Battered by the U.S. mortgage crisis, the average price of a home will depreciate 5.9% in 2008, which is believed to be the steepest decline in home values since the Great Depression, according to the new Housing Predictor forecast. ~~Housing Predictor 2008 National Forecast
While the Chicago area market is one of the luckier ones when compared to Las Vegas, California or Florida, Housing Predictor, an independent market forcaster, estimates that it will depreciate about 5.3% in 2007. Problems in the housing market are not limited to purchases and sales of real property. They also are hitting the investment markets. Late last week, Florida officials suspended redemptions from a low risk fund set up for investing by units of local government. This means the it will be harder for school districts, counties and cities to pay their bills and it's not just going to be in the states hit hardest by the foreclosure crisis. The Montana Board of Investments reported that in the past 3 days (seems Mon-Wed of last week), local governments withdrew $247 million from a "$2.5 billion money-market-like fund called the Short Term Investment Pool." There are problems in Maine too.
We have local government investment pool money market funds here in Illinois too and the particular investments known as The Illinois Funds are considered safer and are rated higher because they comply with state statute. Alexi Giannoulias recently issued a press release stating that the problems plaguing other local government investment pools will not affect The Illinois Funds. Note that Section 2 of the statute describes "authorized investments", using the word "may" and not "must". There are other, perhaps not as safe, funds in which the Illinois governmental units may invest and in which Illinoisans may invest. Note that Giannoulias has also said on his website: "Some local government investment pools operating in Illinois do not comply with the Public Funds Investment Act. These pools may include instruments such as bankers' acceptances, asset-backed corporate obligations like mortgages (emphasis added) and credit card receivables, or municipal securities outside of Illinois, which we believe are inappropriate for most public investors."
So, I started digging around for what I can find about investments of local units of government. I found this from Glenbrook High School District 225. It's a description of investment rules and says a lot of the think one would want it to say about safety of principle and federal insurance etc., but it also includes as allowed investments "Short-term discount obligations of the Federal National Mortgage Association", "Mortgage notes or bonds issued by the Federal Housing Administrator, or debentures issued by him."and "Bonds or other obligations of National Mortgage Associations or the Home Owner's Loan Corporation." Now these are not exactly the same thing as the pools causing problems in Florida, but they could be affected by the mortgage and credit cruch. Here and here are some sites with information on these types of investments. Here is more about GNMA bonds and here is a commentary written by an investment planner:
The reason for this commentary is the continued use of government mortgage instruments as conservative investments where neither the investor nor the broker has hardly any idea of how they actually work. It is true that the underlying mortgages are guaranteed against default by the government, but that is effectively the only guarantee offered. The underlying value of the principal can go up or DOWN and for reasons that are quite dissimilar to regular bond investments.
These investment issues do not affect local governments alone. You need to look at funds in which you are invested to see if your money is in troubled investments.
Now, I am no expert in municipal investments and I am no expert in investing, but looking into these issues sure took my mind off of immigration.
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