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AN AMERICAN TALE - MR. & MRS. BEN DOVER By Mike Gasior I suppose I must begin by explaining why this is my first "double" issue (but I promise it will be of standard length), although since this newsletter is still charity work on my part I will stop short of an actual apology. The simple reason has been my brutal travel and teaching schedule for the first half of this year. While by no means a complaint since having business booming is quite clearly a wonderful thing, it has left me with too little time and even less mental capacity to compose a meaningful string of words and thoughts to share with you, my wonderful readers. The upside of the semi-layoff is that there is seemingly an endless array of topics floating around the news that I look forward to addressing for you in this edition. None of these will be more fun to discuss than the economic tale of a very typical American couple, Mr. & Mrs. Ben Dover. But first just a little bit of business. TWO VIDEO CLIPS ADDED TO THE WEBSITE While I may have consolidated two newsletters into one this month, I will keep you completely up-to-date in the video commentary department. The new clips will address the topics of Interest Rate Swaps and Credit Default Swaps and I took advantage of some new scenery to break up the monotony a little bit. We'll see if you can guess where I was when I filmed these for you. You can view the two new commentaries, as well as all past clips at the following link: http://www.afs-seminars.com/v-commentary.html REMAINING 2006 TRAINING PROGRAMS As hard as it is for me to believe that the year is already almost half over, I will still be presenting some of our most popular programs in New York as well as Bermuda and Grand Cayman. The remaining sessions for this year are: NEW YORK Mortgage & Asset Backed Securities Derivatives Introduction To Securities & Markets Sarbanes-Oxley for Investment Departments Securities Operations, Processing & Accounting CMO, ABS & CMBS Securities Advanced Securities & Markets BERMUDA & GRAND CAYMAN Providing Services to the Hedge Fund Industry Securities Operations, Processing & Accounting I hope to see you or your colleagues at one of the sessions. AN AMERICAN TALE - MR. & MRS. BEN DOVER First and foremost, the story you are about to read is accurate and true. Only the names have been changed and the location kept vague to keep our couple anonymous. The Dovers are a completely typical American middle class couple. After graduating from college fate brought them to work at a rather large insurance company in the northeastern U.S. Having taken accounting in school, Mr. Dover took a position in the securities operations area, while the future Mrs. Dover, having majored in technology found her way into the IT department. The pay was decent, and the benefits even better and Mr. Dover immediately began work on his MBA at night at a college nearby. The two met about a year into their careers and began their courtship, which would last over three years, culminating with their wedding in 1990. They were barely 26 years old, making over six figures combined and with a future so bright they needed to wear shades. They lived in his apartment for that first year of marriage and then at the beginning of 1992 they decided they should make the plunge into their first home. The real estate market in the northeastern U.S. had gotten crushed coming out of the late 1980's and condo prices in particular had taken the biggest hit with some markets witnessing 40% to 60% declines in value. Although friends and family expressed worry and doubt about the young couple venturing into such a scary looking market, not to mention the prospect of a 30-year mortgage of nearly 10%, Mr. & Mrs. Dover made their purchase. For $65,000 they had found a very lovely 2 bedroom, 2 bath condo in a very nice complex with a fireplace, deck and enough room to even start a family. Even with the high percentage mortgage, the monthly payments weren't really any worse than what renting a similar place would cost, plus the interest and taxes were deductible. They were now building some equity and enjoyed the feeling of being homeowners immensely. Both of them continued to move slowly but surely up the ladder at work, and he'd become a manager not long after completing his MBA. Their long-term plan for starting a family began with the birth of a daughter in the summer of 1997. Since the insurance company offered an extremely nice daycare center right onsite, Mrs. Dover continued working after the baby was born and the couple converted the second bedroom of the condo into the baby's room. There was still plenty of room and the value of the condo had seemed to rise ever since the first day they bought it. They'd even taken advantage of falling interest rates to refinance the loan at a rate below 7% and their mortgage was costing them less than ever. Finally in 1999 after the baby turned two, they weighed the amount they were paying for childcare versus Mrs. Dover being a fulltime Mom, and decided that she should leave her job to stay home. After all, he was earning nearly six figures himself at that point and they could easily pay all their bills on his salary alone. There was also the issue of them actively trying to have another child. In 2002 they were hit with two pieces of amazingly good news. First was that Mrs. Dover was pregnant with their second child. Second was that condo units like theirs were currently selling for just over $150,000. With what they had managed to pay down on the principal during the past 10 years, they could walk away with over $100,000 even after commissions and fees from selling. Certainly this would be an extremely nice down payment toward a decent sized home a little further into the suburbs, although those prices had shot up quite a bit too over the last 10 years. But with the family growing, as well as Mr. Dover's paycheck, they decided to make the move up. They knew what they had in mind: a larger than average traditional home with at least 4 bedrooms, 3 baths, and a 3-car garage on a decent sized lot. After all, they had done the right thing in their careers and in their first real estate transaction, along with being fairly conservative in their financial matters. They deserved to feel successful, and that sort of home would make them feel exactly that way. The problem was that houses like they had in mind in the towns they wanted to live in tended to be more in the $650,000 to $700,000 range. With the $100,000 they had to put down, they figured this limited them to houses more in the $500,000 neighborhood since they had the 20% necessary to make that kind of purchase. This problem was quickly solved, however, by a quick visit with their mortgage broker. The mortgage broker explained there were many more options available in the marketplace today, and that she could get them an outstanding mortgage with 10% down. Perhaps even less than 10%, so they should focus instead on finding a home they really loved. Well it didn't take them long to find their "dream home". Nearly 4,000 square feet of beautiful living space with hardwood and granite everywhere, and not only did it have the 3-car garage but even had the room for a pool in the backyard to boot. Sure, the $675,000 purchase price sounded pretty horrifying, but the mortgage broker came back with the news that made their day. With only 10% down ($67,500) she could get the a new type of "hybrid" mortgage with a rate of only 4.25%, which would stay fixed for three years and then become an adjustable rate mortgage tied to whatever 1-year Treasury Bills are paying. Although the prospect of an adjustable rate loan was of some concern, they were somewhat comforted that the interest rate could only change 2% per year, and a maximum of 5% over the life of the loan. So the decision was made. They would put down $75,000 as the down payment and take out a mortgage of $600,000. The monthly payment was a "doable" $2,950, although the property taxes added almost another $1,000 to that, not to mention heat, hot water, electricity, cable, telephone and Internet service. When they totaled up their total monthly nut, the numbers looked like this: $2,950 Mortgage Although this equaled up to quite a large chunk of their after-tax income, they could definitely swing it. They even had $25,000 left over from the sale of the condo that they would save toward putting in that swimming pool in the backyard. They truly loved their new house and his career path seemed dependable enough to make these moves. The couple gave birth to their second daughter not even six months after moving in. By 2004 they began to notice homes in their development similar to their selling for almost $800,000 and their banker had mentioned that they might qualify for a home equity line of credit and actually pay 1% (100 basis points) less than the prime rate. While it almost seemed too good to be true, just three days after filling out a few pages of application and paying no fees, they were approved for $100,000 line of credit. With the prime rate at 4.50% and their payment being based on a 3.50% rate, this definitely seemed like the time to not only build their swimming pool, but also to buy the Chevy Suburban they had been looking at not only for Mr. Dover to use for his 42 mile commute to work, but also for the family's weekend adventures. There was plenty of room for two car seats, plus all the strollers and goodies that accompany having a seven and a two year old. Not only was the rate dirt cheap, the interest was deductible as well. The pool and Suburban quickly maxed out their new credit line. Imagine a brand new in ground pool and a fully loaded top-of-the-line SUV for less than 300 bucks a month. Life doesn't get better than this for the couple with a Midas touch for real estate. Just a couple of months later Hurricane Katrina hit New Orleans and the Gulf Coast and Mr. & Mrs. Dover found the images they would see on the news almost too difficult to watch. Their oldest daughter was nearly eight and she would question them about what had happened and if there was anything she could do to help. She brought her piggy bank of change to the table and asked how she could give this money to those people on television who had lost everything. While the disaster had happened over a thousand miles away, the couple was surprised at how quickly they felt some financial pain at home. His first car had cost him a whopping $300 what seemed now to be a million years ago, so imagine Mr. Dover's reaction to his first $75 fill-up for his new Suburban and the $500+ delivery of home heating oil. Worst of all, the $75 fill-up didn't even come close to getting him through a typical week, and as the colder weather began to creep in the $500 worth of oil wouldn't last a month either. Suddenly, the family began to think twice before taking a weekend jaunt somewhere, or eating out at their whim. Money wasn't necessarily tight, but the both of them were feeling a bit of a cramp. This was about to change though. Barely had the couple begun to realize the bite that oil price increases were having on their lifestyle, the new mortgage payment booklet from the mortgage company slapped a new reality into their consciousness. It seemed that their mortgage rate had increased the full two percentage points, and the payment had suddenly ballooned to $3,695.00. They had also been aware that their property tax bill had been creeping up during the three years that had passed by so quickly, as well as electricity, but it hadn't equaled the $750 jump that the loan payment had leveled on them in one fell swoop. Also aggravating was the Federal Reserve's increasing of the Fed Funds rate, which had served to increase the prime rate an equal amount and instead of paying 3.50% on the home equity loan like they had been only months before, they were suddenly looking at 5.50%. Now the payment for the pool and SUV had swelled to $458 per month, basically a 50% increase. At this point the monthly budget looks this way: $3,695 Mortgage While Mr. Dover has gotten annual increases in the 4% to 5% range during the past few years, it doesn't quite add up to the 36% that his monthly nut has increased during the same timeframe. There are discussions about whether or not Mrs. Dover should return to the workforce, but faced with the prospect of $600 per week for childcare, the couple chooses to have her remain home fulltime. They'll just watch the budget a little closely and cut back on those things that can be trimmed. They've been together for 15 years, beginning when they were 26 years old, but they cannot remember a time when money ever felt this tight to them. There is certainly comfort in the beautiful, luxurious home they live in with new cars in the driveway, not to mention the fact that this real estate still carries tremendous value and some equity even with the loans against it. Oil prices even back off a little bit ending any thoughts of ditching the Suburban. Now it is May 2006 and the Federal Reserve has remained relentless in its defense against inflation and has increased interest rates at every meeting since Mr. & Mrs. Dover's last mortgage rate adjustment. The couple now monitors on a regular basis the interest rate index their mortgage is tied to and they fear that the next increase may once again be in the two-percentage point neighborhood. This will bring the monthly payment to over $4,500 and now suddenly the budget numbers don't seem to add up anymore. In addition to that they haven't been able to pay down the principal balance of the home equity loan at all, and the prime rate just went up to 8.00% this month, bringing their rate to 7.00%. Now the payment for the swimming pool and Suburban is almost double what it was not even two years ago at $583 per month. As if to add insult to injury, gas prices at the pump are back over $3.00 per gallon and the "For Sale" signs on their cul-de-sac seem to grow more numerous every week and none ever seem to come down. They even heard of another couple accepting an offer over 5% lower than their asking price. This would have been unheard of even a year ago, when bidding wars often erupted whenever homes in this subdivision became available for sale. In fact, many homes would have offers at the full asking price within hours of being added to the Multiple Listing Service. Mr. & Mrs. Dover now face some serious decisions and a major crossroad. Adding another $1,500 a month to their expenses is more than difficult...it's impossible. They could sell the Suburban, but they've already lost at least $10,000 on it, and they'd have to buy another car to replace it anyway. And there is no returning the swimming pool. Obviously, they could list the house and join the legions of others rushing for the exits already, but the prospect of moving down in lifestyle is just something Americans always seem to struggle with. They could also sit tight and try to ride this thing out. After all, how much higher could interest rates or oil prices get? Plus, all the "experts" in the media continue to say that real estate may not appreciate like it has in the past few years, but we're looking at nothing more than a "soft landing" at worst for prices. There is no reason for panic. Of course, it is easy to not panic when you have enough money to pay your bills, but panic is often an easy emotion to conjure when your personal financial ledger is not adding up at the end of any given month. If Mr. & Mrs. Dover's mortgage payment increases the maximum amount in a few months, they will be facing that exact prospect. Then what will they do? I suppose we simply need to wait and watch. Stay tuned. THE MORAL? In almost any situation it seems impossible to escape my natural teacher's tendencies, and sharing the above story is another one of those times. Those of you who have read this newsletter over the years can probably attest to many times when I would make particular predictions about the future. The prediction is always accompanied by the reasons for my feelings. I haven't always been right, and many of you often don't agree with me (and I frankly don't always want you to agree with me either), but at the very least I hope that everyone is clear what angle I'm coming from. Lots of people don't share my background in economics or finance, but the story I just told was one of "real life", and one needn't possess an economics degree to figure out the likely path of Mr. & Mrs. Dover, nor the direction of the real estate market and the U.S. economy. You know darn well the trajectory of all of these things and I'd simply like you to consider what I believe is obvious and draw your own conclusions. If you'd like a reminder of the economic modeling I did 16 months ago, click here to go read my March 2005 newsletter that I titled "Real Estate is Over": http://www.afs-seminars.com/newsletter_Mar_2005.html It contains a section that predicts where real estate prices may end up depending upon what level mortgage interest rates get to. That newsletter got a lot of attention last year, and is beginning to gather even more steam now. TWO CENTS ON THE IMMIGRATION DEBATE Like many issues facing America, this current one about what should be done about the immigration "problem" is yet another chance for gasbag politicians to pontificate, complain, grandstand and then ultimately do absolutely nothing of substance to address the problem. One side of me sort of agrees with Donald Trump who suggests that we don't do anything about it. After all, it has been going on for years and years and at the macro level, the United States economy has been pretty darn robust and these illegal immigrants are an important component of many sectors and segments of the overall economy. The idea of building walls or fences that are hundreds of miles long seems pretty darn expensive and somewhat useless to me, which leads me to an idea that would serve both the U.S. and Mexico both very well. Two things we can all probably stipulate to are that Americans like to buy cheap stuff, and that many of the Mexicans who care crossing the border illegally are simply seeking to find employment. These two facts lead me to my solution. Simply build a 350 mile long Wal-Mart right along the border. This was the length of wall recently suggested by some faction of Congress, and is only somewhat larger than a standard sized Wal-Mart anyway. The front doors would be on the American side of the border for the cost-conscious Americans to come in for their shopping, and the back door would be on the Mexican side for the workers in the store to enter to perform their job functions. At the end of the day everyone simply goes back to their respective country and everyone's needs are satisfied. Voila! Problem solved. Who says that complex problems can't be solved with elegantly simple solutions? SOMEBODY PLEASE INVENT THESE TWO THINGS Quite a few of you readers will recognize this request of mine since I've been lamenting the absence of these two products in the marketplace for well over a year, but perhaps there is someone out there reading this who can actually fill this vacuum and make my day. First of all, I want an in-dash, MP3 player/stereo for my car. And I don't mean one of those bogus players that requires me to burn some MP3's onto a CD and then shove that into the player. I'm talking about a player with not only AM/FM/Satellite radio capacity, but also with a 60MB to 200MB hard drive that allows me to store thousands and thousands of songs on it in a variety of folders. AND it needs to have a wireless network card installed in it so that when I am in my garage or driveway, my home network will recognize my car stereo and allow me to download whatever music I would like off of the computers in my house. I'll confess to be a complete moron with regard to many things, but even I know that ALL the technology already exists to allow this invention to occur over the course of a weekend. Secondly, why hasn't any cell phone manufacturers created a phone with enough flash memory to allow me to download at least a few hundred tunes onto my phone so I don't have to purchase an iPod. Because I'll just tell you that I'm never going to buy an iPod, or any other MP3 player either for that matter because I am not lugging another piece of equipment around. I also don't need a phone that takes pictures or video or any other nonsense. Some of you will write that there are plenty of phones out there that can play MP3's, but my understanding is that I have to download those tunes from my phone company or somewhere else and pay somebody for that service. Well I just, plain don't need their service. I've already got a massive collection of music and I don't feel like paying for any more than I already own. My newest digital camera caused me to purchase a 1GB memory card for it, which was itty, bitty and cost barely more than 50 bucks. I don't even want to estimate how many songs fit into 1GB, but it would be more than I could even hope for. Since I'm already a loyal Blackberry customer, perhaps RIM can include such a memory card in their newest Blackberry and the ability to sync it up to my desktop PC, and I will gladly pay them the extra fifty dollars for the added memory. What the heck, I'd probably pay them a hundred extra. I just don't understand why this seems so easy and obvious to me, yet no such products yet exist for the mainstream public. AN UNEXPECTED WEDDING I was in Grand Cayman last week presenting two of my training sessions at the Grand Cayman Marriott Beach Resort, and my group was taking their afternoon break. I took a walk to the beach to check out all the fun and sun I was missing and as I was walking, I passed this HUGE dude who looked vaguely familiar to me, however I couldn't place the guy. As I turned around to head back toward my meeting room, I passed another guy, and although not quite as huge and somewhat older, was still pretty pumped up with quite the tan and some platinum blond hair. When I got back to my room I asked around a little to see if anyone knew what was going on, and I was told the WWE's, Ric Flair was going to be getting married in a couple of days and that tons of wrestlers were descending onto the island. I was also told that the first guy I'd encountered was Triple-H who was there with his quite pregnant wife, Stephanie McMahon. All I can tell you is that these were some massive human beings, topped off by one of them who I had the pleasure to meet (actually, I was frankly somewhat horrified) was a gentleman who goes by the moniker, "The Big Show". Until you actually witness something like this in real-life, it is difficult for people to relate to what I am about to share with you. I'll also remind you that I'm not any sort of dwarf either. I'm somewhere between 6'1" and 6'6" depending upon what convenience store I'm exiting, and around 195 pounds. Now all the statistics I am going to list here are EXTREMELY accurate and I can attest to through first-hand experience. This guy is 7' tall, 505 pounds with a 64" chest and a size 23 shoe. When I sat next to him at the bar later that afternoon, he was drinking a beer out of a standard sized beer mug, and when he held it in his hand YOU COULD NOT SEE THE MUG. No bull. Next time your in a bar someplace, put your hand next to a beer mug and imagine how much larger it would have to be to make the beer mug disappear. All I can say is YIKES! So all I could is marvel at these absolute freaks of nature (which I mean in the most complimentary of ways) and keep my smart alec sense of humor in check at all times. God forbid one of my acerbic observations be misunderstood, resulting in massive internal bleeding on Mikey's part. The only regret was that Hulk Hogan was due to arrive at almost exactly the time I was departing to head back to the states. Meeting some of the other wrestlers was fairly cool, but the Hulkster is an American icon. Maybe I can catch him at the next WWE wedding. GUILTY PLEASURES FOLLOW-UP I received a somewhat surprising avalanche of email after my little rant in March about "guilty pleasures". If you missed it, here's the link for the newsletter and you'll find that section toward the bottom: http://www.afs-seminars.com/newsletter_Mar_2006.html Some of the notes related similar feelings, friends and experiences, but there were also a few notes that were critical in tone, and a bit holier than thou, with one of them strongly suggesting that I seemed to clearly be under the influence of a variety of "demons" and that it would be wise for me to face my "demons" and face them sometime sooner than later. Well, all I can say to that reader is that's an enormously easy thing to say. You haven't met these guys. YOUR APRIL/MAY BRAINTEASER It's been a while since I have gone with a completely mathematical brainteaser so that is our selection for this month. Since it's almost summer I didn't want it to be ridiculously hard, and even if your algebra skills are limited, this one can definitely be figured out if you simple remain calm and use common sense and logic. I thought it was cute and not a bad one to share with your kids as a pop quiz at home. Here it is: "A pound of apples and a pound of bananas cost $3.65, a pound of bananas and a pound of cherries cost $4.95, and a pound of apples and a pound of cherries cost $6.10. What is the price per pound of each fruit?" Give yourself a chance before bailing out and going to look at the answer, which you will find at the following link: http://www.afs-seminars.com/brainteaser_May2006.html The answer to last month's question is: The hint in the question is that it was Friday afternoon. That gives you leverage with the guard -- they'd be tied up doing paperwork about your suicide and miss weekend time with their family -- so they'll give you a cigarette to avoid this inconvenience. Copyright 2006, Michael Gasior. All Rights Reserved Copyright 2006, Michael Gasior. All Rights Reserved. |
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April
/ May 2006 Newsletter
