Any way, the new purchases are a world bond fund, a TIPs fund, and an emerging markets stock fund. Sadly, they have all been performing very well over the past years, so I am probably in for a pullback, but in the grand scheme of things I don’t care. If they get cheaper I can bring my average cost down by staying balanced, i.e., making additional purchases.

Overall, things are pretty well in-line with the exception of commodities, which I am still underweight. Waiting for a decent pullback has kept me, well, waiting. Here is my current allocation.

** Click picture for more readable version **

So where is the ratio now, after the recent declines in home prices?
Well, 2008 median household income obviously hasn’t been released yet, but I will estimate it at $51k, which is probably generous given the current economy (It was 48,200 in 2006). The NAR released the median house sale price in Q1 2008 as $196k, making the ratio 196/51 = 3.8, still exceedingly high by historical standards.

Banks are suffering huge losses from making bad loans, so it makes sense that they would want the ratio to be back in the 2.8 range to avoid this mess in the future. So assuming income increases at 3% annually (probably too much) and home prices continue at the 5% drop experienced between Q4-2007 and Q1-2008 (probably too fast), the ratio of median home price to median household income will be about 2.8 in Q4-2009. I just don’t understand the people that say the worst is over. I suppose it is possible that incomes might increase at a greater rate than I project (although they are about flat in the last decade) and house prices might simply flatten for a very long time while the ratio gets reverts to some normal level, but that is hardly the makings of a robust, thriving housing market or economy in general.

It has occurred to me that I may have too much time on my hands, as this analysis has very little impact on my life. Oh well. I suppose it can’t hurt to think.

1. They say homes have risen 6% a year over the past 30 years. That’s fine, but this data includes the past 5 years, when things sky-rocketed and has no predictive power of what will happen in the next 30 years. In fact, larger data sets spanning the last 100+ years have shown that home prices barely keep pace with inflation, so if anything it might be expected that many years of sub-inflation growth levels are coming to revert to the mean.

2. Every realtor will tell you that all real estate is local, but they still force these national stats down our throats. I am willing to bet that barren acreage in Texas has not increased much in the past 30 years, whereas New York City has probably grown much faster than the 6% figure quoted. The 6% number means nothing to me.

3. Comparisons to stock market returns like the one on their webpage are ridiculous. Here is the text.

“For example, over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5 percent would return nearly 5 times the stock market return, at $110,300.”

Never a fan of simplicity, I have our emergency funds broken up into 3 different places.
1. ING Direct savings and CDs (the two about to expire)
2. Vanguard Money Market Fund
3. Vanguard Tax-Exempt Bond Fund

So here are my thoughts. At this point there is little reason to put money into the money market fund besides easy access (We can write checks out of the account). It has a negative real interest rate (about 2.5% verses 3+% inflation) and however unlikely a scenario, the principal is not protected by FDIC. So that is out for now.
Grade : C-

ING savings are holding at 3%, but will drop a little if the Fed cuts rates again this week. Again, probably a slightly negative real interest rate, but the principal is protected. A new short-term (6 month) ING CD is a viable option, but at best currently offers near zero real interest rate.
Grade : B

Adding to the tax-exempt bond fund seems to make the most sense. While its behavior is much tamer than stocks, it is still a little volatile for an emergency fund. I have to work to keep this chunk of the emergency fund balanced with the other two for this reason. However, it’s 4% tax-free yield is enough to add its volatility, especially when compared to the alternatives.
Grade : B+

So to help maintain most the stability of the emergency fund assets and generate better-than-inflation interest rates, I think I will go with an even split between ING savings/CDs and the Tax-Exempt Bond fund.

Anyway, the measure was not passed because the two sides could not agree on a speed at which tickets would be issued. Hmmm. How about the speed limit? I was always under the impression that officers let people speed, within reason, because the risks of traffic stops (drivers with concealed weapons, high speed chase, etc.) did not outweigh the reward (a small fine). As far as I can tell a camera does not need to fear anyone and if the speed limit is indeed imposed for safety reasons, then it should be upheld. Yes, I am aware that this post makes me sound 84 years old. I prefer to think it makes me sound like Sergeant Angel from Hot Fuzz because he is sweet as balls.

1. It is not a crisis. You and your entire family do not face the firing squad if you can’t afford the home you are in. People that lose homes through foreclosure are extremely inconvenienced and their credit is justifiably punished, but it’s not the end of the world. If *any* new regulation is needed it would be to disallow a recent foreclosure from preventing someone from renting a house/apartment.

2. The responsible borrowers will pay for the unresponsible in the end. That is why I don’t particularly care what crazy schemes Clinton/Obama propose. Whether it is a genuine taxpayer bailout, a continued Fed-orchestrated debasement of our currency, or continued house price declines due to mass numbers of foreclosures, the responsible will pay.

3. Price declines help everyone looking to move up in house, whether it’s first-time borrowers or someone looking to up-size, so this is actually beneficial for a non-negligible percentage of Americans.

4. I’m not an expert, but I think a decrease in home-equity loan use coupled with stagnating wage growth will eventually be deflationary, as fewer dollars are chasing the same number of goods and services. Someone correct me if this is incorrect.

Hmm, what else? Month one of accelerated car payoff has gone smoothly. Paid an extra $300. Cristin paid off a big chunk of her student loans. High five! Paying off debt is cool, but it’s not quite as exciting to me as seeing a savings account balance grow. However, it’s a better investment at this point to pay off my 5.9% car loan than it is to invest in a 3% savings account, so that is what we will do. Always go by the numbers.

1. Estimate next year’s revenue based on last years and the revenue growth rate of the last few years.
2. Estimate the net margin based on last few years and any trends.
3. Net income (earnings) is net margin multiplied by revenue.
4. Estimate number of shares outstanding based on historical data and any trends. You would think this would be constant, but it rarely is due to stock options, share buybacks, etc.
5. Earnings Per Share (EPS) is net income divided by # of shares.
6. Estimate a low P/E and high P/E using past data. P/E can be thought of as the price the market was willing to pay for each dollar in earnings.
7. Low P/E times EPS estimate is a possible buy price. High P/E times EPS is possible sell price. Somewhere in the middle is fairly valued.

Here is an example using Johnson & Johnson, a stock I own. Data gathered from morningstar.com
1. Revenue: 2007 saw $61.1B, 3-yr average annual growth rate 9%. 2008 estimate = 61.1*(1.09) = $66.6B
2. Net margin: looks pretty stable between 17% and 20%. Call it 18%.
3. Net Income: $66.6B * 18% = $11.99B
4. Share count: Buybacks shrinking share count, estimate 2.85B shares in 2008
5. EPS: $11.99B / 2.85B = $4.21 /share
6. PE Range: Stock has been between 15 and 22 most of last decade
7a. Buy Price: low PE (15) * EPS (4.21) = $63.15
7b. Sell Price: high PE (22) * EPS (4.21) = $92.62
7c. Estimated Fair Value = $77.89

This estimate of fair value is relatively close to the much more sophisticated calculations made by Morningstar ($80 fair value) and S&P ($74). I think in my next post I will detail some of the benefits and drawbacks of using this simplistic approach.