January – March 2011 Quarterly Newsletter

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Oahu’s housing market is showing some improvement at the start of this year. The following statistics reflect first quarter data for 2011 compared to first quarter data for 2010. Sales of Houses: 634/611 (+3.8%); Sales of Condos: 903/846 (+6.7%); Median Sales Price of Houses: $559,000/$591,500 (-5.5%); Median Sales Price of Condos: 903/846 (+6.7%). A link to a 4/8/11 Honolulu Star-Advertiser newspaper article is available at http://tinyurl.com/3z9zg4u The newspaper article provides data for various areas of Oahu comparing March 2011 to March 2010. The article’s use of data for only one month suggests a rather sluggish housing market compared to my use of data for the entire first quarter.

On page #8 of the newsletter is an article on housing that appeared in the February 14th issue of Time. Each market, of course, is unique. The April 1, 20011 issue of The Kiplinger Letter listed Hawaii as one of the ten states that was on the bubble from an economic recovery viewpoint, vulnerable to the latest round of home price declines and the meager demand for construction workers.

Hawaii is one of only ten states that doesn’t tax retirement income, so with our financial problems it might appear to make sense to some residents to do that. Gov. Neil Abercrombie proposed in his state of the state address to tie retirement income to federal AGI (adjusted gross income) starting at $37,500 for single returns and $75,000 for joint returns which set off widespread hoopla. Enclosed is an editorial written by a military retiree.

Over the past couple of years, several people have asked me to send them the newsletter article I wrote on improving your credit score. The entire article is enclosed. Some good news . . . we manage over 400 rental properties and are starting to increase rents on a selected basis.
Taxing Pension Plans
Editorial in 2/10/11 Honolulu – Star Advertiser by Jeff Pace, USAF (Ret) (slightly edited)

Gov. Neil Abercrombie’s proposal to tax pensions is shortsighted and just plain wrong. The proposal is fundamentally unfair. Retirees who make one dollar over the adjusted gross income (AGI) thresholds will find their entire pension taxed. Retirees who make one dollar less will pay nothing. (The governor says Social Security will not be taxed, but last time I looked it was included in the computation of the federal AGI and the draft legislation makes no specific exception for Social Security.)

The pension tax is a big enough tax increase to force higher-earning middleclass people out of the state and discourage them from coming here in the first place. We already have the highest marginal income tax rate in the country. The pension tax will just raise the tax bar higher and, in the long run, be more likely to reduce tax revenues than raise them.

This tax will hit those least able to go back to work — the elderly — with a very large surprise tax increase. People made plans, committed to mortgages, made long-term health provisions based on long-standing state tax policy, which is now going to be changed without warning. Financial obligations don’t just magically go away because a politician suddenly decides a taxpayer has excess income.

This will be a permanent, never-ending tax to address a temporary, recession-induced shortfall. With every recession in our history, tax revenues have fallen, then recovered as the economy regained its footing. In effect, the governor will be using a short-term crisis to increase funding for his post-recession plans. All taxpayers should be concerned about what the next fiscal crisis will bring.

This isn’t just about elderly retirees. Hawaii’s military retirees in their 40s and 50s will now have to think hard about whether or not they can afford to live here. A single person or a two-earner couple with a military pension could easily exceed the AGI threshold. It would be a shame to lose more good citizens, many of them locals, who leave the military and hope to stay here. Is this a way to thank the veterans who have just spent the last decade at war?

The AGI threshold amounts aren’t indexed to inflation. Meaning, as pensions are increased by cost of living allowances, more pensions will cross into tax territory. Soon enough, by the governor’s definition, we will all be “wealthy” enough to bear more taxation.

The governor hasn’t shown he’s serious enough about cutting duplication, waste and unnecessary programs. Nowhere in his piece does he mention cutting state programs or eliminating those that duplicate the city’s. Until he’s done that, new tax revenues will just go into the same old political black hole. Abercrombie misled the voting public about taxes during his campaign and now, he is defining “the wealthy” down to what most consider to be middle class. Where will this mentality take us next? Forty years ago, the state made a deal with retirees. He now proposes to break the promise represented by that tax policy.

This brings us to the key paragraph in his article in the 2/6/11 Star-Advertiser (“Pension tax would end preferential treatment”). Abercrombie’s determination that all retirees are obligated to “service the unfunded liability of the pension funds themselves.” In saying this, he cloaks the mismanagement of state retirement funds and denies the state’s responsibility for the scale of the miscalculation it has made. Shortsighted, cynical, deceptive — these are just a few of the words that come to mind regarding the governor’s position. Any legislators who back this proposal, or any version of it, will rue the day they raised their hands in support.

Sea-Based X-Band Radar

When it comes to the Sea-Based X-Band Radar, Alaska’s loss is Hawaii’s gain. Since the towering ballistic missile defense radar, topped by what looks like a giant golf ball, first arrived here in January 2006, it has become a loyal return visitor, shunning its foul-weather, Aleutian Island homeport so completely that it has never even been moored there.

The 289-foot tall SBX, more appropriately known as the golf ball radar, is mounted on a self-propelled oil-drilling platform. About 85 crewmembers operate the SBX, which is run by Boeing; however, the Missile Defense Agency plans to transfer operations and sustainment responsibility to the Navy late this year.

The SBX has returned to Pearl Harbor 11 times, spending some year and a half in port in Hawaii and becoming an instant tourist attraction each time. Some airline pilots even point it out to passengers on their approach to Honolulu International Airport.

The Missile Defense Agency said it has spent about $59 million for repairs and maintenance on the one-of-a-kind $1 billion missile tracking radar. “When there has been a need to come into port, Pearl Harbor has offered the correct mix of labor and supplies to accomplish needed maintenance and repairs” according to the agency last August.

The phased array radar inside the inflatable dome tracks U.S. and foreign missile tests with 45,000 transmission and receiving elements, each about a foot tall, and is so powerful it can see a baseball 2,500 miles away according to the agency. So far, it hasn’t docked anywhere but in Hawaii. Because of shore personnel and infrastructure requirements, operating from a mooring is not as cost-effective as operating at sea with resupply.

Pressure keeps the 18,000-pound, 120-foot-tall dome inflated. It made of materials similar to Teflon and Kevlar.

The SBX is the principal sensor for ballistic missile defense while a missile is in the midcourse of flight outside the Earth’s atmosphere.

The Shadow Inventory

With all of our foreclosures, short sales, etc., it’s important when analyzing the housing market to account for homes that are not currently on the market for sale but will become available shortly. A buzzword used to describe such homes is “the shadow inventory.” Unfortunately, the shadow inventory means different things to different analysts. Some of the different definitions follow:

1. Homes that have been foreclosed upon by a bank or mortgage company (REO’s) that are not currently listed for sale. Common problems we encounter are title problems caused by failure of the bank or mortgage company to obtain clear title during the foreclosure process and occupancy problems where a tenant or owner refuses to vacate.

2. Homes currently in the foreclosure process as well as homes with delinquent mortgages where foreclosures are imminent.

3. #1 & #2 above plus short sale properties not on the market yet.

4. All three of the above plus homes with modified loans (as they have a large percentage of filings), option-arms about to be reset and lots sitting idle where builders are in trouble.

Improving Your Credit Score

Background: Gone are the days when lenders leaned over backwards to qualify borrowers for mortgages. After all the subprime lending problems, it has become increasingly more difficult for many potential homebuyers to qualify for desired financing. This section of the newsletter will discuss things a borrower can do to improve their credit score. The article is based upon a paper used by Keri Shepherd (808-223-4118), a local loan officer with Prospect Mortgage, who is often used by clients of The Stott Team. At the end of the article is information concerning how to obtain free credit reports. I recently did this and obtained a copy of one of my reports.

Check Your Credit Limit(s): Credit scoring software obviously prefers to see that you pay off the balance on all your credit cards each month. If it is impractical for you to do this, the guidance herein should assist you in being able to improve your score. Make sure your creditors report your credit limits to the credit bureaus. When no limit is reported, credit score software scores the amount as though your current balance is “maxed out.” For example, if you know you have a $10,000 limit on your credit card, make sure that the $10,000 limit appears on the credit report. Otherwise, your score will be damaged as severely as if you were actually carrying a balance of the entire available credit.

Evenly Distribute the Balances You are Carrying: A balance of over 70% of your total credit limit on any card damages your credit score the most. The next level is over 50% of your balance, then over 30%. In order to maximize your score without having to pay down your balances, evenly distribute your credit card balances among all your credit cards, rather than carrying a large balance on one credit card. For example, if you are carrying a $9,000 balance on a credit card with a $10,000 limit and have two other credit cards with a $3,000 and $5,000 limit, transfer your balances so that you have a $1,500 balance on the $3,000 limit card, a $2,500 balance on the $5,000 limit card and a $5,000 balance on the $10,000 limit card. Evenly distributing your balances will enable you to improve your score.

Do Not Close Your Credit Cards: Closing a credit card can hurt your credit score, since doing so affects your debt to available credit ratio. For example, if you owe a total credit card debt of $10,000 and your total available credit is $20,000, you are using 50% of your total credit. If you close a credit card with a $5,000 credit limit, you will reduce your available credit to $15,000 and change your ratio to 67%. There are two caveats to this rule. If an account was opened within the past two years or if you have over six credit cards, an account can usually be safely cancelled. The preferred number of credit cards accounts to maximize your score is three to five, although having more should not significantly damage your score. If a card was opened within the past two years and you have over six cards, you may safely close that account.

Keep Older Credit Cards Active: 15% of your credit score is determined by the age of the credit file. The credit scoring software assumes people who have had credit for a longer time are less at risk of defaulting on payments. Therefore, even if your old credit cards have high interest rates, closing those cards will decrease the average length of time you have had credit. Continue to use the old card at least once every six months to avoid the account being changed to “inactive status.”

Get Rid of Your Past Due Accounts: Within the delinquent accounts on your credit report, is a column called “Past Due.” Credit scoring software penalizes you for keeping accounts past due, so any “Past Dues” destroy a credit score. If you see an amount in this column, pay the creditor the past due amount reported.

Get Rid of Your Collection Accounts: Paying a collection account can actually reduce your score? Here’s why: Credit scoring software reviews credit reports for each account’s “date of last activity” to determine the impact it will have on the overall credit score. When a payment is made on a collection account, collection agencies update credit bureaus to reflect the account status as “Paid Collection.” When this occurs, the date of the last activity becomes more recent. Since the guideline for credit scoring software is the date of last activity, recent payment on a collection account damages your credit score. If you are trying to purchase a property or refinance an existing one and you have a collection account, wait to pay off the collection until you are closing on the loan and pay it through escrow.

Obviously, the best way to resolve this dilemma is to completely pay-off the collection account. If that is not practical, then see if the collection agency will remove all reporting to the credit bureaus. Request a letter from the collector that explicitly states their agreement to delete the account on receipt/clearance of your payment. Not all collection agencies will delete such reporting; however, it is worth the effort to try, for if there is no reference to a collection account in your report, your score will improve.

Get Rid of Your Charge-Offs and Liens: Charge-offs and liens do not affect your credit score when older than 24 months. Therefore, paying an older charge-off or a lien will neither help nor damage your credit score. Charge-offs and liens within the past 24 months severely damage your credit score. Paying the past due balances, in this case, is very important. If you have both charged-off accounts and collection accounts, but limited funds available, pay the past due balances first, then pay the collection agencies that agree to remove all references to credit bureaus second.

Get Rid of Your Late Payments: Contact all creditors that report late payments on your credit report and request a good faith adjustment that remove the late payments reported on your account. Be persistent if they refuse to remove the late penalties and remind them that you have been a good customer that would deeply appreciate their help. Since most creditors receive incoming calls in a call center, if the representative refuses to make a courtesy adjustment on your account, call back and try again with someone else. Persistence and politeness pays off in this scenario. If you are frustrated, rude and unclear with your request, you will be making it very difficult for them to help you.

Obtaining Free Credit Reports

There are advertisements that advertise a “FREE” credit report and then charge you for various services. If you have to provide your credit card number to obtain your credit report, it is probably not going to end up being free. My understanding is that the only place where you can actually get a free credit report is through AnnualCreditReport.com. The site is supported by the three credit reporting bureaus: Experian, Equifax and TransUnion. You are entitled to get one free credit report from each of the three credit reporting bureaus each year.

You can request a report by phone by calling 1-877-322-8228 and going through a simple verification process over the phone. Or, you can request that it be mailed to you by completing a request form that you can download from the website and then mailing it to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

Or, you can do what I recently did and download your report online. Without providing a credit card number, I got my 19-page Experian report within a few minutes. One was enough for me, so I didn’t pull-up and print reports from the other two bureaus.

A Mixed Plate of Talk Story

Governor Neil Abercrombie signed a bill in February making it legal for same-sex and heterosexual couples to enter a civil union. The legislation that goes into effect January 1st opens up business and tourism opportunities for the state and affords members of lesbian, gay, bisexual and transgender (LGBT) communities the right to mark their unions with a legally binding ceremony. For years, a debate has existed in Hawaii as to whether the state should allow same sex marriages. When it appeared several years ago that Hawaii might be the first state to enact a same-sex wedding law, there was a backlash by various Mainland groups that threatened to cancel conventions scheduled for Hawaii. Today, CT, IA, NH, VT, and Washington, DC allow same-sex weddings, domestic partnerships are offered in CA, NV, OR and WA while civil unions are allowed in IL, NJ and HI.

86-year-old Senator Daniel Akaka (D) has announced that he will not seek re-election next year after 14 years in the U.S. House and 21 years in the U.S. Senate. Over the past decade, Akaka has been an advocate of native Hawaiian rights. His bill, known as the Akaka Bill in his honor, would treat Hawaiians the same as American Indians and Alaska natives. The bill has passed the House but repeatedly been stalled in the Senate. It is unlikely the bill will advance prior to Akaka leaving the Senate. The leading Republican candidate for Akaka’s Senate seat will likely be former two-term Governor Linda Lingle. There are a number of Democratic candidates but no consensus leader at this time with the fundraising ability and overall appeal of Lingle. The Democratic hopefuls, in no order of importance, are newly elected Congresswoman Colleen Hanabusa, Gov. Neil Abercrombie, Lt. Gov. Brian Schatz, U.S. Rep Mazie Hirono, former Honolulu mayor Mufi Hannemann, and former U.S. Rep Ed Case. The Senate race will likely draw national interest and funding.

The New York Times asked the Gallup-Healthways Well-Being Index to come up with a statistical composite for the happiest person in America. Their result would be a tall, Asian-American, observant Jew who is at least 65 and married, has children, lives in Hawaii, runs his own business and has a household income of more than $125,000 a year. Finding the person was relatively easy as there are only a handful of Asian-American men who practice Judaism at one of the three Jewish synagogues on Oahu. Alvin Wong (69), a Chinese-American who converted to Judaism, lives in Manoa and meets all the Gallup criteria except height. He is the founder of two health care management businesses and in the process of starting a non-profit group devoted to sharing resources to cancer patients and their families. His wife, Trudy, sits on the board of the Friends of the East-West Center. They have been hosting East-West Center scholars for years and have been deluged with worldwide e-mails since the article appeared in the Times.

Astronomers will be able to peer farther into space and back in time, reaching fairly close to the “big bang” that started the universe, under a plan that would add the 14th and biggest telescope to date atop Mauna Kea on the Big Island. The Thirty Meter Telescope Observatory or TMT as it is called would be among a new class of big telescopes that can see farther than ever into the cosmos. TMT is based in Pasadena, CA and supported by various universities and astronomical organizations in the U.S., Canada, Japan, China, and India. TNT states that the planned 184-foot-tall Mauna Kea telescope should be able to get pictures 10 times clearer than the Hubble Space Telescope and be able to see 23 billion light-years in the past to within about 400 million years after the big bang. Construction could start as early as 2012, take eight years and employ 300 local construction workers and about 140 full-time operators, most working at the TMT headquarters in Hilo. The 30-meter mirror would provide nine times the image collecting area of the twin ten-meter Keck telescopes on Mauna Kea . . . An analysis of state worker employment shows Hawaii leads the nation in the ratio of state-to-private-sector jobs. Hawaii’s average was more than three times the nationwide rate at 15.1.

The state now has a 40-second greeting in Hawaiian at Honolulu International Airport that is repeated every 30 minutes. Translated, the message means, “Welcome to the Honolulu International Airport. If you’re headed out, be safe and come back soon. Kamaaina . . . welcome home. And, if you’ve just arrived . . . we hope that you enjoy your stay in our islands.”

After three years of planning, Target Corp. will begin construction this spring on a 130,000-square-foot store in Kailua. In January, Kaneohe Ranch sold the 311,000-square-foot Don Quijote site to Target despite opposition among a vocal group of residents who fear the big-box giant will change Kailua’s small-time charm, bring more people into the quiet neighborhood and cause further traffic congestion. The Kailua store will be smaller than Target’s four other Hawaii stores and is designed specifically for Kailua according to a Target spokesperson.

Hawaii has relatively low levels of gun ownership and firearms-related fatalities. The Washington-based Violence Policy Center said that in 2007, Hawaii had a gun death rate of 2.82 per 100,000 residents, the lowest in the country. Hawaii also ranked last in 2007 in gun ownership, with only 9.7% of Hawaii homes having one or more guns. However, ownership of guns in Hawaii has climbed over the past five years. 2006: 6,527; 2007: 7,317; 2008: 9,018; 2009: 13,182; 2010: 10,952. The huge jump in 2009 was caused by fears that President Obama would crack down on gun ownership in his first year in office. The Glock-19 semiautomatic pistol allegedly used by Jared Loughner in Tucson is legal in Hawaii; however, Hawaii limits the sale of high capacity magazines such as the one carried by Loughner to ten rounds; his apparently carried 33 rounds.

The Hawaii Convention Center has been awarded the 2010 “Best in Business Travel” award for the Best Conference or Convention Center/City by “Business Travel” magazine. This is the third consecutive year that the convention center has won the award. The winners were selected based upon surveys from 8,000 randomly selected “Business Traveler” subscribers. The magazine has ten editions worldwide for a total of over 500,000 readers. The Hawaii Convention Center is the largest meeting and convention facility in the state with 343,000 square feet of indoor meeting space.

Hawaii programs that depend on hundreds of millions of congressional dollars are in jeopardy after U.S. Senator Daniel Inouye (D) said in early February that he would ban “earmarks” for the next two years following a pledge by President Obama in his state of the union presentation to veto any bill that contained earmarks. Inouye chairs the powerful Senate Appropriations Committee and has been responsible for most of the federal earmark money flowing into Hawaii. He has often been dubbed the “king of earmarks and pork barrel spending.” In December, the Senate abandoned a $1.3 trillion appropriations bill, laden with about $321 million in earmarks for Hawaii projects.

Measures to legalize gambling in the islands circulate through the Capitol every legislative session but to date have gone nowhere. Hawaii and Utah remain the only states without some form of commercial gambling. Now, with Abercrombie willing to listen to ideas for legalized gambling to increase state revenues, it appears possible that the ban on gambling could change. A number of bills have been introduced including one to have Hawaii join the Multi-State Lottery Association, which is now operating in 31 states.

A very unpopular Abercrombie proposal is to raise the state alcohol tax by 50%. That would make the tax on beer the highest in the nation and the tax on wine the third highest. Opponents state that we need to increase jobs to work our way out of our dilemma. If we increase the alcohol tax, bar owners will need to increase prices on drinks which will result in fewer jobs, as fewer drinks will be served at the higher prices.