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February 2008 Entries
15 ways to save on homeowners insurance
It takes work, but shopping around is the best way to get a good deal. Here are 14 other ways to reduce your premiums.
By Insure.com
You can save money on homeowners insurance if you know how. Discounts from your insurance company are available for a variety of reasons, ranging from the type of building material used to build your home to how close you live to a fire station. Here are 12 ways you can save money on your homeowners policy:
Shop around. Check with several different insurance companies to get rate quotes. Do your friends or family members like their insurance company? Get online quotes from sites like MSN Money.
Raise your deductible. The deductible is the amount of money you have to pay toward a loss before your insurance kicks in. Typically, deductibles start at $250. Increase your deductible to:
- $500 and save up to 12% on your premiums.
- $1,000 and save up to 24%.
- $2,500 and save up to 30%.
- $5,000 and save up to 37%.
Just make sure you can afford to pay the higher deductible if something should happen.
Buy your home and auto policies from the same company. Many companies will give a discount if you buy both homeowners and auto coverage from them.
Consider insurance consequences when buying a home. If you're looking at buying a home, think about the cost of insuring the home. A newer home's electrical, heating and plumbing systems, and overall structure are likely to be in better condition than those of an older home. This can lead to a discount on your premiums.
Also consider the construction of the home and your geographical location. If you live on the East Coast, you'll want the house to be able to stand up to wind damage; on the West Coast, you need to keep earthquakes in mind.
Insure your home, not the land. Although your home and its contents are at risk from fire, theft, windstorms and other perils, the land your house sits on is not. Don't include the value of the land in deciding how much homeowners insurance you need to buy.
Improve security and safety. Items such as deadbolt locks, burglar alarms and smoke detectors often bring discounts of 5% each, depending on the company. Your insurance company may also offer a significant discount of 15% or 20% if you install a sophisticated home-security system. If you're thinking about buying such a system, check with your insurer to see which systems they recommend and which will earn you a discount.
Stop smoking. Smoking accidents account for more than 23,000 residential fires every year. Some insurers offer to reduce premiums if no one in the home smokes.
Try senior discounts. Insurance companies have found that retired people stay at home more and spot fires sooner than working people. Older people also have more time for maintaining their homes. If you're at least 55 years old and retired, you might qualify for a discount of as much as 10%.
Ask about group coverage. Alumni and business associations often work out insurance deals with an insurance company, which includes a discount for association members. Ask your association's director about any such deals.
Stay with an insurer. If you've kept your coverage with a company for several years, you may receive special consideration. Several insurers will reduce their premiums by 5% after you've been with them for three to five years, and some companies will discount you as much as 10% after six years.
Check your policy annually. You want your policy to reflect the value of your home and belongings. If you review your policy every year, you will be able to make the necessary adjustments. If, for example, you just sold a valuable painting, you won't need the same amount of coverage. But if you added a garage, you'll need to increase your coverage.
Look for private insurance first. If you live in a high-risk area (one that is especially vulnerable to coastal storms, fires or crime) and think you'll be forced to buy homeowners coverage from your state's high-risk insurance pool, check first with an insurance agent. You may find that you can still buy insurance at a lower price in the private insurance market than from the insurer of last resort.
Make payments electronically. Many companies now charge up to $5 for mailed payments, so have your payments automatically deducted to shave that cost. Sometimes the deductions can come from your credit card, so you don't have to worry if the money is in your bank account when payment time comes.
Check your credit rating. Many companies check your credit and base your policy on the information they find. Make sure your credit is in good shape, and if it's not, seek out companies that do not run credit checks.
Get replacement-cost coverage. Actual-cash-value coverage reimburses you for the cost of your property at the time of the claim, minus the deductible. This can result in a lower claim payout than you expect. If your TV is worth $50, for example, that's all you'd get to buy a new one. Replacement-cost coverage will reimburse the full value of an item based on the cost of purchasing a new one. The upfront cost is greater, but you are more likely to receive accurate compensation for your possessions.
Updated Feb. 15, 2008
10 tips on staging your home to sell
It doesn't take long for a prospective buyer to form an opinion about your house. Here's how you can tilt the odds in your favor by making your home appeal to the widest clientele possible.
By Christopher Solomon, MSN Real Estate
You don't have much time.
Prospective home buyers form an opinion about the home you're selling in 15 seconds, by one estimate. And the clock starts ticking at the curb -- even before the home buyers get in the house. So how do you tilt the playing field in your favor? Increasingly, it's by staging your home.
Generally speaking, staging means making your home as appealing as possible, as quickly as possible, to the broadest clientele you can.
"In this market now, staging is desperately needed even more so, because it's so competitive," says Julie Dana, who runs The Home Stylist in Buffalo, N.Y., and who co-authored a book on staging.
In fact, Barb Schwarz of StagedHomes.com estimates that about one in four homes nationwide are now staged. So if you're not doing it, you may be at a disadvantage.
There are techniques to pulling this off -- some of them obvious, and some not so apparent. We polled the experts to get some of their top tips.
Staging as un-decorating
Staging takes some effort and some money -- but it works. According to a study of 2,772 properties sold in eight California cities in 1999 that was done by real-estate broker Joy Valentine, staged homes remained on the market less than half the time that unstaged homes did -- about 14 days versus 31 days. The average difference in sale price over list price for staged homes was 6.3%, versus 1.6% for unstaged homes. You stand to gain $9,000 on a $200,000 house, Dana and co-author Marcia Layton Turner point out in their book, "The Complete Idiot’s Guide to Staging your Home to Sell."
Here's what you need to understand about staging: "How you decorate to live in your house and how you decorate to sell your house are very different," explains Dana. Decorating implies adding. But staging is all about paring away personal decoration. Why? Because the driving idea behind staging is to let people imagine themselves living in your home, leading the good life. It's NOT about you and your stuff and your taste.
Nearly everything in staging sprouts from this basic idea.
The tips
1. Declutter. This is staging's golden rule. Clutter isn't just your average mess. Clutter is the so-called "visual dandruff" -- newspapers, mail, laundry, knickknacks -- that accumulates in a house that's well-lived-in. "The way that we kind of word it is that clutter eats up equity," says Wendy Van Cott Speight, owner of DECO-The Design Company in Bloomington, Ill. "If there's a bookshelf, I'm going to pack up two-thirds of those books and put them away and basically just arrange the rest in nice little displays."
This mantra also applies to furniture. A good rule of thumb is that a staged living room should have half of its furniture removed, to give a better sense of spaciousness and movement, says Van Cott Speight. What to do with it? You're moving, so pull a storage pod into the driveway and pack it up.
And when you do rearrange, make sure you highlight the focal point of the room, such as arranging chairs around a fireplace in an inviting, approachable scene, experts say.
Streamline the kitchen counters, too, says Sally Ann Possidente-Ruiz, a real-estate agent and staging professional who works mostly in New York’s Westchester and Putnam counties. "I'll give you a coffeepot. But put away the toaster and the toaster oven. You don't need it. You want sleek, clean lines. And you want them to say, 'Wow, look at the counter space.' "
2. Be a neat freak. This may go without saying, but the only thing as important as decluttering is having an immaculate house. That means steam-cleaning the carpets. Walls should be painted if needed. Pressure-washing outdoor decks and aluminum siding can do wonders for a home's first impression and boost a home's value, Dana says. One place homeowners can never clean enough is the bathroom, stagers say. Toss out that bath mat; it's probably a wreck. Declutter it ruthlessly, add a few candles, and hide all but one or two of the shampoo bottles, says Possidente-Ruiz.
3. Hide the sword collection. Another name sometimes used for staging is "blanding," and there's a reason for it: Now's the time to sell your space, not your personal tastes, because you never know what may turn off would-be buyers. "It's got to appeal to everyone," says Peggy Selinger-Eaton, one of the founders of professional staging and author of "Staging your Home for Profit," as well as founder the Web site "Peggy's Corner."
Remove family photos and religious items. Possidente-Ruiz remembers one Jewish home buyer who visited a condo and came away with little impression except of the crucifixes and pictures of the owner's First Communion that were inside. He bought a condo in the same complex that needed more work, she says.
Van Cott Speight recalls a different challenge with a house: "They had themed bedrooms -- one room was all clowns, another was superheroes." Were there kids? "Actually, there weren't," she says. That superhero-themed room was the master bedroom. She helped them pack up all that and repainted the master bedroom with "grown-up" colors to appeal to a broader audience. "In order to appeal to a broad audience, you’ve got to take that away, or it will not sell," she says.
4. Search and destroy odors. A popular saying coined by Schwarz of StagedHomes.com is, "If you can smell it, we can't sell it." A house that smells odd to a prospective homeowner -- whether because of a cat's litter box, or dogs, or exotic food -- can easily be a deal breaker. Ask someone you trust to give you an honest answer whether your home has a distinct odor. Then tackle the problem, by steam-cleaning the carpets and furniture, moving litter boxes elsewhere, scrubbing the kitchen, etc. Finally, don't try to mask anything with potpourri, or by baking cookies. Just open windows a few minutes before a showing to let in fresh air.
5. Spend the money where it matters: out front. Use your time and money wisely. Studies show that the front porch is where prospective home buyers spend the most time, as they wait for the door to be unlocked. "A lot of times I'll suggest painting the front door," says Selinger-Eaton. She also often suggests replacing the brass light fixtures on the front porch if they're too badly tarnished, or at least painting them. "Right now I'm doing a lot of black," she says. Certified master stager Barie Pinnell, president of WRE Interiors in Dallas, recommends placing planters on each side of the door, as well, with flowers in vibrant colors that excite the eye. (She often recommends fuchsia and white.)
And to make sure all this work isn't for naught, be sure your real-estate agent's lockbox is on your front door. Some agents will put it on a side door or back door. But your front door and entryway usually make the best impression. Make home buyers experience your house the way you want them to.
Once inside, the foyer or entryway -- if you have one -- is where people will linger the longest in the house, say the pros. "Wow them now!" writes Dana. Make sure the paint is a creamy neutral and fresh, and the flooring looks great. All you need for décor is a thin table, a lamp, a vase of fresh flowers. "If you have a limited budget and can only afford to replace the entryway flooring or the guest bedroom carpeting, choose the foyer. It is the first impression," write Dana and Turner.
6. Use fresh flowers. Throughout the house. Always fresh. Only fresh.
7. Make it current. As much as possible, you want your home to give off a feeling of being up-to-date, trendy even -- regardless of how long it's been since you've bought furniture. But how do you do that? Sometimes professional stagers bring in rented furniture and lamps to impart a better vibe; the staging of multimillion-dollar homes can even involve bringing in "rental" artwork from museums. You can get some of the same effect, though, just by paring down your belongings and looking at what's current these days.
Pick up magazines such as Domino, InStyle and Better Homes and Gardens to get ideas, advise Dana and Turner. Then pick and choose your furniture, and camouflage accordingly, if necessary. For example, what's in today is a more streamlined, clean look; the so-called "lumpy/bumpy" look is out. What to do with that puffy loveseat? Toss a slipcover over it to give it a sleeker appearance. Got a particularly ugly couch? A few big, well-placed cushions from Target can distract the eye and hide it in a pinch, says Selinger-Eaton.
Consider this cautionary tale: A man was selling his home in an exclusive gated community in Danville, Calif., for $2.7 million. But there was a problem, says Selinger-Eaton: While the house had an East Coast look -- yellow, with a big, white porch -- inside the home was festooned with lots of very heavy, ornate Italian drapes in white with bright turquoise. Despite Selinger-Eaton's prompting, the owner was committed to keeping the drapes up. Nine months later, the house remained unsold. The homeowner hired a new broker who agreed to take on the house only if the man did whatever Selinger-Eaton said. "He took the drapes down and the house sold in seven days," she recalls.
8. Think spacious. People often move because they want more room, so make your house feel as spacious as possible. "Closets should be half full, and you should be able to see the bottom of the closet," says author Dana. Show people a jam-packed closet, and they'll think it's too small for them, too.
Similarly, bedrooms should contain only a bed, nightstand and dresser -- or perhaps a comfy reading chair in the master bedroom. (Banish that StairMaster to the basement.) Want to make the master bedroom feel even larger? Swap out the king-size bed for a queen-size bed, Pinnell says.
Another tip: Stagers used to push all the furniture to the walls to try to make a room feel bigger. Today, Selinger-Eaton says to pull furniture two or three inches out from the walls. When possible, allow the corners of a room to be visible.
9. Think vignettes. Vignettes are groupings of accessories, usually in threes. "It could be three pieces of art on the wall; it also could be candlesticks, something tall, medium and short," says Pinnell. "It's about shapes and color," she says of the vignettes, which help draw the visitor through the room and make the room visually interesting. "I call them eye candy."
10. Lighten up. "You want as much light to come in as possible," says Possidente-Ruiz. Remove unneeded blinds. "If there's drapery, I try to make it as sheer as possible, or pull it to the side," she says. "You want people to come in and say, 'I could live here. It's nice and bright.' "
Should you hire a pro -- and how much should you spend?
Now that you know some of the work and thought that goes into staging, perhaps you're considering hiring a professional stager instead. Professionals can offer a variety of levels of service, from consultations to full-service stagings in which contractors are arranged to make home repairs and rental furniture is brought in.
There's no industrywide accreditation process. However, several organizations -- including the International Association of Home Staging Professionals and the Interior Arrangement and Design Association -- offer staging certifications.
Costs can vary depending on services and the part of the country. Buffalo-based Dana charges $130 for a walk-through consultation on a house. For hands-on work thereafter, she charges $69 per hour. To rent furniture and accessories that she provides costs roughly $700 per month per house. Dallas-based Pinnell, who will visit a home, take photos, then return with a 35- to 55-page report, charges $350 to $550 for that consultation. Staging is extra. To stage an empty home, Pinnell usually charges 1% to 1.5% of the list price, including three months of furniture and accessories rental.
A general rule of thumb: According to the National Association of Realtors, the best return on a homeowner's investment for staging is when between 1% and 3% of the home's asking price is spent on staging, which typically gets a return of 8% to 10%.
One last twist to keep in mind: Sometimes real-estate agents will pay for staging in order to sell a home faster and for more money. Sometimes they'll split the cost with a seller. And sometimes they will reimburse a seller for the cost of a staging. Ask your agent what his policy is before taking on the cost yourself.
Now start your decluttering. And be ruthless.
Too Much Recession Talk, Big Builder Says
“Ceaseless talk” about recession is driving the housing market into a hole, says Robert Toll, chairman and CEO of luxury home builder Toll Brothers Inc.
“For home buyers, we believe this drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines," Toll complained in a statement.
Toll noted "glimmers of hope" in a few markets, including Naples, Fla., and the Washington, D.C., suburbs. The company also reported a decline in cancellations so far this year. It had 257 cancellations so far during the current quarter, down from 436 a year ago and 417 in the fourth quarter of fiscal 2007. But signed contracts dropped 37 percent from a year earlier to 647.
The average price of a home sold in the latest quarter amounted to $634,000, down from $646,000 in the fourth quarter and $730,000 in the year-ago period. Toll blamed the decline on a shift in the product mix and more incentives.
Source: Dow Jones Business News, John Spence (02/27/2008
Bernanke Prepared to Cut Key Rates Again
Federal reserve Chair Ben Bernanke told the House Financial Service Committee during an appearance on Wednesday that the Fed is prepared to lower key interest rates again to bolster economic growth.
The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," he said.
Bernanke was asked when he thought the housing market might stabilize. It's possible, he said, that by "later this year it will stop being such a big drag directly" on the economy. But home prices probably will decline into next year, he added.
"It is very difficult to know, and we've been wrong before," Bernanke said.
Source: The Associated Press, Jeannine Aversa (02/27/08)
Speech
Governor Frederic S. Mishkin
At the U.S. Monetary Policy Forum, New York, New York
February 29, 2008
On "Leveraged Losses: Lessons from the Mortgage Meltdown"
The paper being discussed today, "Leveraged Losses: Lessons from the Mortgage Meltdown," by David Greenlaw, Jan Hatzius, Anil Kashyap, and Hyun Song Shin, examines the following puzzle: How could the recent residential mortgage-market meltdown, which the authors estimate will lead to credit losses of around $400 billion--less than 2 percent of the outstanding $22 trillion in U.S. equities--possibly have such large negative effects on economic activity in the United States? After all, a 2 percent decline in stock market prices sometimes happens on a daily basis and yet leads to hardly a ripple in the U.S. economy.
The authors conclude that these losses have such a large potential impact because they are borne by highly leveraged financial institutions, primarily banks. Their theory is basically as follows: Because banks have so much leverage, they contract their lending by a multiple of their credit losses in order to restore their balance sheets. The resulting contraction in bank lending then leads to a substantial decline in aggregate spending, because bank loans cannot be replaced by credit from other sources. Banks are "special"--that is, they have intermediation capabilities not fully shared by other financial market participants, and those capabilities allow banks to overcome informational barriers between borrowers and lenders and thus make loans that otherwise could not be made.
I find the basic story the paper tells to be reasonably plausible and, therefore, find the paper to be valuable. I do, however, want to put the analysis of the paper in a broader perspective and provide some different views on their results.1
The Residential Mortgage Meltdown: A Financial Development Perspective
The first part of the paper provides a nice summary of how recent events in the credit markets led to the subprime meltdown. Let me offer my own view on how the recent disruptions to financial markets have many features in common with typical cycles in financial development.
Financial markets perform the essential economic function of channeling funds to those who have productive investment opportunities (which can include consumer purchases of goods and houses). As I have argued elsewhere,2 this function of financial markets is critical to a well-functioning economy; without it, countries, and their populations, cannot get rich. Enabling financial markets to effectively perform this essential function is by no means easy; financial markets must solve information problems to ensure that funds actually go to those with productive investments, so that they can pay back those who have lent to them. Financial development involves innovations or liberalization of financial markets that improve the flow of information. Unfortunately, however, financial liberalization and innovation, often have flaws and do not solve information problems as well as markets may have hoped they would. When these flaws become evident, financial markets sometimes seize up, often with very negative consequences for the economy.
I would argue that we have been experiencing exactly such a cycle in recent years. Advances in information and communications technology have allowed for faster and more disaggregated mortgage underwriting decisions. A mortgage broker with an Internet connection could quickly fill out an online form and price a loan for a customer with the help of credit-scoring technology. The same technological improvements would allow the resulting loan to be cheaply bundled with other mortgages to produce mortgage-backed securities, which could then be sold off to investors. Advances in financial engineering could take the securitization process even further by aggregating slices of mortgage-backed securities into more complicated structured products, such as collateralized debt obligations (CDOs), to tailor the credit risks of various types of assets to risk profiles desired by different kinds of investors.
As has been true of many financial innovations in the past, the benefits of this disaggregated originate-to-distribute model may have been obvious, but the problems less so. The originate-to-distribute model, unfortunately, created some severe incentive problems, which are referred to as principal-agent problems, or more simply as agency problems, in which the agent (the originator of the loans) did not have the incentives to act fully in the interest of the principal (the ultimate holder of the loan). Originators had every incentive to maintain origination volume, because that would allow them to earn substantial fees, but they had weak incentives to maintain loan quality. When loans went bad, originators lost money, mainly because of the warranties they provided on loans; however, those warranties often expired as quickly as ninety days after origination. Furthermore, unlike traditional players in mortgage markets, originators often saw little value in their charters, because they often had little capital tied up in their firm. When hit with a wave of early payment defaults and the associated warranty claims, they simply went out of business. While the lending boom lasted, however, originators earned large profits.
Many securitizers of mortgage-backed securities and resecuritizers, such as CDO managers, also, in retrospect, appear to have been motivated more by issuance and arrangement fees and less by concern for the longer-run performance of these securities.
These agency problems combined to lower underwriting standards, so that borrowers with weaker financial histories had access to larger loans. When the housing market cooled and house prices no longer rose at a rapid pace, these subprime borrowers found themselves unable to either repay their loans or refinance out of them. Investors apparently failed to realize the importance of these agency problems and, it seems, did not insist on practices to align the incentives of originators, securitizers, and resecuritizers with the underlying risks.
When these problems came to light with the end of the house-price boom, investors--including leveraged financial institutions--took large losses as mortgage-related assets were marked down in anticipation of high defaults. The market for newly issued subprime and alt-A mortgage-backed securities virtually closed. In addition, investors realized that they were sadly mistaken regarding their assumption that structured credit products with high credit ratings embodied very little risk. The unprecedented losses on, and downgrades of, those products suggested that they were far more opaque than investors had suspected, and that investors had had too much confidence in the ability of the credit rating agencies to assess the true risk of these securities. The result was that the originate-to-distribute business model, as well as structured credit products more broadly, have come into question. In turn, this situation has had a chilling effect on securities markets and has put pressure on the balance sheets of leveraged financial institutions.
Although the perspective I have outlined here is consistent with the story told in the paper, it does emphasize that there are two parts of the recent disruption in the credit market: credit losses at banks and the near-collapse of broad classes of securities markets. This perspective raises the issue, which I will return to later, of whether the negative consequences of the decline in intermediation required both of these elements to be present.
Estimating Mortgage-Credit Losses
The paper performs a very useful function by providing estimates of the credit losses likely to be realized on the current stock of outstanding loans. Not only is this calculation crucial for their analysis, it is a useful survey of three different methodologies for arriving at loss estimates. The authors first use a standard vintage curve analysis on outstanding mortgage-backed securities. Although this method makes the strong assumption that future loss curves will follow the same shape as previous loss curves, albeit at much higher levels, it provides a reasonable rough guess of the magnitudes of the losses.
The second method the authors use is ABX pricing of subprime mortgages plus standard loss estimates on prime and near-prime mortgages to come up with loss estimates. ABX prices, in principle, ought to reflect the up-to-the-minute credit losses expected by market participants as well as changes in the price of liquidity and market risk. Indeed, I was worried that ABX pricing might overestimate credit losses because it carries premiums for these other risks, and trading may be light. For example, the AAA-rated tranches of recent vintages are trading for around sixty-six cents on the dollar, which seems to build in either extreme credit-loss estimates or compensation for other risks. However, the authors weight the various vintages and tranches of the ABX by outstanding dollar amounts and get reasonable estimates, which suggests that this approach to estimating mortgage-credit losses may have some value.
The authors' third method is quite clever and uses state-level foreclosure models to estimate how declines in house prices would increase foreclosure starts and thus lead to losses. Figure 1 displays a reasonably tight relationship between the rate of foreclosures started in the third quarter of 2007 and the previous four-quarter change in house prices in the fifty states and the District of Columbia. This figure provides some backing for their approach, which, in effect, uses the historical relationship between house price declines and foreclosure starts in states that have had significant house price declines to estimate the likely effect of current projected house price declines on foreclosure starts. However, their method requires the assumption that future foreclosures will respond to house prices as they have in the past. In addition, past experience was with prime mortgages, because there was little subprime lending. Will foreclosures in the subprime market in the current episode have a similar pattern of behavior to that which has occurred for prime mortgages?
Although each method of calculating mortgage credit losses has problems, the beauty of the authors' approach is that they go at the problem in very different ways. It is striking that three very different methodologies produce similar estimates of around $400 billion in total credit losses over the next couple of years. The authors then estimate that roughly half of mortgage loans are held by U.S. leveraged financial institutions, which include commercial banks, thrifts, hedge funds, the government-sponsored enterprises, and others, and come up with losses to this sector of around $200 billion. This estimate might not be unreasonable, but it is very rough, because it assumes that institutions do not differ significantly in the kinds of risk they take on and that mortgage-related securities are evenly distributed across these financial institutions.
Effect of Credit Losses on Domestic Lending
The authors go on to show that what might appear to be a small amount of losses to financial institutions can lead to an amplified decline in domestic lending. This amplification can then explain how modest losses can lead to a substantial effect on the overall economy. Their calculation is fairly straightforward. They assume that leveraged financial institutions have a target 10-to-1 leverage ratio, so that each dollar of a loss of capital will lead to a contraction of their balance sheet, and hence lending, by $10. Assuming that institutions can make up half of their $200 billion mortgage credit losses by raising new capital, leaving them with a decline of capital of around $100 billion, they come up with a contraction of domestic lending near $1 trillion. Actually, the authors' calculation is a bit more complicated than my simple characterization. They assume that the target leverage of banks and others decreases, as it has in previous lending cycles, but they also net out reduced lending from one leveraged entity to another. On balance, under their baseline scenario, they predict that lending to the unleveraged sector will decline by about $910 billion.
These mechanical calculations are useful, but they miss some important subtleties. First, small losses can hit key institutions, such as bond and mortgage insurers, and have large, unpredictable effects. Second, if leveraged financial institutions such as banks were the only ones that had credit losses and, as a result, cut back lending, other institutions or securities issuance could replace some of the lost lending. Put another way, although banks are special because they have advantages in processing information and making loans, a big contraction in their assets would not necessarily choke off all lending. Banks are special, but not that special. As I discussed earlier, a key characteristic of this episode of financial disruption is that it has spread far beyond leveraged financial institutions. It has led to a sharp decline in securities issuance; this decline has to be an important part of the story of why the current financial market turmoil is affecting economic activity. In other words, mortgage credit losses are a problem because they are hitting bank balance sheets at the same time that the securitization market is experiencing difficulties.
Effect of Decreased Leveraged Institution Lending on Aggregate Spending
The paper then examines the well-known correlation between growth in debt and gross domestic product (GDP) to estimate the effect of the $910 billion decline in leveraged institution lending on economic growth. The authors first estimate an ordinary-least-squares (OLS) regression of quarterly GDP growth on four lags of GDP growth and the past four-quarter growth rate of domestic nonfinancial debt growth. They find that if debt growth falls by 1 percentage point and stays below baseline for a year, quarterly GDP growth is predicted to fall by 0.14 percentage point initially and by 0.22 percentage point over time. The authors rightfully recognize, however, that the coefficient on debt growth may be biased upward because of reverse causality--that is, causality might run from higher economic growth to higher debt growth, because when desired purchases increase, households and business finance them by borrowing more. Another way of stating the problem is that the debt-growth coefficient may not only reflect the affects of changes in credit supply but also changes in the demand for credit.
To deal with the possible bias in the OLS regression and estimate the effect of credit supply on economic growth, the authors appropriately turn to instrumental variable (IV) estimation by instrumenting debt growth in their regression with two instruments, the Treasury-Eurodollar (TED) spread and the Senior Loan Officer Opinion Survey on the willingness of banks to make installment loans. The IV estimate of the coefficient on debt growth more than doubles, so that a 1 percentage point decline in debt growth predicts a decline of 0.34 percentage point in GDP initially and 0.44 percentage points in the long run. Because a standard reverse causality story from GDP growth to debt growth suggests that the OLS estimate of the debt-growth coefficient is upwardly biased, the finding that the IV estimate is larger than the OLS estimate is indeed quite surprising.
This surprising finding raises several questions. It can call into question the validity of the instruments, which, to be valid, need to be correlated with debt growth and yet be unaffected by economic growth. This assumption, however, is unlikely to be correct because poor prospects for economic growth surely raise credit risk, thereby leading to a higher TED spread and less willingness to lend on the part of banks. Thus, a higher TED spread and less willingness to lend may reflect the likelihood of tougher economic times ahead and not an exogenous shift in credit supply.
The final calculation in the paper is to combine the authors' IV estimates with their estimate of the decline in lending from leveraged institutions of $910 billion to estimate the impact on GDP growth. The $910 billion drop in debt against a $30.3 trillion amount of nonfinancial debt outstanding is a 3 percentage point drop in nonfinancial debt growth, which when multiplied by the 0.44 long-run coefficient on debt growth, lead to a slowing of GDP growth of 1.3 percentage points over the following year.
Although this number is not implausible, there are reasons to be suspicious of it. On the one hand, even if you accept the IV coefficient estimate, despite the reasons to doubt its accuracy, it might overstate the impact of the decline in leveraged institution lending on the economy; as mentioned earlier, other sources of lending might come online if leveraged institutions stop lending. On the other hand, the estimated impact on the economy could be too low. As I have discussed, the disruption to the financial system is far broader than just to leveraged institutions. To the extent that the meltdown in the mortgage market has revealed even deeper problems in the financial system, the negative impact on economic activity could be even larger.
Conclusion
I very much enjoyed reading this paper. Many of the calculations in the paper are especially useful and help us get a better handle on how the recent turmoil in credit markets can affect the economy. I agree with the basic story that the authors tell, which is that relatively small losses in one sector of the credit market can have an outsized impact on aggregate economic activity if they cause a disruption to the financial system that leads to an amplified impact on lending. However, as my comments suggest, the authors may not have the full story. It is not just the impact on leveraged financial institutions that matter, but on the overall ability of the financial system to channel funds to those institutions with productive investment opportunities.
Footnotes
1. I thank Andreas Lehnert for his excellent assistance and helpful comments. My remarks reflect only my own views and are not intended to reflect those of the Federal Open Market Committee or of anyone else associated with the Federal Reserve System. Return to text
2. Frederic S. Mishkin (2006), The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich, Princeton: Princeton University Press. Return to text
Figure 1
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Testimony
Chairman Ben S. Bernanke
Semiannual Monetary Policy Report to the Congress
Before the Committee on Financial Services, U.S. House of Representatives
February 27, 2008
Chairman Bernanke presented identical testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, on February 28, 2008
Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve's Monetary Policy Report to the Congress. In my testimony this morning I will briefly review the economic situation and outlook, beginning with developments in real activity and inflation, then turn to monetary policy. I will conclude with a quick update on the Federal Reserve's recent actions to help protect consumers in their financial dealings.
The economic situation has become distinctly less favorable since the time of our July report. Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses. The growth of real gross domestic product (GDP) held up well through the third quarter despite the financial turmoil, but it has since slowed sharply. Labor market conditions have similarly softened, as job creation has slowed and the unemployment rate--at 4.9 percent in January--has moved up somewhat.
Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market. In 2006, after a multiyear boom in residential construction and house prices, the housing market reversed course. Housing starts and sales of new homes are now less than half of their respective peaks, and house prices have flattened or declined in most areas. Changes in the availability of mortgage credit amplified the swings in the housing market. During the housing sector's expansion phase, increasingly lax lending standards, particularly in the subprime market, raised the effective demand for housing, pushing up prices and stimulating construction activity. As the housing market began to turn down, however, the slump in subprime mortgage originations, together with a more general tightening of credit conditions, has served to increase the severity of the downturn. Weaker house prices in turn have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage credit.
The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries.
Consumer spending continued to increase at a solid pace through much of the second half of 2007, despite the problems in the housing market, but it appears to have slowed significantly toward the end of the year. The jump in the price of imported energy, which eroded real incomes and wages, likely contributed to the slowdown in spending, as did the declines in household wealth associated with the weakness in house prices and equity prices. Slowing job creation is yet another potential drag on household spending, as gains in payroll employment averaged little more than 40,000 per month during the three months ending in January, compared with an average increase of almost 100,000 per month over the previous three months. However, the recently enacted fiscal stimulus package should provide some support for household spending during the second half of this year and into next year.
The business sector has also displayed signs of being affected by the difficulties in the housing and credit markets. Reflecting a downshift in the growth of final demand and tighter credit conditions for some firms, available indicators suggest that investment in equipment and software will be subdued during the first half of 2008. Likewise, after growing robustly through much of 2007, nonresidential construction is likely to decelerate sharply in coming quarters as business activity slows and funding becomes harder to obtain, especially for more speculative projects. On a more encouraging note, we see few signs of any serious imbalances in business inventories aside from the overhang of unsold homes. And, as a whole, the nonfinancial business sector remains in good financial condition, with strong profits, liquid balance sheets, and corporate leverage near historical lows.
In addition, the vigor of the global economy has offset some of the weakening of domestic demand. U.S. real exports of goods and services increased at an annual rate of about 11 percent in the second half of last year, boosted by continuing economic growth abroad and the lower foreign exchange value of the dollar. Strengthening exports, together with moderating imports, have in turn led to some improvement in the U.S. current account deficit, which likely narrowed in 2007 (on an annual basis) for the first time since 2001. Although recent indicators point to some slowing of foreign economic growth, U.S. exports should continue to expand at a healthy pace in coming quarters, providing some impetus to domestic economic activity and employment.
As I have mentioned, financial markets continue to be under considerable stress. Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. However, other factors, including a broader retrenchment in the willingness of investors to bear risk, difficulties in valuing complex or illiquid financial products, uncertainties about the exposures of major financial institutions to credit losses, and concerns about the weaker outlook for economic growth, have also roiled the financial markets in recent months. To help relieve the pressures in the market for interbank lending, the Federal Reserve--among other actions--recently introduced a term auction facility (TAF), through which prespecified amounts of discount window credit are auctioned to eligible borrowers, and we have been working with other central banks to address market strains that could hamper the achievement of our broader economic objectives. These efforts appear to have contributed to some improvement in short-term funding markets. We will continue to monitor financial developments closely.
As part of its ongoing commitment to improving the accountability and public understanding of monetary policy making, the Federal Open Market Committee (FOMC) recently increased the frequency and expanded the content of the economic projections made by Federal Reserve Board members and Reserve Bank presidents and released to the public. The latest economic projections, which were submitted in conjunction with the FOMC meeting at the end of January and which are based on each participant's assessment of appropriate monetary policy, show that real GDP was expected to grow only sluggishly in the next few quarters and that the unemployment rate was seen as likely to increase somewhat. In particular, the central tendency of the projections was for real GDP to grow between 1.3 percent and 2.0 percent in 2008, down from 2-1/2 percent to 2-3/4 percent projected in our report last July. FOMC participants' projections for the unemployment rate in the fourth quarter of 2008 have a central tendency of 5.2 percent to 5.3 percent, up from the level of about 4-3/4 percent projected last July for the same period. The downgrade in our projections for economic activity in 2008 since our report last July reflects the effects of the financial turmoil on real activity and a housing contraction that has been more severe than previously expected. By 2010, our most recent projections show output growth picking up to rates close to or a little above its longer-term trend and the unemployment rate edging lower; the improvement reflects the effects of policy stimulus and an anticipated moderation of the contraction in housing and the strains in financial and credit markets. The incoming information since our January meeting continues to suggest sluggish economic activity in the near term.
The risks to this outlook remain to the downside. The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.
Consumer price inflation has increased since our previous report, in substantial part because of the steep run-up in the price of oil. Last year, food prices also increased significantly, and the dollar depreciated. Reflecting these influences, the price index for personal consumption expenditures (PCE) increased 3.4 percent over the four quarters of 2007, up from 1.9 percent in 2006. Core price inflation--that is, inflation excluding food and energy prices--also firmed toward the end of the year. The higher recent readings likely reflected some pass-through of energy costs to the prices of core consumer goods and services as well as the effect of the depreciation of the dollar on import prices. Moreover, core inflation in the first half of 2007 was damped by a number of transitory factors--notably, unusually soft prices for apparel and for financial services--which subsequently reversed. For the year as a whole, however, core PCE prices increased 2.1 percent, down slightly from 2006.
The projections recently submitted by FOMC participants indicate that overall PCE inflation was expected to moderate significantly in 2008, to between 2.1 percent and 2.4 percent (the central tendency of the projections). A key assumption underlying those projections was that energy and food prices would begin to flatten out, as was implied by quotes on futures markets. In addition, diminishing pressure on resources is also consistent with the projected slowing in inflation. The central tendency of the projections for core PCE inflation in 2008, at 2.0 percent to 2.2 percent, was a bit higher than in our July report, largely because of some higher-than-expected recent readings on prices. Beyond 2008, both overall and core inflation were projected to edge lower, as participants expected inflation expectations to remain reasonably well-anchored and pressures on resource utilization to be muted. The inflation projections submitted by FOMC participants for 2010--which ranged from 1.5 percent to 2.0 percent for overall PCE inflation--were importantly influenced by participants' judgments about the measured rates of inflation consistent with the Federal Reserve's dual mandate and about the time frame over which policy should aim to attain those rates.
The rate of inflation that is actually realized will of course depend on a variety of factors. Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect. Upside risks to the inflation projection are also present, however, including the possibilities that energy and food prices do not flatten out or that the pass-through to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate. Indeed, the further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month. Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored. Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future. Accordingly, in the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectations.
Let me turn now to the implications of these developments for monetary policy. The FOMC has responded aggressively to the weaker outlook for economic activity, having reduced its target for the federal funds rate by 225 basis points since last summer. As the Committee noted in its most recent post-meeting statement, the intent of those actions has been to help promote moderate growth over time and to mitigate the risks to economic activity.
A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures. In particular, the FOMC will need to judge whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation as well as the risks to that forecast. Although the FOMC participants' economic projections envision an improving economic picture, it is important to recognize that downside risks to growth remain. The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.
Finally, I would like to say a few words about the Federal Reserve's recent actions to protect consumers in their financial transactions. In December, following up on a commitment I made at the time of our report last July, the Board issued for public comment a comprehensive set of new regulations to prohibit unfair or deceptive practices in the mortgage market, under the authority granted us by the Home Ownership and Equity Protection Act of 1994. The proposed rules would apply to all mortgage lenders and would establish lending standards to help ensure that consumers who seek mortgage credit receive loans whose terms are clearly disclosed and that can reasonably be expected to be repaid. Accordingly, the rules would prohibit lenders from engaging in a pattern or practice of making higher-priced mortgage loans without due regard to consumers' ability to make the scheduled payments. In each case, a lender making a higher-priced loan would have to use third-party documents to verify the income relied on to make the credit decision. For higher-priced loans, the proposed rules would require the lender to establish an escrow account for the payment of property taxes and homeowners' insurance and would prevent the use of prepayment penalties in circumstances where they might trap borrowers in unaffordable loans. In addition, for all mortgage loans, our proposal addresses misleading and deceptive advertising practices, requires borrowers and brokers to agree in advance on the maximum fee that the broker may receive, bans certain practices by servicers that harm borrowers, and prohibits coercion of appraisers by lenders. We expect substantial public comment on our proposal, and we will carefully consider all information and viewpoints while moving expeditiously to adopt final rules.
The effectiveness of the new regulations, however, will depend critically on strong enforcement. To that end, in conjunction with other federal and state agencies, we are conducting compliance reviews of a range of mortgage lenders, including nondepository lenders. The agencies will collaborate in determining the lessons learned and in seeking ways to better cooperate in ensuring effective and consistent examinations of, and improved enforcement for, all categories of mortgage lenders.
The Federal Reserve continues to work with financial institutions, public officials, and community groups around the country to help homeowners avoid foreclosures. We have called on mortgage lenders and servicers to pursue prudent loan workouts and have supported the development of streamlined, systematic approaches to expedite the loan modification process. We also have been providing community groups, counseling agencies, regulators, and others with detailed analyses to help identify neighborhoods at high risk from foreclosures so that local outreach efforts to help troubled borrowers can be as focused and effective as possible. We are actively pursuing other ways to leverage the Federal Reserve's analytical resources, regional presence, and community connections to address this critical issue.
In addition to our consumer protection efforts in the mortgage area, we are working toward finalizing rules under the Truth in Lending Act that will require new, more informative, and consumer-tested disclosures by credit card issuers. Separately, we are actively reviewing potentially unfair and deceptive practices by issuers of credit cards. Using the Board's authority under the Federal Trade Commission Act, we expect to issue proposed rules regarding these practices this spring.
Thank you. I would be pleased to take your questions.
February 2008 Monetary Policy Report
Speech
Governor Frederic S. Mishkin
At the Third National Summit on Economic and Financial Literacy, Washington, D.C.
February 27, 2008
The Importance of Economic Education and Financial Literacy
As an educator myself, it's a pleasure to be here today to take part in this important event that brings people together from educational organizations all over the country, with the common goal of educating students and citizens in the fundamentals of economic and financial literacy. As many of you know, the Federal Reserve has had a long and fruitful relationship with the National Council on Economic Education (NCEE), through our many Reserve Bank collaborative efforts around the country, and through leadership at the national level. This leadership is evidenced, in part, by the involvement of my former and present colleagues on the Federal Open Market Committee, Cathy Minehan and Gary Stern, who currently serve as NCEE board members. Cathy, of course, is the former president of the Federal Reserve Bank of Boston, a bank that under her leadership has played a key role in furthering economic education in our New England states. Gary is president of the Federal Reserve Bank of Minneapolis, from where he has served not only as a long-time member on NCEE's board, but also as its chair. And they are just two of the many Federal Reserve Bank presidents and officials who have worked to foster and improve economic education with the National Council over the years.
There can hardly be a better time to make the case for economic and financial literacy than right now. Others have doubtless stood before an audience like you in years past and made the same case, but now we face a downturn in our housing industry fueled, at least in part, by unwise mortgage borrowing and, at times, abusive lending practices. Improving consumers' knowledge of the home mortgage process will better equip them to avoid unsuitable mortgages in the future. Our national economy has been strained by this housing slowdown and other forces, causing policymakers and others to debate what response is necessary. Also, during this election season, we are reminded of the importance of economic issues. Just a brief consideration of these three cases shows that a better-educated citizenry can not only contribute to a better functioning economy, but also to a more-effective government.
On the first point, many lessons can be drawn from the downward swing in the housing industry, ranging from those that individual consumers can learn at the micro level, to those that financial companies can learn about investment and oversight. In that regard, the Federal Reserve has proposed new rules to strengthen regulatory oversight and to protect consumers in the future, and we continue to assess this episode to determine what more can be done to help homebuyers and homeowners. Of course, one of the most effective ways to help consumers is to empower them with information. And this gets to our first case for economic and financial literacy: Improving consumers' economic decision making will enhance the effectiveness of new rules and regulations. And while we at the Federal Reserve are charged with regulatory duties, we certainly see the value of education and the positive impact it can have on the broader economy. While the current troubles in the housing industry stem from a number of causes, a better-informed citizenry would likely have resulted in more-prudent decision making and, consequently, less harm to the economy.
In the matter of the national economy, here the call for economic education is based on the idea that a better-informed citizenry makes for better economic policymaking. This is a subtle argument, but its logic is no less clear. As my friend Alan Blinder, the noted Princeton economist and textbook author, as well as the former vice chairman of the Federal Reserve's Board of Governors, has said, an uneducated citizenry can lead to simplistic policy solutions, and those solutions are usually suboptimal. "The fact that the basic level of economic literacy in the country, indeed in the world, is so low," Alan has said, "is one of the things that leaves the political process so vulnerable to this malady."1 Now, even Alan would admit that it's difficult to draw a direct line from economic literacy to economic policymaking, but politicians listen to their constituents at home, just as they are supposed to do. And at a time when our elected officials are confronted with a myriad of options to address a slowing economy, or when they consider the increasing fears about a globalizing economy, it's fair to ask whether they are getting good economic counsel from their constituents. This is not to say that there is only one valid answer for these complicated questions, but it does mean that we get a better answer when we are all better informed. Let me reinforce this point by sharing this quote from Ben Bernanke, Chairman of the Federal Reserve's Board of Governors:
The Federal Reserve's mission of conducting monetary policy and maintaining a stable financial system depends upon the participation and support of an educated public. Accomplishing this mission involves trade-offs and tough decisions. As the Fed pursues the monetary policy objectives that have been set out for us by Congress--to pursue price stability, maximum employment, and moderate long-term interest rates--it is essential that the public understand our objectives and our actions. Educating the public about the reasoning behind our decisions helps build confidence in our economic system--another critical factor in keeping our economy running smoothly.2
Chairman Bernanke made those comments nearly two years ago, but the message is no less relevant today.
Let's now consider our third case for economic and financial literacy--the role of citizens as voters. Americans elect a president every four years and we also send representatives and senators to Washington. As is so often the case, the pundits and the opinion polls tell us that the top issues on voters' minds this year are those relating to the economy. What do the candidates have to say about how, if at all, the federal government should address the lagging national economy? How about issues relating to trade? Taxes? Income inequality? Even issues that are not often described as economic--such as health care, education, and the environment--are informed by an understanding of economic principles. All these issues are better understood by an appreciation of tradeoffs, cost-benefit ratios, and opportunity cost, to name just a few core economic tools and principles.
Finally, as we are so often told, people vote with their pocketbooks. And not only do they vote with their pocketbooks, they also make a lot of pocketbook decisions every day that have an impact on the health of the economy, such as whether to take on a particular mortgage, how much to save and invest, whether to lease or buy a car, and how to manage credit cards. This brings us back to the importance of financial literacy. The choices we make as individuals--as consumers, investors, and even voters--are linked to the broader economy in ways that we don't always appreciate. However, one thing is certain--we make better decisions if we are better informed, and the whole economy benefits. That's the promise of economic education--to get back to the title of this session--that it not only improves the lives of individual consumers, but that it also makes for more-effective policy and a better economy. Delivering on that promise is the hard part, of course, but that's where the National Council comes in. We at the Federal Reserve are proud of our relationship with the National Council and with other educational organizations around the country, and we look forward to continuing this important work. The task at hand is not easy, as all of you know, but the returns are high.
Footnotes
1. Blinder, Alan S, (1994), "Interview with Alan S. Blinder," The Region, Federal Reserve Bank of Minneapolis, December, Return to text
2. Bernanke, Ben (2006), "A Message from Chairman Bernanke," Federal Reserve Bank of Dallas, July, Return to text
Press Release
Release Date: February 28, 2008
For immediate release
The Federal Reserve Board on Thursday requested public comment on proposed changes to its Payments System Risk (PSR) policy that are intended to loosen intraday liquidity constraints and reduce operational risks in financial markets and the payments system. The Board is proposing a new strategy for providing intraday credit to depository institutions and would encourage these institutions to collateralize their daylight overdrafts.
The Board has spent several years reviewing long-term developments in intraday liquidity, operational risk, and risk management in financial markets and the payments system, including the increased use of daylight overdrafts at the Federal Reserve Banks and increased Fedwire funds transfers late in the day. The Board published a consultation paper on these issues in 2006 and received public comments. As a result of this review and the comments, the Board is proposing changes to the Federal Reserve's current strategy for providing intraday credit to the banking industry to help ease intraday liquidity constraints and reduce operational risk.
Specifically, the Board proposes to adopt a policy of supplying intraday balances to healthy depository institutions predominantly through explicitly collateralized daylight overdrafts. To avoid significantly disrupting the operation of the payments system and increasing the cost burden on a large number of institutions that incur small amounts of daylight overdrafts, the Board would allow depository institutions to pledge collateral voluntarily to secure daylight overdrafts. The proposed policy would encourage the voluntary pledging of collateral to cover daylight overdrafts by providing collateralized daylight overdrafts at a zero fee and by raising the fee for uncollateralized daylight overdrafts to 50 basis points (annual rate) from the current 36 basis points. In developing this proposal, the Board has sought to minimize the effect of the proposed policy changes on institutions that use small amounts of daylight overdrafts by increasing substantially the biweekly fee waiver to $150 from $25. The proposed policy would also involve changes to other policy provisions, including adjusting net debit caps, streamlining procedures for the expansion of daylight overdraft capacity for certain foreign banking organizations, eliminating the current deductible for daylight overdraft fees, and increasing the penalty daylight overdraft fee for ineligible institutions to 150 basis points (annual rate) from the current 136 basis points. The Board expects that a revised PSR policy could be implemented approximately two years from the adoption of a final rule.
To assist depository institutions in assessing the impact of the proposed changes on their institution, the Board has developed a simple fee calculator that will allow institutions to estimate their daylight overdraft fees under the proposed policy. The fee calculator is located on the Board’s website at https://www.federalreserve.gov/apps/RPFCalc/.
Comments are requested by June 4, 2008.
The Board's notice is attached. The Board also requested public comment today on a proposed change to the daylight overdraft posting rules under its PSR policy.
Attachment (366 KB PDF)
Payments System Risk Policy Fee Calculator
Prince Harry To Be Pulled Out Of Combat Zone
By Ron Synovitz
Britain's Ministry of Defense has confirmed that Prince Harry is to be withdrawn from Afghanistan after news leaked that the third-in-line to the British throne has been secretly serving as a front-line combat soldier in Helmand Province for more than two months.
Prince Harry's deployment to a dangerous combat zone in southern Afghanistan was meant to last at least four months.
The youngest son of Prince Charles and the late Princess Diana was sent to Helmand Province in mid-December only after an agreement had been reached with the British press and select members of the international media to not report his presence until he was safely out of harm's way.
But the British military today decided to withdraw Prince Harry from Afghanistan after the news embargo was broken on February 28 by German, Australian, and U.S. Internet sites.
The British Ministry of Defense, which confirmed the Internet reports, has released video footage of Prince Harry that was recorded in Helmand Province during January and February:
The 23-year-old prince is one of about 7,700 British soldiers stationed in Afghanistan -- most of them in Helmand Province. He is the first British royal to be sent on active combat duty in more than a quarter-century.
The news leak about his deployment has prompted several British newspapers to call for his return, saying that he is a high-level target and that his presence in Helmand Province threatens the safety of other soldiers in his unit.
Taliban Response
The Taliban has downplayed the significance of Prince Harry's presence in Afghanistan. Taliban spokesman Qari Yusef Ahmadi told RFE/RL's Radio Free Afghanistan today that Prince Harry's deployment is a public relations exercise that has no tactical impact on the fighting.
"That will not have much effect on the war because there are more experienced soldiers than him stationed here in Afghanistan. We look at him as an ordinary soldier," Ahmadi said.
But General Azimi, a spokesman for the Afghan Defense Ministry, says news of Prince Harry's service in Afghanistan is a morale booster for both NATO and Afghan government forces.
"The presence of important people such as the Prince of England would have a great impact on the morale of all NATO forces -- particularly, British soldiers -- when they see important people of their country next to them at the battle front," Azimi said. "From political perspective, the presence of the prince in Afghanistan shows strong support for Afghanistan and war against terrorism."
Prince Harry arrived in Helmand Province seven months after plans to send him to Iraq were scrapped amid threats from Iraqi militants to kidnap or kill him. The prince reportedly had threatened to quit the armed forces if he was not allowed to serve in combat.
In Afghanistan, he has been responsible for calling in air strikes against Taliban positions. He also has taken part in foot patrols through villages and has been filmed firing a heavy caliber machine gun at suspected Taliban positions:
For his part, Prince Harry describes the Taliban fighters he has targeted as elusive guerilla fighters.
"The Taliban are very good at hiding in their trenches. But it is somewhat like I could imagine World War Two to be like. It's just no man's land. They pop up their heads. They poke their heads up and then that's it," Harry said.
"Then, if [British forces] are coming under a lot of fire, I call the air [support] in. And as soon as the air [strike] comes, they just disappear or jump down these holes or go into their bunkers."
Prince Harry has said he agrees that his royal lineage and celebrity status would be a threat the safety of the men under his command once his presence in Afghanistan is known to Taliban and Al-Qaeda fighters.
"If I do go on patrols in amongst the locals, I'll still be very wary about the fact that I need to keep my face slightly covered -- just on the off chance that I do get recognized, which will put other guys in danger. The Gurkhas think it's hysterical, how I'm called 'the bullet magnet.' But they've yet to see why," Harry said.
British soldiers serving in Prince Harry's unit say that he has not received special treatment, or had a comparatively pampered existence, in Helmand Province. They say the prince has eaten the same military rations and lived under the same difficult conditions as other British soldiers:
(RFE/RL's Radio Free Afghanistan correspondent Freshta Jalalzai contributed to this story.)
National Assn. of REALTORS Urges End to Abusive Lending
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February 18th, 2008 - 6:19 am
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REALTORS testify before Congress and push to curb predatory lending practices that put Seniors at risk of foreclosure.
.jpg) The National Assn. of REALTORS® testified recently that foreclosure rescue scams have caused major problems for many Americans and that older Americans and other vulnerable borrowers are frequently targets. NAR called for increased funding for programs that provide financial assistance, counseling and consumer education to borrowers to help them avoid foreclosures and foreclosure rescue scams.
John W. Anderson, past NAR chair of the Federal Housing Policy Committee and Regulatory Issues Forum, spoke at a hearing before the Senate Special Committee on Aging. “I know firsthand that foreclosure rescue scams rarely turn out with a happy ending,” said Anderson, a REALTOR® broker-owner from Minneapolis. “REALTORS® are not only in the business of helping people into homes, but also making sure they keep their homes. Abusive lending and foreclosure rescue scams erode confidence in the nation’s housing system and destroy families and communities. Many older Americans rely on their home as the foundation of their net worth and for security in their old age. For them, a foreclosure is emotionally and financially crippling.”
NAR research shows that the foundation of many older Americans’ net worth is in their home equity. NAR’s study found that half of older baby boomers are concerned about their financial security, given rising medical costs, increased monthly household bills and other age-related expenses.
“Abusive lenders and foreclosure scammers are on the lookout for older boomers who encounter unexpected expenses; these lenders then swoop in to ‘save the day.’ We must all work together to make sure all consumers know they have some place to go for information and counsel, and that they can take steps to prevent foreclosures,” Anderson said.
NAR supports the HOPE NOW alliance, which brings homeowners together with homeownership counselors, lenders, investors and others. NAR also promotes FHASecure, a Federal Housing Administration program that offers foreclosure mitigation options.
Working with the Center for Responsible Lending, FHA, and NeighborWorks, NAR has produced a series of educational brochures designed to educate consumers about different types of loans and provide information on various financing and refinancing options available to them. “REALTORS® help families achieve the dream of homeownership, and we believe that consumer protections should be in place to ensure that the dream does not turn into a family’s worst nightmare. We stand ready to work with Congress on the important issue of foreclosure rescue scams and on eliminating other predatory lending practices,” said Anderson.
Mortgage Help Now Aids Homeowners At Risk of Losing Their Homes
A group of mortgage industry executives and lawyers have formed a new company to offer assistance to homeowners facing foreclosure due to the mortgage industry collapse. Using their knowledge of mortgages and their relationship with lenders they are helping borrowers keep their homes, and work out new loan arrangements to avoid foreclosure, bankruptcy and financial ruin.
 A group of mortgage industry executives and lawyers have formed a new company to offer assistance to homeowners facing foreclosure due to the mortgage industry collapse. Using their knowledge of mortgages and their relationship with lenders they are helping borrowers keep their homes, and work out new loan arrangements to avoid foreclosure, bankruptcy and financial ruin.
The company, which is known as Mortgage Help Now, is affiliated with The Liput Group, a group of professional consulting companies operated by former mortgage industry executives and bank lawyers that normally provides advice to lenders and Wall Street on sophisticated bank issues such as loss mitigation, investor relationships, and regulatory matters.
Andrew Liput, The Liput Group's president, and a corporate and banking lawyer for more than twenty years said, "our staff has decided to take our expertise, and our established relationships with mortgage banks, and use it to help consumers faced with foreclosure."
In light of the highly publicized collapse of the sub-prime mortgage market, and the resulting rise in foreclosures from interest only and teaser rate adjustable loans, thousands of consumers are facing serious financial consequences and need help.
Liput says that "the government can only do so much," and adds, "we have the experience and the contacts to evaluate a consumer's personal financial situation and deal with their lender and loan servicing company on an even playing field."
Rather than pay lawyers high hourly fees to learn about the mortgage business and try and stop a foreclosure, Liput feels using mortgage insiders will be less expensive and get faster, better results for homeowners. "Lawyers are not trained in the highly specialized mortgage industry, so they charge a lot of money to review documents and get up to speed. We know the industry, the market, the lenders, and the methods to fight foreclosure and, whenever possible, save a consumers home. When that is not possible, we know the language and the techniques to minimize the financial consequences. We also do it for a lot less, recognizing these consumers are facing tough money problems."
Mortgage Help Now is based in New Jersey but can handle mortgage foreclosure and default problems nationwide. For more information, you can reach them toll free at 1-888-424-3728 or you can visit their web site at www.liputgroup.com.
NAR Supports Homeownership Outreach Program for All Americans
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February 27th, 2008 - 9:29 am
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NAR President-elect Charles McMillan debunks myths that create barriers to homeownership.
 “Homeownership is part of the American dream,” said 2008 National Assn. of REALTORS President-elect Charles McMillan (shown at right). “As the nation’s leading advocate for housing issues, NAR is committed to removing disparities in homeownership and making the face of homeownership in this country look more like America.”
McMillan helped debunk some “Myths that Create Barriers to Homeownership” as part of a panel discussion during the meeting, which was attended by approximately 4,000 people. He was joined by representatives from the U.S. Dept. of Housing and Urban Development, the National Assn. of Real Estate Brokers, the National League of Cities, Neighborhood Housing Services, and Wells Fargo Bank.
According to data from the U.S. Census Bureau, African Americans own homes at a rate much lower than Caucasians; in the fourth quarter of 2007, 47.7% of Black households owned their own home compared with 74.9% of Non-Hispanic White households.
“Homeownership is a great financial and personal investment, and it has proven to be one of the best ways to build long-term wealth,” said McMillan. “In addition to the financial benefits, studies show that homeownership strengthens levels of educational achievement among children, increases volunteerism and political activism, and reduces community crime levels.”
NAR supports policies and initiatives that further minority homeownership and has successfully partnered with organizations like the Congressional Black Caucus Foundation to help raise awareness and identify and promote solutions that address minority needs, such as foreclosure prevention, housing counseling, and homeownership preservation.
NAR also partners with real estate organizations representing African American, Latino and Asian American real estate professionals to sponsor the biennial HOPE (Home Ownership Participation for Everyone) Awards. The HOPE Awards program showcases education programs, financing initiatives, pioneering leadership, and exceptional projects that help minority families achieve their homeownership dreams and encourage more innovation among real estate professionals to better serve the minority market.
Savings Resources for Consumers
from the Federal Reserve
Having savings and an emergency fund helps you manage your personal finances and achieve your short- and long-term goals. The following resources provide information and links to agencies and organizations that may be able to help you.
- Federal Citizens Information Center
- Federal Deposit Insurance Corporation
- Securities and Exchange Commission
Last update: February 28, 2008
The New Baby Boom
BY ROBERT FREEDMAN
Economists can argue about the short-term prospects of home sales as consumers ponder the best time to buy. But there’s little doubt among analysts about the market’s long-term prospects.
The United States is adding one person every 13 seconds. At the start of 2008, the country had surpassed 303 million residents, almost 3 million more than it had at the start of 2007, the Census Bureau says.
One of the driving forces of this increase is a rise in the U.S. birth rate, now the highest it’s been in more than 40 years, according to an Associated Press review of births dating back to 1909. Fueling the births are higher rates for immigrant households, particularly Hispanics.
For real estate professionals, the country’s continuing strong growth is a good sign in today’s challenging times. “With a population increase of 3 million, household formation typically expands by up to 1.5 million,” says NAR Chief Economist Lawrence Yun.
And because new household formation is the critical first step toward home ownership, the population gains point to robust demand in the years ahead, especially since a significant portion of the increase is fueled by immigrants, who arrive at the rate of one every 30 seconds, the Census Bureau says.
Immigrant households have the highest home ownership rates of all demographic groups, according to a study released last year by the Homeownership Alliance. After immigrant households have been in the country for 30 years, their rate of home ownership rises to just below 75 percent.
For Yun, the Census Bureau figures suggest demand for housing will rise. Last year, new household formation totaled only 650,000 units, about half the historical norm. “Many people have evidently doubled up with roommates or have moved back in with family,” he says. Markets should see more demand once consumer confidence is restored.
Population gains bode well for home sales.
Real Estate Tips: If you're a buyer
Take your time...and don't forget to ask for goodies
By Ellen Florian Kratz, FORTUNE writer May 8, 2006: 9:41 AM EDT
NEW YORK (FORTUNE Magazine) - True, home prices still are exorbitant by most historical standards. But the market is moving in buyers' favor - here's how to capitalize on that shift.
Don't let the asking price be your guide
Many sellers are clinging to bloated pricetags that are based on what homes were fetching at the peak rather than what's realistic today. Case in point: A four-bedroom home in Wellesley, Mass., that debuted on the market last summer for $750,000 now has an asking price of $620,000.
To gauge local conditions, you want to know how many houses are for sale and how long the average house has been sitting on the market today vs. a year ago.
Once you focus on a particular house, get the same report on comparable dwellings that an agent would give a seller. It costs you nothing, and it can save you from placing more money on the table than you should.
Without doing this research "you're just shooting in the dark," says Lyle Martin, co-founder of Assist-2-Sell, a discount realty firm. "The home could be totally overpriced, or it could be a steal."
Take your time
In the heat of the boom, home shoppers committed to properties within minutes of touring them. Although sellers still have the upper hand in some markets, in most, time is on your side.
You can make good use of it by getting to know your target market intimately. "Now you can do your homework," says Lance Pagel, a Re/Max agent in Roseville, Calif.
Some of the things you can use the extra time to delve into more deeply: the school system; zoning issues that could change the value of homes in the coming years; the job picture; and recent property tax increases, as well as the outlook for more.
Once you're ready to make an offer, again, don't be hasty. Hire a professional to conduct a careful inspection, and follow up by getting estimates for dealing with any problems he uncovers - repairing a leaky roof or replacing an old furnace. All this is part of the cost of carrying a house, and you need to factor it into your budget before you know what you can really afford to pay.
Ask for goodies
Sellers who won't budge on the asking price may be willing to make other concessions. This is especially true when you're buying from homebuilding companies, which need to keep prices stable to avoid angering recent purchasers.
To move product these days, they're throwing in all sorts of upgrades.
In January the National Association of Home Builders found that 41 percent of builders were offering freebies, up from 32 percent six months earlier.
Near Sacramento, Centex is offering backyard landscaping, window treatments, and free washers and dryers to first-time buyers of 1,700- to 2,800-square-foot homes. A Fairfax, Va., builder of condos is tossing in a prepaid two-year lease on a BMW to buyers of two- or three-bedroom units.
And in San Diego, in a program offered by mortgage lender Cal Pacific, some sellers are promising to make up to a year's worth of mortgage payments to buyers who come close to the full asking price. Still, with plenty of houses to choose from, don't let a gimmicky offer lead you to overpay for a place you're not crazy about.
Real Estate Tips: If you're a seller or speculator
Price it right, and don't be afraid of agents. Plus: a word of caution for flippers out there.
By Ellen Florian Kratz, FORTUNE writer
NEW YORK (FORTUNE Magazine) - Each day brings fresh evidence of peaking home prices. But, with the right strategies, sellers can still command top dollar.
Price it right
The worst mistake a seller can make in a softening market is to overprice a home. Even putting a high price on your home to "test the market" for a few weeks (with the notion that you can always lower it later) is a bad idea.
Your goal should be to seal a deal during "the first two or three weeks your house is new to the market," says Lyle Martin, co-founder of Assist-2-Sell, a discount realty firm. That's when your home generates interest from serious buyers who have their radar up for fresh properties.
If you're asking too much, they'll move on, and your house will get lumped in with the rest of the inventory. And if it lingers too long, "it can become stigmatized," says Pam O'Connor, CEO of Leading Real Estate Companies of the World. "Buyers will think there is something wrong with it."
How can you be certain that you're pricing it right?
Start by checking out your rivals: similar homes for sale in your neighborhood. But the numbers that you really want are the actual prices comparable homes have sold for recently - a market analysis that any good real estate broker will prepare.
And don't cling to memories of what houses were commanding six months ago; if your area has seen a slowdown in sales, you're not going to get top dollar. "The silver lining," says Gil Campos, a 25-year Boston real estate veteran, "is that houses priced correctly are selling for what they're asking."
Set the stage
In a faltering market you need to stand out. That's where something called staging comes in - that is, sprucing up your home in a way that encourages prospective buyers to envision themselves living there.
The first step is to rent a storage locker and fill it with all that clutter from the attic, basement, and garage. Also remove any furniture that makes your home look overcrowded. And you may want to sweep your house clean of such personal items as wedding photos, framed diplomas, or children's fingerpaintings - it's difficult for prospective buyers to see your home as their castle if your family's signature is all over it.
Tone down unique decor. That nude oil painting hanging in the foyer may turn off buyers. Rooms painted in unusual colors should be redone in neutral tones.
"You're not selling your things, you're selling the space," says Barb Schwarz, CEO of StagedHomes.com.
Curb appeal is equally important. Says Long Island, N.Y., agent Diane Saatchi of the Corcoran Group: "The trip from the driveway to the front door can kill a deal."
So slap a fresh coat of paint on the door, hang a wreath, hide the garbage cans, and plant flowers along the walkway.
Hire an agent
You may hate the idea of parting with 6 percent of your home's value, especially when you're facing the prospect of getting less than you dreamed of. And with the Internet making do-it-yourself sales easier than ever, you may be tempted to dispense with an agent.
But in a tougher environment, marketing is everything, and an experienced agent--that is, one who didn't recently jump into the real estate gold rush - can be invaluable in helping you price your home correctly and in getting it noticed by prospective buyers. An agent can also steer you through the tortuous sales process and keep a deal on track when the inevitable glitches crop up.
So are there ways to save on those steep commissions? Any real estate professional will tell you that fees are always negotiable. But just as investors with hefty portfolios often pay smaller percentage fees to their advisors, sellers of high-end homes have the most leverage when it comes to commissions.
Paul Butler, a Windermere broker in the Puget Sound area, recently reduced the take on a $900,000 property to 4 percent. You may also be able to get a package deal if you use your listing broker to buy another house in the same market.
If you're a speculator ... get out now
In 2005, investors accounted for 28 percent of the housing market, up from 23 percent in 2004, according to the National Association of Realtors. But the game of buying a home - or two or three or 17 - holding it for a bit, and then flipping it for a handsome profit has pretty much played itself out.
"Get out as fast as possible," says Mark Zandi, chief economist with Moody's Economy.com. "The market is moving away from the investor, and even when it stabilizes, I don't think it's going to come back anytime soon."
So don't repeat the mistake that tech investors made during the dot-com bubble. As stocks spiraled downward, they held on, thinking that the market would bounce back quickly. Just accept that you're going to lose money on that Miami deal.
"Take your lumps," says Jon Duncan, a Tacoma financial planner. "If you're feeding this thing cash flow, it won't take long to make this a very bad investment."
Grant to Help Mortgage Workers
Former employees of mortgage lenders in California who lost their jobs following the subprime lending meltdown will have an opportunity to be retrained for positions in growth industries, such as healthcare and biotechnology.
The state has received a grant from the federal government and plans to use up to $5.6 million to retrain mortgage industry workers.
California sacrificed the most mortgage industry jobs last year at a net loss of 15,933 positions, or 18.5 percent of the nationwide total, according to MortgageDaily.com. Lenders eliminated everyone from mortgage bankers and payroll to clerical and administrative staff.
Source: Los Angeles Times (02/21/08)
The U.S. Economy and Monetary Policy
Vice Chairman Donald L. Kohn
At the University of North Carolina at Wilmington, Cameron School of Business' Business Week Program, Wilmington, North Carolina
February 26, 2008
When, at the end of July, I accepted Tom Simpson's invitation to speak to you today on the economy and monetary policy, little did I realize the challenges I would face. For one, the economy and financial markets have taken some unexpected twists and turns over the intervening seven months, and we are still in the midst of a rapidly evolving and highly uncertain situation. For another, when we set the date, I had expected that Chairman Bernanke would have already given our Monetary Policy Report to the Congress, and I could simply develop some of the themes he had laid out. However, that testimony will be tomorrow, and I must emphasize that the views you are about to hear are my own and not necessarily shared by any of my colleagues on the Board or the Federal Open Market Committee (FOMC).1
Several major developments are shaping current economic performance, the outlook, and the conduct of monetary policy. The most prominent of these developments is the contraction in the housing market that began in early 2006. Both the prices and pace of construction of new homes rose to unsustainable levels in the preceding few years. For a time, the resulting correction was largely confined to the housing market, but the consequences of that correction have spread to other sectors of the economy.
The financial markets are playing a key role in the transmission of the housing downturn to the rest of the economy. In the first half of 2007, investors became concerned about the likely performance of many subprime adjustable-rate mortgages made from late 2005 through early 2007. Lenders turned away from subprime mortgages and some other investments as the magnitude of the losses on those mortgages began to emerge, as uncertainty about the ultimate size of the losses and who would bear them mounted, and as these experiences undermined confidence in a variety of other credit instruments, especially those with complex structures. Those tendencies have intensified as risks of a spillover to the broader economy have risen. The increase in expected losses along with the unwillingness of investors to fund some types of credits has led to pressures on banks and other financial intermediaries as well as on prices and liquidity in securities markets. The result has been a substantial tightening in credit availability for many firms and households.
At the same time, continued sizable increases in the prices of food, energy, and other commodities have raised inflation. To some extent, those increases have resulted from strong demand in rapidly growing emerging-market economies, like China and India. But the increases likely also reflect conditions such as adverse weather in some parts of the world, the use of agricultural commodities to produce energy, and geopolitical developments that threaten supplies in some petroleum-producing centers. The higher prices have eroded the purchasing power of household income, adding to restraint on spending.
In my remarks today I will trace the effects of these developments in more detail, discuss the response of monetary policy, and talk about the implications for the future path of the economy.
Recent Economic and Financial Developments
The pace of real economic activity stepped down sharply toward the end of last year and has remained sluggish in recent months. Real gross domestic product (GDP) is estimated to have risen only slightly in the fourth quarter. The contraction in the housing market continues to drag down economic growth. Declines in real residential investment subtracted nearly 1 percentage point from the overall increase in real GDP in 2007. Even so, the inventory of unsold new homes remains unusually high, because the demand for housing has fallen about as rapidly as the supply. Problems in the subprime market have virtually cut off financing in this sector. Prime jumbo mortgages are being made, but the lack of a secondary market has caused the spread between rates on these mortgages and on those that have been eligible for purchase by Fannie Mae and Freddie Mac to widen substantially. Even the standards for conforming mortgages have been tightened of late. Weak demand, in turn, is leading to widespread declines in the actual and expected prices of houses, further discouraging buyers. Starts of new single-family homes continued to fall in January, dropping to fewer than 750,000 units--a level of activity more than 1 million units below the peak in early 2006. Judging from the further decline in permits last month, additional cutbacks in construction are likely. It appears that the correction in the housing market has further to go.
For the better part of the past two years, the trouble in the housing market was contained; however, over the past several months, the weakness appears to have spread to other sectors of the economy. Tighter credit, reductions in housing and equity wealth, higher energy prices, and uncertainty about economic prospects seem to be weighing on business and household spending. Labor demand has softened in recent months. Private nonfarm payrolls were little changed in January, and the unemployment rate moved up to 4.9 percent, on average, during December and January, after remaining around 4-1/2 percent from late 2006 through most of 2007. The higher level of weekly claims for unemployment insurance suggests continued softness in employment this month.
Apart from the labor market, the hard data on economic activity in the first quarter are limited, but, on the whole, the data suggest economic activity has remained very sluggish. Retail sales were up moderately in nominal terms in January, but after adjusting for the rise in prices of consumer goods, real spending on non-auto goods appears to have been little changed last month. In addition, unit sales of new motor vehicles weakened. Total industrial production rose just 0.1 percent in January for a second consecutive month, and manufacturing output was unchanged. Much of the other information about the current quarter has come in the form of surveys of business and consumers--and most all of it has been downbeat. That said, I can still see a few bright spots. One is that the level of business inventories does not appear worrisome at present. Another is that international trade continued to be a solid source of support for the economy through the end of last year. The worsening financial conditions and slower growth in the United States have had some effect on the rest of the world, but the prospects for foreign growth remain favorable.
The most recent news on inflation--the January report on the consumer price index (CPI)--was disappointing. Once again, total or headline CPI was boosted by a jump in energy prices and relatively large increases in food prices; last month's rise left the twelve-month change in the overall CPI at 4.3 percent--twice the pace a year ago. In addition, the January increase of 0.3 percent in the CPI excluding food and energy was slightly higher than the average monthly rate in 2007. Nonetheless, the twelve-month change in this measure of core inflation, at 2-1/2 percent, was still slightly below the rate one year earlier. The recent readings on core inflation suggest that the higher costs of energy, a pickup in prices of imported goods, and, perhaps, the persistent upward price pressures in commodity markets may be passing through a bit to core consumer prices.
The Implications of Financial Stress for the Economic Outlook
The recent evolution of U.S. financial markets is a complicated story, and a full consideration of how and why this episode of financial turmoil developed is a topic for another speech. Today, I am going to focus on some key aspects of the situation in which we find ourselves and discuss their implications for the economy and for monetary policy.
The pressures from the financial turmoil have been most intense for those financial intermediaries that have been exposed to losses on mortgages and other credits that are repricing, as well as for those institutions now required to bring onto their balance sheets loans that previously would have been sold into securities markets. As those intermediaries take steps to protect themselves from further losses and conserve capital, and as investors more broadly have responded to the evolving risks, spreads on household and business debt in securities markets have widened, the availability of bank credit has decreased, and equity prices have weakened.
In addition to the drying up of large portions of mortgage finance that I referred to previously, conditions have firmed on loans for a variety of other purposes. Responses to our Senior Loan Officer Opinion Survey in January showed that banks have tightened terms and standards for household and commercial mortgages, commercial and industrial loans, and consumer loans. In corporate bond markets, spreads have been widening on both investment- and speculative-grade issues. Lenders are demanding much higher risk premiums for commercial real estate loans. And equity prices have fallen substantially over the past seven months, reducing household wealth and increasing the cost of raising equity capital for businesses.
To be sure, the easing of monetary policy that I will be discussing in a minute has, quite deliberately, been intended to offset the effect of this tightening, resulting in some borrowers seeing lower interest rates. But financing costs have risen, on balance, for riskier credits, and almost all borrowers are dealing with more cautious lenders who have adopted more stringent standards. Those financial market developments are, in many respects, a healthy correction to previous excesses. But, in some cases, they may represent an overreaction, or at least positioning for the small probability of very adverse economic conditions. In any case, they have the potential to adversely affect household and business spending.
The recovery in financial markets is likely to be a prolonged process. The length of the recuperation will depend importantly on the course of the economy, particularly on developments in the housing market. If the deterioration in the housing market were greater than expected in coming months, the losses borne by financial institutions would be even greater, and lenders might further reduce credit availability. More widespread macroeconomic weakness could make lenders more cautious and could cause the financial problems to spread further. The recent problems of financial guarantors, with possible implications for municipal bond markets as well as for bank balance sheets, are an indication that the financial sector remains vulnerable.
Even in a more favorable economic environment, some time is likely to be required to restore the functioning and liquidity of a number of markets. The collapse of the subprime mortgage market and subsequent problems in other areas of the financial markets have brought to light a number of deficiencies in the practice of financial intermediation that will take some time to correct. Clearly, lending standards in the subprime mortgage market were too lax, particularly for riskier households. Compounding the problem, those involved in moving the loans from originator to investor, including the credit rating agencies, failed to ensure that the quality of the underlying credit was accurately assessed and represented. Moreover, some of the financial instruments developed in recent years were opaque, making it difficult for investors to price them correctly. And many did not fully appreciate and properly manage the risks involved in the maturity, credit, and liquidity transformations that were taking place in several sectors of the financial market. A number of markets will need to make institutional changes before they are likely to function smoothly again, and regulators will need to adapt their oversight to take account of the lessons learned. In the end, we will have a safer system, but one with more bank intermediation, less leverage, and higher financing costs for many borrowers.
The Monetary Policy Response
The Federal Reserve has responded to the unfolding situation by acting to improve the access of depository institutions to liquidity and by easing the stance of monetary policy substantially.
Problems in the subprime mortgage market had been evident by early 2007, but the disruptions took a far more serious turn last August when pressures spread to commercial banks both here and abroad. Among other things, the disruption of markets for structured credits had the effect of bringing a good deal of financial intermediation back onto the balance sheets of banks. Uncertain about the ultimate call on their lending capacity, the financial strength of some of their counterparties, and their own needs for liquidity, banks and other lenders became much more reluctant to extend credit in term funding markets.
The Federal Reserve was created in large part to supply liquidity and calm markets in such situations, importantly by assuring banks of a backup source of funding through the discount window. To enhance the utility of the discount window and encourage its use, the Federal Reserve reduced the spread between the discount rate and the federal funds rate last August, and we made lending available explicitly on a term basis, rather than only overnight. However, banks were reluctant to use even this more attractive discount facility because they feared that their counterparties would see it as a sign of weakness, and pressures in term funding markets increased.
In December we introduced a new method for banks to borrow from the Federal Reserve against a broad range of collateral--the term auction facility (TAF). The TAF is an auction through which a fixed amount of lending is offered to the banking system, and it seems to have been successful in avoiding the "stigma" problem and in helping funding markets return to more normal functioning. Markets were also aided by coordinated efforts to supply liquidity by several other central banks at the same time.
As the deterioration in financial markets increasingly has threatened to hold down spending and employment, the FOMC has eased monetary policy, reducing the federal funds rate target by 2-1/4 percentage points since the turmoil erupted in August. Those actions have been intended to counteract the effects on the overall economy of tighter terms and conditions in credit markets, the drop in equity and housing wealth, and the steep decline in housing activity. Our objective has been to promote sustainable growth and maximum employment over time.
But easier monetary policy will not forestall a period of economic weakness in the near term. Experience teaches us that some time is likely to pass between a decline in interest rates and its positive effect on demand. Once financial conditions change, time is required for individuals to recalibrate, and then execute, their spending decisions. Lower interest rates will not stop, only cushion, the correction in housing markets.
Easier monetary policy will not--and should not--"bail out" lenders and other investors who made poor choices or failed to protect themselves against the remote, but potentially severe, contingency that house prices would decline or against the much more predictable repricing of credit and liquidity risk. The adjustment in financial markets is part of the process that ultimately will restore credit allocation and market functioning to a sounder, more sustainable basis.
What policy can do is attempt to limit the fallout on the economy from this adjustment. Lower interest rates should support aggregate demand over time, even in the face of widespread contraction in the supply of credit. Certainly, interest rates on loans will be lower than if policy had not been eased, and, if policy is eased sufficiently, they can be absolutely lower than before for many borrowers, which could well be necessary in an environment where standards and nonprice terms on access to credit are tighter. Among other things, lower rates should facilitate the refinancing of mortgage loans, and they will hold down the cost of capital to business. To be sure, reductions in interest rates will not help borrowers facing a cutoff of credit from lenders, but, in general, credit is still flowing from banks and other lenders. Easier policy should also support asset prices--or at least cushion declines that otherwise would have occurred. And expected policy easing likely contributed to the drop in the foreign exchange value of the dollar, which is bolstering our exports.
The extent of the financial adjustment, as I mentioned previously, is itself highly dependent on how housing and the economy evolve. Part of the rise in risk spreads, reduction in credit availability, and the declines in stock prices in the past few months reflect investor efforts to protect themselves against the potential for very adverse economic outcomes--that is, the exposures and losses that would accompany a persistent steep decline in house prices and a significant recession. Of course, these actions--reducing exposures, tightening credit standards, demanding extra compensation for taking risk--themselves make these "tail risk" scenarios even more likely. In circumstances like these, the decisions of policymakers must take account of not only the most likely course of the economy, but also the possibility of very unfavorable developments. Doing so should reduce the odds on an especially adverse outcome not only by having policy a little easier than otherwise, but also by reassuring lenders and spenders that the central bank recognizes such a possibility in its policy deliberations. Whether the Federal Reserve has done enough in this regard is a question this policymaker will be weighing carefully over coming months.
Even as we respond to forces currently weighing on real activity, we must also set policy to resist any tendency for inflation to increase on a sustained basis. Allowing elevated rates of inflation to become entrenched in inflation expectations would be costly to reverse, constrain our ability to cushion further downward shocks to spending, and result over time in lower and less stable economic expansion. Inflation expectations generally have appeared reasonably well anchored, giving the FOMC room to focus on supporting economic growth. Moreover, as I will explain below, for a variety of reasons, I do not expect the recent elevated inflation rates to persist. In my view, the adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States. But the recent information on prices underlines the need to continue to monitor the inflation situation very carefully.
The Outlook for Economic Activity and Inflation
How long the adjustment in financial markets will take and the consequences of that adjustment for economic activity are subject to considerable uncertainty. In my view, the most likely scenario is one in which the economy experiences a period of sluggish growth in demand and production in the near term that is accompanied by some further increase in joblessness.
New building activity will continue to decline until the overhang of inventories of unsold homes has been substantially reduced, and the demand side of the market is not likely to revive appreciably until buyers sense that price declines are abating and financing conditions for mortgages are improving. Consumer spending will be damped by the effects on real incomes of a weak labor market and rising energy prices and by the effects of declines in the stock market and home prices on household wealth. Business spending on capital equipment should be held down by slower sales and production and by caution in a very uncertain economic environment. Nonresidential construction is likely to lose some momentum in the wake of both weak growth in overall economic activity and tighter credit. Some modest offset to these areas of weakness should come from export demand, which should be boosted by the lagged effects of recent declines in the dollar and supported by still-solid growth abroad.
By midyear, economic activity should begin to benefit from several factors. One is the fiscal stimulus package that the Congress recently enacted. The rebates that households are scheduled to begin to receive in May should provide a temporary boost to consumption. Although the timing and the magnitude of the spending response is uncertain, economic studies of the previous experience suggest that a noticeable proportion of households are quite sensitive to temporary cash flow. The potential effects of the business incentives are perhaps more uncertain. Although economic theory suggests that they should bring forward some capital spending, past experience has been mixed.
Second, the decline in residential investment should begin to abate later this year as the overhang of unsold homes is worked off, reducing what has been a significant drag on economic growth over the past two years. Finally, the declines in interest rates that began last summer should be supporting activity over coming quarters, and their effects should show through more clearly to improvements in economic activity as the stress in financial markets dissipates.
Although a firming in the growth of economic activity after midyear now appears the most likely scenario, the outlook is subject to a number of important risks. Further substantial declines in house prices could cut more deeply into household wealth and intensify the problems in mortgage markets and for those intermediaries holding mortgage loans. Financial markets could remain quite fragile, delaying the restoration of more normal credit flows. As observed in the minutes of its most recent meeting, the FOMC has expressed a broad concern about the possibility of adverse interactions among weaker economic activity, stress in financial markets, and credit constraints.
I expect the run-up in headline inflation to be reversed and core inflation to edge lower over the next few years. This projection assumes that energy and other commodity prices will level out, as suggested by the futures markets. Moreover, greater slack in the economy should reduce pressure on prices and wages. Despite high resource utilization over the past couple of years and periods of elevated headline inflation, labor cost increases have remained quite moderate, and inflation expectations remain reasonably well anchored.
Nonetheless, policymakers must remain very attentive to the outlook for inflation. As I mentioned earlier, the recent uptick in core inflation may reflect some spillover of the higher costs of food, energy, and imports into core prices. And the prices of crude oil and other commodities have moved up further in recent weeks. A related concern is that inflation expectations might drift higher if the current rapid rates of headline inflation persist for longer than anticipated or if the recent easing in monetary policy is misinterpreted as reflecting less resolve among Committee members to maintain low and stable inflation over the medium run. Persistent elevated inflation would undermine the performance of the economy over time.
Conclusion
These have been difficult times for the U.S. economy. The correction of excesses in sectors of the economy and financial markets has spilled over more broadly. Growth has slowed, and unemployment has increased; both borrowers and lenders are facing problems, and the functioning of the financial markets has been disrupted. At the same time, inflation has risen. I believe we will see a return to stronger growth, lower unemployment, lower inflation and improved flows in financial markets, but it probably will take a little while. And adverse risks to this most likely scenario abound: Uncertainty could trigger an even greater withdrawal from risk-taking by households, businesses, and investors, resulting in more pronounced and prolonged economic weakness; events beyond our borders could continue to put upward pressure on inflation rates.
But we should not lose sight of some fundamental strengths of our economy. Our markets have proven to be flexible and resilient, able to absorb shocks, and quick to adapt to changing circumstances. Those markets reward entrepreneurship and risk-taking, and many people are looking for opportunities to buy distressed assets and restructure and strengthen businesses to take advantage of the economic rebound that will occur. Monetary policy has proven itself, under a wide variety of circumstances, very effective in recent decades in damping inflation when needed and in stimulating demand and activity when that has been appropriate. Our job at the Federal Reserve is to put in place those policies that will promote both price stability and growth over time. We have the tools. As Chairman Bernanke often emphasizes: We will do what is needed.
Footnotes
1. Stephanie Aaronson and Joyce Zickler, of the Board’s staff, contributed to the preparation of these remarks. Return to text
Building Green - Safeguard Indoor Environmental Quality
You can help protect the occupants in your building from eye and lung irritation and other health problems by specifying gas-free materials and furnishings and keeping your space well ventilated.
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Materials and Furnishings
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Choose materials such as carpets, paints, wall coverings and adhesives carrying the Green Seal label and furnishings with Greenguard certification -- signifying they emit low levels of potentially harmful volatile organic compounds (VOCs) |
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Cleaning and Maintenance
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Limit the use of harmful cleaning solvents in your space by choosing low-maintenance floorings and furnishings and by equipping entryways with features such as awnings, mats and walk-off areas. |
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Minimize the spread of toxic chemicals in your space by centrally locating janitorial facilities and installing a separate ventilation system and sink for mixing concentrated cleaning agents. |
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Use cleaning products that come in concentrated form and minimize the use of harmful compounds. |
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Ventilation
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Specify a displacement ventilation system that delivers low-speed fresh air at floor level and allows it to rise in the room. |
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Install operable windows, which keep occupants comfortable and more satisfied by allowing them to control their access to fresh air. |
Building Green - Make Smart Use of Materials and Resources
Using reused and recycled materials as much as possible -- during construction and throughout the life of your building -- will save you money and time and help conserve natural resources such as wood.
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Evaluate and specify materials or assemblies based on life-cycle analysis tools such as eLCie, BEES and Athena. |
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Create a management plan for construction waste management with the help of a consultant. Some integrated waste management companies such as Allied Waste offer services that are designed to meet LEED criteria in this area. |
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Make use of preexisting building shells and other structural elements at your site, when possible. |
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Set aside used materials such as hardwood flooring, high-quality brick, structural steel, plumbing fixtures and cabinetry and install them in your new space or elsewhere |
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Use materials that were harvested, extracted or recovered in the region. |
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Choose remanufactured furniture, which is made from recycled parts, costs less and saves natural resources. |
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Limit wood use. For items such as shelving and bookcases, consider using composites made from wheat fiber or other agricultural waste or other non-wood materials. |
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Specify certified wood products. Purchase wood or wood products that are certified by the Forest Stewardship Council, indicating they originate from sustainable, well-managed forests. FSC-certified wood can be more expensive than common types of wood, but is less expensive than exotic varieties. Growing demand is driving down the price of certified wood |
Building Green - SAVE ENERGY
Energy-efficient design is one of the best opportunities you have for cutting costs and reducing your project's harmful environmental effects.
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Windows and Daylighting
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Incorporate daylight design elements such as clerestories, light shelves, skylights and high-performance windows. Increasing the amount of natural light in your building or workspace will reduce your electricity bill, as well as help boost employee productivity and satisfaction |
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Specify windows with a shading coefficient no higher than 0.4 on the south, east and west and a visible transmittance level above 0.6 to let sunlight in and keep excessive heat out. If you are building in a region with hot summers and cold winters, a U-value in the .25 to .35 range will provide adequate insulation against the heat and cold. |
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Tune your window specifications to your building's orientation. Shading coefficients are most important on southern, eastern and western exposures, while northern exposures should have high visible transmittance and low U-values. |
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Electricity Use
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Site your building according to its heating and cooling needs. Adjusting a building's orientation by just a few degrees can have a big impact on the size of your heating and cooling system and your energy bill. |
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Specify lighting fixtures with a coefficient of utilization of at least 80 percent. |
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Make sure your fixtures and lamps are properly sized for use with one another. For example, T-5 lamps don't work as well in direct fixtures designed for T-8 lamps and may be too bright for some direct-lighting strategies. |
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Install occupancy sensors to control lighting, ventilation, air conditioning and heating in enclosed areas that are occupied intermittently, including offices. |
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Instead of using recessed fixtures to light a workspace, use a pendant strategy with an open top so light will hit the work surface and also reflect off the ceiling and walls into the task area. |
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Emphasize light-colored surfaces that reflect light and appear brighter. |
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Hire a lighting designer. A good lighting specialist will provide solutions that cut energy costs while creating a more pleasant and productive environment. |
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HVAC System
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Hire an independent commissioning team early in the design process to check the design, installation, calibration and performance of your energy systems and help ensure you will meet your efficiency goals. Your design should include equipment to monitor water and energy performance over the entire life of the building. |
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Implement features such as low-e windows, increased insulation, task/ambient lighting and energy-efficient office equipment to reduce waste heat, which will allow you to downsize your HVAC system. |
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Consider staging multiple smaller HVAC chillers, rather than one large chiller. Compressors that run near capacity are most efficient. Variable speed drives can also help chillers operate more efficiently. |
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Specify oversized ducts that will deliver air at a lower speed and enable you to reduce the size and electricity consumption of your fans. An added benefit is a much quieter mechanical system. |
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Implement automated building controls for your HVAC system. |
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Office Equipment
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Choose photocopiers, fax machines, printers, water coolers and other office equipment that carry the Energy Star label, an indication that they use an average of 50 percent less energy than standard models. |
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Ensure that the Energy Star "sleep mode" features are enabled on the equipment. |
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Make use of laptop computers, which use 50 percent to 90 percent less energy than standard desktop models. |
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Specify computer monitors with flat screens, which use half as much energy as CRT screens and offer sharper displays and less reflection |
Building Green - Maximize Water Efficiency
Both inside a workspace and outside a building, there are numerous steps you can take to reduce your use of clean, drinkable water, an increasingly precious and expensive resource in many areas of the country.
Landscaping
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Landscape with plants that are well adapted to the local climate. Choosing indigenous plants over exotic varieties can help reduce the need for irrigation, as well as environmentally harmful pesticides and fertilizers. Invasive non-native plants can harm the local ecology. |
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Choose a micro-irrigation system, instead of traditional sprinklers, to deliver water to your grounds more efficiently. During watering, micro-irrigation delivers 85 to 90 percent of the moisture supply to plants, compared with just 40 to 50 percent delivery for typical broadcast sprinklers. |
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Plant low-water ground covers or drought-tolerant grass and use absorbent soil mixtures to promote stormwater infiltration and reduce additional costs related to managing stormwater. |
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Water plants and grass with rainwater from an on-site cistern to limit the use of potable water. |
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Fixtures and Cooling Towers
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Specify waterless urinals, low-flow or composting toilets and high-efficiency faucets and dishwashers, which use a lot less water than conventional technologies. |
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Install a plumbing system that recycles water at your site. Known as "gray water," this recycled water can be used to flush toilets, fill a cooling tower or irrigate landscaping. |
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Choose a closed-loop cooling tower, which can save hundreds of gallons of water per day on average by reducing evaporation. In addition, investigate whether your area allows the use of non-chemical cooling towers and water conditioning systems. These use polarization technology or sand filtration combined with ozone for disinfection instead of chemicals, helping keep polluted discharge out of the sewer system, and lower water consumption by reducing the need for make-up water. |
Overpriced Real Estate
In the real estate world, a large group of people are looking to buy homes at any given time. These are the seller's best prospects. This ready group of buyers is wasted, however, if your house is overpriced.
People who have been shopping around and are accustomed to comparing properties will probably refuse to look at your home with an unrealistic price tag. You and your real estate agent may know that you would sell for $10,000 less, but the buyers do not know this. As a result, your overpriced property receives little attention.
Don't be fooled into thinking that your house is worth more than someone is willing to pay for it, or that it's just a matter of waiting for the "right" buyer to show up. Surveys show that the longer a house is on the market before being sold, the greater the drop in price from the listing price when it does sell. The buying public eventually sets an accurate price. An overpriced house just sits on the market, waiting for a price adjustment before it will attract a buyer.
Don't Fear Falling Prices
Yale Professor Robert Shiller, whose Case-Shiller 20-city home price index has become an industry standard, says people shouldn’t fear gradually falling home prices.
"There's nothing troubling about a gradual correction of home prices. If we keep our incomes at the current level and home prices go down we are richer, we can buy more housing," Shiller says.
But if home prices fall suddenly, Shiller says that could undermine housing as well as consumer confidence and the economy.
There has been a misperception that houses will constantly appreciate, Shiller says. "Sometimes people will try to imagine that we can have both high home prices and affordable housing. But I can tell you that doesn't add up," he says.
"You either have high home prices or lower home prices. And lower home prices are what we want, and people shouldn't be afraid of that," Shiller says. "Most of us care about our children and grandchildren, and these people have to buy houses so why would we want high home prices? We want economic growth, we don't want high home prices."
Source: Reuters News, Lynn Adler (02/21/08)
IRS is Eyeing Real Estate Practitioners
The Internal Revenue Service is paying close attention to the definition of "Real Estate Professional" when it reviews tax returns. Under the IRS Code and Regulations, real estate professionals are defined as those who spend 750 hours or more annually handling real estate-related activities.
Real estate professionals with property investments cannot record more than $25,000 in losses against their real estate income if they earn less than $100,000 and no losses at all are permitted if they earn more than $150,000. However, there are no limits to taking real estate losses against other forms of income.
Given that the IRS definition of real estate activity requires "brokering" property sales, purchases, or leases, two cases in California reveal auditors declaring that real estate agents are not real estate professionals.
Source: Realty Times, Diane Kennedy (02/21/08)
6 ways to make your nest egg last forever
Worried that you have enough? Here are vital actions you should take to guarantee you'll never outlive your savings.
By Kiplinger's Personal Finance Magazine
The oldest baby boomers are 60, yet many of them still don't know whether they are saving enough or how to convert those savings into a lifetime of retirement income. If you're one of those 41 million boomers who are now 50 to 60 years old, the next five to 15 years will be critical. That's when you'll need to top off your retirement savings, focus your investment strategy and figure out how to maximize your income after your paychecks stop.
For many people, work remains an important part of their lives -- financially as well as personally -- even after they retire. Michele Sabatier's pension from the National School Boards Association, where she worked for 18 years as a graphic designer and art director, will buy her the freedom to pursue a new career as a teacher. After resigning from the association earlier this year, Sabatier plans to trade a two-year commitment with the Mississippi Teacher Corps for a free master's degree in education at the University of Mississippi. When the two years are up, she can apply to teach anywhere she likes. "I had reached an age where I wanted to do something different with my life," says Sabatier, 51.
Now that her only child has graduated from college, she's eager to move from northern Virginia to a less expensive area. She plans to take her pension as a lump sum -- a wise move because she is divorced and a monthly benefit would be passed on only to a surviving spouse. "I can't imagine doing absolutely nothing," Sabatier says about her ambitious plan for the next phase of her life. "I think it's interesting how our retirement will be so different from that of our parents' generation."
If you want your retirement to be ideal as well as different, these strategies will get you off to a good start:
Get a financial checkup
The five years before you leave your job and the five years after are the most critical transition periods for investing and financial planning. As your priority shifts from accumulating money to shepherding it through retirement, you'll probably benefit from some financial guidance.
A newly approved pension-reform law will make it easier for employers and 401(k) providers to offer investment advice to workers. Some providers, such as Principal Financial Group, already offer one-on-one counseling to workers who are within five years of retirement age. If you're behind schedule, you might be urged to boost your contributions or work longer. Mutual-fund companies encourage new retirees to roll over 401(k) and other retirement savings into an IRA, in exchange for advice on investing for growth and income and for guidance on withdrawing money.
Principal Financial calls the five years before and after you retire the red zone. It's the time when workers 50 and older can make catch-up contributions to their 401(k)s and other retirement plans. They'll also confront crucial decisions about retirement benefits and investments. For example, if you're lucky enough to have a traditional pension, you may be able to choose between taking a lump sum or a monthly check. Deciding when to collect Social Security benefits can also have an effect on your cash flow.
If you've been an aggressive investor, it's probably time for a portfolio makeover. Severe market downturns during the first few years of retirement -- or just before it starts -- can mess up the rest of your life. Although you should not park all your retirement money in bonds and bank accounts, you can surely do without the riskiest kinds of investments.
An illustration from Prudential underscores how vital it is to avoid large losses during the red-zone years: Even if your retirement investments average a 7% return for 30 years, the sequence of year-to-year returns will determine how long your money lasts. Let's say you retire at 62 with a lump sum of $250,000 and intend to withdraw 5% of the portfolio's value each year. If you lose a bundle during your first few years of retirement, you could run out of money by age 79. But if you enjoy double-digit profits early on and your losses come later, you'll end up with more than twice as much as you had when you started -- even after taking annual withdrawals and allowing for some disastrous drops toward the end of the 30 years.
Set your budget
The possibility of running out of money is the main reason financial advisers such as Christine Fahlund, of T. Rowe Price, urge you to go slow, limiting your first year's withdrawals to 4% of your total retirement funds. Then you can raise the draw by 3% a year to cover inflation. If you start at $500,000, you can safely withdraw $20,000, or 4%, during the first year. Then you boost the second year's take to $20,600, the third year's to $21,200, and so on.
While that sounds conservative -- and it is -- there's a reason. The strategy is intended to help you survive should a bear market strike as you begin your retirement. On the other hand, if your investments perform well initially, you can reassess the situation after a few years and pay yourself more.
Unfortunately, few prospective and current retirees are aware of these guidelines. A recent survey by New York Life found that only one in 10 people could identify 4% as an appropriate initial withdrawal rate. Nearly half thought it should be more.
David Colescott is living proof that the 4% rule works. After retiring at age 65 in 1999, when the stock market was soaring, the Pinehurst, N.C., man enrolled in T. Rowe Price's Retirement Income Manager program. That was early in 2000, just before the three-year bear market began. Even though his portfolio took a hit during those down years, he's been able to recover and give himself a raise every year since. He has no concerns about outliving his money.
Colescott, who is a former Marine and international communications consultant, calculates that even if his investments don't earn another dime -- which is unlikely because he has 60% in stock funds and 40% in bond funds -- he'll still be able to withdraw money at his current rate for another 15 years. Colescott's advice: Be cautious with your withdrawal strategy but not too timid with your investments, because you'll need some growth to sustain you through a retirement that could last for decades.
Do a dry run
As with most things, practice makes perfect. That's why Ed Fulbright, a CPA and financial adviser in Durham, N.C., advises near-retirees to test-drive a retirement budget. "If you can live on your projected retirement cash flow for two to three years without increasing your debt, then you know that you can make it in retirement," Fulbright says.
That's also a backdoor strategy to finding something extra to put away. If you believe you can live comfortably in retirement on 85% of what you're making -- a fair rule of thumb -- then save and invest at least 15% of your gross income.
Paul and Madonna Engle of Marietta, Ga., decided to experiment with a retirement budget before they quit their jobs. "We kept track of our expenses for two years and figured we needed about $4,000 a month after taxes," Paul says. The couple, both 57, contributed the maximum amount to their 401(k) plans plus the additional catch-up contributions. In 2006, you can contribute up to $15,000 to a 401(k) or similar retirement plan. If you are 50 or older, you can kick in an extra $5,000.
After living on their practice-retirement budget for two years, the Engles decided they were ready for the real thing. In 2005, Paul stepped down after 29 years with IBM, and Madonna gave up her job with a small accounting firm after the 2006 tax season. Paul's pension and their income from four rental properties will provide all the income they need -- even before they start claiming Social Security benefits. At this rate, they may never have to raid their retirement savings -- except for splurges like an upcoming trip to the Galápagos Islands.
Choose your date
The government pegs the "normal" Social Security retirement age at 65 to 67, but yours is really up to you -- and it's a big decision. Ron and Monica Reimer could begin collecting Social Security benefits next year when they both turn 62, but their checks would be reduced by 25% for the rest of their lives. Or they can wait until their normal retirement age of 66 and get full benefits. Your best starting date depends on several factors, including: Do you plan to work beyond 62? Will you need money immediately? Are you concerned about providing the largest monthly benefit for a surviving spouse?
If your vision of retirement includes work, as it does for more than three-fourths of baby boomers interviewed in a recent Merrill Lynch study, then claiming Social Security at 62 is a mistake.
Should you continue working, there's an "earnings cap" penalty on Social Security benefits paid prior to your normal retirement age. Earn more than the cap -- $12,480 for 2006 -- and you forfeit $1 in benefits for every $2 you make over the limit. Once you reach your normal retirement age, the earnings cap disappears.
For the Reimers, who live in Georgetown, Texas, the decision is not clear-cut. Since neither spouse is employed, the earnings cap doesn't matter. With Ron's pension from DuPont and their stash of other retirement savings, they don't need the Social Security money. Still, they want to know the best time to start collecting benefits.
Thomas Dalton, a professor of accounting and taxation at the University of San Diego, says a single, nonworking 62-year-old would be better off taking Social Security as soon as possible because doing so reduces the need to tap tax-deferred retirement funds. "The advantage of leaving retirement funds in a tax-deferred account earning 8% far outweighs the loss in Social Security benefits from early retirement," Dalton wrote in the June 2006 issue of The CPA Journal. Even at 5%, the early retiree would still come out ahead until age 89. Waiting until normal retirement age to collect benefits would pay off only if a retiree lives past 89.
The situation is different for married couples, says Henry Hebeler, author of "J.K. Lasser's Your Winning Retirement Plan." Hebeler agrees that taking reduced Social Security benefits at 62 might be the right thing to do if you've been forced out of your job and need money or if you're in poor health and doubt that you'll live to 66 or 67. But delaying is wisest for most married couples, he says. A surviving spouse is entitled to 100% of the primary wage earner's benefits. So if Ron wants to leave the most income possible for Monica, he should wait until his normal retirement age or later to tap Social Security benefits. That way, Monica would be entitled to the maximum survivor benefit -- including annual cost- of-living adjustments -- for life.
Also, because Monica earned a small Social Security benefit based on her earnings history, she can claim her own retirement benefits earlier without jeopardizing her future survivor benefits. Although her retirement checks would be 25% smaller at 62, she would still be entitled to the full survivor benefit -- worth 100% of Ron's monthly retirement payments -- as long as she is at least 66 when she begins to collect it.
Consider an annuity
Concerned that you'll outlive your money? One solution is to use a portion of your savings -- usually no more than half your nest egg -- to buy an immediate annuity that will guarantee you income for the rest of your life. A traditional annuity has several flaws. You relinquish a large chunk of your assets, and if you die prematurely, the insurance company keeps the money unless you pay extra to pass on the benefit to a surviving spouse or continue payments to a named beneficiary for a set number of years. Plus, inflation eats up the buying power of your fixed payouts.
The insurance industry is selling new varieties of immediate annuities that offer you more choices and more control. For example, New York Life sells an immediate annuity with a "changing needs" option that lets you raise or lower payouts to accommodate your situation. If you owe five years of payments on your mortgage, for example, you can take more income now and reduce the amount after the debt is paid. Or, if you fear your savings will run dry in 20 years, you can choose a smaller payout up front and arrange to boost your income later.
A new deferred annuity from Prudential lets you gamble for growth by investing in a variety of accounts that resemble mutual funds but guarantee you a minimum return of at least 5% a year, regardless of market performance. If the investments outperform the guaranteed return, you can base your annual withdrawal on the higher balance.
Those added guarantees come at a price, however. For example, if a 65-year-old married couple invested $100,000 in a traditional fixed immediate annuity, they would receive payouts of about $7,000 a year as long as either of them lived.
If the same couple bought a deferred annuity with a minimum-earnings guarantee, they would receive only about $5,000 a year if they began payouts immediately. But the longer they waited to use the annuity balance for income, the more guaranteed principal they'd build up, resulting in larger monthly checks for life. And once the surrender period disappeared, they could cancel their deferred-annuity contract and collect their remaining balance, if there was any left over.
The minimum-earnings guarantee and assured income for life made sense to Bill and Amanda Cichanski. Bill, 62, is a design engineer in Tacoma, Wash., who is scaling back his hours as he makes the transition to retirement. He and Amanda, a legal nurse consultant, have been planning an exit strategy that will allow them to travel and pursue outdoor sports, such as hiking and fly-fishing. Bill recently put $300,000 into one of the new-style Prudential annuities. He plans to rely on other retirement savings first, letting his annuity balance grow. "It allows me more control than an immediate annuity, and whatever's not used can go to Amanda," he says.
Roll it over
When it's time to switch jobs or retire, you have three options for your retirement savings. If you have at least $5,000, you can leave it in the account with your former employer. Or, regardless of the amount, you can roll it into an IRA -- or into your new employer's plan, if it accepts rollovers. In general, an IRA offers you more investment options than most employers' 401(k)s, so a rollover is usually wise. But if your 401(k) includes company stock, don't move it without evaluating all your options. There are special rules involving company stock that could result in significant tax savings.
Let's say you have $500,000 worth of company stock in your 401(k) that you bought on your own or received as your employer's match, and your total purchasing cost, or basis, is $100,000. If you roll over the stock into an IRA, you would pay ordinary income taxes on all withdrawals. So would your beneficiaries, if you die with money in your account.
Instead, consider taking advantage of special rules for what's called net unrealized appreciation. When you take a lump-sum distribution from a 401(k), you can move the stock to a taxable account and roll the rest of the assets to an IRA. You'll pay ordinary income taxes on your $100,000 basis, which in the 28% tax bracket is $28,000. But the remaining $400,000 of appreciated earnings will be taxed only when sold and will qualify for the 15% long-term capital-gains tax rate. If you leave the stock to your heirs, they will inherit the stepped-up basis, which is the value of the stock at the time of your death. If they sell it immediately, they could end up paying little or no taxes on many years of growth.
By Mary Beth Franklin, Kiplinger's
The world’s best-kept retirement secret
The war is long over, but the bad rap remains. Today's Nicaragua is an inexpensive paradise eager to welcome expatriates.
By International Living
Nicaragua is virtually unknown to most people and usually misunderstood, which is why forward-thinking investors can find some of the best real-estate deals on Earth in this country.
For the record, Nicaragua is not in the midst of a civil war, and it's not a communist state. The country has, however, suffered from a serious case of bad press.
Nicaragua is one of the most beautiful countries in all the Americas. It boasts a dramatic Pacific coastline; long, gentle Caribbean beaches, volcanoes and freshwater lakes dot the hilly inland. Colonial cities like Granada and León offer visitors a taste of days gone by, while Managua, the capital, is rapidly becoming a real first-world city.
The country's most famous beach destination, Barceló Playa Montelimar, is a 290-room, all-inclusive resort with four restaurants, an airstrip and miles of secluded beaches. Farther south is the popular town of San Juan del Sur, where cruise ships dock regularly. The town is quickly becoming a hot spot for North American expatriates.
Masaya is home to Nicaragua's best craft market, offering just about anything that's hand-crafted in the country -- ceramics, leather goods, iron work, hammocks, jewelry, rocking chairs, masks, clothing . . . you name it. There are five active volcanos at nearby Masaya Volcano National Park offering the best volcano viewing in Central and North America. It's the only place in the region where you can see hot magma rising from the depths of the Earth -- and you can drive right to the top.
Lake Nicaragua, the 10th-largest freshwater lake in the world, is famous for its freshwater sharks, the only ones in the world. The lake has great sport-fishing and, with 350 "isletas," island-hopping. The islands of Lake Nicaragua were created hundreds of years ago when the volcano Mombacho exploded. Today, you can explore this extinct volcano along trails in the cloud forest. You'll see more varieties of orchids than just about anywhere else in the world and all kinds of wildlife, including 170 counted species of birds and blue morpho butterflies. You can also take a canopy tour, shooting from treetop to treetop on harnessed zip-lines.
Safe and stunning
Nicaragua is a nation at peace. Its government is democratically elected, committed to a free-market economy and eager to attract foreign investors. A recent study by the Inter-American Institute on Human Rights and a survey of police forces in the Americas show that Nicaragua is the safest country in Central America and one of the safest countries in the world. Recent studies also point to Nicaragua's low reported crime rate -- lower than in Germany, France or the U.S.
In September 1999, Nicaragua enacted the most attractive -- and most aggressive -- tourism-incentive law in Latin America. If you've ever toyed with the idea of owning your own B&B, running a sailboat charter, leading adventure treks into the jungle, dishing up meals in your own restaurant or operating any kind of tourism-related business, Nicaragua is the place to do it.
Law 306 is sweeping in scope and offers hard-to-beat benefits for investors who take advantage of the program. If your business qualifies, you pay no income- or real-estate taxes for up to 10 years. You can bring in (or buy locally) all the supplies you need -- from furniture and boats to linens and cash registers -- tax- and duty-free.
Incentives for foreign retirees
If you're simply in the market for a place to relax and spend a few months a year in a quiet, safe, affordable retreat, again, Nicaragua is hard to beat. The country's retiree incentive program is much like Costa Rica's was in the 1980s, attracting thousands of expatriates. To be eligible, you need only be over 45 and have a monthly income of at least $400.
The benefits come mostly in the form of tax incentives. As a foreign retiree, you:
- pay no taxes on any out-of-country earnings.
- can bring into Nicaragua up to $10,000 of household goods for your own home, duty-free.
- can import one automobile for personal or general use duty- and tariff-free, and sell it after five years, tax-free.
- can import an additional vehicle every five years under the same duty exemptions.
The cost of living in Nicaragua is a fraction what you're used to paying up north. Our sources on the ground say a two-week supply of pork and beef costs about $65. For enough fresh vegetables to feed four or five people daily for a week, expect to pay about $55. A 30-minute consultation with a U.S.-trained physician will cost you about $35. You can hire a maid who will cook, clean and do your laundry for less than $120 a month; and you'll spend just $25 on a wonderful restaurant meal of local delicacies, including with wine and dessert.
The Pacific Coast
Because most of the world still believes Nicaragua is a country full of problems and political unrest, local real estate, especially waterfront real estate, is undervalued.
Developers are scurrying to build along the Pacific Coast, where the government is improving the local infrastructure by paving roads and improving tourist areas.
Not too long ago -- in 1997 -- we looked at raw land on the Pacific, a lot here and there for sale without amenities. Only one "development project" was under way. Now, you have several to choose from, all with water, electricity and views of the surf below.
While it's true that prices are already on the rise, it's still possible to find bargains. One development on a hill outside the town of San Juan del Sur has views of the harbor and the pristine coast. The development is a walk to the beach and a five-minute drive from town. Four years ago, a lot here with water, electricity, and paved roads started at $39,000. Now, an oceanfront lot in San Juan del Sur, with a home, can sell for up to $385,000. Yet, because Nicaragua is still booming, there are plenty of new developments emerging and a number of good deals remain along the Pacific Coast.
Near Grenada you'll find Lake Apoyo. This crater lake, formed over 21,000 years ago when a volcano erupted, is the largest crater lake in the country and one of the most beautiful. The views from the top stretch over the hillsides, taking in the blue waters below. Because of its elevation, Lake Apoyo is generally five degrees (Fahrenheit) cooler than Granada, just 15 minutes away. Its pristine water has therapeutic qualities, thanks to the sulfur and other minerals, and the temperature is 85 degrees all year long. It is in a Nicaraguan natural reserve and a proposed UNESCO World Heritage site.
Large three-bedroom, two-and-a-half-bathroom villas on the shore of Laguna de Apoyo can be purchased for $170,000 to $190,000. Each has views of the lake and Mombacho volcano, access to the lake and all resort facilities. Across the lake, one-acre beachfront lots are going for $90,000.
Granada
Charming Granada, on Lake Nicaragua, is the jewel of Nicaragua's colonial crown, the second-oldest city in the Americas. Its large central plaza is surrounded by 16th-century colonial buildings, great restaurants, museums and other entertainment.
You can pick up a vacant lot in an area of town where you might not want to live right now, but could probably live in a couple years, for around $45,000. You could also buy a habitable two-bedroom, two-bathroom house within walking distance of the center of town for around $80,000 to $100,000. Fully restored three-bedroom, two-bathroom colonial homes are going for $150,000 and up.
Word is getting out about this country. But it's not simply because the property deals are so attractive or the cost of living so affordable. It's because this country boasts a stable democracy, a booming economy and one of the most comprehensive incentive programs anywhere.
By Kathleen Peddicord, International Living
Kathleen Peddicord is the publisher of International Living, a 25-year-old business that publishes several free e-letters, a monthly print newsletter, and a growing line of books and reports, all detailing the best places in the world for Americans to live, travel and invest. Eight years ago she decided to bite the bullet herself, and moved her family of four from Baltimore, Maryland to Waterford, Ireland. Since mid-2004, she has been dividing her time between Waterford and Paris, France.
International Living publishes several free e-mail newsletters about retiring, living, and traveling overseas. Kathleen Peddicord recommends: IL Postcards, a daily publication on the world's best travel and retirement opportunities.
For more information about anything you have read in this article, write to Webeditor@InternationalLiving.com.
Save a million at virtually any age
You can easily turn a goose egg into a nest egg if you begin early. For those who have been slow to get started, here are calculations for how much you need to put aside each month.
By Kiplinger's Personal Finance Magazine
The road to $1 million starts early, but there's hope, and help, for late bloomers.
Check your age category below to see how much you need to save each month to accumulate $1 million by age 65. (Because of rounding, some savings calculators may show slightly different numbers.) You'll also find strategies to fit retirement saving into the rest of your life.
At age 25, you're starting from scratch. At ages 35, 45 and 55, we assume you already have money in savings on which you're earning 8% annually. Even if you can't save quite this much now, our step-by-step guide will help you set priorities for every stage of life.
How to save a million at age 25
If you've saved zero, to reach $1 million by age 65 you need to save $286 a month.
Successful savings strategies:
- You're just starting your career, so this is your chance to build a solid financial foundation. Time is on your side.
- Contribute enough to your company 401(k) plan to capture your employer match. If you don't have a retirement plan at work, fund an individual retirement account.
- You'll be investing for 30 years or more, so you can afford to keep 100% of your account in stocks.
- Pay down credit cards and other high-interest debt. That will free up money to save for a house.
How to save a million at age 35
If you've saved zero, to reach $1 million by age 65 you need to save $671 a month. If you've got $50,000, you need to save $304 a month.
Successful savings strategies:
- You may be starting a family or preparing to buy a home. Balance your short-term needs with long-term savings goals.
- Although you have added responsibilities, don't neglect retirement.
- Aim to save 15% of your gross income, including an employer match in your 401(k). If one parent leaves work to care for the kids, consider opening a spousal IRA.
- Shift your assets to 90% stocks and 10% bonds.
How to save a million at age 45
If you've saved zero, to reach $1 million by age 65 you need to save $1,698 a month. If you've saved $50,000, you need to save $1,298 a month. If you've saved $100,000, you need to stash away $861 a month.
Successful savings strategies:
- You may be juggling the needs of a growing family and aging parents, but don't take a break from retirement savings.
- You can contribute up to $15,500 to a 401(k) or similar workplace-based retirement plan this year or $5,000 to an IRA. Roll over retirement savings from previous jobs into an IRA.
- Adjust your asset allocation to 80% stocks and 20% bonds.
- Your kids can get grants or loans for college, but there's no financial aid for your retirement.
How to save a million at age 55
If you've saved zero, to reach $1 million by age 65 you need to save $5,466 a month. (See "What to do if you're 55 and haven't saved a dime.")
If you've saved $50,000, you need to save $4,859 a month to reach $1 million by 65. If you've saved $100,000, you need to save $4,253 a month. If you've saved $200,000, you need to put away $3,040 a month.
Successful savings strategies:
- Take advantage of your peak earning years to top off your savings.
- Add $5,000 in annual catch-up contributions to your 401(k) savings and an additional $1,000 to your IRA.
- As you near retirement, reallocate your portfolio to 70% stocks and 30% bonds.
- Estimate your retirement expenses and your projected income. If you're coming up short, consider working a few more years.
This article was reported and written by Mary Beth Franklin for Kiplinger's Personal Finance Magazine.
Published Feb. 21, 2008
Press Release - Ask About Real Estate.net
"Top Real Estate Referral and Global Listing Company boast record month in January"
Ask About Real Estate, LLC, aka: www.askaboutrealestate.net posted January, 2008 numbers with over a 50% increase in sales and over a 72% increase in referrals over the same month January, 2007.
Ask About Real Estate.net is widely considered the Match.com of real estate linking key real estate professionals: Realtors, Lenders, Appraisers, Home Inspectors, Title Companies and many others in the field with consumers all across America. Their market share has expanded and grown to include foreign investors and consumers relocating to America.
Learn more about Ask About Real Estate.net - check out the "Help" Section, "About Us" Section, "Real Estate Tips" Section, and listen to the "Consumer" and "Real Estate Professional" virtual messages on why they should join the Ask About Real Estate system and what services they will receive. Click here to begin - www.askaboutrealestate.net.
Source: Q Maxwell - Real Estate Referral News
Budgeting To Buy A Home
If you want to buy a house, start by estimating what you can afford and making a budget to buy. Many prospective buyers find it difficult to accumulate enough cash for a down payment, especially if they are saddled with heavy debt. With some discipline and creative strategies, you can probably come up with more cash than you think. Check your current finances and investigate ways to save and raise extra funds.
- Write down your monthly income, savings, and spending. If you have a lot of high-interest credit debt, try to move your balances to cheaper cards and plan to spend a year paying off as much of that debt as possible.
- Identify your long-term financial goals. Owning a house may be one, saving enough for retirement may be another.
- Make a home-buying savings plan. Open a savings account just for this purpose and make regular deposits, even if you put asidej ust $20 a week.
- Look for other sources of down payment funds, such as a Roth Individual Retirement Account (IRA). First-time buyers now have access to $10,000 of these funds penalty-free under certain conditions.
- Cut back on non-essential spending. Your friends and relatives will understand that you can't spend $20 to go to dinner and the movies if you say you're saving to buy a house. Your children will understand, too. In fact, saving to buy a house can be a family activity.
- Make saving for a house fun. Chart your progress on paper and post it somewhere to remind yourself of your goal.
Price Your Property Correctly
In a perfect world, you would sell your home for the most amount of money in the least amount of time. That doesn't happen often—and pricing your home too high could cost you money in the long run. In almost any market, the homes that sell the fastest and for the most money are those that are priced closest to what a reasonable buyer would expect to pay at that time. That is why you absolutely must know your competition and understand how key factors play into your pricing decision.
Key variables affecting price include:
-
Comparable sales prices
The most reliable indicators of current market value are pending sales of properties similar to yours and comparable sales that have closed within the past six months. Find out whether or not these were full-price sales. If houses are selling for 95 percent of their list price, it's unwise to price your property more than 5 percent above what you expect to get.
- Market conditions
Find out how long recently sold comparable properties were on the market before they sold. The longer properties are on the market in your area, the more vital it is to price your home close to market value if you want to sell quickly. Get a free estimate of your home's value to find out where you stand.
- Square footage
Use square footage to compare your price against comparable listings and recent sales. For example, if you have 2000 square feet and you want to price your home at $200,000, that's $100 per square foot. If your neighbor has 2,200 square feet and has his home priced at $200,000, that's about $91 per square foot. Make sure your square footage calculation supports your expected price.
- Land
The size of your lot may play a pivotal role in pricing your home, especially if there are many comparable homes for sale on varying sizes of lots. See what comparable lots alone are selling for in order to get a sense of land prices.
- Features The number of bedrooms and bathrooms is a key variable in pricing a property. If your area is full of homes with two bathrooms, and you have only one bath, you may need to adjust your price downward.
Buy Real Estate in Your IRA
A little-known IRS provision lets you extend your real estate purchasing with tax-deferred dollars.
Are stock market woes preventing you from building wealth in your retirement account? If so, you might be interested in a small, but growing, trend among individual retirement account owners—investing their retirement funds in real estate.
How It Works
If the option of using tax-deferred funds to purchase property sounds appealing, you’ll need to locate an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account. Most banks and brokerage companies—the most common IRA account options—limit your choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. But Section 408 of the Internal Revenue Code permits individuals to purchase land, commercial property, condominiums, residential property, trust deeds, or real estate contracts with funds held in many common forms of IRAs, including a Traditional IRA, a Roth IRA, and a Simplified Employee Pension plan, or SEP-IRA.
To find a custodian that specializes in real estate, search under terms such as “real estate IRA” or “self-directed IRA.” This latter term was coined by the financial industry in the 1980s to distinguish the self-directed IRA from other IRAs that focus on stocks and bonds. The IRA account holder can’t serve as the custodian of his or her own account. However, it’s important to select a custodian knowledgeable about the types of investment you’re interested in, because the custodian holds title to the real estate. Do your homework, and understand what you’re getting into.
Fees can vary widely among custodians, as can the flexibility of the services provided for account holders. If the custodian holds real estate on your behalf, but does not service it (collect the rent, etc.), you may have to contract with other providers. However, be sure that all rents are paid into the IRA and that all taxes are paid by the IRA.
Purchasing the Property
Most IRA custodians that hold real estate will usually allow you to purchase raw or vacant land, residential properties, or commercial buildings for your portfolio. In addition, some custodians may permit foreign property or leveraged property.
Since buying a property may require more funds than you currently have available in your IRA, you also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note.
Unfortunately, Internal Revenue Service regulations will not let you use the real estate owned by your IRA as your residence or vacation home. Nor can your business lease space in your IRA-held property. The underlying premise for any real estate investment purchased with IRA funds is that you can’t have any personal use or benefit of the property. To do so may cost you plenty in taxes and penalties.
There are a few other IRS limitations as well. You cannot place a real estate property that you already own into your IRA. Your spouse, your parents, or your children also couldn’t have owned the property before it was purchased by your IRA. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only “lineal descendents” be disqualified.
Once you’ve chosen a property, your IRA custodian—not you personally—must actually purchase it. The title will reflect the name of your IRA custodian for your benefit (such as Silver Trust Co., Custodian FBO John Doe IRA). In addition, if you put up earnest money with your personal funds, you’ll need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.
Operating an IRA-held Property
Because all property expenses, including taxes, insurance, and repairs, must be paid from funds in your IRA, you’ll need liquid funds available in your account. Of course, all income generated from the property will be deposited in your IRA account so you can use that money to cover your costs. You also can make annual contributions within federal guidelines.
Currently, you can contribute $3,000 annually to a traditional or Roth IRA ($3,500 if you’re age 50 or older) and as much as 15 percent of your annual compensation, up to $40,000, if you’re a self-employed individual with a SEP-IRA. If your account doesn’t have funds to cover property expenses, you will have to withdraw the property from your IRA and pay taxes on the value of the property, as well as possible penalties for early withdrawal.
It’s also possible to sell properties while they are held by your IRA, so long as the purchaser is not a family member. Once a deal closes, your IRA account now holds the cash proceeds—ready for you to make your next investment. An alternative is to sell an IRA-held property with seller financing so that all payments made by the buyers are paid to the IRA.
Distributing Your Property
You can withdraw real estate from your IRA and use it as a residence or second home when you reach retirement age (age 59½ or older for a penalty-free withdrawal). At that time, you can elect either to have the IRA sell the property or take an in-kind distribution of the property. Under that arrangement, your IRA custodian assigns the title to the property to you. You will then have to pay income taxes on the current value of the property if it’s been held in a traditional IRA. If the property was held in a Roth IRA, you won’t owe taxes at distribution. This makes a Roth IRA extremely attractive if you anticipate that your real estate investments will appreciate over time.
Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement.
IRA Options
While any form of IRA allows for real estate investment, there are other pluses and minuses to consider when choosing the account type that’s best for you:
- A traditional IRA lets you deduct annual contributions (currently set at $3,000, or $3,500 if you’re age 50 or older) from your income. However, once you begin withdrawing money, those funds will be taxed as regular income.
- A Roth IRA gives you no deduction on your current contributions (again $3,000), but does allow you to withdraw funds tax-free. If you expect to buy a real estate investment in an IRA and hold it for a long period, this is probably your best option, particularly if the property increases in value over that period.
- A SEP-IRA is designed for self-employed individuals and small companies. You can contribute up to 25 percent of your compensation, or $40,000, whichever is less. However, keep in mind that if you have employees, you must make contributions for them as well. This option is a great alternative for real estate practitioners who can make the higher contributions because they can build up funds more rapidly to purchase properties. Withdrawals from a SEP-IRA are treated like those of a traditional IRA for tax purposes.
Title Insurance for Owners
If you finance your home, the lender will require you to purchase title insurance for the amount of your mortgage. You will be given the option of increasing the coverage to include your equity in the property. The owner's coverage fee is a one-time charge that protects your equity in your new home, including its appreciated value. Most experts agree that the additional coverage is a good idea.
Before your sale is finalized, the title company will inspect the public records and confirm the sellers' ownership of the property. They will look for any liens that may have been filed against the property, and that must be paid off before it can be sold. Even the most careful search, however, cannot guarantee that there was not an error at some point in the transfer of title during the chain of ownership. Title insurance is one of those things you will probably never need, but if you do, you will be very glad you have it!
The Purpose of Title Insurance
When you finance a home through a lender, you will be required to purchase title insurance to cover the amount of your mortgage loan. At the closing you will be given the option to buy additional coverage to protect your investment.
Before the closing, the title company will order a title report to make sure the sellers actually own the home and that no one else has a legal interest in the property. This process will identify any potential title problems or liens. Title insurance covers you against any future claims that did not appear on the title report. It is a one-time charge that you pay at the closing of the transaction, and it covers your future equity up to a stated maximum amount as your property increases in value. It's a small price to pay to protect such a major investment.
Home Warranties
You have just found a new home that you love and are planning to place your current home on the market. When the day arrives for your first open house, you begin to think of all of the things that could break down or go wrong. The air conditioner may stop working or your trusty old dishwasher might "bite the dust" the morning that the structural inspection is scheduled. Purchasing home warranty protection is one way to reduce these worries for you and your buyer.
The most popular warranty plans cover the home from the time it is listed until one year after the closing date. Although the details of these policies vary, there is usually a standard deductible of $35 to $100 (this amount differs from state to state). Many sellers purchase these warranties to make their property more attractive to potential buyers and to limit their liability in the event that a problem is discovered after the closing.
Hazard Insurance
Are you considering taking out hazard insurance on a property before you actually take title? It may be a good idea!
Even though you are not yet the owner of record, as the buyer, you have an insurable interest in a property the moment that you and the seller execute the sales agreement. As a matter of practice, however, buyers do not usually take out insurance until the papers change hands, and it should not be necessary if the agreement of sale is properly executed.
It is very important to both parties that the agreement states that the property will be insured for a specific amount. From the buyer's point of view, an adequate sum must be stipulated, and the agreement should not read "as now insured", which can indicate that the seller may not want to increase the insurance.
As a general rule, the amount of insurance on the buildings on a property should equal the sales price, less the value of the lot.
Do You Need Mortgage Protection
If you have a mortgage on your home, you may have received several offers from insurance companies that sell coverage to pay off your mortgage in the event you die unexpectedly. Although insurance in general is a good idea, mortgage insurance is usually a poor value in most cases.
If you read the large print, it appears that the policy will protect your family if you die before your mortgage is paid off. All you have to do is fill out the paperwork, have a physical exam, and pay a little more each month. The fine print, however, may limit the coverage relating to accidental death. If there are two people on the deed of trust, the policy may pay only half if one of them dies.
When considering mortgage insurance, call a good insurance agent before you send in your forms. Insurance experts usually advise against separate policies to cover various contingencies. A regular term life insurance policy equal to the amount of your mortgage will probably offer you a lot more coverage for your money.
Do You Really Need Title Insurance
When a home is purchased, title insurance is one of the closing cost items on the closing statement. This insurance protects the buyer from defects in the title that are not discovered until after the closing. There are two kinds of title insurance--coverage that protects the lender for the balance of the mortgage if the buyers have a loan, and coverage that protects the buyers' equity in the property.
It is prudent to purchase owners' coverage because most of the title problems that arise after a closing are not from a sloppy title search, but are the result of inaccurate information in the public records. The ownership chain goes back a long way, and fraud or misrepresentation anywhere in the chain could mean big problems. Title insurance will protect you if a wife or husband did not properly sign off on the ownership papers or if the property was sold as part of an estate that was later disputed. Most people do not have to deal with the title insurance company after the closing, but this coverage could save your investment if a problem arises.
Builder Confidence Rises Slightly
Builder confidence in the market rose in January, according to the National Association of Home Builders//Wells Fargo Housing Market Index.
The index, which gauges current sales conditions for single-family homes, rose one point to 20, while the index gauging sales expectations for the next six months declined one point to 27. Meanwhile, the index gauging traffic of prospective buyers rose five points to 19, its highest level since July of 2007.
The overall optimism was driven by increasing traffic of prospective buyers through model homes, the association reported.
"While builders remain very cautious about the outlook for new-home sales, given today's economic environment, the fact that more consumers appear to be checking out their options is a good sign," says Sandy Dunn, a home builder from Point Pleasant, W. Va., and the newly elected 2008 president of the National Association of Home Builders.
The builders' chief economist David Seiders says the membership was encouraged by the increasing interest but still cautious.
"Builders know there's a difference between people looking and people buying, and their current outlook remains quite subdued," Seiders says. "Additional stimulative measures on the legislative and policy side are definitely needed to bolster consumer confidence and help bring about a housing and economic recovery."
Source: National Association of Home Builders, Paul Lopez (02/20/08)
Foreign Buyers Look to U.S. Housing
Foreign buyers are snapping up property in Florida.
The strength of the Canadian dollar, the euro, and other foreign currencies, on top of a slowdown in the U.S. real estate market, is making the United States an enticing place for foreigners to buy property.
In South Florida, real estate practitioners say that buyers are especially coming from continental Europe, Scandinavia, and Canada. Miami Beach's famous South Beach district is luring Italians, French, and German buyers, while many Russian buyers are flocking to Sunny Isles Beach to the north. And Venezuelan buyers are looking for housing deals in Doral, to the west.
Brigitte Benichay, who is president of Rich Homes in Miami, says her European customers don’t need mortgages. "Eighty percent of the ones I meet want to pay all cash. Business is very strong," she says.
Source: Reuters News, Jim Loney (02/19/08)
Candidates Disagree on Foreclosure Fix
As the presidential primary in Ohio approaches, Sens. Hillary Clinton (D-N.Y.) and Barack Obama (D-Ill.) are highlighting their different housing proposals. Voters in Ohio especially are concerned about the housing proposals because the state has one of the highest foreclosure rates in the nation.
Clinton insists that government intervention is necessary. She proposes ceasing foreclosure proceedings for 90 days to allow borrowers and lenders to work on modifications, instituting a five-year interest-rate freeze on adjustable-rate subprime mortgages for primary residences only, and the use of government-backed mortgages to refinance borrowers who can no longer manage their monthly payments.
Meanwhile, Obama says that government involvement will force lenders to put the brakes on making new loans and modifications. Instead, he is focusing on stricter penalties for predatory lenders, tax credits for mortgage interest, and a $10 billion fund dedicated to preventing foreclosure and assisting first-time buyers.
Source: The Wall Street Journal, Nick Timiraos (02/20/08)
Housing Stocks Become Hot Item
Investors who bought housing stocks at the beginning of the year after two and a half years of steep declines are being rewarded for their prescience.
As the Federal Reserve started cutting interest rates, the stocks of home builders Toll Brothers, Lennar, and Hovnanian rose 40 percent, 52 percent, and 96 percent respectively.
Some analysts believe these increases portend sunnier days ahead for the entire housing industry.
"What took us into this malaise will be what takes us out," Bill Miller, portfolio manager for the Legg Mason Value Trust, wrote this week in a letter to the fund's shareholders. "Housing stocks peaked in the summer of 2005 and were the first group to start down. Now housing stocks are one of the few areas in the market that are up for the year."
"Stocks are predictive of the industry about six to nine months ahead of time," adds Justin Walters of Bespoke Investment Group in Harrison, N.Y. He says he is bullish on the sector, noting that house-price futures at the Chicago Mercantile Exchange have been forecasting a bottom in house prices in many U.S. markets toward the end of 2008.
Source: Fortune, Colin Barr (02/14/08)
Congress Moves to Boost Housing
Congress is eyeing more incentives as ways to address problems in the housing market — a growing issue in this contentious election year.
Top Democrats, who successfully backed the just-passed economic-stimulus bill, say they will push through a second measure that — among other things — will allow bankruptcy judges to alter the terms of certain mortgages.
Another measure under consideration is a tax break allowing companies with operating losses this year or the two previous years to apply them to past years for a refund. This idea is popular with home builders.
A third proposal would allot an additional $10 billion in bonding authority so housing-finance agencies can give more help to people refinancing subprime loans or first-time buyers. President Bush recently backed this idea.
Lawmakers also are considering $4 billion in block grants so localities with high foreclosure rates can buy and rehabilitate unoccupied property and $200 million for pre-foreclosure housing counselors.
Source: The Wall Street Journal, Sarah Lueck (02/15/08)
Bernanke is Optimistic for Late '08
Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee on Feb. 14 that the central bank is likely to make fewer rate cuts in the immediate future.
Over the past six months, the Fed has cut rates by a total of 2.25 percentage points; but the aggressive moves have not done much to alleviate the credit squeeze. Bernanke said the economy is more likely to see the benefits of the rate cuts in the second half of the year, and analysts now say the markets still expect the Fed to cut rates at its next meeting on March 18 but do not expect it to be as aggressive in doing so.
The Fed "is signaling less rather than more in the way of future rate cuts and this is disappointing to those who feel more is necessary," says Richard DeKaser, National City Corp. chief economist.
Source: Investor's Business Daily, Scott Stoddard (02/15/08)
Real Estate Tip - Reducing Indoor Air Pollution
Air pollution is a fact of life in the 21st century. Reducing our use of pollutants will improve the environment and the health of those who live on our planet. But what about indoor air pollutants? The air quality inside your home affects you too, especially since most people spend more time indoors than outdoors.
Indoor air pollutants include elemental particles and gases produced by wood smoke and propane gas ranges. Some building materials, home furnishings and cleaning products emit toxic organic chemicals like formaldehyde that can contribute to poor indoor air quality. Outdoor pollutants such as radon gas from the soil under your home, carbon monoxide and nitrogen dioxide from the vehicles that drive by or pesticides from your neighbor's orchard can also seep inside your house.
How can you reduce the risk of negative health effects from indoor air pollution? First, check the contents of the household products you use, and always open the windows if there are warnings about fumes. You can buy a relatively inexpensive detector for indoor toxic emissions at your local hardware store. If air exchange is poor inside your home, consider installing a mechanical ventilation system that will maintain a healthy flow of air and filter out pollutants.
Serious Home Inspections
When you are involved in the process of buying a home, it is safe to assume that you will probably find one that you like, make an offer, and purchase it. There are many steps along the way, and more and more buyers in the market today want guarantees. Inspections by structural engineers and environmental specialists often turn up something wrong with the property you want to buy. Many sales have been halted or delayed because asbestos, lead, or radon was found on the property.
If a problem has been found with the property you want to buy, ask yourself two questions:
1) Can the problem be fixed?
2) If so, what will it cost to repair it?
Some of the following problems could keep you from purchasing a property, if:
1) the house rests on a fault line;
2) the water supply is contaminated;
3) there is a severe crack in the foundation;
4) the house is located under electro-magnetic power lines;
5) the house is contaminated with radon gas.
Enlist your real estate agent's help in identifying the existence of any of these problems prior to buying property.
Those Radon Blues in Real Estate
Radon gas can be a worry for homeowners. This naturally occurring substance has been found in homes throughout the country. It is odorless, colorless and undetectable without sophisticated testing. Radon has been linked to many diseases, and environmental experts caution that it should be tested. Remember that if radon gas is detected, it can usually be removed at a relatively low cost with simple ventilation systems.
If you are concerned about radon in your home, you can have it tested. You can contact your nearest branch of the Environmental Protection Agency for information about how to find a reputable company qualified to perform the tests. If you are buying a new home in an area where radon has been a problem, you might consider including a radon test as part of the structural contingency clause. And if you are planning to sell your home, you can test it for radon before placing it on the market. If there is no problem, your fears will be put to rest, and even if radon is detected, it is neither difficult nor costly to correct.
Detecting Elevated Radon Levels
Radon gas is a colorless, odorless, radioactive gas that can pose a serious health risk if it becomes trapped under your house. Radon typically enters the home via underground crawl spaces, sump pumps, gaps in the basement and even the water supply. It can pollute your indoor air with its toxic vapors, and is held responsible for more than 20,000 lung-disease-related deaths every year. Radon is assumed to be present in millions of American homes.
How do you detect the presence of radon gas, and how can you reduce its presence and influence if it is found in your home? First, have your home tested by a professional. Many contractors are licensed or certified by state and/or local agencies. They will conduct diagnostic testing to determine if radon gas is at acceptable levels. If levels are dangerous, the contractor can install a radon reduction system. Ask the contractor for references documenting the results of past work in other homes. Make sure the company checks the house after the system is installed, to verify that it is reducing the radon levels
What is a loan Mortgage Loan pre-approval/ pre-qualification?
Mortgage loan pre-approval and pre-qualification is a process of determining how much a lender will likely provide you with to Purchase property.
Pre-qualification: takes into consideration your income, debt and the amount of cash available for your down payment and closing costs to establish how much home you can afford.
Pre-approval: A preliminary mortgage commitment from a lender upon reviewing your financial profile including credit history and and assets.
If one Realty represents me, can they only show me homes listed by them?
The realtor you hired can show you any home listed on the market by any company, even
“FOR SALE BY OWNER”.
How much do the services of a Real Estate Agent cost?
The seller normally pays the buyers agent. But there are exceptions. In cases where the builder sells the property or properties are “FOR SALE BY OWNER” the seller may or may not pay the buyer agent s commission. The buyer would then need to pay his/her agent part or the entire commission on the property.
Should I sign a contract with a home buyers agent to represent me as a buyer?
Buyers Agent becomes your exclusive representative when purchasing realty. By law you, the buyer, are owed obedience, accountability, duties of care and disclosure by the contracted agent. However, an agent who is a sellers agent owes the same duties exclusively to the seller and not to the buyer. If you do not hire an agent and purchase a home, honesty and fairness may only lean in the sellers favor. They are legally bound to provide advice and guidance to the seller with respect contract negotiations.
Having the proper representation could save you tens of thousands of dollars
What other advantages are there to contracting a real estate agent?
They work to protect your rights as a home buyer. They will assist you by explaining inspections you are entitled. Inspect prospective purchase such as a home environmental, lead paint and radon. Needed recommendations, advice and counsel are invaluable.
Credit Repair Eases Home Buying
Daily Real Estate News | February 7, 2008
Anyone who is contemplating buying real estate should first consider a financial housecleaning.
Getting a mortgage has gotten more difficult, even for people with excellent credit. So it pays for potential buyers to examine their credit history.
Here are some smart steps to suggest potential buyers take:
Get a credit report. Credit reports are available free at annualcreditreport.com. Examine it for incorrect information, such as closed credit accounts or debts belonging to someone else with a similar name. Address any problems such as delinquent bills.
Credit score improvement. It takes a credit score above 680 to get a mortgage. Scores higher than 720 rate better deals. Expect to pay a surcharge on credit scores lower than 680.
Consider FHA loans. FHA borrowers pay a small insurance premium, but only a 3 percent down payment. Borrowers must have a steady job, be able to verify income, have a record of paying bills on time and keep the loan amount to no more than 31 percent of gross income.
Avoid jumbo loans. Conventional loans are significantly cheaper than loans above $417,000.
Source: The Boston Globe, Andrew Caffrey, Binyamin Appelbaum (02/03/2008)
Homeowners Confident on Market
Daily Real Estate News | February 7, 2008
Despite plenty of evidence to the contrary, 77 percent of homeowners believe that their homes are worth as much or more as they were in 2006, according to a Harris Interactive survey conducted for Zillow.com.
And 36 percent say their homes increased in value in 2007.
The slow market also isn’t discouraging homeowners from major transactions. Despite what they read and hear about the real estate market, 34 percent say they are equally or more likely to consider selling their homes this year, and 35 percent are just as likely as before to take out a home equity loan. 36 percent would consider a second mortgage.
Homeowners continue to forge ahead on projects that they believe improve the value of their homes. In 2008:
1. 82 percent will spend the same or more on minor home improvements (install new garbage disposal, repaint or wallpaper a room).
2. 67 percent say they will spend the same or more on major home improvements (replace the roof, remodel the kitchen).
Are people just in denial? Not really, says Stan Humphries, Zillow.com vice president of data and analytics. "This likely reflects the fact that most Americans have not realized home-related losses because they're staying in their homes,”
Source: Zillow.com (02/07/2008)
Federal Reserve Board to the Rescue? Part I
Jack M. Guttentag The Mortgage Professor
by Jack M. Guttentag
The Board has spoken - but is it too late?
On December 18 of last year, the Federal Reserve Board released its long-awaited proposals for curbing abuses in the home mortgage market. In this set of three articles, I examine Board proposals to curb lax underwriting rules, unfair practices by mortgage brokers, and abusive practices by loan servicing agents.
The proposals were long delayed, probably because home loan reform is not a Board priority. Monetary policy is its first priority, bank regulation comes second, and consumer protection is a poor third. The delay is particularly problematic in connection with its proposals for changing underwriting rules, the subject of this first article in the series.
The Major Underwriting Rules
Underwriting rules determine whether or not a particular borrower is eligible for a particular loan. The major rules are the minimum down payment, minimum credit score, maximum ratio of housing expense to income, and required mode of documenting income and assets. On conventional loans (those not FHA or VA), underwriting rules have been set by the private market with minimal oversight by government.
Underwriting requirements set by private markets tend to become increasingly liberal when house prices are rising. Rising prices convert bad loans into good ones -- good, at least, from a lender perspective. If the borrower can't make the payments, having equity in the property allows the borrower to refinance into a mortgage with lower payments, or to sell.
During 2000-2006, house price appreciation was extraordinarily large, and underwriting requirements were relaxed to a degree never seen before. In the subprime market, loans with no down payment were made to borrowers with poor credit who couldn't fully document their income.
What the Board Could Have Prevented
If the Board in 2002 had intervened by requiring a minimum down payment of 10 percent on subprime loans, the crisis that erupted in 2007 never would have happened. Even if the Board didn't take action until 2004, the very worst batch of loans, those made in 2005-2006, would have been markedly reduced. The down payment is the appropriate tool for early regulatory intervention because it is easy to define and enforce, and has a marked effect on borrower demand and loan quality.
But Board actions won't come until later in 2008, which is terrible timing. The mortgage market has already done a 180 percent reversal in underwriting requirements. The price sheets I get from the remaining subprime lenders show down payment requirements of 15 percent. And I now hear complaints from prime borrowers that lenders are examining documents with a microscope, and asking for more and more verifications. Santa Claus has become Scrooge. In this kind of market, regulatory tightening of underwriting requirements is "piling on."
Further, with one exception, the Board proposes that it intervene in the most complex and judgmental parts of underwriting. The proposed rules would prohibit lenders from making loans that borrowers cannot afford, and require lenders to verify income and assets. (The rules would apply to "higher-price loans," which include subprime loans). In my view, regulators should steer clear of these areas because rules that are very difficult to define are also difficult to enforce.
Interestingly enough, this may be the Board's unstated view as well. Their lengthy explanations of how they intend to enforce the new rules indicate very clearly what a quagmire such enforcement is going to be.
Unclear Rules Hard to Enforce
For example, the rule against making unaffordable loans would only be enforced in connection with a "pattern or practice" of making such loans, and would take account of "the totality of circumstances in the particular case." Similarly, the requirement that lenders verify income and assets only applies to the income and assets the lender "relies upon" in approving the loan, and would not apply if failure to verify "would not have altered the decision to extend credit."
The Board does not have the army of highly-trained and sophisticated examiners that would be needed to enforce rules like these. Implicitly, enforcement will be delegated to community groups and class-action lawyers, who like murky rules because they provide additional grounds for suing lenders. That may help a few individual borrowers, but it won't make the market work better.
The one defensible underwriting rule proposed by the Board would require that all "higher-priced" loans carry escrow accounts for the payment of taxes and insurance. In contrast to the rules regarding affordability and income verification, this rule is unambiguous and easy to enforce -- a loan either has an escrow or it doesn't. Further, the cost is small because borrowers can opt out after one year.
But it raises an interesting question: Why should an escrow opt-out be limited to borrowers with higher-priced loans? How about prime borrowers who have had their insurance cancelled and tax liens placed on their homes because the servicer failed to pay the insurance and taxes?
Next week: How the Board would deal with abuses by mortgage brokers.
Posted on Wednesday, January 30, 2008, 12:00AM
Bigger Role Sought for Fannie, Freddie
Thursday February 7, 12:38 pm ET
Lawmakers Say Bigger Role for Fannie, Freddie Should Also Come With Tighter Gov't Oversight
WASHINGTON (AP) -- Senators on Thursday said Fannie Mae and Freddie Mac should play a bigger role in helping struggling homeowners even as they called for tighter oversight of the government-sponsored mortgage finance companies.
At a hearing of the Senate Banking Committee, its chairman Sen. Christopher Dodd, D-Conn., said the two companies need to do more to help homeowners with high-priced loans refinance into more affordable mortgages. Lenders also stand to benefit from the fees generated by this increased activity.
The economic stimulus packages passed by the House and pending in the Senate include provisions raising for one year the cap on mortgages that Fannie and Freddie may buy in high-cost areas from $417,000 up to $729,750, a move intended to stimulate new loans and refinancing activity in markets such as California and the Northeast.
But in return for allowing Fannie and Freddie to buy the higher-priced mortgages, Sen. Charles Schumer, D-N.Y., said the companies should agree to finance troubled lower-income borrowers.
Dodd said the committee is poised to write legislation that would tighten the government's reins on Fannie and Freddie, giving a new regulator authority to limit their multitrillion-dollar mortgage holdings. A bill doing that passed the House last spring but the Senate has not yet acted.
The two companies were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. Together they hold or guarantee about $4.9 trillion in home-mortgage debt. Fannie and Freddie lost $1.4 billion and $2 billion, respectively, in last year's tumultuous third quarter.
The Bush administration and congressional Republicans have long been critical of how Fannie and Freddie operate. Officials have pointed to the companies' multibillion-dollar accounting scandals in recent years to bolster their case that Fannie and Freddie's massive mortgage holdings are improperly managed and pose a risk to the financial system.
James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight -- the agency that oversees Fannie and Freddie -- told the panel that the loan limits should not be raised without also providing stricter government regulation of the companies.
Freddie's chairman and CEO, Richard Syron, said in testimony prepared for the hearing that the company last year helped around 47,000 borrowers avoid foreclosure last year by refinancing them into lower-interest loans. Fannie President and CEO Daniel Mudd said the company has aided 68,000 homeowners.
By Marcy Gordon, AP Business Writer
Short sales help some borrowers avoid foreclosure
Your adjustable-rate mortgage has reset and you can't afford the higher monthly payments. In a sluggish real-estate market, the property isn't worth the same as the day you bought it. What's next?
For homeowners and lenders who share a devalued asset, the answer may be a short sale.
How does that work?
• Short sales are deals between borrowers and lenders to sell a house for less than what is owed on the mortgage. Some in the real-estate business expect their numbers to grow.
The growth of foreclosures in the past year has been attributed to the increase in adjustable-rate subprime mortgages. Such loans allowed people with less-than-perfect credit to buy property, often with little or no money down. Those resets are now pricing some homeowners out of their houses.
• Short sales come with advantages and disadvantages for both borrower and lender.
For the homeowner, short sales avert a foreclosure process that can damage his or her credit record. Travis Olsen, president and principal partner of the National Short Sale Center in Scottsdale, Ariz., said foreclosure histories can keep someone from obtaining new credit to buy another house for up to 10 years.
• But short sales aren't perfect solutions for consumers because they can still reduce a credit score by 75 to 100 points, said Burt Hoffman, a Stamford, Conn., attorney. Short sales are a growing part of his practice.
Lenders will consider such sales as an alternative to foreclosure because the latter process is time-consuming and costly, Olsen said.
Interest payments go uncollected, unpaid taxes pile up and lawyers and real-estate agents must be compensated for their services. Disgruntled homeowners in arrears may let the property's condition slide, or they may even damage the property out of spite or frustration.
Selling a property short of what's owed on the mortgage can get an unproductive asset off an investor's balance sheet quickly.
• There are conditions for doing such a deal, Olsen said. The borrower must be unable to pay the existing mortgage, and the property must be worth less than the borrowed amount.
Homeowners walk away from short sales with nothing, and often less than that. The house is worth less than what they bought it for, so they've lost the closing costs and any equity in the property that might once have existed.
• Not all lenders will accept short sales as a complete solution to the debt owed. Hoffman said a few banks want promissory notes from borrowers that require them to pay the full amount of the mortgage even after the short sale has been closed.
Short sales have "a lot of moving parts," Hoffman said. "It's a very tough deal to work. You have got to do it properly."
— Jerry Gleeson,
The (Westchester, N.Y.)
Journal News
Rising rents — landlords finally are recovering from a downturn in the market
By Kirsten Grind
Special to The Seattle Times
Jay Olson recently stood up in front of a room packed with several hundred property managers and landlords at a rental-housing conference in Seattle to tell them the good news.
After years of offering freebies and shaving rents to attract tenants, landlords finally are recovering from a downturn in the market, said Olson, a regional vice president at San Diego-based ConAm Management and also the president of the Washington Multifamily Housing Association.
It's due to a combination of factors: a shortage of apartments, still-high home prices, a stumbling housing market that has many prospective buyers taking a wait-and-see approach and the Seattle-area's strong job growth.
The message for apartment owners at the conference? If you haven't raised your rent already, you should.
"Nearly all the economic factors are in our favor," Olson said. "This doesn't happen every year."
Many apartment owners already have raised rents.
Last year, the average rent in King and Snohomish counties for all apartments rose 8.6 percent, reaching $1,012 in the fourth quarter of 2007, according to the most recent report from Seattle-based Apartment Insights Washington, which surveys 150,000 apartment units on a quarterly basis. Over the past two years, since the first quarter of 2005, rents have climbed 16.7 percent.
Vacancy rates averaged 4.4 percent across Snohomish and King counties, also an indication of a tight rental market.
At the high end, the average rent in Kirkland for all units was $1,515 a month, in downtown Bellevue it was $1,359 and in downtown Seattle, $1,357.
The most-affordable areas included Everett, where the average apartment rent was $713 a month, Des Moines at $777 a month and Burien at $793.
A large chunk of the rent increases happened in the third quarter of last year as the housing market took a turn for the worst. Buyers, hesitant to jump into a house, instead opted to rent. What's also helping the market is strong job growth.
Rob Kellum, chief operating officer for Suhrco Residential Properties, said some of the 16,000 units the company manages from Bellingham to Olympia have seen rent increases as high as 20 percent.
"Some of that is to make up for the rents we lowered in 2003 and 2004," Kellum said.
While 2008 is also shaping up to be a good year for landlords, there's an interesting "crosscurrent" of events that could affect the market, said Tom Cain, a partner in Apartment Insights Washington.
For one, some of the 7,000 apartment units in King, Snohomish and Pierce counties that have been converted into condos in 2007 are turning back into rentals because of the slowdown in the housing market.
Also, after a dry spell of apartment construction, several projects are under way and will add to the supply over the coming years. There are 5,474 new units under construction right now, according to Apartment Insights.
"I imagine there will be condos that don't sell that will be rented," Cain said.
The reborn renter
Of course, the strong rental market makes it a bad time to be a tenant.
Deals are hard to find and landlords aren't making any concessions.
Janelle Morgan, 36, wanted to move out of her Bothell apartment after her landlord increased her and her roommate's monthly rent $200 to $1,050. But looking around, she realized that it will be hard to find a more-affordable place that she would want to live in.
"They're expensive and they're not nice," she said.
Instead of leasing an expensive apartment, prospective renter Lee Rhodes decided to take advantage of the housing market's woes.
He placed an ad offering to rent a vacant house that has been sitting on the market with no potential buyers in sight.
The advantage to him: He can probably get a better deal because owners are eating the cost of their mortgage anyway.
Willing to move
Of course, that means he has to be willing to move as soon as the house is sold, which doesn't bother Rhodes, a helicopter pilot who recently moved to the area.
"I was thinking of buying, but I was feeling that the market might move another leg down," he said. "I'm willing to wait for six to 12 months to see what the market does before I jump in and buy."
In addition to prospective buyers who are waiting it out, there also is the "reborn renter," a term used to describe people who have lost their house to foreclosure and are now back on the rental market.
"Those are the people we lost over the last five years who bought a home, they went out and got a subprime loan and now they're losing their homes," Kellum said, adding they're expecting to see more of that this year.
Olson of the Washington Multifamily Housing Association has these suggestions for renters: Be wary of landlords offering deep discounts because in this environment, it may be a signal that something's wrong with the place. And do your homework.
"It's going to be expensive so get what you want and shop around," he said. "Find a good location, get closer to work and save on gas."
To rent or to sell?
Real-estate investors also are trying to figure out their next move. With housing appreciation in the Seattle-area at its lowest rate in a decade and a deep supply of single-family homes on the market, many are choosing to hold onto their properties.
One of them is real-estate investor Olya Lapina, with three properties in the Seattle area, who recently started offering a lease-to-buy option on her homes.
Her reasoning is this: because of the subprime mortgage meltdown, many prospective first-time homebuyers are leery of getting into a home right now and may not qualify for a loan anyway.
Her strategy is to offer them a way to eventually buy, while taking advantage of the strong rental market to get them in the door.
"It's become more popular in the current situation," she said.
Lapina charges a set rent and then takes money out each month to put toward the tenants' down payment. She's attracting renters who eventually want to buy a home and are tired of landlords increasing their rents each month. The selling price of the home is also set.
William Kemper, a Seattle property owner, is taking a different approach.
He's decided to sit tight for the first part of the year. Last summer he saw a huge amount of interest from tenants looking for rentals, but now he said he's seen a bit of a slowdown.
Kemper is looking for a tenant to rent a basement apartment on Capitol Hill for $1,300 a month. Kemper had some calls and shown it twice, but nothing like the interest when he rented it briefly for the first time in October.
Still, "I'm not anticipating any trouble renting it," said Kemper, who isn't planning a rent increase anytime soon.
Despite the credit crunch, $759 billion of direct real estate investing occurred worldwide in 2007, an 8% increase from the year before, according to Jones Lang LaSalle. About 52% of the volume occurred in the first half before the credit crunch began thwarting commercial property sales. Most of the second half slowdown in sales occurred in the United States and the United Kingdom. Even with the second-half slowdown, full-year investment volume for the U.S. increased 7% to $191 billion last year.
The Cleveland office market is off to a strong start in 2008 as investors have acquired or have agreed to buy four buildings with 2.3 million sf for a total of $202 million. Vacancy rates in the city dropped to 12% at the end of December from 14.2% in 2007, according to Grubb & Ellis. Vacancy rates are expected to drop this year as several major firms are seeking large chunks of space for lease.
Fannie Mae originated a record-setting $60 billion in apartment loans last year, a whopping 75% more than in '06. The agency saw their origination volumes skyrocket in large part because of the capital-markets dislocation resulted in the near shutdown of the CMBS market. The 26 licensed lenders that Fannie relies on for the bulk of its volume were given greater decision-making authority in the loan-origination process, generating $30.3 billion of the volume.
Gasoline could drop 50 cents/gallon by spring Wed Feb 6, 2008
By Timothy Gardner
Buffett: Bank woes are "poetic justice"
Not All Is Gloomy in Real Estate: A Blog Network Attracts Capital
By DAN MITCHELL
The residential real estate market may be troubled, but property-focused Web sites are still attracting visitors and investors.
Curbed.com, a popular real estate blog network with sites in New York, San Francisco and Los Angeles, has obtained $1.5 million in financing to expand into new cities and add staff members. According to Lockhart Steele, the network’s publisher, traffic is growing 10 percent a month and the site is drawing national advertisers.
Nick Denton, Mr. Steele’s boss when he was managing editor of the Gawker Media blog network, and Zach Nelson, chief executive of NetSuite, a maker of business software, are among the individual investors. Gawker Media also invested.
In some respects, sites like Curbed are insulated from the woes of the real estate market in a way that traditional sites may not be. “We’re not just about real estate,” Mr. Steele said. “People come to the site to talk about their neighborhoods and about life in the city.” This wide focus has helped Curbed draw advertisers like American Express and Volkswagen, Mr. Steele said.
At greater potential risk are national-focused sites like Zillow.com and Realtor.com that depend on an active market of buyers and sellers to thrive. Nonetheless, Zillow, which estimates home values, last month obtained $30 million in its latest round of financing, bringing the total to $87 million for the site, which was started less than two years ago. And its traffic in the third quarter was 20 percent higher than in the period a year earlier, according to Spencer Rascoff, Zillow’s vice president for marketing and chief financial officer.
It has also begun posting home listings provided by brokerage firms. The first of these to participate is ERA.
“The housing slowdown has actually increased people’s appetite and interest,” Mr. Rascoff said. “In a crazy market like this, both buyers and sellers are trying to get an edge.”
Advertising-supported sites seem, at least for now, to be on safer ground than those that rely heavily on “showcase listings” that sellers pay for.
“Any site that charges fees to brokers will be hurt the most,” said Steve Murray, editor of the newsletter Real Trends. Realtor.com, run by the National Association of Realtors, remains the top real estate destination on the Web, with more than five million unique visitors a month — down only slightly in the last six months, according to Nielsen/NetRatings. If the downturn lasts long enough, “everyone suffers,” said Brad Inman, founder and publisher of the real estate news service Inman News. During bad times, “there’s always an uptick first” in real estate advertising, he said. “Nobody’s free of the dark shadow of a down market.”
Still, Mr. Inman was one of the lead investors of Curbed.com, in part because Curbed “is not a direct real estate play,” he said. “I didn’t even think of it in context of the market.”
Market cheers Microsoft's offer for Yahoo
The Dow gains nearly 93 points Friday on news of the buyout bid, plus the view that interest rates on bonds "will stay lower for longer."
By Kate Gibson
MarketWatch
Article Last Updated: 02/01/2008 10:46:35 PM MST
NEW YORK — U.S. stocks on Friday ended higher for a fourth day in five, with the major indexes all scoring weekly gains, lifted by software giant Microsoft Corp.'s blockbuster $44.6 billion bid for Internet search engine Yahoo Inc.
"One of the most important developments today was that the bond market decided that interest rates will stay lower for longer," said Tony Crescenzi, bond market strategist at Miller Tabak & Co.
The Dow Jones industrial average rose 92.8 points, or 0.7 percent, to end at 12,743.19, giving the blue chips a weekly rise of 4.4 percent.
Of the Dow's 30 components, 22 advanced, led by Citigroup Inc., up 5.4 percent.
Another Dow component, General Motors Corp. also advanced, up 2.7 percent, with the Detroit automaker beating its rivals in January sales.
"Microsoft's bid for Yahoo offers investors hope that value can now be found in the U.S. stock market," said Frederic Ruffy, an analyst at Optionetics.
While helping bolster sentiment across the broader market, the bid by Microsoft weighed on its stock, with shares of the technology titan off 6.3 percent in the wake of its $31-a-share offer for Yahoo.
Shares of Yahoo gained 48.8 percent on the news of the unsolicited takeover bid, the largest yet in the high-tech sector, according to data from Thomson Financial.
The S&P 500 climbed 16.87 points, or 1.2 percent, to 1,395.42, up 4.9 percent from week-earlier levels.
The Nasdaq Composite gained 23.5 points, or 1 percent, to 2,413.36, a 3.7 percent lift on the week.
Volume neared 1.8 billion on the New York Stock Exchange, with advancing stocks topping those declining by roughly 4 to 1. On the Nasdaq, more than 3 billion shares changed hands, and advancers remained almost 3 to 1.
On the New York Mercantile Exchange, crude-oil futures slumped $2.79 to finish at $88.96 a barrel. Gold futures dropped sharply, with gold for April delivery down $14.50 to end at $913.5 an ounce.
The first batch of key economic data Friday came in much weaker than expected. Nonfarm payrolls fell by an estimated 17,000 in January, the Labor Department said. Economists polled by MarketWatch had expected an 85,000 increase in the figure.
"The January employment report unequivocally indicates that the U.S. economy is contracting," said Tony Crescenzi, chief bond strategist at Miller Tabak & Co.
And, as has been the case in weeks of market volatility, weak economic data was viewed in varying light, given the potential impact on U.S. monetary policy and Federal Reserve moves.
"Before today, the bond market was pricing in the possibility that by early 2009 the Federal Reserve would begin to take back its interest rate cuts," said Crescenzi. "This view changed after today's employment report, with the bond market deciding that any rate reversal would take longer."
Cramer: Countrywide Still Looks Like a Buy
This column was originally published on RealMoney on Feb. 6 at 7:32 a.m. EST. It's being republished as a bonus for TheStreet.com readers.
The conundrum of Countrywide (CFC - Cramer's Take - Stockpickr) going up even as another subprime dealer, Mortgage Lenders Network, goes under, may be answered by a simple tenet: The weak hands are going under, leaving the biggest and best to triumph.
When I pulled up with Angelo Mozilo, the man who built Countrywide -- the man who is Countrywide, some would say -- we joked about how strong Countrywide's business is because it has always "modeled" the bad loans better than anyone. One of the mistakes made by the analyst community is believing that any loans that go under could be death to a lender. In truth, the good ones model what will happen under a lot of scenarios, and it is pretty clear that Countrywide has the best models. Always has.
When the company's stock got bid up on takeover rumors, despite insider selling, I expected it to come right back down.
It didn't because what's really happening is the long-awaited shakeout. There have been too many crummy players in this business. You are seeing the small ones go under -- and some larger private ones, too. What you aren't seeing is the pullback in the major brokerages' business that is emblematic of a recognition that the margins got too bad in the subprimers that they bought to get the flow for mortgage back. You heard this if you listened closely on all the big brokers' conference calls.
If the brokers are pulling back and the smaller independents are going belly up, that leaves Countrywide to reap the benefits of the inevitable expansion in margin that comes from the end of the price wars for subprime.
That's why it is going up. That's why it will continue to go up. That's why Countrywide is still a buy, despite the problems in housing and the headlines about how bad this business is.
Ways to Make Cold Calls Easier
Daily Real Estate News | February 6, 20084
Practitioners should take a new approach to cold calls that involves a change in attitude, says veteran business coach Dr. Maya Bailey, author of "Law of Attraction for Real Estate Professionals." Rather than referring to them as "cold calls," Bailey suggests that agents view them as "direct response calls" which removes the negative connotation.
Her other recommendations include:
- Practitioners should keep in mind that they are making calls to offer their time and expertise, not to sell something.
- Use a "permission-based" approach, which involves realty professionals introducing themselves at the start of a call and asking the individual on the other end to give them 30 seconds of their time. By seeking permission before continuing, agents can connect with contacts in a friendly manner.
- It is important for agents to remember that they need to encounter more "no's" in order to get to "yes," and not take rejection personally.
Source: RISMedia, Maya Bailey (02/04/08)
How to make your home stand out
You can help your house sell quickly and at a good price -- even in a slow market -- by following these suggestions from readers.
By MSN Real Estate staff
It takes a lot more than sparkling windows, scented candles and chocolate-chip cookies to sell a home in today's market.
But those are among the take-home tips for home sellers from the folks who replied to an MSN Real Estate message board request for advice on making a house stand out.
Readers' No. 1 suggestion, expressed in many variations: Clean every square inch of your property and keep it clean until closing. More than 200 respondents started at the curb and didn't stop until the back fence as they posted suggestions to help attract buyers. Here are some of the best reader comments. (Editor's note: Posts have been edited for grammar and spelling.)
Online appeal
"The loveliest home doesn't have a chance with the poor photography I see in a huge portion of Internet listings, which are the first impression of your home for many buyers. With so many listings posted in some areas, trying to make out details in dark, blurry photos when there are a lot of other listings to look at could have a very negative effect. I always think that if I were trying to sell in this market, I'd be furious with my Realtor if I had a stylish, attractive home represented by a fuzzy, dark rectangle!" -- suefrog
"We just learned from our buyer's agent that one outside shot of the home is usually Realtor code for a foreclosure or corporate-owned house." -- Buying and Selling
"Another thing in a listing that can sometimes make people shy away from even looking at your home is pets in the pictures or notes about pets on the listing. My sister-in-law is VERY allergic to cats and cigarette smoke. When they move, it is always to a new house so they know there have been no previous owners to leave any lingering odors or allergens." -- AZ Native
"If it's in your budget, get a small Web site just for your house address. I give all my clients one for free -- e.g., 123mainst.com. This enables you to put a ton more photos on your Web site, disclosure statements, (and) up-sell your house!" -- Real Estate Diva
First impressions
"'Curb appeal' literally begins and starts with the curb! How clean and presentable is your curb? Does it need to have sand, dirt or pebbles swept clean? Does it need to have leaves, cigarette butts or other debris cleaned up? Are there weeds or grass growing in the cracks and crevices of your curbs and sidewalks? Concrete curbs (sidewalks, driveways, etc.) that are badly cracked or broken should be replaced. You'll be amazed at how other things in your yard start taking on a much more attractive look." -- Curb Appeal
"If the house is small, remember if you plant your bushes and trees at the corners of the exterior the house appears much larger." -- B. Glass
"Wash down the exterior of your house. You don't necessarily need to rent a power washer. A hose and broom and some dishwashing cleanser work great. ... Look for cobwebs and hornets nests weekly. Beg, borrow or steal a lawn edger if you don't use one regularly. Trim back all grass at every edge, including the street. Sweep the street gutters! You may have to do the neighbors on both sides, too (I did), to make sure your section of the street looks really tidy and well-kept." -- wecanhope
"Curb appeal is huge, especially in the winter when sidewalks are icy and snow-covered. If you take time to shovel and salt your sidewalks, the home looks like it's been taken care of even when the buyers can't see the lawn under the foot of snow covering it. In the spring and summer, lawn ornaments are a no-no, and a quick driveway resealing is inexpensive and works wonders for the drive-by appearance of your house." -- Waddle
"Being a real-estate agent myself, I come across many things that help sell a home. The most obvious is landscaping. Good landscaping makes a home look 100% better. Even if it's just some shrub and tree/shrub trimming along with some fresh mulch, do something to spruce up the outside appearance." -- Realtor61
Keep it clean
"Clean: Believe it or not, this can make your home more valuable. Either do it yourself or hire a cleaning service to come in and deep-clean your house. Nobody buys a dirty shirt. Why would they buy a dirty house?" -- mpharnish
"When we found out we were going to move, I followed the best advice given to us: Make your house look like a very comfortable, expensive hotel room -- clean, uncluttered and not like anyone else has ever been there. We rented a storage unit and moved close to 75% of our belongings into it, including everything in the attics, and cleared out the closets to only those clothes we would need in two weeks. We sold in one day, $5,000 above our asking price. ... However, it took a lot of work. I literally cleaned the tracks of the windows with Q-tips -- total craziness!" -- anlatima
"Make sure the areas around your furnace and hot-water heater are clean, neat and spacious. The components themselves should not be covered with dust, cobwebs, rust spots, etc. Even if they're old, they should look shiny and well-maintained. Change the filters often to help with dusty smells. … Take everything out of the garage, vacuum all floors, walls and ceilings, then paint it bright white. If there are shelves and brackets, paint them bright white too. Then bring back only a little of what once dwelled there." -- wecanhope
"The average time on the market in our Ohio city is now over six months! We listed and sold our home in three months with very little investment. We packed the things we didn't need in our daily lives. Gone were the kitchen appliances that get used once every other month, gone were the pictures/frames/art items, gone were the books, video games (we weren't currently addicted to) and other junk. Not only did we get a sale much quicker than our neighbors, but we got asking price -- just by getting a head start on the packing we were going to have to do anyway! -- MajicJewel
"Consider the following distractions I saw at my neighbors' house when they had it 'show ready': dirty bars of soap at the sinks, an empty plastic dish rack obscuring a nice almond-colored kitchen sink, unfolded and mismatched towels on the towel racks, several dirty windows, a bleach-stained pillow sham in the master bedroom, food-stained potholders near a lovely, new stove, faded lawn furniture cluttering a rather small backyard, and bulky furniture lined up military style against the wall of the family room. Really think out of the box when it comes to clutter and cleanliness; every wine-stained tablecloth and bunched-up throw rug chips away at the positive image you'd want to project in your home." -- beebeebooks
"An old kitchen can be a killer to even the nicest home. If your appliances are more than 10 years old, replace them. Upgrade laminate countertops to Corian, granite or something comparable. Dark wood cabinets could be painted white. Cheap cabinets could be refaced, if replacing is not within your budget. New hardware is an inexpensive and effective way to improve cabinet appearance. Replace vinyl tile with ceramic, Pergo or wood. Improve the lighting to make the kitchen as bright as possible. Clear the countertops as much as you can. Don't just clean the drip bowls on your stove, replace them. Every penny you put into a kitchen will be worth it in the end." -- Maryland Realtor
"Whenever it was time to sell my house, my husband said 'Better Homes & Garden' it. We even washed the light bulbs off and (polished) every bit of wood cabinetry and molding. I borrowed a good friend's bookcase to finish off a living room; I stored boxes and boxes of our things at my brothers’; and when there was a showing, put our dirty laundry in the car and drove it down the road. We even took the dog's dish and food (and the dog) to the neighbors." -- midwestrealtor
The great color debate
"Certainly you can decorate your house however you like, but once you are selling, you have to keep in mind what buyers are looking for. If you want to know what they like, go look at popular model homes in the area that are selling hot. However they are decorated should be how you do it. No pink bathrooms or green walls. Paint it all a soft white!" -- jchandjd
"As far as colors go, it's good to have some color in your home. Buyers like to see that you've cared enough about your home to do that arduous sponge painting. However, don't use colors that look like they'll take three coats of primer and three coats of paint to cover up. Don't make every room a different pastel color. Don't use more than two colors in a single room. Don't use any dark colors, as they make a room look smaller." -- Maryland Realtor
"I agree that garish or designer color schemes don't sell well. On the opposite end, stark white walls make a house look cold and unfinished. Painting walls a warm cream or taupe, with white trim, makes rooms more inviting but is still neutral enough for most buyers. … If your furniture is shabby or mismatched, consider putting it into storage and renting some new furniture, rugs and silk plants just until the house sells. Visit some of the model homes at new developments for ideas. Their decorators know what makes a home look attractive and classy." -- CountryCousin
The smell factor
"Consider the smell of your home. Have a neighbor come in and smell it. You might tell them that you have been smelling something and wondered if they could smell it too; that will help encourage them to tell you the truth. They might tell you what nobody else has -- that your house smells like cigarettes, mold or cat urine." -- Perplexed Neighbor
"When I go into a house with smelly candles, simmering oils or baking cookies, all I wonder is what odor they're trying to cover up! I once looked at a house where we arrived to some frantic cookie baking -- and I thought nothing of it until I went into one of the bathrooms that had a distinct odor of sewer! So please, can the candles -- they come across as overkill (like intrusive perfume) at the least, and at worst they smack of deception and dishonesty. I find myself thinking, if they'll cover up an odor, what else will they conceal?" -- OregonSal
"I just bought my first home and I have to say smell was an interesting factor. The house I bought always smelled amazing every time I toured it. Some of the other ones smelled like trash or pets. I think a nice air freshener is a good, subconscious way to sell your home." -- Lauren in Dallas
"Something else that really helps is the interior smell. If you don't feel like baking chocolate-chip cookies (seems to be a common favorite), put a little water in a pot, add a little vanilla extract and put it in your oven at about 200 degrees. Candles are a good alternative. I would avoid cinnamon at all costs, however. People from certain areas of the world find cinnamon to be an offensive smell." -- Realtor61
"As far as candles and cookies and such ... you really can't leave those things going in the house while you're gone. So you have to count on cleanliness and clean-smelling things to do the trick while you're away. No. 1: Don't allow any smoking in the house while it's on the market. To help with other typical smells, I'd recommend the following. For the bathroom: Try swabbing the toilet daily with a little squirt of dishwashing liquid or clean-smelling shampoo. For the kitchen: Run some ice and dishwashing liquid in the garbage disposal daily. For carpets: Steam clean. Then steam clean again. I'd think that all things being equal, most folks could live with a paint color that wasn't to their taste for a few months after moving in. But no one would pay top dollar for a house that appears ill-maintained and smells just plain weird!" -- wecanhope
"No offensive house odors. ... Many homes were great in appearance, but smelled horrible; we just walked out." -- petjoel
No surprises
"My wife and I sold our 1984 bi-level in three months while there are still similar homes on the market a year later that were up for sale when ours was. The best thing we did was have a home inspector go through our house as if we were buying it. He told us everything that a potential buyer would be told, and we corrected these issues in advance. Our first serious offer came with an inspection contingency. The buyers were thrilled when the inspection came back great. SOLD!" -- dwb1999
"Operating costs: Have reasonably accurate information on the costs of your home taxes, annual heating bills, along with documentation of any recent major repairs or upgrades such as a new roof or new wiring or plumbing." -- Coldwell Banker Terrequity
Precision pricing
"With so many houses on the market today there are two factors that actually sell a house. ... It MUST be 1. the best house for 2. the best price." -- waddle
"The absolute most important thing you can do to help sell your home in our current market is to price it either at or below fair market value. That isn't to say that you should give your home away at all. If you price your home too high, today's educated buyers won't even bother looking at it. If you price it 5%-10% below fair market value, you up your chances of multiple offers in which the buyer will put their best foot forward on their offer. By doing this, you may actually get more than fair market value for your home!" -- Realtor61
"There is an adage in real estate: 'There is NO objection that cannot be overcome by price!'" -- Coldwell Banker Agent
"What makes a home stand out is price. … This is a business deal. Price it right and then pray." -– Grandpa Frank
Home Refinancing Basics
Before you refinance, know the pitfalls as well as the advantages
In recent years, millions of homeowners have taken advantage of low rates and refinanced their mortgages. This article describes the advantages and possible pitfalls associated with a "refi."
Before You Start:
- Remember that refinancing to reduce debt can be a smart move, but refinancing in order to borrow more for consumer purchases (car, vacation, etc.) could set you back significantly.
- Read the fine print on your current mortgage to learn whether you'll be assessed penalties or fees for "getting out" of that loan early.
- Make sure you know whether you have a fixed or variable interest rate and what the terms are.
Home Refinancing Basics
In recent years, Americans seeking to take advantage of low interest rates have lined up to refinance their mortgages. In fact, refinancing hit an all-time high in 2003, and remained high in both 2004 and 2005, according to the Mortgage Bankers Association of America.
But while it's true that refinancing has the potential to help you reduce the costs associated with borrowing money to own a home, it is not necessarily a strategy that makes sense for every individual in every situation. So before you make a commitment to refinance your mortgage, it's important to do your homework and determine whether such a move is the right one for you.
To Refinance or Not
The old and arbitrary rule of thumb said that a refi only makes sense if you can lower your interest rate by at least two percentage points for example, from 9 percent to 7 percent. But what really matters is how long it will take you to break even and whether you plan to stay in your home that long. In other words, make sure you understand - and are comfortable with - the amount of time it will take for your overall savings to compensate for the cost of the refinancing.
Consider this: If you had a $200,000 30-year mortgage with an 8 percent interest rate, your monthly payment would be $1,468. If you refinanced at 6 percent, your new monthly payment would be $1,199, a savings of $269 per month. Assuming that your new closing costs amounted to $2,000, it would take eight months to break even. ($269 x 8 = $2,152). If you planned to stay in your home for at least eight more months, then a refi would be appropriate under these conditions. If you planned to sell the house before then, you might not want to bother refinancing. (See below for additional examples.)
Remember: All Mortgages Are Not Created Equal
Don't make the mistake of choosing a mortgage based only on its stated annual percentage rate (APR), because there are a variety of other important variables to consider, such as:
The term of the mortgage - This describes the amount of time it will take you to pay off the loan's principal and interest. Although short-term mortgages typically offer lower interest rates than long-term mortgages, they usually involve higher monthly payments. On the other hand, they can result in significantly reduced interest costs over time.
The variability of the interest rate - There are two basic types of mortgages: those with "fixed" (i.e., unchanging) interest rates and those with variable rates, which can change after a predetermined amount of time has passed, such as one year or five years. While an adjustable-rate mortgage (ARM) usually offers a lower introductory rate than a fixed-rate mortgage with a comparable term, the ARM's rate could jump in the future if interest rates rise. If you plan to stay in your home for a long time, it may make sense to opt for the predictability and security of a fixed rate, whereas an ARM might make sense if you plan to sell before its rate is allowed to go up. Also keep in mind that interest rates hovered near historical lows in recent years and are more likely to increase than decrease over time.
Points - Points (also known as "origination fees" or "discount fees") are fees that you pay to a lender or broker when you close the deal. While a "no-cost" or "zero points" mortgage does not carry this up-front cost, it could prove to be more expensive if the lender charges a higher interest rate instead. So you'll need to determine whether the savings from a lower rate justify the added costs of paying points. (One point is equal to one percent of the loan's value.)
How Much Would You Save?
| A homeowner with a 30-year, $200,000 mortgage charging 8% interest would pay $1,468 each month. The table below illustrates the potential monthly savings and the various break-even periods that would result from refinancing at different rates. |
Rate After
Refinancing |
New Monthly
Payment |
Monthly
Savings |
Months to
Break Even* |
| 7.5% |
$1,398 |
$70 |
29 |
| 7.0% |
$1,331 |
$137 |
15 |
| 6.5% |
$1,264 |
$204 |
10 |
| 6.0% |
$1,199 |
$269 |
8 |
| 5.5% |
$1,136 |
$332 |
7 |
| 5.0% |
$1,074 |
$394 |
6 |
| *Assumes $2,000 closing costs. Rounded up to the next highest month. |
A Closer Look at Mortgage Fees
| Using data collected during 2003, researchers at Bankrate.com determined the average fees charged to consumers who borrow money to buy a home. Based on a loan of $180,000, the fees broke down as follows: |
| Average Lender/Broker Fees |
| Administration fee: |
$336 |
| Application fee: |
$205 |
| Commitment fee: |
$498 |
| Document preparation: |
$194 |
| Funding fee: |
$228 |
| Mortgage broker fee: |
$839 |
| Processing: |
$320 |
| Tax service: |
$73 |
| Underwriting: |
$269 |
| Wire transfer: |
$31 |
| Third-Party Fees |
| Appraisal: |
$327 |
| Attorney or settlement fees: |
$445 |
| Credit report: |
$29 |
| Flood certification: |
$17 |
| Pest & other inspection: |
$68 |
| Postage/courier: |
$45 |
| Survey: |
$174 |
| Title insurance: |
$605 |
| Title work: |
$200 |
| Government Fees |
| Recording fee: |
$76 |
| Various taxes: |
$1,339 |
Stick With What You Know?
Finally, keep in mind that your current lender may make it easier and cheaper to refinance than another lender would. That's because your current lender is likely to have all of your important financial information on hand already, which reduces the time and resources necessary to process your application. But don't let that be your only consideration. To make a well-informed, confident decision you'll need to shop around, crunch the numbers, and ask plenty of questions.
Summary:
- The decision to refinance should only be made if the long-term savings outweigh the initial expenses. To calculate your break-even point, divide the cost of the refi by your monthly savings. The resulting figure represents the number of months you will need to stay in the home to make the strategy work.
- Don't select a new mortgage based only on its annual percentage rate.
- Also evaluate the term of the loan, whether the interest rate is fixed or variable, and the relative merits of paying up-front fees in exchange for a lower rate.
- Your current lender already knows you and has your financial information on file, so you may be able to get a better deal that way, instead of going to a new lender.
- To get the best possible refinancing deal, you'll need to shop around, crunch some numbers, and ask a lot of questions.
Checklist:
- Shop around and conduct a detailed cost assessment (with a financial professional, if necessary) to identify which mortgage offers the greatest financial benefits.
- Read the entire contract before signing. Don't let anyone pressure you or rush you to make a hasty decision.
- If refinancing results in lower monthly payments, use those savings to pursue other important goals, such as preparing for retirement and college costs.
Home seller quandary: Fix up house or offer credit?
by Dian Hymer
Sellers who anticipate losing money if they sell their home may wonder why they should spend a dime fixing the place up for sale. Isn't this throwing good money after bad? Even sellers with plenty of equity in their homes often figure the way to get the most out of the sale is to cut sale costs to a minimum.
This attitude is directly contrary to the notion that the way to make the most money on the sale of a home is by pricing the property appropriately for the market, and by making cost-effective improvements that will result in a higher sale price in a shorter time.
Job applicants don't show up for an important interview in tattered old clothes if they want to make a good impression, particularly if there were plenty of other qualified applicants. Likewise, if you wanted to get top dollar from the sale of a car you would have the car detailed so that it looked its best. The same principal applies to selling single-family homes.
Today, many housing markets have plenty of homes for sale and far too few buyers. For years, buyers competed with one another in order to buy a house. Now, in general, sellers are being forced to compete with other sellers in order to get their home sold.
Consider the competitive nature of the market when deciding if you're going to improve your home before selling it, and how much you'll invest. Keep in mind that the point of fixing up a home to sell is to maximize your return from the sale. Don't waste money on improvements that have little or no value to buyers.
HOUSE HUNTING TIP: Ask your real estate agent or a staging decorator to walk through your home with you for the purpose of determining what fix-up projects you should ideally complete before marketing the property. For example, you might be inclined to replace worn-out carpet. Your agent, however, might advise otherwise.
An agent who specializes in the sale of older homes in the area might recommend refinishing the hardwood floor that is hidden underneath the carpet instead. Buyers looking for charming older homes usually prefer hardwood floors to carpet.
A common opinion expressed by sellers is that it's pointless to fix up a place for someone else whose decorating preferences might be quite different. For example, why not just offer a credit to the buyers so that they can either change the carpet or refinish the hardwood floors -- whichever they prefer?
The problem with this approach is that most buyers have a difficult time imagining how a home will look fixed up. They remember what they see, not what the house could look like with this or that improvement.
Imagine there are five homes listed for sale in an area, all similarly priced, but not all in the same condition. Three houses have old, worn carpet covering most of the floors; one has linoleum over the floor; and the fifth has pristine, recently refinished hardwood floors. Most buyers will gravitate to the home with the beautiful hardwood floors.
The best houses in the best condition and offered for the best price usually sell quickly. A fast sale is important to some sellers in this market. The sooner your home is sold, the sooner you stop paying mortgage payments, property taxes and various maintenance costs.
THE CLOSING: In areas where prices are declining, a quick sale can result in a higher price than might be attainable in a few months.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
First Impressions - Curb Appeal
Good curb appeal is a major plus when it comes to marketing a home. A little bit of work on the front of your home can pay big dividends.
When a potential buyer pulls up in front of your house, their first impression is absolutely crucial. Sometimes buyers won't even look at a home with droopy shutters, sagging gutters, peeling paint and a bumper crop of dandelions in the front yard. Or they might go in expecting to find a "fixer-upper" that could be purchased at a bargain price. If a house looks neat and cared for from the street, the initial good impression will carry over as the buyers step inside. It is not necessary to hire a professional landscaper, but listen to your real estate agent's suggestions when you list your home. Local nurseries can help you select blooming plants that will thrive in your area. Keep the lawn mowed, and regardless of the season, take care of exterior maintenance. Strong curb appeal will help your home sell more quickly and for top dollar.
Improving To Sell - Curb Appeal
Many homeowners wait until they are ready to put their home on the market before painting, planting flowers, and making other improvements to their homes. After completing these improvements, they may be so delighted with the results that they wish they had done the work on their home sooner in order to enjoy the changes.
Whether you have recently purchased a home or have been settled in your home for several years, you should consider evaluating the condition of your house as if you planned to sell it soon. Maximize your home's "curb appeal" now, so that you will reap the benefits every time you pull into your driveway. Plant those flowers and bulbs and you will have your fresh flowers on your own dining room table. Add new window treatments to freshen the appearance of the main rooms. If your house needs an upgraded kitchen, go ahead with the renovation. You will enhance your whole neighborhood and experience the pleasure of living in a more beautiful and fully functional home.
Brighter is Better - Curb Appeal
Sometimes a real estate agent will walk into a home that is basically attractive, yet communicates the feeling that something is lacking. Then the agent notices that all of the drapes are closed, interior lights are off and there is a lot of overgrown shrubbery blocking the sunlight that might otherwise pour through the windows.
A dark house is not as appealing to most buyers as one that is flooded with light. As a part of your preparations to market your home, try to maximize the light in your home. Make sure that all the windows are clean and the drapes are open when the house is being shown. A fresh coat of light paint can do a lot to brighten up the interior. If your house has very dark paneling, and you do not wish to repaint the walls, you may want to consider adding additional lamps. Your real estate agent may be able to provide other simple and cost-effective ideas about how to maximize your home's appeal.
A Beautiful Yard - Curb Appeal
Many people wait until they are about to sell their home before they put energy and attention into improving the landscaping. Then in a desperate attempt to create instant curb appeal, they call in a professional landscaper and spend a lot of money making the yard beautiful for the next owners to enjoy.
Why wait until you are ready to move to enhance your surroundings? Even if you don't want to take on a major project, you can plant a few bushes and bulbs each year. You can get plants that bloom at different times of the year, many of which don't need a tremendous amount of care. There are several benefits to this approach. You will be able to enjoy your improvements yourself, and you will profit more from your sale if you haven't invested a lot of money in your yard right before the transaction. Well-landscaped lawns tend to increase the real estate values in the whole neighborhood, and can result in a more rapid increase in the equity you have in your home
9 Steps to Add Consistency to Your Business
Bob Corcoran Offers Real Estate Agents A Formula for Dependability
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January 28th, 2008 - 12:24 am
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Consistency is the oil for the engine of business. Peek under the hood of the great businesses and you’ll see consistency causing a smooth purring sound:
- McDonalds: No matter where in the country you are – those cheeseburgers all taste exactly the same.
- UPS: When was the last time you had a problem with “big brown” getting your package either to you or to your client?
- Starbucks: That same exact aura and taste is in every single store.
And ask any of the leaders of those companies why they’re successful and I guarantee you’ll hear the word consistency uttered sooner rather than later.
So how do you achieve consistency in your real estate business? Here are nine ingredients of consistency:
- Review your business. Take an inventory of your current situation to see if your business is set up to accomplish what you truly want to achieve. Are you selling the number of homes you expected to? Are you selling homes in the price range that will lead you to your financial goals?
- Clarify your vision. Write a vision statement that spells out clearly what you see your business providing for the customer. Then write a mission statement that explains how you intend to achieve your objective or vision. Set achievable sales goals and monitor them weekly.
- Analyze the market regularly. Keep an eye out for any upcoming changes in the market. And reevaluate your target market and understand how that market will evaluate your services and make decisions.
- Examine the competition. Know exactly who your competition is and how you compare. Look at how they’re different from you and why you believe you can get a client to choose you over them. Look for any opportunities that put you in a better light and determine what risks your competitors pose.
- Develop a sound business strategy. Know what your strengths and weaknesses are and describe them in detail. Then outline how you plan to capitalize on both. Spell out who will implement the strategy and how because you must have accountability from a coach or peer.
- Outline your services. Rank your services by how much money each brings in and how you can improve each one. Also, look at how you’re positioning those services to the buying public. And analyze how you list homes and work with buyers or sellers.
- Energize your sales and marketing. Outline specifically all the ways potential clients know you exist and why they should choose you when they do learn about you. Examine your marketing and advertising strategies to ensure they’re potent.
- Add efficiency to your operations. I regularly help clients set up systems so their businesses run on autopilot. I also help them determine if they’re spending their time on dollar productive activities versus wasting time. Do you have job descriptions, an ideal weekly schedule and a daily activity record? These items will help keep you on track.
- Get a handle on your numbers and finances. Do you know your average price per sale? Do you know your average time on market for your listings? Do you know your profit and loss numbers? Budget projections? You must have a firm grasp of all your numbers and track them regularly.
And finally, wrap all these items up into a single solid business plan and you’ll be well on your way to a business that gives off that sweet purring sound – smooth, fast, efficient and profitable.
Make a commitment to do it today. And to help you get started, I’ve outlined all of this for you in a worksheet free of charge on my website at http://www.corcorancoaching.com/BrokerAgent.php.
Best of luck to you!
(Bob Corcoran is a nationally recognized speaker and author who is founder and president of Corcoran Consulting Inc. 800-957-8353, an international consulting and coaching company that specializes in performance coaching and the implementation of sound business systems into the residential or commercial broker or agent’s existing practice. We look forward to hearing from you. Sign up TODAY for your complimentary business consultation.)
7 Ways to Use Text Messaging for Innovative Buyer Representation
Real Estate Technology Tips to Enhance Communication with Clients
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February 5th, 2008 - 7:52 am
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Attitudes of first time home buyers have changed. A higher level of service is demanded because consumers are raising the bar for what is expected from their real estate professional without additional compensation. Regular, authentic, and innovative communication such as text messaging will sustain the attention of new prospects and make them spread the word about the services you offer.
According to the National Assn. of REALTORS® "Profile of Home Buyers and Sellers," 39% of home sales are first time home buyers and 65% of first-time home buyers are between the ages of 18-35 representing the Gen X and Gen Y groups. These busy professionals are happier with sending one or two lines via text messaging rather than spend several minutes on the phone.
Here are seven ways to use text messaging for innovative buyer representation:
- e-mail to text messaging. Just about every wireless phone today has a text messaging feature available. If you are at your office you can send an e-mail to the wireless phone number’s text messaging service. For example e-mail to 3144965973@messaging.sprintpcs.com and it will go to my wireless phone with the message intact. If you are using Outlook for your contact manager I recommend saving the text messaging e-mail address as an additional e-mail address. Also, be sure to keep these messages short as most phones cannot retrieve more than a 100 characters. This way you can e-mail vital real estate information to a client’s cell phone without having to pick up your phone. Please click on this link to find the e-mail address that corresponds with your wireless service provider: http://www.livejournal.com/tools/textmessage.bml?mode=details.
- Immediate response to lead generation. Web sites generate leads by asking for consumer contact information which will be e-mailed to the agents’ inboxes. With the time delay of checking e-mail regularly leads may be lost by not being the first to respond. Ask your web site provider or host if you can add an extra e-mail to be notified of new leads. Give the e-mail address that corresponds to your wireless service provider in order to be notified. This way you will be the first to respond to online leads since your cell phone is on you where ever you go already.
- Quick text. In a given month how many times do you ask or are asked the same question? What is your e-mail address? What is your fax number? What is your address? Where are you? Common responses to frequently asked questions or answers can be stored automatically in “quick text” (text messaging template). Add new templates for the following:
a. Can you talk now?
b. e-mail me at Speaking@DougDevitre.com
c. Please fax the documents to 314.754.8302
d. Please visit my web site at www.ReTechTraining.com
e. In a meeting. I will call you back as soon as I can.
This way you save time and respond quickly by not retyping the same answers or questions repeatedly.
- Text message directions. New clients or prospects will always ask where your office is located. Here are two ways to send directions to your client by text messaging. First, save the office address and directions from major interstate as “quick text” on your phone. Second, www.mapquest.com has a new feature that will allow you to send directions directly to the mobile phone via text messaging. This will save you and the client time by explaining how to get to your office.
- Text message new listings. Almost every multiple listing service gives agents the ability to e-mail clients with new listings that hit the market, have price reductions, or a change of status. These reports are e-mailed as soon as the changes occur whether the agent knows or not. Here is something better. Since every mobile phone has text messaging capabilities adding text to e-mail address to the auto-prospecting service so that all new listings go to both the client's cell phone and e-mail address. The links from the e-mail to text can open up pictures and additional property information if the client has a web enabled phone.
- Virtual phone duty. Have questions while online? We’ve got immediate answers. A prospect may need immediate questions answered even though they do not want to pick up the phone and dial. A free service, Plugoo, will allow you to add a widget to your web site so that consumers can ask questions without having to call or e-mail. This will help generate rapport early on with potential buyers while protecting their identity.
- Add media to text messages. Pictures are worth 1,000 words. No matter if you are previewing property, on a building inspection, or on a walkthrough, photos will clarify circumstances to provide a higher level of service. Mobile phones that have cameras can also send text messages to include either photos or videos. This will help save time when discussing options and provide evidence for ambiguous items.
History of communication has lead us from face to face, to mail, to fax, to e-mail, to text messaging. Each one of these forms saves more time than the other. There is no replacement for face to face communication when selling a product or service. Text messaging should be used to either get the appointment for the sale or service the sale after it has occurred. Social online networking sites such as FaceBook, MySpace, and Twitter are using text messaging as the primary way to communicate. Learning how to better serve the text messaging crowd will help generate rapport faster and provide a higher level of service overall.
(Doug Devitre e-PRO, ABR, GRI, CRS, PMN, SRS, Devitre Holdings, LLC., wwww.ReTechTraining.com, 1213 Oakleaf Dr., St. Louis, MO 63119. Speaking@DougDevitre.com)
How to Buy a Country Retirement Property
Consider Making Your Second Home Your Retirement Home
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February 4th, 2008 - 12:06 pm
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Most Americans stay where they are in retirement. Of the 420,000 relocators who cross state lines each year, most look to small towns, small cities, milder climates and a lower cost of living. The younger you are when you start planning retirement, the better. But those of the 77 million Baby Boomers who have not saved enough may not be out of luck.
If relocating to a small town or rural area might be in your plans, here are ways to approach it:
Buy your retirement place as soon as you can. This is often hard to do, because it requires that you start a long-term investment when you’re young and many considerations are unknowable or subject to change. Some make decision easier by starting it as a second home that can become their retirement place.
About nine percent of America’s 111 million householders (owners plus renters) — roughly 10 million -- own a second home, the rate being highest among those in their 50s, according to Professor Rachel Drew, coauthor of a November, 2007 study by Harvard’s Joint Center for Housing Studies, “Projecting the Underlying Demand for New Housing Units: Inferences from the Past, Assumptions about the Future.”
The advantages of extending your second home into your retirement residence are many. The second home can be used mostly as a rental unit with income helping to retire its mortgage and the owner getting many tax benefits along with some personal use. As equity builds and appreciation occurs, you have another asset to borrow against. You also can have local friends in place before retirement.
Buying a second home sooner allows you to buy a retirement place cheaper. The second home you bought for $100,000 30 years ago might easily cost $750,000 or more today as a retirement place. The tax-free profit you will get on the sale of your principal residence can now be used for retirement living rather than for the purchase of your next house.
Buy your retirement place with your IRA. A Roth Individual Retirement Account (IRA) is the best retirement savings vehicle available. It allows an individual to contribute $4,000 annually (on which tax is paid), but all principal and all appreciation can be withdrawn tax-free in retirement. Most of us keep our IRAs in stocks, CDs and bonds.
You can also use IRA money to buy a retirement place in advance of your retirement. You cannot live there or use it until you retire. And you can’t use the retirement property to collateralize a loan, even its own. You can use its rental income before your retirement to pay for maintenance and build your IRA account.
Using IRA money to buy rural land is simpler than buying a rural residence, since land generally requires little maintenance or insurance, and taxes are usually low.
If you sell timber or lease the IRA land for crops, minerals or hunting, your net income after taxes and expenses is added to your IRA. Taxes on income earned from the IRA property has to be paid from IRA funds. The biggest benefit of IRA real estate is its appreciated value, which you can sell before retirement and put the net into your account.
The IRS has established rules for buying and managing real estate with IRA money: you must know what they are and follow them. See Title 26 — Internal Revenue Code, Section 408A, Roth IRAs.
 An excellent introductory book on the subject is IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment, 2nd ed., by Patrick Rice. Mr. Rice locates real-estate investments for IRA owners.
Picking a Place. Where to Retire Magazine is a good source for articles on small communities that are retiree-friendly, and Money Magazine ran a “Best Places to Retire in 2006”.
 Warren Bland’s, Retire in Style, 60 Outstanding Places Across the USA and Canada, 2007, profiles suitable small towns and small cities. He also writes community reports; both at www.nextdecade.com. He’s developed a useful evaluation tool for retirees by which he rates communities – poor to excellent -- against 12 criteria: landscape, climate, quality of life, cost of living, transportation, retail services, health care, community services, recreation, cultural/educational activities, work/volunteer activities and public safety.
Professor Bland gave me these picks for small towns with rural lifestyles available in their host counties: Ithaca, NY; Bloomington, IN; Charlottesville, VA; Gainesville, FL; Fredericksburg, TX; Chico, CA; and Medford-Ashland, OR.
Five of these six have a university. Smaller towns with colleges offer many of the same benefits to retirees—restaurants, bookstores, cultural activities, sports and cheap 17-year-old computer fixers.
If out-in-the-country-living is your goal, choose a county and then a couple of neighborhoods that appeal to you. I’d look for a pretty place with fewer than 20,000 residents, no resource-extraction controversies, a small college and a slow-growing rural economy.
What relocating retirees value in a rural community.
- Compatibility with a new group of peers
- Levels of services that meet their needs, however they’re individually defined
- Peace and quiet—political, environmental, neighborhood
- Proximity to what’s important to them—family, part-time work, recreation, religious congregation
- Climate and interesting topography
- Opportunities for volunteerism
- Multi-channel television, Internet and catalog shopping, DVDs, email, search engines and all the rest make “distance-from” much less a discount factor in rural life than in the past.
Important services. Retirees should evaluate these services:
- Proximity of primary-care and emergency physicians. If a relocator has special needs, those medical providers have to be convenient and competent.
- Quality and reliability of hospital transportation
- House and yard help
Property search criteria. Retirees need to accept that they will be able to do less property-related hard work as they get older. Therefore, look for property that has:
- Convenient and safe physical access, particularly in bad weather
- Age-friendly layout in land and house.
- Routine maintenance that’s easy.
- Dependable utilities
Some of us will be fortunate enough to retire with no loss in our standard of living, but most of us will not. Relocating to a small town or rural community will stretch your retirement dollars as well as your mind.
(Curtis Seltzer, land consultant, is author of How To Be a DIRT-SMART Buyer of Country Property at www.curtis-seltzer.com. The current issue (January, 2008) of Equus contains his article on how to buy a horse farm, “Select the Right Horse Property.”)
How will you use your credit card?
The first step in choosing a credit card is thinking about how you will use it.
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If you expect to always pay your monthly bill in full--and other features such as frequent flyer miles don’t interest you--your best choice may be a card that has no annual fee and offers a longer grace period.
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If you sometimes carry over a balance from month to month, you may be more interested in a card that carries a lower interest rate (stated as an annual percentage rate, or APR).
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If you expect to use your card to get cash advances, you’ll want to look for a card that carries a lower APR and lower fees on cash advances. Some cards charge a higher APR for cash advances than for purchases.
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What are the APRs?
The annual percentage rate--APR--is the way of stating the interest rate you will pay if you carry over a balance, take out a cash advance, or transfer a balance from another card. The APR states the interest rate as a yearly rate.
Multiple APRs
A single credit card may have several APRs:
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One APR for purchases, another for cash advances, and yet another for balance transfers. The APRs for cash advances and balance transfers often are higher than the APR for purchases (for example, 14% for purchases, 18% for cash advances, and 19% for balance transfers).
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Tiered APRs. Different rates are applied to different levels of the outstanding balance (for example, 16% on balances of $1–$500 and 17% on balances above $500).
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A penalty APR. The APR may increase if you are late in making payments. For example, your card agreement may say, “If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply.”
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An introductory APR. A different rate will apply after the introductory rate expires.
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A delayed APR. A different rate will apply in the future. For example, a card may advertise that there is “no interest until next March.” Look for the APR that will be in effect after March.
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If you carry over a part of your balance from month to month, even a small difference in the APR can make a big difference in how much you will pay over a year.
Fixed vs. variable APR
Some credit cards are “fixed rate”--the APR doesn’t change, or at least doesn’t change often. Even the APR on a “fixed rate” credit card can change over time. However, the credit card company must tell you before increasing the fixed APR.
Other credit cards are “variable rate”--the APR changes from time to time. The rate is usually tied to another interest rate, such as the prime rate or the Treasury bill rate. If the other rate changes, the rate on your card may change, too. Look for information on the credit card application and in the credit card agreement to see how often your card’s APR may change (the agreement is like a contract--it lists the terms and conditions for using your credit card).
How long is the grace period?
The grace period is the number of days you have to pay your bill in full without triggering a finance charge. For example, the credit card company may say that you have “25 days from the statement date, provided you paid your previous balance in full by the due date.” The statement date is given on the bill.
The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away.
If you carried over any part of your balance from the preceding month, you may not have a grace period for new purchases. Instead, you may be charged interest as soon as you make a purchase (in addition to being charged interest on the earlier balance you have not paid off). Look on the credit card application for information about the “method of computing the balance for purchases” to see if new purchases are included or excluded. Information on methods of computing the balance is in the section “How is the finance charge calculated?”
How is the finance charge calculated?
The finance charge is the dollar amount you pay to use credit. The amount depends in part on your outstanding balance and the APR.
Credit card companies use one of several methods to calculate the outstanding balance. The method can make a big difference in the finance charge you’ll pay. Your outstanding balance may be calculated
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Over one billing cycle or two,
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