Archive for June, 2009

Mortgage Math : Financial Advice in an Uncertain Economy

The national savings rate is up to a 15-year high and more Americans are getting serious about getting out of debt, rather than spending beyond their means. When staring down a pile of debt that includes mortgage, credit cards and school loans, the question becomes: Where to begin?

One way to pay down debt that appeals to many people is making an extra mortgage payment. The math seems almost irresistible when looking at the amount of money that can be saved over the life of a mortgage loan by making extra payments. For example, paying an extra $100 a month on a $250,000 mortgage at 6 percent saves over $50,000 and pays the loan off a few years early. That’s a smart thing to do, right?

Not necessarily, says MSN financial analyst Liz Pulliam Weston. “Most people still have better things to do with their money, even in this economy, than to pay down a low-rate debt that’s often tax-deductable to boot.”

Weston points out that if someone is carrying credit card debt, say at 12 percent, every dollar put towards paying off that debt earns an instant 12 percent return. That is a great return considering the hit most retirement funds have taken over the last year and home values are shaky these days. Even a one-year certificate of deposit only averages around a 2 percent return.

A 2007 study found that an estimated 16 percent of American home owners pay extra on their mortgage. But that might not be the smartest use of funds. Financial planners all sing the same tune when it comes to paying off debt: tackle the debt with the highest interest rate first.

The debt with the highest interest rate is usually credit cards. Financial guru Dave Ramsey suggests trying a debt snowball. He instructs people who want to pay down their credit card debt to make a list of all credit card balances and then tackle the smallest balance first. Like the snowball that starts small and gains girth and speed as it rolls down hill, Ramsey touts the psychological benefits of watching the number of balances diminish along with the total dollar amount.

If credit card debt is not an issue, paying down the mortgage still may not be the smartest financial move. Unless retirement is right around the corner, using extra funds to invest in a retirement fund will give a greater return on that money. One study found that most people who make an extra mortgage payment each year would have gotten 11to 17 cents more on the dollar if they had invested in a 401k instead.

Should you pay down the mortgage or invest in the stock market? “Even with the recent turmoil, over the long term your money can earn better returns in the market compared with paying off low-rate debt. Based on historical returns, a mix of 60% stocks, 30% bonds and 10% cash would earn an average of more than 8% a year in most 20- to 30-year periods, according to market researcher Ibbotson Associates. You may doubt we’ll ever return to the days of positive returns in the stock market, but we will,” says Weston.

In these times of economic uncertainty, building an emergency savings plan is also a smarter thing to do than making that extra mortgage payment. Most financial planners suggest having enough in savings to cover at least three-months’ expenses, and the smarter safety net is six months’ of expenses in savings. While the paying-down-the-mortgage math seems sound, double check the numbers before writing that check.

Ki works as a realtor in the Austin real estate market. His site has a search of Austin homes for sale It also provides information and statistics on Austin real estate and Pflugerville real estate.

Is the President’s Economic Plan Just Stimulating Conversation?

Somewhere, somehow 600,000 jobs are going to be created and/or saved by the end of summer. In fact, the White House announced recently that 150,000 jobs have been saved in the last few months. Maybe it was yours; maybe it was mine. The problem is that all this job saving is a little difficult to pin down.

President Obama announced recently that this summer will see a ramping up of spending from the $787 billion stimulus fund and create or save 600,000 jobs. According to the Associated Press, the President spoke to his cabinet about “modest progress” in the economy. In particular he cited that fewer jobs were lost last month than expected. There have also been some admissions from this administration that their original economic forecasts made at the end of last year were too optimistic.

“At the time, our forecast seemed reasonable,” said Vice President Joe Biden’s top economic adviser, Jared Bernstein, explaining that the White House underestimated the scope of the recession.

By the White House’s earlier estimates the nation’s unemployment rate should be about 8 percent, not the 25-year-high 9.4 percent. It seems everything is on the rise these days from the President’s un-approval rating for how he is handling the economy to gas prices to the national deficit.

But the Obama administration is trying to make things better. According to Recovery.gov, in the next 100 days the American Recovery and Reinvestment Act will save or create jobs in the following areas

* Department of Health and Human Services — Enable 1,129 health centers in 50 states and eight territories to provide expanded service to approximately 300,000 patients
* Department of the Interior — Begin work on 107 national parks
* Department of Transportation — Begin work on rehabilitation and improvement projects at 98 airports and at more than 1,500 highway locations throughout the country
* Department of Education — Fund 135,000 education jobs, including teachers, principals and support staff
* Department of Veterans Affairs — Begin improvements at 90 veterans medical centers across 38 states
* Department of Justice — Hire or keep on the job approximately 5,000 law enforcement officers
* Department of Agriculture — Start 200 new waste and water systems in rural America

The government will also be flush with money in the weeks ahead as ten banks have been given permission by the Treasury Department to repay money they received from the government bailout of the banking industry. According to the Associated Press, $68 billion of the nearly $200 billion Troubled Assets Relief Program funds will be returned from banks such as JP Morgan, Goldman Sachs and American Express.

There are other signs that the economy is slowly starting to improve. Granted most of the good news is really in the category of less-bad-news, but job losses are down, the economy is sinking at a lower rate and consumer confidence is starting to return. What is nearly impossible to track is if the improvement is a result of government intervention or just a part of the economic cycle.
Ki bikes Shoal Creek when he is not working. He has focused on real estate since graduating. His website is focused on Austin Texas real estate, where future owners can search for listings in the Austin MLS. His website has a blog devoted to Austin real estate with current market stats and information.

April 2009 National Real Estate – Sales Up From Last Month Down From Last Year

We see some mixed signals in the national stats this month. Once we do seasonal adjustments April Sales were up 2.9% compared to last month. But we are down 3.5% compared to this time last year.

Inventory is up 8.8% compared to last month. I am not too worried about that since inventory usually goes up as we move into the summer (and we didn’t do seasonal adjustments for the inventory numbers). The good news is that inventory is down 12.8% compared to this time last year. As any seasoned real estate investor will tell you we need inventory numbers to go down before we can start seeing a true recovery. So the drop in inventory numbers is a good sign.

Yr Month Seasonally Adjusted Sales (Annual) Sales (Non Adjusted) Inventory Months of Inventory
2008 Apr 4,850,000 434,000 4,549,000 11.3
2008 May 4,950,000 483,000 4,482,000 10.9
2008 Jun 4,900,000 504,000 4,495,000 11.0
2008 Jul 4,990,000 504,000 4,575,000 11.0
2008 Aug 4,930,000 489,000 4,335,000 10.6
2008 Sept 5,100,000 438,000 4,272,000 10.1
2008 Oct 4,940,000 413,000 4,198,000 10.2
2008 Nov 4,540,000 322,000 4,163,000 11.0
2008 Dec 4,740,000 361,000 3,700,000 9.4
2009 Jan 4,490,000 257,000 3,611,000 9.7
2009 Feb 4,710,000 280,000 3,798,000 9.7
2009 Mar 4,550,000 357,000 3,648,000 9.6
2009 Apr 4,680,000 414,000 3,968,000 10.2
vs. last month: 2.9% 16.0% 8.8% 6.3%
vs. last year: -3.5% -4.6% -12.8% -9.7%

The months of inventory is down 9.7 percent compared to last year. The big number to watch over the next few months will be interest rates. If interest rates can stay below 6 or 6.5 percent we could continue to see a recovery. We could run into problems though if rates move up past 6.5 percent. If buyers are thinking of buying in the next 6 months it might be a good time to start looking now while rates are still low.

Not So Fast: Is the American Economy Really On Its Way to A Recovery?

Is the recession near the end? Is the American economy on its way to recovery? The answer is probably yes. That’s good news, right? Not so fast, say some economic analysts. And they mean, literally, that the stock market may be rebounding a little too quickly.

According to a recent report at Yahoo Finance, the stock market’s rally in recent months is a bit of a mixed blessing. The hope that the economy is on the rebound “has lifted the Standard & Poor’s 500 index, a benchmark for many investments like mutual funds, an enormous 39 percent from a 12-year low on March 9. Those kinds of gains might normally take four years to materialize.”

Both being too quick to call it a recovery and not cautious enough in investing could cause this budding economic upturn to wither on the vine. The numbers remain mixed, with the number of job losses in the month of May are down, but unemployment is up. While the government’s report of 345,000 jobs lost is the lowest since September, the actual unemployment rate is 9.4 percent. This indicates that although less people are being laid off, it is still very tough to find a job out there. In fact, the overall number of job seekers rose as college graduates flood the job markets.

Even Federal Reserve Chairman Ben Bernanke has said, even once the economy begins to recover, jobs will be the last sector to rebound. But there are still other troubling signs out there. Recent Commerce Department data shows that May retail sales were mixed, but in general analysts were surprised that more shoppers hadn’t returned to stores. Wall Street may be throwing caution to wind, but Main Street seems to be holding onto their cash, with the savings rate up again last month.

One of the biggest downfalls of overzealous investing is that investors are helping push interest rates higher. According to Yahoo, investors have been selling off Treasury bills because they feel they are no longer in need of the safety of government debt. This causes mortgage rates and other kinds of loans for consumers to rise. Interest rates are still historically low, but they have been creeping up in the last few weeks. As the interest rates goes up, borrowing is falling off. The Federal Reserve reported last week that consumer borrowing in April fell by twice as much as analysts had been expecting.

The latest results of the AP’s Economic Stress Index, which tracks the economic strains in 3100 counties across the country, show that many areas of the country are struggling more than they were a year ago.

“The AP calculates a score from 1 to 100 based on each county’s rate of unemployment, foreclosure and bankruptcy, with lower numbers indicating less economic pain. The average Stress score dipped to 9.7 in April, from 10.3 in March. In April 2008, the national average was 5.9.”

So while most indications show improvement in the economy in the first part of 2009, a slow, steady recovery is more likely to help this nation that has been stressed in so many ways over the last year and a half. After all, exuberant investing is what got us into this mess in the first place.

Ki lives and works in Austin and has worked in the Austin real estate market for 10 years. He maintains a search of Austin MLS on his website. It also has general information on Austin real estate and current mortgage rates