Real Estate Crash Hit Lower-Priced Homes The Hardest

When the housing bubble popped — in 2006, 2007, or 2008, depending on where you were — chances are that the value of your home took a nose dive. But who got hit worse, the top of the market or the bottom?

In an effort to answer this question, Clear Capital, a valuation and analytics firm in Truckee, Calif., (near Lake Tahoe) analyzed the market in terms of “tiers.” Take as a starting point the national peak of the market, that glorious, golden-haze summer of 2006.

At that point, any home that sold for less than $150,000 was in the bottom quarter of properties — what Clear Capital calls a “low-tier” house. Any home that sold for more than $395,000 was in the top quarter of properties — a “top-tier” house. The remaining two in the middle were — of course — “mid-tier.”

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What Clear Capital has found is that not all those layers fell by the same amount. The average mid-tier house fell in value by 41%, while homes in the low tier fell 46.3%. Homes in the top tier, though, have lost only 26.8% of their value since the crash. If you picture a wedding cake with three even layers, what happened is that the bottom layer pancaked more than the other two.

So is this another tale of the rich getting off relatively easy? Maybe not, according to Alex Villacorta, director of research and analytics for Clear Capital.

“You may argue that by percentage, what happened in the top tier is an easier hit to take,” Villacorta notes. “But for people who are a little bit overextended, that’s an absolute hit of $106,000.” The low tier, by contrast, saw valuation suffer by an average of $69,500. The average mid-tier house, for its part, dropped $100,900.

That’s the bad news. The good news is that, according to Villacorta, it looks like all tiers of the market have adjusted to the large numbers of foreclosures and the subsequent resale of those properties by banks. In other words, while your local market may not be great, it’s probably fairly stable. And even if there’s an onrush of more foreclosures — which some analysts predict will happen in 2012 — prices are unlikely to tank.

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That relative stability is due in large part to the rental market. Former homeowners still need to live somewhere, of course, and their demand for rentals has led to the recovery of those low tier homes. Villacorta says investors have been buying empty properties from banks and improving them for renters. The result: The decline in home prices slowed during 2011.

“In terms of our Home Data Index, we see stabilization on a national level,” Villacorta says. “We’ve seen only a 1% drop in prices since January — and no change at all in the past six months.”

The Blackberry Moral (Or: The Trouble With Too Many Options)

We were intrigued but not surprised by a recent article in the New York Times detailing troubles at Research in Motion, maker of the Blackberry. Among several problems facing the Canadian tech company is an overabundance of models; dozens, in fact—so many the company can’t say for sure how many different versions of the once cutting-edge device are actually on the market. This situation is hurting sales, which anyone with a basic knowledge of behavioral economics could have predicted. TMO—Too Many Options—is not just tricky for realizers and other marketers to navigate; it’s harmful to almost everyone’s well-being, financial and otherwise.
One of the core principles of behavioral economics is a concept called “choice conflict,” whereby people become less likely to choose as the number of options they face increases. What’s tricky, of course, is that people are often attracted to wide selections of items and services. In one of the more well-known experiments in all of behavioral economics, conducted by psychologists Sheena Iyengar and Mark Lepper, grocery store shoppers randomly encountered a jelly-tasting table offering one of two selection sets: six kinds of jam, across the taste and price spectrum; or 24 jars, equally diversified. Although shoppers were 40% more likely to stop at the table with 24 varieties on display, those who stopped when there were only six jellies to taste were 10 times more likely to actually buy a jar!
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The lesson here, more often than not, is that we think we want many options in life, but what we really desire is the illusion of choice and a trusted screener—someone (friend, relative, colleague or adviser) or something (an affinity group like AARP or an unbiased evaluator like Consumer Reports) to narrow our choices and help us choose. Not only is there good reason to think that fewer choices will simplify our lives, there’s also considerable evidence to suggest we’ll be happier for the simplicity.
As we detailed in our book, Iyengar and Lepper conducted another shopping experiment, setting up a chocolate-tasting booth that alternated between six options and 30. After making their choice, shoppers were then asked to rate their satisfaction level on a scale of 1 to 10. The result: Those who picked from the smaller selection of chocolates were nearly 15% happier with their choice. With six choices, you can only imagine a few ways that your decision to pick one chocolate over the others might have been “wrong.” But with 30 options, you’re left thinking that however much you like the chocolate you chose, there are 29 possible ways you might have chosen better.
Such self-doubt, conscious or otherwise, is not uncommon. Decades ago, the political scientist-sociologist-economist-psychologist-computer scientist Herbert Simon (a future Nobel Prize winner) began to think about and describe people as being one of two types of decision makers: “maximizers” or “satisficers.” You doubtless know many folks in each camp. Maximizers want to understand everything about a choice before making it. They devote much time, effort and emotion to seeking out and examining options, hoping to make the best possible choice. Satisficers, meanwhile, generally make choices through a combination of the best available information, intuition and advice from smart people they trust.
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There are benefits to each strategy, of course, and some people toggle back and forth between each approach depending on the choice in question. But for many people in many situations, maximizing may not be as virtuous or rewarding as they imagine it to be. Consider a 2001 paper, “Doing Better but Feeling Worse.” In it, Iyengar (along with Columbia University colleague Rachael Wells and Swarthmore psychology professor Barry Schwartz) described an experiment that tracked college seniors through a year of job hunting and subsequent employment. Not surprisingly, students who leaned heavily toward a maximizing approach got jobs that paid more — 20% more, on average — than students who were more satisficing by nature. But satisficers were much happier with their decisions — and they stayed that way throughout their early careers.
Obviously, we’re not advocating a world of severely limited options for consumers. But we are suggesting that those of us who consistently pursue the perfect decision among an ever-increasing set of choices might be heading in the opposite direction from the most satisfying result.

Guru Gaffe: Investors Losing Faith in ‘Bond King’

Andrew Harrer / Bloomberg via Getty Images

For heralded bond fund manager Bill Gross, 2011 was one of his worst years on record.

Bill Gross, a legendary bond fund

Bill Gross, a legendary bond fund manager, is about to close the books on a terrible year for his $241 billion PIMCO Total Return Fund. His missteps underscore the risks of a concentrated investment and in staying too long with a flawed strategy.

Gross is known as the bond king and has been likened to both Peter Lynch and Warren Buffett. That’s how good he’s been at buying and selling bonds over the years. But earlier this year he made a big bet that interest rates would rise, and when rates fell instead his fund began to lag badly.

(MORE: Real Estate Crash Hit Lower-Priced Homes the Hardest)

The fund is up less than 4% this year, about half the gain of the average comparable bond fund in what has been a good year for most bond investors. In the bond world, where yields typically drive returns, such underperformance is epic. Gross ranks in the bottom 10% of bond fund managers this year.

His long-term record remains stellar. But in a what-have-you-done-lately world, investors have begun to exit his fund. Last month, his fund had net outflows of $500 million as the universe of comparable funds enjoyed net inflows of more than $10 billion. Gross likely will record his first calendar year of net outflows when 2011 draws to a close. His fund was launched in 1987.

What went wrong? Gross underestimated the European debt crisis and the punishing effect of last summer’s Congressional wrangling over the debt ceiling. These events eroded confidence in the global economy and sent interest rates plunging. Gross had been positioned for higher rates, evidently thinking that the economy would soon show signs of recovering.

He apologized to his investors for the misread—but not necessarily for the outsized gamble. Indeed, in an effort to get ahead of the next trend he has been loading up on mortgage-related securities that should rise if the Federal Reserve ramps up a program to buy mortgages in an attempt to prop up the U.S. housing market, as some believe the Fed plans to do.

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That’s how Gross earns his millions. He makes bold bets and is right often enough to keep getting more chances. But his misstep this year is eerily reminiscent of another guru gaffe—stock picker Bill Miller’s bad bet on financial shares in 2008, which caused his stock fund to lose 55% of its value and sent loyal investors fleeing from his Legg Mason Value Trust fund. Despite years of outperforming, Miller retired last month with a diminished reputation.

No one is saying it’s time for Gross to hang it up. Gross has said that “the competitive fire burns even hotter.” Odds are he’ll rebound. But Gross’s near-term troubles are one more example of how a concentrated bet (Do you have too much company stock in your 401(k)?) and staying with a flawed strategy too long (Are you saving too little and counting on unrealistic returns?) can damage your portfolio and maybe your retirement dreams.

More Shoppers Hit Dollar Stores for Holiday Gifts

According to a new survey, there are now more chain dollar stores than drugstores in the U.S.

The past few years of economic

The past few years of economic struggle have been a boom time for dollar stores. One study has it that business has been so strong in recent times at dollar stores, they now outnumber drugstores in the U.S. Consumers now rank dollar stores as their second-favorite resource for buying holiday gifts (after online shopping). And now it appears that the group most responsible for dollar stores’ soaring popularity is one you might not expect: wealthy shoppers.
Let’s face it: For many people, when it comes to the piles of presents tucked under Christmas trees and stuffed into stockings, quantity matters at least as much as quality. So it’s no wonder that during the holiday season—recent holiday season especially—everyone looks for creative ways to get more, no matter what the size of the family budget.
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In the same way that business has soared at pawn shops during the holidays, sales at dollar stores are likewise humming along.
One reason why dollar store sales are so strong, according to the Los Angeles Times, is that the chains are doing more than usual to cater to holiday shoppers. Family Dollar, for instance, is stocking 10% more toys this holiday season, compared to 2010, and is also carrying pricier gift items like MP3 players and flip cameras.
In a recent Nielsen survey, consumers named e-retailers as the top category of places to shop for holiday gifts. Holding the #2 spot on the list, though, is the dollar store. The fact that dollar stores are popular with low- and middle-income consumers should come as no surprise, especially given the economy.
(MORE: Shocker! The Rich Expected to Go on Big Shopping Sprees This Holiday Season)
What’s more surprising is that wealthier individuals are also turning to dollar stores in significant numbers. Shoppers with more than $100K of annual income are making 11% more trips to dollar stores since 2008. They’re spending more too, with the average purchase rising by 23%.

Read more: http://moneyland.time.com/2011/12/23/more-shoppers-hit-dollar-stores-for-holiday-gifts/#ixzz1hc2MuQY9