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As Investors, Understanding Wealth and Income Distribtuion is Important

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As Investors, Understanding Wealth and Income Distribtuion is Important

The following article provides an effective view of the distribution of income and wealth in the United States currently.  A frequently cited key contributing factor to the Great Depression was the disparity in income and wealth in the United States.  At the time, rapid gains in productivity succeeded in creating a bubble of supply that those with money did not have the appetite even though they did have the capital to purchase.  This combined with a number of possibly related factors then aligned to cause rampant deflation, unemployment, etc.

During the course of the new deal and through the years of “the Great Society” led by American Democrats, this spread was effectively reversed to a more even share.

Leading into and after World War II until the early to mid 70s, income redistribution was perhaps the best economic course.  Under those circumstances there weren’t readily avaiable alternate sources of labor.  Therefore, you could push cash down and expect it to return to the U.S. econoomy.  However, in today’s global economy this is more difficult.  A simple re-distrbution strategy even if you believe this should be the goal won’t work when minimum wage increases simply lead to production moving to readily available less expensive production in our global economy.

The attached article shows how this pressure is playing out within our economy.

Wealth, Income, and Power

by G. William Domhoff

September 2005 (updated December 2010)

This document presents details on the wealth and income distributions in the United States, and explains how we use these two distributions as power indicators.

Some of the information may come as a surprise to many people. In fact, I know it will be a surprise and then some, because of a recent study (Norton & Ariely, 2010) showing that most Americans (high income or low income, female or male, young or old, Republican or Democrat) have no idea just how concentrated the wealth distribution actually is. More on that a bit later.

As far as the income distribution, the most amazing numbers on income inequality will come last, showing the dramatic change in the ratio of the average CEO’s paycheck to that of the average factory worker over the past 40 years.

First, though, some definitions. Generally speaking, wealth is the value of everything a person or family owns, minus any debts. However, for purposes of studying the wealth distribution, economists define wealth in terms of marketable assets, such as real estate, stocks, and bonds, leaving aside consumer durables like cars and household items because they are not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale (see Wolff, 2004, p. 4, for a full discussion of these issues). Once the value of all marketable assets is determined, then all debts, such as home mortgages and credit card debts, are subtracted, which yields a person’s net worth. In addition, economists use the concept of financial wealth — also referred to in this document as “non-home wealth” — which is defined as net worth minus net equity in owner-occupied housing. As Wolff (2004, p. 5) explains, “Financial wealth is a more ‘liquid’ concept than marketable wealth, since one’s home is difficult to convert into cash in the short term. It thus reflects the resources that may be immediately available for consumption or various forms of investments.”

We also need to distinguish wealth from income. Income is what people earn from work, but also from dividends, interest, and any rents or royalties that are paid to them on properties they own. In theory, those who own a great deal of wealth may or may not have high incomes, depending on the returns they receive from their wealth, but in reality those at the very top of the wealth distribution usually have the most income. (But it’s important to note that for the rich, most of that income does not come from “working”: in 2008, only 19% of the income reported by the 13,480 individuals or families making over $10 million came from wages and salaries. See Norris, 2010, for more details.)

As you read through these numbers, please keep in mind that they are usually two or three years out of date because it takes time for one set of experts to collect the basic information and make sure it is accurate, and then still more time for another set of experts to analyze it and write their reports. It’s also the case that the infamous housing bubble of the first eight years of the 21st century inflated some of the wealth numbers.

So far there are only tentative projections — based on the price of housing and stock in July 2009 — on the effects of the Great Recession on the wealth distribution. They suggest that average Americans have been hit much harder than wealthy Americans. Edward Wolff, the economist we draw upon the most in this document, concludes that there has been an “astounding” 36.1% drop in the wealth (marketable assets) of the median household since the peak of the housing bubble in 2007. By contrast, the wealth of the top 1% of households dropped by far less: just 11.1%. So as of April 2010, it looks like the wealth distribution is even more unequal than it was in 2007. (See Wolff, 2010 for more details.)

One final general point before turning to the specifics. People who have looked at this document in the past often asked whether progressive taxation reduces some of the income inequality that exists before taxes are paid. The answer: not by much, if we count all of the taxes that people pay, from sales taxes to property taxes to payroll taxes (in other words, not just income taxes). And the top 1% of income earners, who average over $1 million a year, actually pay a smaller percentage of their incomes to taxes than the 9% just below them. These findings are discussed in detail near the end of this document.

The Wealth Distribution

In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households had an even greater share: 42.7%. Table 1 and Figure 1 present further details drawn from the careful work of economist Edward N. Wolff at New York University (2010).

Table 1: Distribution of net worth and financial wealth in the United States, 1983-2007
  Total Net Worth
Top 1 percent Next 19 percent Bottom 80 percent
1983 33.8% 47.5% 18.7%
1989 37.4% 46.2% 16.5%
1992 37.2% 46.6% 16.2%
1995 38.5% 45.4% 16.1%
1998 38.1% 45.3% 16.6%
2001 33.4% 51.0% 15.6%
2004 34.3% 50.3% 15.3%
2007 34.6% 50.5% 15.0%
  Financial Wealth
Top 1 percent Next 19 percent Bottom 80 percent
1983 42.9% 48.4% 8.7%
1989 46.9% 46.5% 6.6%
1992 45.6% 46.7% 7.7%
1995 47.2% 45.9% 7.0%
1998 47.3% 43.6% 9.1%
2001 39.7% 51.5% 8.7%
2004 42.2% 50.3% 7.5%
2007 42.7% 50.3% 7.0%
Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds.

Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2004, 2007, & 2010).

Figure 1: Net worth and financial wealth distribution in the U.S. in 2007


In terms of types of financial wealth, the top one percent of households have 38.3% of all privately held stock, 60.6% of financial securities, and 62.4% of business equity. The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.

Table 2: Wealth distribution by type of asset, 2007
  Investment Assets
Top 1 percent Next 9 percent Bottom 90 percent
Business equity 62.4% 30.9% 6.7%
Financial securities 60.6% 37.9% 1.5%
Trusts 38.9% 40.5% 20.6%
Stocks and mutual funds 38.3% 42.9% 18.8%
Non-home real estate 28.3% 48.6% 23.1%
TOTAL investment assets 49.7% 38.1% 12.2%
  Housing, Liquid Assets, Pension Assets, and Debt
Top 1 percent Next 9 percent Bottom 90 percent
Deposits 20.2% 37.5% 42.3%
Pension accounts 14.4% 44.8% 40.8%
Life insurance 22.0% 32.9% 45.1%
Principal residence 9.4% 29.2% 61.5%
TOTAL other assets 12.0% 33.8% 54.2%
Debt 5.4% 21.3% 73.4%
From Wolff (2010).
Figure 2a: Wealth distribution by type of asset, 2007: investment assets
Figure 2b: Wealth distribution by type of asset, 2007: other assets


Inheritance and estate taxes

Figures on inheritance tell much the same story. According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000. On the other hand, 91.9% receive nothing (Kotlikoff & Gokhale, 2000). Thus, the attempt by ultra-conservatives to eliminate inheritance taxes — which they always call “death taxes” for P.R. reasons — would take a huge bite out of government revenues (an estimated $1 trillion between 2012 and 2022) for the benefit of the heirs of the mere 0.6% of Americans whose death would lead to the payment of any estate taxes whatsoever (Citizens for Tax Justice, 2010).

It is noteworthy that some of the richest people in the country oppose this ultra-conservative initiative, suggesting that this effort is driven by anti-government ideology. In other words, few of the ultra-conservative and libertarian activists behind the effort will benefit from it in any material way. However, a study (Kenny et al., 2006) of the financial support for eliminating inheritance taxes discovered that 18 super-rich families (mostly Republican financial donors, but a few who support Democrats) provide the anti-government activists with most of the money for this effort. (For more infomation, including the names of the major donors, download the article from United For a Fair Economy’s Web site.)

Actually, ultra-conservatives and their wealthy financial backers may not have to bother to eliminate what remains of inheritance taxes at the federal level. The rich already have a new way to avoid inheritance taxes forever — for generations and generations — thanks to bankers. After Congress passed a reform in 1986 making it impossible for a “trust” to skip a generation before paying inheritance taxes, bankers convinced legislatures in many states to eliminate their “rules against perpetuities,” which means that trust funds set up in those states can exist in perpetuity, thereby allowing the trust funds to own new businesses, houses, and much else for descendants of rich people, and even to allow the beneficiaries to avoid payments to creditors when in personal debt or sued for causing accidents and injuries. About $100 billion in trust funds has flowed into those states so far. You can read the details on these “dynasty trusts” (which could be the basis for an even more solidified “American aristocracy”) in a New York Times opinion piece published in July 2010 by Boston College law professor Roy Madoff, who also has a book on this and other new tricks: Immortality and the Law: The Rising Power of the American Dead (Yale University Press, 2010).

Home ownership & wealth

For the vast majority of Americans, their homes are by far the most significant wealth they possess. Figure 3 comes from the Federal Reserve Board’s Survey of Consumer Finances (via Wolff, 2010) and compares the median income, total wealth (net worth, which is marketable assets minus debt), and non-home wealth (which earlier we called financial wealth) of White, Black, and Hispanic households in the U.S.

Figure 3: Income and wealth by race in the U.S.


Besides illustrating the significance of home ownership as a source of wealth, the graph also shows that Black and Latino households are faring significantly worse overall, whether we are talking about income or net worth. In 2007, the average white household had 15 times as much total wealth as the average African-American or Latino household. If we exclude home equity from the calculations and consider only financial wealth, the ratios are in the neighborhood of 100:1. Extrapolating from these figures, we see that 70% of white families’ wealth is in the form of their principal residence; for Blacks and Hispanics, the figures are 95% and 96%, respectively.

And for all Americans, things are getting worse: as the projections to July 2009 by Wolff (2010) make clear, the last few years have seen a huge loss in housing wealth for most families, making the gap between the rich and the rest of America even greater, and increasing the number of households with no marketable assets from 18.6% to 24.1%.

Do Americans know their country’s wealth distribution?

A remarkable study (Norton & Ariely, 2010) reveals that Americans have no idea that the wealth distribution (defined for them in terms of “net worth”) is as concentrated as it is. When shown three pie charts representing possible wealth distributions, 90% or more of the 5,522 respondents — whatever their gender, age, income level, or party affiliation — thought that the American wealth distribution most resembled one in which the top 20% has about 60% of the wealth. In fact, of course, the top 20% control about 85% of the wealth (refer back to Table 1 and Figure 1 in this document for a more detailed breakdown of the numbers).

Even more striking, they did not come close on the amount of wealth held by the bottom 40% of the population. It’s a number I haven’t even mentioned so far, and it’s shocking: the lowest two quintiles hold just 0.3% of the wealth in the United States. Most people in the survey guessed the figure to be between 8% and 10%, and two dozen academic economists got it wrong too, by guessing about 2% — seven times too high. Those surveyed did have it about right for what the 20% in the middle have; it’s at the top and the bottom that they don’t have any idea of what’s going on.

Americans from all walks of life were also united in their vision of what the “ideal” wealth distribution would be, which may come as an even bigger surprise than their shared misinformation on the actual wealth distribution. They said that the ideal wealth distribution would be one in which the top 20% owned between 30 and 40 percent of the privately held wealth, which is a far cry from the 85 percent that the top 20% actually own. They also said that the bottom 40% — that’s 120 million Americans — should have between 25% and 30%, not the mere 8% to 10% they thought this group had, and far above the 0.3% they actually had. In fact, there’s no country in the world that has a wealth distribution close to what Americans think is ideal when it comes to fairness. So maybe Americans are much more egalitarian than most of them realize about each other, at least in principle and before the rat race begins.

Figure 4, reproduced with permission from Norton & Ariely’s article in Perspectives on Psychological Science, shows the actual wealth distribution, along with the survey respondents’ estimated and ideal distributions, in graphic form.

Figure 4: The actual United States wealth distribution plotted against the estimated and ideal distributions.
Note: In the “Actual” line, the bottom two quintiles are not visible because the lowest quintile owns just 0.1% of all wealth, and the second-lowest quintile owns 0.2%.
Source: Norton & Ariely, 2010.


David Cay Johnston, a retired tax reporter for the New York Times, published an excellent summary of Norton & Ariely’s findings (Johnston, 2010b; you can download the article from Johnston’s Web site).

Historical context

Numerous studies show that the wealth distribution has been extremely concentrated throughout American history, with the top 1% already owning 40-50% in large port cities like Boston, New York, and Charleston in the 19th century. It was very stable over the course of the 20th century, although there were small declines in the aftermath of the New Deal and World II, when most people were working and could save a little money. There were progressive income tax rates, too, which took some money from the rich to help with government services.

Then there was a further decline, or flattening, in the 1970s, but this time in good part due to a fall in stock prices, meaning that the rich lost some of the value in their stocks. By the late 1980s, however, the wealth distribution was almost as concentrated as it had been in 1929, when the top 1% had 44.2% of all wealth. It has continued to edge up since that time, with a slight decline from 1998 to 2001, before the economy crashed in the late 2000s and little people got pushed down again. Table 3 and Figure 5 present the details from 1922 through 2007.

Table 3: Share of wealth held by the Bottom 99% and Top 1% in the United States, 1922-2007.
  Bottom 99 percent Top 1 percent
1922 63.3% 36.7%
1929 55.8% 44.2%
1933 66.7% 33.3%
1939 63.6% 36.4%
1945 70.2% 29.8%
1949 72.9% 27.1%
1953 68.8% 31.2%
1962 68.2% 31.8%
1965 65.6% 34.4%
1969 68.9% 31.1%
1972 70.9% 29.1%
1976 80.1% 19.9%
1979 79.5% 20.5%
1981 75.2% 24.8%
1983 69.1% 30.9%
1986 68.1% 31.9%
1989 64.3% 35.7%
1992 62.8% 37.2%
1995 61.5% 38.5%
1998 61.9% 38.1%
2001 66.6% 33.4%
2004 65.7% 34.3%
2007 65.4% 34.6%
Sources: 1922-1989 data from Wolff (1996). 1992-2007 data from Wolff (2010).
Figure 5: Share of wealth held by the Bottom 99% and Top 1% in the United States, 1922-2007.


Here are some dramatic facts that sum up how the wealth distribution became even more concentrated between 1983 and 2004, in good part due to the tax cuts for the wealthy and the defeat of labor unions: Of all the new financial wealth created by the American economy in that 21-year-period, fully 42% of it went to the top 1%. A whopping 94% went to the top 20%, which of course means that the bottom 80% received only 6% of all the new financial wealth generated in the United States during the ’80s, ’90s, and early 2000s (Wolff, 2007).

The rest of the world

Thanks to a 2006 study by the World Institute for Development Economics Research — using statistics for the year 2000 — we now have information on the wealth distribution for the world as a whole, which can be compared to the United States and other well-off countries. The authors of the report admit that the quality of the information available on many countries is very spotty and probably off by several percentage points, but they compensate for this problem with very sophisticated statistical methods and the use of different sets of data. With those caveats in mind, we can still safely say that the top 10% of the world’s adults control about 85% of global household wealth — defined very broadly as all assets (not just financial assets), minus debts. That compares with a figure of 69.8% for the top 10% for the United States. The only industrialized democracy with a higher concentration of wealth in the top 10% than the United States is Switzerland at 71.3%. For the figures for several other Northern European countries and Canada, all of which are based on high-quality data, see Table 4.

Table 4: Percentage of wealth held in 2000 by the Top 10% of the adult population in various Western countries
  wealth owned
by top 10%
Switzerland 71.3%
United States 69.8%
Denmark 65.0%
France 61.0%
Sweden 58.6%
UK 56.0%
Canada 53.0%
Norway 50.5%
Germany 44.4%
Finland 42.3%


The Relationship Between Wealth and Power

What’s the relationship between wealth and power? To avoid confusion, let’s be sure we understand they are two different issues. Wealth, as I’ve said, refers to the value of everything people own, minus what they owe, but the focus is on “marketable assets” for purposes of economic and power studies. Power, as explained elsewhere on this site, has to do with the ability (or call it capacity) to realize wishes, or reach goals, which amounts to the same thing, even in the face of opposition (Russell, 1938; Wrong, 1995). Some definitions refine this point to say that power involves Person A or Group A affecting Person B or Group B “in a manner contrary to B’s interests,” which then necessitates a discussion of “interests,” and quickly leads into the realm of philosophy (Lukes, 2005, p. 30). Leaving those discussions for the philosophers, at least for now, how do the concepts of wealth and power relate?

First, wealth can be seen as a “resource” that is very useful in exercising power. That’s obvious when we think of donations to political parties, payments to lobbyists, and grants to experts who are employed to think up new policies beneficial to the wealthy. Wealth also can be useful in shaping the general social environment to the benefit of the wealthy, whether through hiring public relations firms or donating money for universities, museums, music halls, and art galleries.

Second, certain kinds of wealth, such as stock ownership, can be used to control corporations, which of course have a major impact on how the society functions. Tables 5a and 5b show what the distribution of stock ownership looks like. Note how the top one percent’s share of stock equity increased (and the bottom 80 percent’s share decreased) between 2001 and 2007.

Table 5a: Concentration of stock ownership in the United States, 2001-2007
  Percent of all stock owned:
Wealth class 2001 2004 2007
Top 1% 33.5% 36.7% 38.3%
Next 19% 55.8% 53.9% 52.8%
Bottom 80% 10.7% 9.4% 8.9%
Table 5b: Amount of stock owned by various wealth classes in the U.S., 2007
  Percent of households owning stocks worth:
Wealth class $0 (no stocks) $1-$10,000 More than $10,000
Top 1% 7.4% 4.2% 88.4%
95-99% 7.8% 2.7% 89.5%
90-95% 13.2% 5.4% 81.4%
80-90% 17.9% 10.9% 71.2%
60-80% 34.6% 18.3% 47.1%
40-60% 52.3% 25.6% 22.1%
20-40% 69.7% 21.6% 8.7%
Bottom 20% 84.7% 14.3% 2.0%
TOTAL 50.9% 17.5% 31.6%
Both tables’ data from Wolff (2007 & 2010).  Includes direct ownership of stock shares and indirect ownership through mutual funds, trusts, and IRAs, Keogh plans, 401(k) plans, and other retirement accounts. All figures are in 2007 dollars.

Third, just as wealth can lead to power, so too can power lead to wealth. Those who control a government can use their position to feather their own nests, whether that means a favorable land deal for relatives at the local level or a huge federal government contract for a new corporation run by friends who will hire you when you leave government. If we take a larger historical sweep and look cross-nationally, we are well aware that the leaders of conquering armies often grab enormous wealth, and that some religious leaders use their positions to acquire wealth.

There’s a fourth way that wealth and power relate. For research purposes, the wealth distribution can be seen as the main “value distribution” within the general power indicator I call “who benefits.” What follows in the next three paragraphs is a little long-winded, I realize, but it needs to be said because some social scientists — primarily pluralists — argue that who wins and who loses in a variety of policy conflicts is the only valid power indicator (Dahl, 1957, 1958; Polsby, 1980). And philosophical discussions don’t even mention wealth or other power indicators (Lukes, 2005). (If you have heard it all before, or can do without it, feel free to skip ahead to the last paragraph of this section)

Here’s the argument: if we assume that most people would like to have as great a share as possible of the things that are valued in the society, then we can infer that those who have the most goodies are the most powerful. Although some value distributions may be unintended outcomes that do not really reflect power, as pluralists are quick to tell us, the general distribution of valued experiences and objects within a society still can be viewed as the most publicly visible and stable outcome of the operation of power.

In American society, for example, wealth and well-being are highly valued. People seek to own property, to have high incomes, to have interesting and safe jobs, to enjoy the finest in travel and leisure, and to live long and healthy lives. All of these “values” are unequally distributed, and all may be utilized as power indicators. However, the primary focus with this type of power indicator is on the wealth distribution sketched out in the previous section.

The argument for using the wealth distribution as a power indicator is strengthened by studies showing that such distributions vary historically and from country to country, depending upon the relative strength of rival political parties and trade unions, with the United States having the most highly concentrated wealth distribution of any Western democracy except Switzerland. For example, in a study based on 18 Western democracies, strong trade unions and successful social democratic parties correlated with greater equality in the income distribution and a higher level of welfare spending (Stephens, 1979).

And now we have arrived at the point I want to make. If the top 1% of households have 30-35% of the wealth, that’s 30 to 35 times what we would expect by chance, and so we infer they must be powerful. And then we set out to see if the same set of households scores high on other power indicators (it does). Next we study how that power operates, which is what most articles on this site are about. Furthermore, if the top 20% have 84% of the wealth (and recall that 10% have 85% to 90% of the stocks, bonds, trust funds, and business equity), that means that the United States is a power pyramid. It’s tough for the bottom 80% — maybe even the bottom 90% — to get organized and exercise much power.

Income and Power

The income distribution also can be used as a power indicator. As Table 6 shows, it is not as concentrated as the wealth distribution, but the top 1% of income earners did receive 17% of all income in the year 2003 and 21.3% in 2006. That’s up from 12.8% for the top 1% in 1982, which is quite a jump, and it parallels what is happening with the wealth distribution. This is further support for the inference that the power of the corporate community and the upper class have been increasing in recent decades.

Table 6: Distribution of income in the United States, 1982-2006
Top 1 percent Next 19 percent Bottom 80 percent
1982 12.8% 39.1% 48.1%
1988 16.6% 38.9% 44.5%
1991 15.7% 40.7% 43.7%
1994 14.4% 40.8% 44.9%
1997 16.6% 39.6% 43.8%
2000 20.0% 38.7% 41.4%
2003 17.0% 40.8% 42.2%
2006 21.3% 40.1% 38.6%
From Wolff (2010).


The rising concentration of income can be seen in a special New York Times analysis by David Cay Johnston of an Internal Revenue Service report on income in 2004. Although overall income had grown by 27% since 1979, 33% of the gains went to the top 1%. Meanwhile, the bottom 60% were making less: about 95 cents for each dollar they made in 1979. The next 20% – those between the 60th and 80th rungs of the income ladder — made $1.02 for each dollar they earned in 1979. Furthermore, Johnston concludes that only the top 5% made significant gains ($1.53 for each 1979 dollar). Most amazing of all, the top 0.1% — that’s one-tenth of one percent — had more combined pre-tax income than the poorest 120 million people (Johnston, 2006).

But the increase in what is going to the few at the top did not level off, even with all that. As of 2007, income inequality in the United States was at an all-time high for the past 95 years, with the top 0.01% — that’s one-hundredth of one percent — receiving 6% of all U.S. wages, which is double what it was for that tiny slice in 2000; the top 10% received 49.7%, the highest since 1917 (Saez, 2009). However, in an analysis of 2008 tax returns for the top 0.2% — that is, those whose income tax returns reported $1,000,000 or more in income (mostly from individuals, but nearly a third from couples) — it was found that they received 13% of all income, down slightly from 16.1% in 2007 due to the decline in payoffs from financial assets (Norris, 2010).

And the rate of increase is even higher for the very richest of the rich: the top 400 income earners in the United States. According to another analysis by Johnston (2010a), the average income of the top 400 tripled during the Clinton Administration and doubled during the first seven years of the Bush Administration. So by 2007, the top 400 averaged $344.8 million per person, up 31% from an average of $263.3 million just one year earlier. (For another recent revealing study by Johnston, read “Is Our Tax System Helping Us Create Wealth?“).

How are these huge gains possible for the top 400? It’s due to cuts in the tax rates on capital gains and dividends, which were down to a mere 15% in 2007 thanks to the tax cuts proposed by the Bush Administration and passed by Congress in 2003. Since almost 75% of the income for the top 400 comes from capital gains and dividends, it’s not hard to see why tax cuts on income sources available to only a tiny percent of Americans mattered greatly for the high-earning few. Overall, the effective tax rate on high incomes fell by 7% during the Clinton presidency and 6% in the Bush era, so the top 400 had a tax rate of 20% or less in 2007, far lower than the marginal tax rate of 35% that the highest income earners (over $372,650) supposedly pay. It’s also worth noting that only the first $106,800 of a person’s income is taxed for Social Security purposes (as of 2010), so it would clearly be a boon to the Social Security Fund if everyone — not just those making less than $106,800 — paid the Social Security tax on their full incomes.

A key factor behind the high concentration of income, and another likely reason that the concentration has been increasing, can be seen by examining the distribution of all “capital income”: income from capital gains, dividends, interest, and rents. In 2003, just 1% of all households — those with after-tax incomes averaging $701,500 — received 57.5% of all capital income, up from 40% in the early 1990s. On the other hand, the bottom 80% received only 12.6% of capital income, down by nearly half since 1983, when the bottom 80% received 23.5%. Figure 6 and Table 7 provide the details.

Figure 6: Share of capital income earned by top 1% and bottom 80%, 1979-2003 (From Shapiro & Friedman, 2006.)
Table 7: Share of capital income flowing to households in various income categories
  Top 1% Top 5% Top 10% Bottom 80%
1979 37.8% 57.9% 66.7% 23.1%
1981 35.8% 55.4% 64.6% 24.4%
1983 37.6% 55.2% 63.7% 25.1%
1985 39.7% 56.9% 64.9% 24.9%
1987 36.7% 55.3% 64.0% 25.6%
1989 39.1% 57.4% 66.0% 23.5%
1991 38.3% 56.2% 64.7% 23.9%
1993 42.2% 60.5% 69.2% 20.7%
1995 43.2% 61.5% 70.1% 19.6%
1997 45.7% 64.1% 72.6% 17.5%
1999 47.8% 65.7% 73.8% 17.0%
2001 51.8% 67.8% 74.8% 16.0%
2003 57.5% 73.2% 79.4% 12.6%
Adapted from Shapiro & Friedman (2006).

Another way that income can be used as a power indicator is by comparing average CEO annual pay to average factory worker pay, something that has been done for many years by Business Week and, later, the Associated Press. The ratio of CEO pay to factory worker pay rose from 42:1 in 1960 to as high as 531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing in big stock options. It was at 411:1 in 2005 and 344:1 in 2007, according to research by United for a Fair Economy. By way of comparison, the same ratio is about 25:1 in Europe. The changes in the American ratio from 1960 to 2007 are displayed in Figure 7, which is based on data from several hundred of the largest corporations.

Figure 7: CEOs’ pay as a multiple of the average worker’s pay, 1960-2007
Source: Executive Excess 2008, the 15th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy.

It’s even more revealing to compare the actual rates of increase of the salaries of CEOs and ordinary workers; from 1990 to 2005, CEOs’ pay increased almost 300% (adjusted for inflation), while production workers gained a scant 4.3%. The purchasing power of the federal minimum wage actually declined by 9.3%, when inflation is taken into account. These startling results are illustrated in Figure 8.

Figure 8: CEOs’ average pay, production workers’ average pay, the S&P 500 Index, corporate profits, and the federal minimum wage, 1990-2005 (all figures adjusted for inflation)
Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy.


Although some of the information I’ve relied upon to create this section on executives’ vs. workers’ pay is a few years old now, the AFL/CIO provides up-to-date information on CEO salaries at their Web site. There, you can learn that the median compensation for CEO’s in all industries as of early 2010 is $3.9 million; it’s $10.6 million for the companies listed in Standard and Poor’s 500, and $19.8 million for the companies listed in the Dow-Jones Industrial Average. Since the median worker’s pay is about $36,000, then you can quickly calculate that CEOs in general make 100 times as much as the workers, that CEO’s of S&P 500 firms make almost 300 times as much, and that CEOs at the Dow-Jones companies make 550 times as much.

If you wonder how such a large gap could develop, the proximate, or most immediate, factor involves the way in which CEOs now are able to rig things so that the board of directors, which they help select — and which includes some fellow CEOs on whose boards they sit — gives them the pay they want. The trick is in hiring outside experts, called “compensation consultants,” who give the process a thin veneer of economic respectability.

The process has been explained in detail by a retired CEO of DuPont, Edgar S. Woolard, Jr., who is now chair of the New York Stock Exchange’s executive compensation committee. His experience suggests that he knows whereof he speaks, and he speaks because he’s concerned that corporate leaders are losing respect in the public mind. He says that the business page chatter about CEO salaries being set by the competition for their services in the executive labor market is “bull.” As to the claim that CEOs deserve ever higher salaries because they “create wealth,” he describes that rationale as a “joke,” says the New York Times (Morgenson, 2005, Section 3, p. 1).

Here’s how it works, according to Woolard:

The compensation committee [of the board of directors] talks to an outside consultant who has surveys you could drive a truck through and pay anything you want to pay, to be perfectly honest. The outside consultant talks to the human resources vice president, who talks to the CEO. The CEO says what he’d like to receive. It gets to the human resources person who tells the outside consultant. And it pretty well works out that the CEO gets what he’s implied he thinks he deserves, so he will be respected by his peers. (Morgenson, 2005.)

The board of directors buys into what the CEO asks for because the outside consultant is an “expert” on such matters. Furthermore, handing out only modest salary increases might give the wrong impression about how highly the board values the CEO. And if someone on the board should object, there are the three or four CEOs from other companies who will make sure it happens. It is a process with a built-in escalator.

As for why the consultants go along with this scam, they know which side their bread is buttered on. They realize the CEO has a big say-so on whether or not they are hired again. So they suggest a package of salaries, stock options and other goodies that they think will please the CEO, and they, too, get rich in the process. And certainly the top executives just below the CEO don’t mind hearing about the boss’s raise. They know it will mean pay increases for them, too. (For an excellent detailed article on the main consulting firm that helps CEOs and other corporate executives raise their pay, check out the New York Times article entitled “America’s Corporate Pay Pal”, which supports everything Woolard of DuPont claims and adds new information.)

There’s a much deeper power story that underlies the self-dealing and mutual back-scratching by CEOs now carried out through interlocking directorates and seemingly independent outside consultants. It probably involves several factors. At the least, on the worker side, it reflects an increasing lack of power following the all-out attack on unions in the 1960s and 1970s, which is explained in detail by the best expert on recent American labor history, James Gross (1995), a labor and industrial relations professor at Cornell. That decline in union power made possible and was increased by both outsourcing at home and the movement of production to developing countries, which were facilitated by the break-up of the New Deal coalition and the rise of the New Right (Domhoff, 1990, Chapter 10). It signals the shift of the United States from a high-wage to a low-wage economy, with professionals protected by the fact that foreign-trained doctors and lawyers aren’t allowed to compete with their American counterparts in the direct way that low-wage foreign-born workers are.

On the other side of the class divide, the rise in CEO pay may reflect the increasing power of chief executives as compared to major owners and stockholders in general, not just their increasing power over workers. CEOs may now be the center of gravity in the corporate community and the power elite, displacing the leaders in wealthy owning families (e.g., the second and third generations of the Walton family, the owners of Wal-Mart). True enough, the CEOs are sometimes ousted by their generally go-along boards of directors, but they are able to make hay and throw their weight around during the time they are king of the mountain. (It’s really not much different than that old children’s game, except it’s played out in profit-oriented bureaucratic hierarchies, with no other sector of society, like government, willing or able to restrain the winners.)

The claims made in the previous paragraph need much further investigation. But they demonstrate the ideas and research directions that are suggested by looking at the wealth and income distributions as indicators of power.

Where is the 2011 multifamily market and residential rental market going in 2010

Its the time of year to take a swing at trends.  Perhaps this attempted look in the crystal ball will be useful to you.

Rental ownership cements its market position as the place to be for investors.  This is especially true for existing stock.  The pressure on commodities will create a value enhancing rental spiral that will not be offset by the glut of foreclosures.

  1. Rates begin moving upward slowly at first and likely accelerating toward year end.
  2. The dollar stiffens and begins rising slowly against major global trading partners inspite of the unprecedented cash inflows of QE2 and the year end tax agreement.
  3. Chinese, Brazilian, Indian Currencies rise creating import inflation.
  4. U.S. based manufacturing continues to strengthen.  By year end 2010, markets begin to recognize the U.S. faces steadily improving long term manufacturing pressures created by a weakened union environment, strengthening markets abroad compared to developing markets, and improved competitiveness of the U.S. labor force.
  5. The accelerating global economy creates further inflation pressure.
  6. Wage inflation remains muted throughout the year because of the huge glut of unemployed.
  7. Energy prices rise sharply through mid year and flatten perhaps for the long term as substitutes begin to slowly erode demand growth globally as supplies catch up because of increased commodity pricing.
  8. The U.S. economy accelerates to 200,000 new jobs per month by year end and possibly on average for the year.
  9. New home construction adds 500,000 to 600,000 units of all types.
  10. Foreclosures easily exceed 1,000,000 units.
  11. Consumers continue cutting debt of all types driven by tighter (but possibly easing) lending requirements for all installment purchases and loans.  On a percentage basis debt levels fall.
  12. Consumer debt totals begin to rise at a low rate as a result of more people with more money (fall out from increased hiring).
  13. The rental market strengthens systemically as development decisions face a decade or more of constraint ahead.
  14. In the U.S. and globally, central city / employment centered housing is a winner in a world of increasing commodity and energy prices.  Fitting more people into existing stock is a winner for investors and renters for the foreseeable future.

Some Consumer Credit Info You May Find Useful

November 19th, 2010

3 Big Trends In Consumer Credit Right Now

credit trend

Every month, Credit Karma releases a Credit Climate report that is a snapshot of how healthy Americans are with their credit and debt. It’s an interesting look at what is really in consumers’ credit reports. Are we drowning in debt, are consumers still credit-crunching, and is your credit score on par with the national average? Our data gives us a glimpse.

We sliced and diced the data into our most interesting, bite-sized chunks of what the credit climate was like in October. Here are the 3 trends in consumer credit right now that’s peaking our interest.

 1) Consumers Are Shaving Off Some Credit Card Debt

Right before Black Friday and the 2010 holiday shopping sales erupt, consumers have been paying down their debt steadily into October. Since January this year, overall credit card debt dropped 7%, and was an average $7,382 in October. There are some star states, like Oregon, Nevada, and Hawaii, outperforming that pace, paying down balances by more than 10%. Wisconsin is the biggest winner, with credit-savvy consumers decreasing their credit card debt by 28%! We can all take a page out of our fellow Wisconsonians’ book.

 2) Credit Scores Stay At A Spooky Average of 666

Hey consumers, we have work to do. Credit scores have not consistently improved this year, and dropped 3 points since January. In October, national average of credit scores remains a spooky 666.

With this credit score, consumers fit the fair credit score range and will likely get limited financial options and mediocre interest rates. If you fit this credit profile, remember that the difference in rates offered at this credit range could be the difference of thousands of dollars over the life of a loan, so don’t get too comfortable in this poor credit position.

But as consumers seem to be paying down credit card debt, which should help stabilize credit scores (scores have been stuck at 666 for the last 3 months) and, if slashing debt becomes a permanent trend, scores will begin to climb back up in 2011.

 3) Who’s Paying Down Their Debts?

One the one hand, credit card debt, mortgage, and home equity debt has been decreasing from January to October. In addition to credit card debt’s 7% drop, mortgage debt fell 3% and home equity fell about 1%. On the other hand, auto loans and student debt has been climbing since the beginning of the year, with a 3% and 8% jump respectively.

This can mean several things. Credit card, mortgage, and home equity debt may be dropping because there are more charge-offs and delinquencies that issuers are writing off their balance sheets—not a good sign for consumers. Mortgages could also be falling because new mortgages are cheaper since home prices are declining. Auto loan debt may be increasing slightly because more and more consumers are buying last inventory of 2010 car models and becoming more comfortable with big purchases like cars. Student loans might be picking up because so many 20-somethings are hard pressed to find stable employment to pay back loans, or are going back to school and starting to pick up the tab for it.

credit could keep changing in 2011. Consumers typically binge-spend for the holidays, and it looks like by the way spending is picking up, that it’s going to be a healthy shopping season. In January, consumers start scaling back debt and tightening their financial belts, along with other long-overdue New Year’s resolutions.

Come back next month as we do another temperature check of America’s credit climate.

Renting Units Can Be Challenging… Here’s a Good Way to Think About It.

I’ve experienced challenges in this area as many of our readers probably have at one time or another.  This piece is a good reminder of the right way to fill up units.

Jan 04 2011

GONE FISHING: using the right bait for your apartment prospect

Posted by: Jim Baumgartner on Jan 4, 2011 21:36 Tagged in: Apartment Marketing , Apartment Leasing


I recently had lunch with my friend and professional peer, Laurel Zacher.  We were discussing the key to understanding psychographics when working with site marketing or training of leasing staff.  I have been frustrated by multi housing professionals assuming that every customer shares their likes and dislikes.  I was floundering trying to explain how we have to put our feet in our customers’ shoes. 

She responded by saying, ‘you have to use the bait your fish likes!’ 

I so wish I had said that.

Since I didn’t create the line, I told Laurel that I was going to steal it (she very graciously said it was okay).

Some thoughts on fishing:

1)  What fish are you going after?  Take the time to research who your current customers are.  Early in my career I was asked to fill a building that was less than two years old and had never surpassed 83% occupancy.  The owner was frustrated!  I drove to the site and thought, “You know, this building is 83% full–not 17% vacant!”  (Yes, I know it was 17% vacant–but that wasn’t the important part.)  The key was that 83% of the homes were occupied by people who chose to be there.  I wanted to know why.  We discovered that the vast majority of the residents were from outside of a metro area.  They had to live in the city for economic opportunities; however, they did not want to live in a city.  We immediately began using different bait–’enjoy serenity’ was our theme.  We talked up the natural setting:  wooded hills overlooking a pond.  We pointed out that the buildings were small and you would get to know your neighbors.  It worked. 

2)  Use the right bait!  If you are dealing with seniors, remember that relationship is key.  They want to know and trust you.  Trying to rush them through the selling process will not work.  They really do want to slow down and smell the roses with you.  On the flip side, if you are working with students they don’t care about the roses–tell them where they can find beer and dates (in that order!) On my latest new construction project, we correctly predicted that our customers would be young professionals.  Sadly, my young professional days are behind me so when reviewing marketing materials and ads, I passed them in front of staff members who are in that demographic.  Invariably they chose what I didn’t like; however, that’s what we went with–because we used the bait our fish liked!  (And, by the way, it worked!)  Using the wrong bait is frustrating, a waste of time and can be financially disasterous.

3)  If you don’t understand which bait your customer is hungry for, ask.  It’s okay to pull together a team of up-and-comers together to be your advisory panel.  Tap into their wants and desires.  In the process, you will learn some amazing things and you will develop loyalty and excitement from your posse! 

And lastly–the fish are biting.  Have fun!

Jim Baumgartner is Senior Vice President of RentSoda, a consulting company offering apartment marketing, business & operations consulting as well as industry-specific training.

CNBC Post on Foreclosure Dump – Prelude to a Bargain Opportunity?

The Foreclosure Dump

Published: Thursday, 13 Jan 2011 | 1:24 PM ET
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By: Diana Olick
CNBC Real Estate Reporter

Fuse | Getty Images

It’s coming, no question.

Today’s report from RealtyTrac serves as a warning to big banks, Fannie, Freddie and local communities; The foreclosure glut is coming, and they’d better be ready to get rid of that glut in a big way.

2010 saw a record number of bank repossessions, over a million, even with a big drop in volume toward the end of the year, thanks to the robo-signing scandal and ensuing foreclosure freezes.

“Early indications in January were that this robo-signing related delay will be over by the end of first quarter if not sooner,” says RealtyTrac’s Rick Sharga. “I think we’re going to see a significant spike in foreclosure activity early in 2011, and that will contribute in part to 2011 being a record year.”

Sharga estimates as many as a quarter of a million foreclosures that should have happened in 2010 will now be pushed into the 2011 numbers, and added to an already huge supply of bank owned properties. The four biggest banks already have close to $7 billion worth of foreclosed properties (REO) on their books, and Fannie and Freddie have about $24 billion collectively. While REO sales make up about one third of all sales in the current market, there is an estimated 3 year supply.


There are obviously many incentives to buy REO’s, number one being the price discount, as well as some other programs offered by the government; but there are a lot more downsides.

Just today I read an article in the Wall Street Journal of witches in Salem being hired to remove the negative spirits from foreclosed homes.

Other similar burgeoning businesses include Feng Shui experts, etc.

There’s always somebody ready to profit from distress.

HousingWire today reports on a study by Field Asset Services that finds rehabbed REOs spend five fewer months on the market, 69 days compared to 222 days. Many investors buy foreclosures and do the rehab themselves, but for regular home buyers, clearly having the home renovated, with no sign of the preceding trouble, is a huge added value. Through its Neighborhood stabilization Program, the Department of Housing and Urban Development has provided $7 billion in grants to local governments and nonprofits; that money can be used to rehab foreclosed properties, or, to bulldoze them.

I also know there have been many discussions brewing within the government and at the banks with hedge funds looking to buy up bulk foreclosures. So far no big deals we know of, but they’re coming for sure. The government may even be considering incentives to get more investors to buy foreclosures, which I blogged about last month.

As the numbers mount, the GSE’s and the banks will have to put more resources into unloading these properties, especially as new Spring organic housing supply comes on the market. If they choose to slash prices even more, the dip in overall home prices may fall deeper than expected.

Housing Slow Recovery In the News – Bloomberg

Housing slow progress is old news.  Here is an update from Bloomberg.

Housing’s Anemic Rebound Gives Little Boost to U.S. Economy

By Kathleen M. Howley – Jan 12, 2011 12:01 AM ET 
Housing's Anemic End to Five-Year Slump

A worker runs an electrical cord through a new home under construction in Cary, North Carolina. Photographer: Jim R. Bounds/Bloomberg

Jan. 5 (Bloomberg) — Martin Connor, chief financial officer at Toll Brothers Inc., talks about the outlook for the U.S. housing market. Connor also discusses markets in Las Vegas, Florida and California. He talks with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg)

This may be the year the U.S. housing market starts crawling up from rock bottom. Held back by foreclosures, the pace will be so weak it won’t do much for economic growth.

Home prices probably will start to gain in 2011’s third quarter and rise 0.6 percent for the year, the first annual advance since 2006, according to Fannie Mae, the largest U.S. mortgage buyer. Real residential investment, an inflation- adjusted measure of homebuilding, will increase 9.6 percent in 2011 after five years of declines to a record low, based on the median forecast of 30 economists at a Federal Reserve Bank of Chicago symposium last month.

“There’s a good chance of a housing turnaround this year, but it’s not going to be enough to give much help to the economy,” said Karl Case, co-creator of the S&P/Case-Shiller Index that tracks U.S. home prices. “We’re coming off 50-year lows and we still have to deal with the foreclosure mess.”

Housing demand may be stabilizing after transactions plunged last year. Home sales and construction will rise in every quarter of 2011, according to estimates by the Mortgage Bankers Association, the National Association of Realtors, Fannie Mae and Freddie Mac. Lender delays in pushing through foreclosures may be the biggest challenge to a broader recovery, said Mark Zandi, chief economist for Moody’s Analytics Inc.

Massachusetts Ruling

Bank seizures of homes have tumbled since October, when allegations of flawed affidavits caused lenders including Bank of America Corp. and Ally Financial Inc. to temporarily suspend court actions and review their procedures. Last week, the Massachusetts Supreme Judicial Court upheld a judge’s decision that two foreclosures were invalid because the mortgages were improperly transferred to and from securities.

“The problems that have come to light in the legal process have the potential to cause more foreclosure delays,” Zandi said from West Chester, Pennsylvania. “By the end of this year, the housing crash could be over, or, if we see foreclosures pushed into next year, we might not see a recovery until the end of 2012. It’s very difficult to gauge how it will play out.”

Housing was a driver of economic growth before its collapse led to the worst recession since the 1930s. Residential investment contributed half a percentage point to gross domestic product growth in 2004, an 18-year high that outstripped defense spending, according to Bureau of Economic Analysis data. Last year, inflation-adjusted investment in new homes probably drained 0.17 percentage point from GDP, based on the average of 2010’s first three quarters.

‘Very Small’ Contribution

“The economy probably will see a positive contribution from housing this year, but a very small one,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “Even if construction were to decline further, it would only have a small effect because it is such a small share of the economy at this point.”

Sales of existing homes may reach an annualized pace of 5.23 million by the end of the year, up 10 percent from the current quarter, according to a forecast posted on the website of Washington-based Fannie Mae. Existing home sales probably slid to a 13-year low of 4.82 million in 2010, the company said.

Sales of new homes may have dropped to 321,000, the lowest in Census data going back to 1963, the company said. Final numbers for 2010 come out later this month in separate reports by the Commerce Department and the National Association of Realtors.

Record Affordability

Affordability and a decline in the inventory of homes for sale will boost demand for housing in 2011, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

The National Association of Realtors’ affordability index, a gauge of median income against home prices, reached an all- time high of 184.5 in November. The number of new homes available for sale dropped to a 42-year low in that month, while the inventory of previously owned homes on the market fell to 3.7 million, the third consecutive decline, according to data from the Commerce Department and the Realtors group.

“This may be the year we see the beginning of a normal housing market outside foreclosure-overwhelmed areas,” such as California, Arizona, Nevada and Florida, Naroff said. “That doesn’t mean housing is going to be great, because we’re coming off such low levels.”

Foreclosures may also rise. Bank seizures, including home auctions and so-called short sales of properties in default, probably will reach 2 million this year, up from about 1.7 million in 2010, Zandi said. Prior to October’s moratoriums, he had estimated last year’s foreclosures would total 2 million.

Longer to Bottom

“It’s possible we don’t get as many foreclosure sales this year as I’m anticipating, if more sales are delayed by these problems,” Zandi said. “That means it will take longer for prices to reach a bottom.”

Even with the foreclosure crisis, a real estate recovery may accelerate if the world’s largest economy continues to expand, said Case, the co-founder of the home-price index and professor emeritus at Wellesley College in Wellesley, Massachusetts. While housing won’t be much help to GDP this year, gains in jobs and income will expand the number of eligible homebuyers and bolster confidence, he said.

Gross domestic product grew at a 2.6 percent rate in the third quarter of 2010, up from 1.7 percent in the prior period. The unemployment rate fell to 9.4 percent in December, the lowest since May 2009, the Labor Department reported last week.

“If the economic recovery keeps going and unemployment keeps improving, it’s a mood changer,” said Case. “It’s possible we could see people get off the fence and get back into the market.”

Mortgage Trends to Consider this Year

This report from MSNBC is interesting:

1. Mortgage rates will slowly rise throughout the year
The Mortgage Bankers Association (MBA) anticipates that rates will rise slightly in 2011, hovering around 5 percent and increasing to about 6 percent in 2012. Holden Lewis of Bankrate wrote this past fall that economists had predicted a rise in mortgage rates by the third quarter of 2010. At the end of 2010, mortgage rates began to climb out of the 4 percent range and slightly above 5 percent. While any increase in mortgage rates is unwelcome to homeowners who want to refinance or to buyers, a 5 percent mortgage rate is still historically in the low range of interest rates.

2. Overall demand for mortgages will decrease
The MBA predicts that total mortgage originations for 2011 will decline to less than $1 trillion, driven by subdued economic growth and a lack of consumer confidence.

3. Mortgage refinancing applications will drop
Mortgage refinancing has represented a large portion of all mortgage applications in any given week this year, with the refinancing applications accounting for about 80 percent of all mortgages written this year. The MBA predicts that refinancing activity will drop below 40 percent of mortgages in 2011 and decline further to 26 percent of mortgages in 2012. Not only will rising mortgage rates reduce the demand for refinancing, but the pool of qualified homeowners will shrink. Homeowners who could qualify are likely to have done so in 2010, and others have difficulty obtaining a loan approval because of reduced equity or credit or income challenges.

4. Mortgage applications for a home purchase will become a greater part of the market
The MBA predicts that stabilizing home prices and modest increases in home sales will increase the number of applications for a mortgage for a home purchase.

5. Jumbo loan mortgages will be more attractive
In 2009 and earlier in 2010, mortgage rates for jumbo loans (loans over $417,000 in most housing markets and above $729,750 in high-cost housing markets) were far higher than mortgage rates for conforming loans. The higher rates prevented homeowners from refinancing and kept some purchasers out of the market for more expensive homes. In the Q4 of 2010, mortgage rates on jumbo loans decreased, which will likely spur refinancing applications and purchase applications for the high-end housing market.

6. All-cash purchases will become a larger part of the market
Lawrence Yun, chief economist of the National Association of Realtors, says that all-cash purchases represented about a quarter of all existing home purchases in the last four months of 2010. He anticipates all-cash purchases to continue to represent a significant portion of the market in 2011.

7. The mortgage loan process will remain slow and complex
Holden Lewis at Bankrate says even if the number of loan applications drops, lenders anticipate that the time between application and closing will continue to take as much as 60 days. In fact, many lenders recommend a loan lock of 60, 75 or even 90 days to ensure that the loan process will be complete within the lock period. One issue is simply the new level of documentation and verification that is required for a loan approval. Another issue that slows refinancing applications is the existence of a second mortgage or a home equity line of credit, which must be re-subordinated to the first loan when refinancing. Getting a lender to agree to keep the home equity loan in the second position can be time-consuming.

The bottom line
While these general mortgage trends may impact the real estate market overall, each homeowner or buyer considering applying for a mortgage should meet with a lender to determine the cost and availability of a loan that meets his or her needs.

Apartments Shine as We Expected

CNBC offers a good synapsis on how the apartment market has unfolded.  Investors can make hay in this area.

One Bright Spark in US Housing — Apartments

Published: Thursday, 6 Jan 2011 | 12:01 AM ET
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By: Diana Olick
CNBC Real Estate Reporter

If there is an upside to the downturn in U.S. housing, it is the recovery of the commercial multi-family market. Apartments are in vogue again, now that home ownership is less than palatable for some and out of reach for so many others.

Apartment Building

Despite the fact that the fourth quarter is usually a weak period for the apartment market, given that most families decide to move and lease new apartments during the second and third quarters when school is out, national apartment vacancies fell by half a percent in the fourth quarter of 2010, from 7.1 percent to 6.6 percent, according to Reis, Inc. Close to 58,000 new units were filled.

The good news is that it appears to be a real trend; this latest drop in the vacancy rate follows one of the sharpest drops on record during the third quarter, on top of the fact that the fourth quarter is usually prone to seasonal weakness.

As a result of this new demand, asking and effective rents each grew by 0.5 percent. It’s also encouraging that effective rent kept pace with asking rent, which means that landlords are having to make fewer concessions. Experts at Reis cite an improving economy and improving sentiment about the labor market. This latest data also appears to prove that the apartment sector bottomed in the fourth quarter of 2009. It is now leading the recovery in commercial real estate, as the office and retail sectors don’t get the boost from the change in housing demand.

Investors may now take a harder look now at real estate investment trusts that specialize in the apartment sector, like Sam Zell’s Chicago-based Equity Residential (EQR), Palo Alto, CA-based Essex Property Trust (ESS), Northern Virginia’s Avalon Bay (AVBPRH), or Denver-based UDR (UDR). Many of these REITs will be looking for bargains to buy, and they will likely find them.


Multi-family continues to outpace all other sectors in loan defaults in commercial mortgage backed securities. The multi-family delinquency rate rose 68 basis points in December to 16.48 percent, according to a new report from Trepp. Despite a loosening in commercial lending recently and attempts to resolve troubled loans, the delinquency numbers continue to go up, which means more properties will be available for distressed prices.

It begs the question, will the recovery in the apartment sector help to bring down these loan delinquencies?

“In the near-term, it probably won’t help much,” notes Ryan Severino, an economist at Reis. “A lot of those CMBS deals were underwritten at the top of the frothy market, before the recession, with very unrealistic expectations about future vacancy rates, rent growth, etc. ”

Severino says the recovery still needs far more time to catch up to where we were before the recession, that is, to the expectations used when those original CMBS deals were underwritten.

2011 – What We Can Expect for the Housing Market

Rates are headed up even as QE2 roles out from the fed.  The hiccups in the foreclosure process combined with the excess demand absorbed by the first time homebuyers tax credit have set the stage for another down leg on the housing market.  In the long run, this must depress rents somewhat in general, but not in all cases.

One exception is inner city multihousing.  Rising fuel prices and new electric car options are making urban living increasingly attractive.  Expect inner city multihousing and even housing sales in general to remain relatively strong in these areas.

If you are a buyer, the stars continue to align in your favor.

Existing Home Sales Are in The Tank for the Long Term

This CNBC Article from December 16 demonstrates the size of the issue and hints at the tenancity the problem exhibits.

Negative Home Equity Is Worse Than You Think

Published: Wednesday, 15 Dec 2010 | 1:12 PM ET
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By: Diana Olick
CNBC Real Estate Reporter
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There was a lot of talk last week about how negative equity, now at 22.5 percent of all homes with mortgages, according to CoreLogic [CLGX  18.08    -0.10  (-0.55%)   ] , will affect the housing recovery. Then mortgage rates popped up to 5 percent overnight, thanks to the 10-year Treasury, and more folks voiced concern over today’s potential home buyer and his or her ability to take advantage of this low-priced housing market.

Tooga | Stone | Getty Images

Owing more on your mortgage than your home is currently worth doesn’t necessarily mean you can’t afford your monthly mortgage payment or that you’re going to go about your day any differently, other than feeling a little financially depressed. While it may make some more likely to walk away or “strategically default,” most won’t.

It does mean that you can’t use your home to pay for anything, like a new car or your kids’ college tuition, and it does mean that you can’t move up to a nicer home without having to take a hit by paying off your mortgage with whatever stash of cash you have. Now here’s the issue: The move-up buyer (which is the market we’re counting on now to get us out of this mess, given that the home buyer tax credit pulled a lot of first-time buyer demand forward to the beginning of 2010). A significant number of move-up buyers, even if not underwater on their mortgages now, may be in a negative equity position when it comes to buying a new home.

Let me just preface that if you happen to be wealthy independent of your home, or a relative just died and left you a sizeable chunk of cash, this doesn’t apply to you. Now here goes. Mortgage expert Mark Hanson makes an excellent point and did some math, which I want to share:

“In order to sell and re-buy, a homeowner must receive enough proceeds from the sale to 1) pay off the mortgage(s), 2) pay a Realtor 5-6 percent and 3) put a 3.5-20 percent down payment on a new vintage loan,” begins Hanson, and those alone may be too financially off-putting in today’s economy for many potential buyers.

“Effective negative-equity is the big weight on housing that has no easy or quick cure,” continues Hanson.

His math:

  • Real effective negative-equity as it pertains to house selling and buying starts at:
  • <9.5% positive equity for FHA repeat buyers (6% Realtor fee + 3.5% down payment)
  • <16% positive equity for Fannie/Freddie repeat buyers (6% Realtor fee + 10% down payment)
  • <26% for Jumbo repeat buyers (6% Realtor fee + 20% down payment)

When lowering Corelogic’s negative equity threshold to 75% on CA mortgages, 53% are effectively underwater.

30 yr fixed 5.19% 5.32%30 yr fixed jumbo 5.57% 5.66%15 yr fixed 4.55% 4.86%15 yr fixed jumbo 4.92% 5.07%5/1 ARM 3.77% 3.38%5/1 jumbo ARM 4.03% 3.45%
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And I would add to Hanson’s logic, that CoreLogic also noted that an additional 2.4 million borrowers are in a “near-negative equity” position, with less than 5 percent equity in their homes. That puts them out of the move-up market as well.

With rising mortgage rates, even if they don’t go much higher, the “effective” negative equity rate of the move-up buyer will impact recovery, slowing sales as more buyers/demand are priced out of the market.

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