New investment strategies don’t stray far from traditional products.

As I was catching up on my back issues of the Wall Street Journal I came across an article telling me that in this new economic environment investment advisers are embracing new tactics and turning their clients to alternative investments. (Advisers Ditch ‘Buy and Hold’ For New Tactics, WSJ 4/29) My first thought was “it’s about time.” As I read the article though I realized that when the investing establishment talks about alternative products they are mostly referring to new flavors of the same old menu of stocks and bonds.

The biggest disappointment here is that most money managers are simply becoming more active traders rather than just following the traditional buy and hold approach. In fairness, for the small percentage of investment advisers that truly know how to do this, it is probably a good thing for their clients. But what would really be much better for most investors is the recognition that there are other asset classes available to them, and that they offer significant portfolio enhancements in terms of diversification, returns, and security. Unfortunately it appears that the “new” investment tactics consist of exchange-traded funds, structured products such as derivatives, asset allocation funds and hedge funds, or taking a more quantitative approach to investment decisions. A very small number of advisers are looking for true alternative assets to expand their clients portfolios, but most shy away because their knowledge and experience doesn’t stray too far from the tried, and tired, world of stocks and bonds.  True alternatives include various real estate investments, currencies, commodities such as gold, and even oil and gas exploration.

Real estate, if approached the right way, is still one of the safest and best investments available to most investors today. There are dozens of great real estate investment approaches that vary by risk-return, time horizon, and level of investor involvement and control.

Trust deed investments offer one of the highest levels of security, quickest return, and least management hassles in the market today. On the opposite end of the spectrum is pre-developed land investments (which we previously discussed in Identifying High Growth Areas.) In the middle are direct commercial or residential income investments, or buying REO properties which we discuss in the next article.

What the investing establishment doesn’t want you to know is that these investment opportunities are accessible to most investors, including through IRAs or 401ks providing tax free or tax deferred growth, and offer viable alternatives to the volatile and unpredictable stock market.

On Monday April 13th UC Berkeley’s Fischer Center for Real Estate and Urban Economics held it’s 14th annual conference in San Francisco. Keynote speaker and well known real estate guru Ken Rosen did not paint a rosy picture for a short term recovery.

“The world is structurally changed and it’s going to take a long time to get back to a system that is sustainable,” Rosen said. “The underlying assets are still going down at accelerating rates.”

Rosen predicts that both residential and commercial real estate values will continue to get pressured from three key dynamics:

• Unemployment will continue to climb, likely topping 10% in the near future (meaning millions of new job losses)
• The credit markets will remain constrained for some time, and interest rates will begin to rise.
• The newly conservative consumer is not going to return to the debt-addicted lifestyle and spending will continue to be curtailed.

With residential values continuing to plummet and some office values down 35%-40% conservative investing is key. Private mortgage lenders can protect their trust deed investors through conservative underwriting and low Loan-to-value lending. For equity investors with money this is a great time to buy as values are highly compressed.

There has been a lot of excitement in the past week about the new “conforming” loan limits for Fannie and Freddie loans. The new limits were announced as part of the American Recovery and Reinvestment Act of 2009 which the President signed into law on February 17, 2009. Realtors and potential home buyers and owners are happy that the new conforming loan limits was raised to $729,500 from $417,000. If you live where I live, in the San Francisco Bay area, and a few other high cost areas, there is good reason to be happy. But for most of the country this provision doesn’t change a things. It’s a good provision to be sure, but there is a lot of misinformation among the general public so we should put things in perspective.

The new loan limits up to which Fannie and Freddie are allowed to underwrite home mortgages are established by county. These limits are equal to the greater of 125% of the 2008 local area median home price or $417,000 for Fannie and Freddie, with an overall maximum cap of $729,750. Here are some fun facts:

• There are 3,142 counties in the U.S. (excluding protected territories such as Puerto Rico and the American Virgin Islands.)
• Only 275 counties, or 8.8%, will see loan limits raised above the previous $417,000.
• Only 73 counties, or 2.3%, will have loan limits of $729,750.
• The new average agency loan limit nationwide is just $430,322, a 3.2% increase.
• The 275 jumbo counties are spread across 29 states, but just 5 of those states (VA, MD, CA, AK and NJ) encompass almost 60% of these counties.

You can check your counties new loan limits on the OFHEO page.

UPDATE: As of the first week in May banks have begun rolling out the new “Super High Balance” Conforming loan programs. Pricing is only slightly higher than regular conforming but underwriting guidelines remain very tight. (I.e., you better have a good job and excellent credit scores.)

Managing your credit in these challenging economic times.

Not long ago managing your credit was a hot topic. Everyone wanted access to the easy money floating around and there was plenty of advice on how to build and maintain a good credit rating. Suddenly those voices have gone silent, but now more than ever it’s critical to keep an eye on your credit ratings.

These days it seems most lending institutions have gone out of the lending business, making credit pretty hard to find even for the most credit worthy. This will eventually change and the credit markets will return – don’t ask me when – but they will. But when the worst is past and the banks are lending again the requirements will be much stricter than they’ve been for most of the past decade, and your good credit score will be key. While the math behind the credit score is complex and mysterious (my statistican wife claimed it’s a State Secret,) in general there are five key factors to be aware of:

How Fair Isaac Corp. weights the various parts of your credit management to determine your credit score.

1. Payment History

It may seem obvious but paying your bills on time is the most important thing you can do. If you’re behind on a credit account make it your financial priority to get current and stay current. While this is important on all your accounts certain types of credit will impact your score more. Always try to pay your mortgage first and then your credit cards.

2. Watch your utilization rate.

Your utilization rate is the total amount you owe divided by your credit available. So if you have a credit card with a $5,000 credit limit and a $2,500 balance, your utilization rate is 50%. Credit bureaus generally like to see utilization rates in the 30%-35% range. This is less an issue of what you owe than how you manage it. For example, do not close an established credit account as a short term strategy to improve your score. Here’s why…

Suppose you have 4 credit cards with $30,000 of total credit available, and on average you carry a total balance of $9,000. Your utilization rate is 30% and everybody is happy. Now you decide to cancel a card you never use, with $0 balance and $10,000 of credit available. All of a sudden your utilization rate is 50% and your score could take a big hit.

I know the schemers among you are thinking “I’ll just run out and apply for a bunch of new credit to drive down my utilization rate.” Unfortunatley they’re on to you because…

3. Length of Credit History.

Longer credit histories are more heaviliy weighted than new ones. So if you’re going to cancel a card try to cancel a newer one. New credit accounts will reduce your average account age, and that can result in a lower score.

4. Type of Credit.

Mortgages and HELOCs tend to have the strongest impact on your credit score, followed by credit cards. If you’re going to close down a credit account close your department store cards first. (In fact, better would be not to get sucked into those one-time 10% discounts to open new revolving credit account.) Then consider your newer bank cards such as Visa or Mastercard. But try to avoid the shell game of moving balances around. If you really want to stop using a card, pay it off first then shred the card.

5. New Credit

If you’re looking for new credit – maybe a mortgage or a new card – be focused and do your inquiries over a short period of time. The scoring systems will track the length of time over which new credit is sought and distinguish between the search for a new line of credit from trying to open a bunch of new credit accounts. Many commercial inquiries into your credit score over time can really pull down your score. But remember, checking your own credit report will never affect your score, and this is something you should do regularly.

6. Expanded Use of Credit Scoring

If everything we’ve said so far seem old news to you, this last one may be a bit of a surprise; more and more institutions are using, or contemplating using, your credit score to evaluate you as a customer. Insurance is a big one. It’s controversial still but be prepared, it’s coming. If you have a bad credit score you very likely will not only pay more for your mortgage but you’ll pay more for insurance as well (if you can get either.) There is talk about credit scores being used in evaluating job applicants as well. For now the major reporting agencies claim they do not make credit scores available for employment evaluations, but a growing population of employers claim they do look at a person’s credit history. Whatever the truth, a well managed credit history is becoming ever more important in our modern world.

Learning from the lessons of Lincoln.

President Obama feels a close kinship with Abraham Lincoln. To be sure there are many similarities. Both were born outside Illinois (Obama in Hawaii and Lincoln in Kentucky.) Both men became lawyers and served in the Illinois State Legislature.

US National Debt continues to skyrocket with new budget.

Each served only a single term in Congress before ascending to the Presidency. And both men were (are) powerful orators who catapulted onto the national political scene and became commander-in-chief with no previous military experience.

President Obama often looks our 16th president as a model and source of inspiration, and as inspirational models go he makes a good choice. I would encourage number 44 to look to Mr. Lincoln even further however, for inspiration in substance as well as form. President Lincoln also governed during very turbulant times in our history. And as he so eloquently put it:

This quote is as relevant today as it was 140 years ago. Most people agree that our current crisis was brought about in great part by horribly irresponsible abuse of debt – by our banks and other financial institutions, by our government, and by the American people (as we argued in Save the World.)

So what are we doing? We are discouraging thrift, taxing the wage payer and spending WAY more than we earn. We, the American people, shoulder a hefty chunk of responsibility for our current mess, but we also seem to know when the party is over and how to make the necessary choices. The household savings rate hit 5% in January according the Department of Commerce, the highest level in almost 14 years. Meanwhile our government is ramping up its deficit spending to the tune of $1,750,000,000,000. Our government “for the people” needs to take a cue “from the people” – they owe it to us.

When people are doing well they travel more, go out to nice dinners, buy new cars. When times are tough we eat in, enjoy “staycations,” and just do the regular maintenance to keep our cars running well a few more years. We seem to understand that discretionary spending is a luxury of strong economic times. Shouldn’t we expect the same of our government?