Bill McCord's Blog

It’s all about meeting new people and helping them realize their dreams.

From the 1st meeting to the close of escrow, maybe 3-6 months, you go through the equivalent of 20 years of getting to know people well, and developing the ability to work toward a common goal.

 Then you may do nothing more than exchange xmas cards and sending out occasional marketting info. However, if the result of your initial business experience was positive, you will be hearing from their friends and family.

 Then, about 5 years later you will be renewing close aquaintance helping them with their next move.

There is nothing more gratifying than that phone call regarding new business coming from a past client or a referral from them. That is a FUN call.

I’ve lost count of the number of times I’ve been asked “I see the Fed lowered it’s rate(s) today, www.federalreserve.gov/ how much have mortgage rates dropped by”?

When I answer, as is most often the case, “they’ve not gone down, they’ve gone up”, the response is “how can that be.

So let’s try to explain it once and for all.

First the basics.

There are 3 actors in this story.

1.The Federal Reserve Bank.

2. Mortgage Backed Bonds/Securities.

3. Inflation.

FACT: There is no direct relationship between the Federal Reserve and Mortgage Interest Rates.

FACT: Despite the continued repetition from the Talking Heads in the mainstream media, there is also no direct connection between the 10 year Note and Mortgage Interest Rates. In fact the two will often go in opposite directions after a Fed action.

SUPER FACT: Mortgage Interest Rates are directly affected ONLY by the prices of Mortgage Backed Bonds, commonly referred to as Mortgage Backed Securities. For the most part these are Long Term Bonds issued by FANNIE MAE and FREDDYMAC, and it is their price going up or down which drives Mortgage Interest Rates.

As with all Long Term investments, Bonds are most directly affected by the outlook for Inflation, which makes it likely they will be paid back in the future with inflated dollars. Inflation reduces the current value of all Fixed Investments such as Bonds.

The Golden Rules:

1. Prospects of higher Inflation drive down prices of all Bonds.

2. When Bond prices go down, Mortgage Interest Rates go up, and vice versa.

Here is where the Fed comes in. Drastic lowering of rates by the Federal Reserve Bank will always lead to fears of Inflation and put downward pressure on all Bonds. This is precisely what we have seen since the start of this current lowering cycle.

The sole exception to this is your Home Equity Line of Credit (HELOC) which is usually tied to the Prime Rate. The Prime rate is historically 3% more than  the Fed Funds rate; so in today’s topsy-turvy world you will often  find your Equity Line loan having a lower interest rate than your 1st. Mortgage.

For all Home owners in California above 62 years old, or those with parents in that age group, the State Controllers Office has a program which allows long term postponement of Property Taxes. Go to www.sco.ca.gov and select “Public and Gov, Services” tab, then select “Property Tax Postponement”.

Consider a 68 year old Grandmother living alone in the old family home in North San Jose. All her children and grand children are living in Pleasanton, about 30 minutes freeway driving away. She would love to sell up and move closer to the family, and could afford a suitable house using her sale proceeds. However, the price of the house in Pleasanton would be higher than the sales price of the San Jose house, so thanks to California’s Proposition 13 www.hjta.org/node/320 and the incomplete Propositions 60 and 90, www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm she would not be able to carry her existing Property Tax payment over to the new house. This would increase her Property Taxes by $600 per month. This makes the whole thing impracticable as she cannot afford this extra expense. and her children are unable to subsidize her, even if she would accept it.

Here’s how the numbers work:

Grandma’s house, bought in 1980 for $50,000, is now worth $600,000 and has no mortgage.

Thanks to Prop 13 her property taxes are only $90/month.

The replacement house in Pleasanton will cost $750,000 and she can easilly handle the small mortgage needed.

However, thanks again to Prop 13, her new property taxes will be $781/month. This she cannot manage.

Using the Property Tax Postponement program she is able to make the move and simply allow the accrued Property Taxes to reduce her final estate. A result with which the whole family can be happy.

Many Buyers in my market area (Silicon Valley, CA) will research schools to decide where they want to buy. Unfortunately the Acronym Zoo makes it difficult to actually dig out the truly relevant information. In a small effort to help with this I’ve put together the following basic descriptions of each of the normal acronyms used.

APR (AccountabilityProgress Reporting) is the California State mandated system to measure current performance of schools.

API (Academic Performance Index) is the result of the measurement process and is a unique number for each school.

AYP (Adequate Yearly Progress ) and PI (Program Improvement) reports are the results of a Federally mandated program with a different focus.

API measures the performance and progress of a school based on statewide tests at grades 2 through 12. It produces a numerical rating between 200 and 1,000. Depending on the current rating, each school receives a target for improvement over the following year, expressed as a percentage. The higher the current score the lower the percentage increase required until at 800 the requirement is to maintain that score.

AYP is used to drive and monitor progress toward a common goal for all schools. This goal is that all schools must have 100% of students achieve proficiency in English-language arts, and mathematics by 2014.

To truly understand how to interpret these go to the California Dept of Education site. http://www.cde.ca.gov/ta/ac/ar/ This will give links to details for all these and related systems.

In todays crazy world we all know people who are struggling to get by. Here is information about some sources of help not commonly known about.

There are many free, low cost, discount and income-eligible services offered by government agencies and trusted sources. This link will take you to many of them http://www.takechargeca.ca.gov/campaigns/free.shtml.

You can also obtain this list from the Department of Consumer Affairs at (800) 952-5210. Visit their website for information on a multitude of programs provided by the State for all of us.  www.takeChargeCA.ca.gov 

The list of free and low cost services help California consumers save money!  Want a free or low cost hair cut, or manicure?  Looking for help paying for a Smog Check, or just some basic coupons for household products or food?  It’s all there and much, much, more.

Despite the doom and gloom pouring out from the talking heads and empty suits of the mainstream media we here in Silicon Valley do not inhabit a wasteland of short sales and REO’s. Yes, we do have some in a few pockets of the Valley, but they are not having much affect on the big picture.

The Pending to Listing ratios for Santa Clara Valley continues to get more favourable each month. This is the most credible statistic available for tracking market trends and is currently better than it was 12 months ago. I have seen nothing in the Murky News, or heard it mentioned on the TV or Radio.

The truth is that the current problems are concentrated geographically and have not wiped out Real Estate values all over the State.

Have prices in Silicon Valley gone down. Yes in general, but only to the extent of correcting for a out of control boom.

Is now a good time to buy. Yes, in my part of the world.

NOTE: I’ll follow up shortly with info on some super 1st time buyer programs for the Counties and Cities of Silicon Valley.  These are NOT low income programs. More to follow.

From my personal experience as a Certified Mortgage Planner www.cmpsinstitute.org/ I would say that the Gift Tax is the most missunderstood part of the whole I.R.S. rule book.

Most people think that a gift of up to $12,000/year to a family member is free of tax to both giver and receiver. TRUE.

But there is so much more that is also TRUE.

1. In any one year both you and your spouse can make gifts of $12,000 to as many people as you wish, family or not. This can be repeated every year. NO TAX.

2. At any time each of you can make gifts of $1,000,000 to any one person or combination of people. This is a lifetime total. NO TAX.

SUMMARY:

$12,000 per person tax free in any one year.

e.g. Mother and Father each gift $12,000 to both Son and Daughter-in-Law (total $48,000) toward a down payment on their 1st house. By making one gift in December and one in January this could be $96,000.

$1,000,000 tax free, either all at once, or over a lifetime.

e.g. Mother gifts Daughter $500,000 to buy 1st house outright.

A definitive description of the Gift Tax can be found at www.irs.gov. Search for “publication 950″. I am not formally qualified as a tax advisor or accountant. Anyone wishing to utilyze these or similar strategies should consult a Licenced professional.

The following quote is from The Economist Magazine

“Everybody wants it. Nobody understands it. Money is the great taboo. People just won’t talk about it, and that’s what leads you to the subprime mess. Take the greed and financial misrepresentation out of it, and the root of this mess is massive levels of financial illiteracy.”

 I’m one of the famous “Baby Boomers” (born between 1946 and 1964) who, if you listen to the mainstream media, are both the cause and the solution for everything wrong with the world. This is a very simplistic view, but it in one very important area I totally agree. PERSONAL FINANCE.

Our parents are children of two World Wars and a major depression. Personal finance was not a complicated issue. The Boomers are the first generation to grow up in a financially complex world while having more money to invest than their parents. They are bombarded with conflicting opinions on how best to spend and invest their money. The vast majority of the advice comes from sources which have more interest in how to separate you from your money than from increasing it.

How did they learn to navigate this brave new world? Some have been fortunate enough to choose parents who were knowledgeable enough to educate them. A few will have recognized the weakness and taken the time to educate themselves. Unfortunately the large majority did not even realize there was a problem. These are the “Goldfish” referred to in my earlier blog entry.

My concern is with the next generation, hence the title of this item. The Kids.

How are financially uneducated parent going to teach their kids how to survive in the increasingly complex financial water we are swimming in.

Here’s a suggested starting point for those who acknowledge the problem but need help with the solution.

Buy and read “The Only Investment Guide You’ll Ever Need” by Andrew Tobias, then try to make sure your kids read it before they ever receive a single dime of their own to spend. if necessary pay them to read it and discuss it with them.

You may well find the whole topic more interesting after this, so here are a couple of other books which will prove it can also be very entertaining.

1. “Freakonomics” by Steven D Levitt & Stephen J Dubner.
2. “The Undercover Economist” by Tim Harford

In addition, here is an excellent web site www.mvparents.com/ dealing with this topic and many other issues regarding our children

In my opinion, if your kids can both read and understand how money works you have given them the best gifts any parent could ever give.

Recommendations’ for other books etc will be welcome.

Many Californians who bought their home since late 2006 now find themselves facing mortgage payment shock, and are unable to refinance due to a drop in the value of their home.

This double whammy is the major cause of the increased number of foreclosures and short sales.

While there is no easy answer for many in this situation there is one thing they can do to at least reduce the cost of owning their home.

California Proposition 8 allows for a reduction in Property Taxes when the current value of the house is now lower than the assessed value (usually the purchase price in this scenario.)

For example. You paid $450,000 in December 2006 for a beautiful 4 bed 3 bath home in Elk Grove.

The Builder is now selling the same house in phase 3 of the development for $380,000.

Your property taxes are $5,628 per year.

The buyer at $380,000 is paying $4,752 per year. That’s $868 per year less than you.

Prop 8 allows you to file for a “reduction in assessed value” in the County where you live. Example: www.acgov.org/forms/assessor/decline_market.pdf for Alameda County. There is some paperwork required but nothing you cannot handle yourself.

There is no need to fall for the flyer in the mail offering to take care of this for you at at a  price.

Simply call the County Assessors office and explain you want to apply for a “Reduction in Assessed Value” for your home. They will send you the required forms which you complete and send back. It may take a couple of months before they respond but respond they must.

PROBLEM.

I”m finding an increasing number of my clients are buying or refinancing homes on the basis of tax advice from a previous Realtor or Mortgage Broker, rather than the law as defined by the IRS in Pub 936.

They are told that they can claim tax relief on all mortgage interest up to $1,000,000, even when the loans are on 2 different properties.

WRONG!

There are 3 categories of debt involved here:

1. Home Acquisition Debt. This is defined as “the total amount of all mortgages, up to a maximum of $1,000,000, used to purchase the property. This can be spread across your Principal Residence and a 2nd home. (This does not mean a Rental House). The amount which is deductible will be reduced by any paying off of principal. Therefore, if you bought a home using a $400,000 mortgage, and have since paid it down to $250,000, your Home Acquisition debt is now $250,000. The interest on this is the amount eligible for a tax deduction. Even if you re-finance for a higher amount only the $250,000 is Home Acquisition Debt.

NOTE: This item is exempted from the Alternative Minimum Tax (A.M.T.). calculation

2. Home Equity Debt. This is a fixed amount of up to $100,000 which can possibly be added to the Current  Acquisition Debt to increase the amount allowed for tax deduction.

NOTE: This item can be paid down and re-used to the max $100,000 repeatedly. However, it IS included in A.M.T. calculations.

3. Home Improvement Debt. If incurred in order to make improvements in the house, the new debt can effectively increase the Current Home Acquisition Debt.

BEWARE. Improvements must either:

Add to the value of the home.

Prolong the useful life of the home,

Adapt the home to new uses.

Ongoing maintenance does not qualify.

Any time I have a client who plans to pay cash, or put down a large deposit we have an interesting review of these issues before proceeding.

I am not formally qualified as a tax advisor or accountant. For advice on this issue and with exceptions to the guidelines please consult a licensed professional.