do you want to be a real estate investor? If you do you had better learn to negotiate. The more complex the transaction, the more your negotiating skills come into play. As an example, consider the recent offer I received on a property I badly need to sell. The offer was for full price and I accepted the deal with few changes. No need to negotiate there, right? I wish. Obtaining a meeting of minds from buyer and seller is only the beginning. There are several major hurdles in a transaction even after the contract is signed. Perhaps the most critical of these is the inspection. Since it can be expensive to obtain a professional inspection, few buyers will bear this expense without first making sure they can agree with the seller on price and terms. In the example I cited, the buyer spent several hundred dollars for a professional inspection which took about five hours to complete. The result was that the inspector thought the building needed a new roof and the buyer wanted a substantial price reduction in order to replace the roof. I was able to produce a document that showed the roof had been replaced within two years. So much for the competency of the "certified inspector". Deal over, I won. Right? I wish it were that simple. I question the competency of the inspector and the buyer questions the competency of the roofing contractor who did the job. What was the outcome? Negotiations still in process. In a complex real estate transaction, you don't know the deal is done until you sign the final papers and cash the checks. Even then, there is the possibility of lawsuits for such things as misrepresentation and withholding material facts. The main point of this post is to let you know that some of what you read and see on TV about the huge profits in real estate investing don't tell the whole story. If you enter into this investing arena, you will need negotiating skills beyond those required for other types of investments. You also need to make sure you are willing and able to handle the stress involved. I could make several posts with examples of some of the negotiating problems I've encountered over the past 30 years. If you would like to see others, send me an e-mail or give me a call.

ENERGY PRICES DOWN

In one of my recent posts entitled, "If you can't beat 'em, join 'em" I recommended investing in energy companies as a hedge against rising utility and transportation prices. Shortly thereafter, one of the companies, Devon Energy rose almost 20% due to their partial ownership of a huge new discovery in the gulf which is estimated to increase our country's reserves almost 50%. This sounds almost too good to be true and may well be; however, it does serve to calm the markets in view of some of the predictions that we will be running out of oil. All of the stocks I spoke of in that post, including Devon Energy have since gone down substantially. but I make no apology. That's what a hedge does. Since I don't know the direction of energy prices, I buy these stocks to protect me if they continue to increase. If this happens, I pay more for my gasoline and utilities but benefit from increases in the prices of these stocks. If energy prices drop, I benefit by paying less for energy but the prices of the companies I buy will probably drop. I frown when I look at the value of the stocks I purchased but I smile when I fill up my truck. If I had known energy prices were in for a drop, I would not have bought these stocks but I didn't know. My position is that you can make bets on the direction of a given stock but there is no way you can know. Your only hope is that you will be right more than you are wrong.

CASH OUT MUST EQUAL CASH IN.

When I told my brother, a banker for the past 30+ years that this was an important part of financial planning, his response was "Duh!" Since when is a common sense statement like that worth mentioning? If this is just so much common sense, why are so many Americans trying to fool themselves into thinking that they can circumvent this rule. Perhaps one reason is that you can circumvent it for a short time and, on occasion, you can even circumvent it for a long time, but eventually, you have to face the music. The longer you continue to spend more than you earn, the more painful the eventual correction will be. Suppose you have $5,000 a year to spend on discretionary items and you want to spend 10,000 this year. The result is you have $5,000 less to spend next year which means you have no discretionary income or you can drag it out for five years and have $1,000 lest to spend for the next five years. This is the case even if you have no interest. If you pay 15% interest, a rate not uncommon for consumer credit, you will have $1,000 less to spend for 10 years. I am not one of those guys who hates all debt but you have to ask yourself, Is it worth it? Over the 20+ years I have spent in financial planning I have encountered many who feel that they are entitled to a certain standard of living, even if their income doesn't support it. It may sound obvious if we say that there is no way you can do this forever but that is the simple, unvarnished truth.

Retirement Insurance.

Given the fact that there are so many unknown factors facing today's retirees, it is mandatory that we remain diligent to guard against an interruption in retirement income. We don't know how long we will live, how well our investments will perform, how much we will need to spend for our health care, or even if social security will be able to continue without cutting benefits for current retirees. There a number of things we can do to make our retirement more secure; however, the two that work best are the two least popular among the people I work with. The first is to maintain your ability to earn income. I know that sounds like retirement isn't really retirement and perhaps that's true, but we need to re-think this issue since changing times require changing strategies. In the event of a disaster, you most important asset could well be your ability to earn income to fund your living expenses. The second means of enhancing your security is to simplify your lifestyle. I have many clients who left the work force in their late 40's or early 50's. Most will tell you that they have been able to do this because they have maintained a simple, low cost lifestyle. Think about it. It may not be as hard as it sounds.

A DAY TO REFLECT

The first thing that came into my mind when I woke up this morning was the tragedy of five years ago and the way that it changed life as we knew it. An estimate of the cost to our government is in the neighborhood of a trillion dollars. It was a trillion dollars we had to borrow. We have still not realized the effect of all these expenditures which are continuing. Another thing I thought about was the determination of our enemy, as illustrated by the docu-drama on television last night and scheduled for tonight. We almost certainly underestimated the severity of our situation in the past and we may be continuing to underestimate it. It is becoming evident that we have to broaden our views as to who our enemies really are. A case in point is the recent evidence that Iran and Syria are funding massive infusion of weaponry to the Hezbollah terrorists. Last, but not least, is the division among our own people. We need a comprehensive policy to fight this war and we need to be united in implementation of this policy. This should include everything from cultivation of relationships with our true allies in this battle to strengthening homeland security and seeking energy independence. While this may not sound like a post about your personal finances, it definitely is. The pursuit of this war will have a profound effect on your future quality of life and your path to financial independence.

SIGNS OF MARKET TOPS.

Do you ignore radio or TV commercials? If you do, I can't say I blame you but there are things you can learn by paying attention to what is being touted in the financial markets. For example, a few years ago there was a commercial by a well-known talk radio host telling you it was time to get started in rental real estate. A developer was offering you a chance to own a brand new $330,000 duplex with a $16,500 down payment. The commercial promised a positive cash flow from the beginning and stated that if you had made a similar investment 10 years ago, you would have a return of 90+% per year. Although these facts were mostly true, the developer was recently indicted on a number of counts, not the least of which was securities fraud. The developer took earnest money from over 1000 borrowers and ended up delivering only 40 finished units. This was a bad deal from the beginning but that is not my point. The more ads like this one air, the more likely it is that we are nearing a market top in that investment sector. In a normal market, no one would believe these "too good to be true" promises. Another example is the plethora of ads touting gold as an investment vehicle. The ads state that if you had invested in gold three years ago, you would have made a 20% return. Again this is true but it fails to mention that if you had bought gold 25 years ago, your return would be negative. I believe gold has a place in some portfolios but these ads lead me to believe that the easy money has already been made for this cycle and we are very near a market top. There are other signs of market tops which we will discuss in future posts. In the meantime, if you would like to develop a clearer picture of your financial situation send me an e-mail.

SLOW PROGRESS.

I guess some progress is better than no progress. Finally got my picture up. The old coot with the guitar in the upper left hand corner is me. Although I have spent the past 25 years in the financial services business, my main passion is playing the guitar. Fortunately, I am better at finance than I am as a guitar picker. Another change is that the address of this site is stormysvision.blogspot.com. Seems that reflects the philosophy of this blog better than the old address. Hope to learn more about how to do this as time progresses. Reader comments are welcome. Send me an e-mail with your questions.

REAL ESTATE OPPORTUNITIES.

The most successful investors I know buy when the most investors are selling and sell when the majority are looking to buy. This is called "contrarian investing" and it works more often than any other strategy I know. It doesn't matter whether you are talking about the stock market, the real estate market, or precious metals. It is virtually always preferable to go against the prevailing trend. This sounds simple but it is not nearly as simple as it sounds. The problem is you could rush out and buy when a downtrend has a long way yet to run. During the real estate crash of the late 80's some buyers bought too early and were unable to hang on until the market turned around. Many of those became foreclosure statistics along with those who bought at the top of the market. So how do you know when the downtrend is over? The short answer is you don't. The long answer is to watch the market carefully for certain signs. In the real estate market, one of the most important statistics is the demand for rental space. Sometimes real estate investors forget that it is tenants who drive the market. Buying when tenant demand is low means that you may not receive adequate income to fund property operating expenses and mortgage costs. The result is you may have to sell into a weak market to stop the negative cash flow that you will have unless tenant demand increases. How do we measure tenant demand? One of the easiest ways is to look at the vacancy rate in the market you are considering. A falling vacancy rate is a sign of a market that will improve. Another sign is the amount and cost of new construction. If there is little in the way of new inventory being produced and the cost of construction is higher than the cost you are paying for the property you are considering, this is positive since there is no way a developer can build a new property without having to charge more rents than the market will pay. These are but two overly simple strategies. There are many others. Stay tuned.

FALL IS IN THE AIR.

It's been a chilly rainy weekend. I can even see a few leaves starting to turn yellow here and there. From a strictly seasonal standpoint, this is not a time to get too aggressive in the stock market. Historically, October has been one of the poorest months to own stocks. That said, October could be a good month to buy if you can catch a good stock that is dropping just because the rest of the market is going down. Of course, stocks don't always drop in October but statistically, that's what usually happens. As I said in my last post, energy stocks are a good hedge against future increases in energy prices. Many companies are selling at low multiples to earnings and still appear to be a good buy. While many investors are thinking oil and natural gas prices are ready for a fall, it should be remembered that a lot of these companies have earnings that still can increase if raw material prices drop. That's because some have long-term contracts that were based on price levels before the recent run up. Even if we do get a drop in oil prices, these companies can benefit from expiration of old contracts and replacement with prices below current levels.

IF YOU CAN'T BEAT 'EM, JOIN "EM

No need to sit around and complain about gasoline and utility prices. Accuse these companies of gouging all you want but the market place sets these prices and attempts to jawbone the price down are doomed to failure. What can you do about high energy prices? You can conserve by driving less, buying more fuel efficiency, keeping thermostats lower, or a number of other measures. We probably should all do more of that anyway but in the final analysis, we can't conserve our way out of this one. One way I've been dealing with this is to invest in companies that produce energy. Here are but a few suggestions of companies you might want to research if you decide to take this route. Be aware that these are not specific recommendations. Devon Energy (DVN) is a company that produces natural gas from their own reserves. The price has been pretty well stagnant for the past year, mainly because natural gas inventories have been building and prices stagnating. I think it is a bargain at less than 9 times earnings. If you are looking for an income stream (and who isn't) you could buy a royalty trust that distributes income earned from royalties. One natural gas play is San Juan Basin Trust (SJT), a trust that pays royalty distributions monthly. The yield varies with gas prices and inventory levels but is virtually assured to go up if gas prices continue to increase. You could also invest in refinery companies. For example, Frontier Oil (FTO) is a refining company with the capabilities of refining less expensive, high sulfur, crude oil. Their refineries are located away from the gulf coast and less subject to hurricane damage. By way of disclosure, I either own, or have recently owned all these stocks. I seldom mention specific companies in my posts and these are just a few of the many companies that you could invest in that will profit from increasing energy prices. The purpose of this post is to let you know that it is possible to derive some benefits from high energy prices. These benefits can go a long way towards helping you deal with higher transportation and utility prices.

MONDAY MORNING, BRIGHT AND SUNNY

It's a beautiful day. Time for another 4-mile walk before it gets too hot. Speaking of too hot, our real estate market got too hot. This is why its cooling off now. Our strategy was to stay inside while it was too hot. The question is, when will it be time to venture out into the market again? My guess is that it may be approaching that level soon. One indicator is that the rental market is getting better. Another is that construction costs are getting out of hand. This means that you can buy a property now for much less than it would cost to reproduce at today's labor and material costs. Furthermore, in contrast to two years ago, it is easier to find tenants. It never ceases to amaze me when investors are eager to buy properties when tenants are scarce. In the long run, unless you are a "quick turn artist", the ultimate success of your real estate investment will be governed by your ability to locate tenants to cover your costs of capital and operating expense. Stay tuned for new information as it becomes available. Call me at 720-449-0200 if you want to talk about some of the topics you see here.

SATURDAY MORNING

It's a cloudy Saturday morning in Colorado. I guess it really doesn't matter what day it is. I do what I want most days anyway. Gonna try to get a four mile walk in if it doesn't rain. One of the most proactive things us old folks can do is take care of our health. Not only does it keep our health care costs lower, which ultimately improves our cash flow, it keeps us in a position to supplement our retirement income via part time work. Whatever your retirement plans, it is in your best interest to maintain your health.

A SLOW START

You may notice that the first publication on this blog was almost two years ago. The whole concept has been incubating in my aging mind for all that time. I finally got going again a few days ago. One of the main things on my mind lately is the real estate markets. Major building companies like Toll Brothers and Lennar have seen their stock prices drop drastically over the past few years and it certainly appears that the bloom is off the rose. Still many keep building and many markets are oversupplied with new and resale inventory. This creates problem for those of us who want to sell our existing properties and move on. The problem is further complicated by the fact that many have mortgages that will re-price in the next two or three years. When I say re-price I mean that your rate will increase. The worst thing you can do in these circumstances is stick your head in the sand and wait to find out what your rate will be. The most logical approach is to get busy and project what is likely to occur over the next few adjustment periods and make a plan to deal with the worst case scenario. I'll post more on the methodology of this later. If you can't wait you can always call our office at 720-449-0200. Ask for Phil and I'll get back to you if I'm not there.

TIME TO GET STARTED.