From wsjonlin.com:
The economy expanded in the third quarter after shrinking for four consecutive quarters, likely marking an end to the worst recession since World War II. But the recovery is expected to be slow, as the economy continues to fight rising unemployment and a persistent credit crunch.
Gross domestic product rose by a higher-than-expected seasonally adjusted 3.5% annual rate July through September, the Commerce Department said Thursday in its first estimate of third-quarter GDP. Economists surveyed by Dow Jones Newswires had forecast 3.2% GDP growth during the summer. GDP is the broad measure of economic activity in the U.S.
Thursday, October 29, 2009
Boston Real Estate - Q3 2009 - Some Positive News!
Sales of existing homes in September posted the largest monthly increase in 26 years as buyers scrambled to cash in on the first-time home buyer tax credit. Sales jumped 9.4 percent to a seasonally adjusted annual rate of 5.57 million last month according to the National Association of Realtors.
Nationwide sales are up almost 24 percent from their bottom in January, 2009. Prices, however, continued to be dragged down by foreclosures and short sales. The median price last month was $174,900, down almost 9 percent from $191,200 a year earlier.
But looking back at the last 4 months we can see an upward trend. According to the Case-Shiller Home Price Index of 20 cities, home prices rose for the fourth month in a row during August and suffered a smaller-than-expected annual drop. Prices in the index rose a non-seasonally adjusted 1.2% in August.
In a further sign of a stabilizing market, the inventory of unsold homes on the market fell about 7 percent to 3.63 million - less than an eight-month supply at the current sales pace.
Nationally, prices could fall further because rising unemployment leads to more foreclosures. The jobless rate, currently at 9.8 percent is expected to rise as high as 10.5 percent next year, causing more people to fall behind on their mortgages.
Here in Boston we seem to be doing better, quite a bit better, than the national average. In Massachusetts the unemployment rate is 9.3%, half a point lower than the national average. Next year the Massachusetts economy is expected to grow by 2%, faster than the national prediction. And while Massachusetts lost 4% of its jobs, the nation lost 5% of its jobs.
Although the performance of the Massachusetts economy may not seem all that much better than the national economy, there are some key differences which indicate Massachusetts will pull out of the recession sooner, and in a more meaningful way than the rest of the nation. Our mix of industries (technology, health care, biomedical and financial services) is expected to lead the recovery (as opposed to automobile, heavy manufacturing, and construction which will lag). In fact already this year Massachusetts companies are reporting strong increases in sales.
With respect to the housing market the story is rather similar. City-wide the median sale price comparing, Q3 2009 to Q3 2008, is only down 5.43%. But in some neighborhoods the median sale price for the same period is actually up. In the South End, for example, median sale price posted a 3.55% gain.
So far so good. It looks like we have seen the worst of it here in the greater Boston area. There is light at the end of the tunnel. It will be most interesting to see how we fare in Q4 since it was in Q4 2008 that we saw the start of the 6 month precipitous decline that began with the collapse of Lehman Brothers. Stay tuned!
And in the meantime please do not hesitate to call or email me whenever I can help you, a client or a friend with a real estate need in the greater Boston area. I promise to take excellent care of them.
Nationwide sales are up almost 24 percent from their bottom in January, 2009. Prices, however, continued to be dragged down by foreclosures and short sales. The median price last month was $174,900, down almost 9 percent from $191,200 a year earlier.
But looking back at the last 4 months we can see an upward trend. According to the Case-Shiller Home Price Index of 20 cities, home prices rose for the fourth month in a row during August and suffered a smaller-than-expected annual drop. Prices in the index rose a non-seasonally adjusted 1.2% in August.
In a further sign of a stabilizing market, the inventory of unsold homes on the market fell about 7 percent to 3.63 million - less than an eight-month supply at the current sales pace.
Nationally, prices could fall further because rising unemployment leads to more foreclosures. The jobless rate, currently at 9.8 percent is expected to rise as high as 10.5 percent next year, causing more people to fall behind on their mortgages.
Here in Boston we seem to be doing better, quite a bit better, than the national average. In Massachusetts the unemployment rate is 9.3%, half a point lower than the national average. Next year the Massachusetts economy is expected to grow by 2%, faster than the national prediction. And while Massachusetts lost 4% of its jobs, the nation lost 5% of its jobs.
Although the performance of the Massachusetts economy may not seem all that much better than the national economy, there are some key differences which indicate Massachusetts will pull out of the recession sooner, and in a more meaningful way than the rest of the nation. Our mix of industries (technology, health care, biomedical and financial services) is expected to lead the recovery (as opposed to automobile, heavy manufacturing, and construction which will lag). In fact already this year Massachusetts companies are reporting strong increases in sales.
With respect to the housing market the story is rather similar. City-wide the median sale price comparing, Q3 2009 to Q3 2008, is only down 5.43%. But in some neighborhoods the median sale price for the same period is actually up. In the South End, for example, median sale price posted a 3.55% gain.
So far so good. It looks like we have seen the worst of it here in the greater Boston area. There is light at the end of the tunnel. It will be most interesting to see how we fare in Q4 since it was in Q4 2008 that we saw the start of the 6 month precipitous decline that began with the collapse of Lehman Brothers. Stay tuned!
And in the meantime please do not hesitate to call or email me whenever I can help you, a client or a friend with a real estate need in the greater Boston area. I promise to take excellent care of them.
First Time Buyer Credit - To Be Extended
Senators agree to extend home-buyer tax credit
By Stephen Ohlemacher, Associated Press Writer
WASHINGTON — Senators agreed Wednesday to extend a popular tax credit for first-time home buyers and to offer a reduced credit to some repeat buyers.
The tax credit provides up to $8,000 to first-time home buyers but is set to expire at the end of November. The Commerce Department said Wednesday that new home sales fell 3.6% in September, and some industry representatives blamed uncertainty about the tax credit.
Senators agreed to extend the existing tax credit for first-time home buyers while offering a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least five years, said Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, D-Nev.
The tax credits would be available to home buyers who sign sales agreements by the end of April. They would have until the end of June to close on their new homes, according to a summary of the legislation being circulated among lawmakers.
Senators were still negotiating the expansion of a separate tax credit that lets money-losing businesses get refunds for taxes paid in previous years, providing them with an immediate source of cash.
Senators in both political parties were hoping to add both tax provisions to a bill that would give people running out of unemployment insurance benefits up to 20 more weeks of federal aid. The Senate could vote on the overall bill as early as Thursday, but lawmakers were still haggling over several unrelated amendments Wednesday evening.
Popular bills like the one to extend unemployment benefits often attract amendments that would have a difficult time passing on their own.
Republicans were demanding that they be given a chance to offer amendments to restrict federal aid to the beleaguered community activist group ACORN and on requiring that people receiving unemployment insurance be processed through E-Verify, an Internet-based system that employers use to check on the immigration status of new hires.
Majority Democrats have refused to add the amendments.
If the Senate passes the bill, it would go to the House, which passed a similar bill extending unemployment benefits last month. House leaders have also said they support extending the tax credit for home buyers.
Sen. Chris Dodd, D-Conn., has been negotiating for several weeks with Sen. Johnny Isakson, R-Ga., to craft an extended tax credit for homebuyers that would pass the Senate.
Lawmakers didn't release a cost estimate for extending the tax credit, though similar proposals were projected to cost about $10 billion.
Industry representatives said uncertainty about the tax credit is hurting new home sales. September's decline was the first since March.
It takes 45 days to 60 days to close on a house, making it unlikely a sale made today would be consummated by the end of November, said Lucien Salvant, spokesman for the National Association of Realtors.
"Buyers right now have an incentive to hold off, not knowing whether the credit will be extended," Salvant said.
About 1.4 million first-time homebuyers have qualified for the credit through August. The National Association of Realtors estimates that 350,000 of them would not have purchased their homes without the credit.
By Stephen Ohlemacher, Associated Press Writer
WASHINGTON — Senators agreed Wednesday to extend a popular tax credit for first-time home buyers and to offer a reduced credit to some repeat buyers.
The tax credit provides up to $8,000 to first-time home buyers but is set to expire at the end of November. The Commerce Department said Wednesday that new home sales fell 3.6% in September, and some industry representatives blamed uncertainty about the tax credit.
Senators agreed to extend the existing tax credit for first-time home buyers while offering a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least five years, said Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, D-Nev.
The tax credits would be available to home buyers who sign sales agreements by the end of April. They would have until the end of June to close on their new homes, according to a summary of the legislation being circulated among lawmakers.
Senators were still negotiating the expansion of a separate tax credit that lets money-losing businesses get refunds for taxes paid in previous years, providing them with an immediate source of cash.
Senators in both political parties were hoping to add both tax provisions to a bill that would give people running out of unemployment insurance benefits up to 20 more weeks of federal aid. The Senate could vote on the overall bill as early as Thursday, but lawmakers were still haggling over several unrelated amendments Wednesday evening.
Popular bills like the one to extend unemployment benefits often attract amendments that would have a difficult time passing on their own.
Republicans were demanding that they be given a chance to offer amendments to restrict federal aid to the beleaguered community activist group ACORN and on requiring that people receiving unemployment insurance be processed through E-Verify, an Internet-based system that employers use to check on the immigration status of new hires.
Majority Democrats have refused to add the amendments.
If the Senate passes the bill, it would go to the House, which passed a similar bill extending unemployment benefits last month. House leaders have also said they support extending the tax credit for home buyers.
Sen. Chris Dodd, D-Conn., has been negotiating for several weeks with Sen. Johnny Isakson, R-Ga., to craft an extended tax credit for homebuyers that would pass the Senate.
Lawmakers didn't release a cost estimate for extending the tax credit, though similar proposals were projected to cost about $10 billion.
Industry representatives said uncertainty about the tax credit is hurting new home sales. September's decline was the first since March.
It takes 45 days to 60 days to close on a house, making it unlikely a sale made today would be consummated by the end of November, said Lucien Salvant, spokesman for the National Association of Realtors.
"Buyers right now have an incentive to hold off, not knowing whether the credit will be extended," Salvant said.
About 1.4 million first-time homebuyers have qualified for the credit through August. The National Association of Realtors estimates that 350,000 of them would not have purchased their homes without the credit.
Thursday, September 17, 2009
Boston Real Estate - More Evidence of a Housing Turnaround!
More Evidence of a Housing Turnaround!
In yet another sign that the national real estate market continues to improve the Census bureau reported today that new home building increased in August. Judging by their actions, home builders are regaining confidence in the housing market recovery.
Let’s take a look at the numbers. Builders broke ground on 598,000 new homes during August, up 1.5% from July - considerably higher than industry experts had forecast. As further evidence of a turnaround, building permits rose 2.7% to 579,000 from July. These leading indicators bode well for the future.
This good news on new home starts and building permits comes on top of recently released reports indicating that sales of newly constructed homes jumped in July to hit their highest level since last September. New homes sold at an annualized rate of 433,000 in July - exceeding analysts' forecasts.
Also, sales of existing homes rose in July for the fourth consecutive month. Sales of previously owned single-family homes rose 7.2% compared with June and 5% from July 2008.
As I’ve noted before the first-time homebuyer tax credit has helped increase demand for housing. This credit, however, expires at the end of November. Considering it takes about 60 days to close a deal, time is running out. The Boston Globe reports today that the White House and Congress are considering extending the $8,000 first-time tax credit. Don’t count on it though; the program has already cost the Federal government twice as much as had been forecast. So stay tuned!
And remember, whenever you or someone you know has a real estate need in the great Boston area, be sure to give me a call or email me. I promise to take great care of them.
In yet another sign that the national real estate market continues to improve the Census bureau reported today that new home building increased in August. Judging by their actions, home builders are regaining confidence in the housing market recovery.
Let’s take a look at the numbers. Builders broke ground on 598,000 new homes during August, up 1.5% from July - considerably higher than industry experts had forecast. As further evidence of a turnaround, building permits rose 2.7% to 579,000 from July. These leading indicators bode well for the future.
This good news on new home starts and building permits comes on top of recently released reports indicating that sales of newly constructed homes jumped in July to hit their highest level since last September. New homes sold at an annualized rate of 433,000 in July - exceeding analysts' forecasts.
Also, sales of existing homes rose in July for the fourth consecutive month. Sales of previously owned single-family homes rose 7.2% compared with June and 5% from July 2008.
As I’ve noted before the first-time homebuyer tax credit has helped increase demand for housing. This credit, however, expires at the end of November. Considering it takes about 60 days to close a deal, time is running out. The Boston Globe reports today that the White House and Congress are considering extending the $8,000 first-time tax credit. Don’t count on it though; the program has already cost the Federal government twice as much as had been forecast. So stay tuned!
And remember, whenever you or someone you know has a real estate need in the great Boston area, be sure to give me a call or email me. I promise to take great care of them.
Monday, September 14, 2009
Boston Real Estate - Noted Economist Forecast Mid-Term to Long-Term Growth
Last week I attended a very interesting luncheon and lecture at the Union Club in Boston. The topic was the “Current Economic Outlook and Longer-Term Issues.” The speaker was noted economist and chief portfolio strategist for Bank of America Harvey B. Hirschhorn. The following are a few highlights from his talk and a few comments of my own.
Over the last year the Fed took innovative and unprecedented actions to avert an all-out depression. We are now seeing signs of improvement. In short, the Fed increased the money supply to unprecedented levels and created new methods to push that money into the economy. There are two main areas in which we are seeing improvement.
The first area is the housing market. Prices are now stable to rising. The number of pending homes under contract, the number of housing starts, and the number of sales have all risen for several months in a row. With the Fed keeping mortgage rates low, and Congress having passed the $8,000 first-time buyer tax credit, there has never been a better time to buy a home. Affordability is the highest it’s been in years.
Over the next year or two the improvement in the housing market will be a catalyst for growth in the broader economy. As people buy and sell homes they boost the economy by creating more construction jobs, ordering new furniture, buying appliances, and thankfully paying their brokers real estate commissions.
The second area to see improvement is inventories. In Q4 08 and Q1 09 a couple of things happened. As the economy tanked companies cut back on production and laid off millions of employees. At the same time Americans continued to do what they do best - spend. As a result inventories are way down and the productivity rate is up.
Companies will have to rebuild inventories as the recession ends and the economy improves. Just replacing inventory will slowly force companies to start rehiring. By December or January we should see the pendulum swing from layoffs to hires, with unemployment peaking at about 10%.
Looking at the next two years Hirschhorn has the following thoughts. While the economy typically sees growth of 5% to 6% in the first year after a recession, he predicts only moderate growth of 3% to 4%. Inflation will remain low because the productivity rate is so high companies will not feel the need to increase prices. The Fed will also keep interest rates down to keep the housing market perking along. Corporate profits will be decent. And the stock market will continue to improve. That said, Hirschhorn cautions, do not look for a Dow at 14,000 and an unemployment rate of 5% at anytime in the near future!
Looking out three years and beyond Hirschhorn cites several areas of concern: (1) The Fed is going to have to reign in the money supply at some point in order to avoid double digit inflation. If it moves too quickly to restrict the money supply (i.e., raises interest rates too quickly) it could cause a double dip recession. (2) Over the next three years we will run trillion dollar deficits. If the Chinese cut back on the amount of US debt they are willing to purchase, interest rates will have to rise to attract buyers. (3) Taxes are going to have to go up to pay for the government’s efforts to restart the economy. And (4) there will be a government restructuring and regulation scheme for the entire US financial system. This will be, according to Hirschhorn, the largest change to the US financial system since the Federal Reserve System was created almost 100 years ago. There will be winners and there will be losers.
Wrapping it up look for continued modest improvements over the next 2 years but keep an eye out for longer term prospects. Personally, after listening to Hirschhorn (and taking copious notes of which you are the direct beneficiary) I feel pretty good. Hirschhorn recommends for the next two years that investors have a position in commodities and real estate. I sell homes. I like his thinking!
As always it would be my pleasure to help you or anyone you know with their real estate needs in the greater Boston area. Feel free to call or email me the next time you know someone buying or selling in my market. It will be my pleasure to assist them.
Over the last year the Fed took innovative and unprecedented actions to avert an all-out depression. We are now seeing signs of improvement. In short, the Fed increased the money supply to unprecedented levels and created new methods to push that money into the economy. There are two main areas in which we are seeing improvement.
The first area is the housing market. Prices are now stable to rising. The number of pending homes under contract, the number of housing starts, and the number of sales have all risen for several months in a row. With the Fed keeping mortgage rates low, and Congress having passed the $8,000 first-time buyer tax credit, there has never been a better time to buy a home. Affordability is the highest it’s been in years.
Over the next year or two the improvement in the housing market will be a catalyst for growth in the broader economy. As people buy and sell homes they boost the economy by creating more construction jobs, ordering new furniture, buying appliances, and thankfully paying their brokers real estate commissions.
The second area to see improvement is inventories. In Q4 08 and Q1 09 a couple of things happened. As the economy tanked companies cut back on production and laid off millions of employees. At the same time Americans continued to do what they do best - spend. As a result inventories are way down and the productivity rate is up.
Companies will have to rebuild inventories as the recession ends and the economy improves. Just replacing inventory will slowly force companies to start rehiring. By December or January we should see the pendulum swing from layoffs to hires, with unemployment peaking at about 10%.
Looking at the next two years Hirschhorn has the following thoughts. While the economy typically sees growth of 5% to 6% in the first year after a recession, he predicts only moderate growth of 3% to 4%. Inflation will remain low because the productivity rate is so high companies will not feel the need to increase prices. The Fed will also keep interest rates down to keep the housing market perking along. Corporate profits will be decent. And the stock market will continue to improve. That said, Hirschhorn cautions, do not look for a Dow at 14,000 and an unemployment rate of 5% at anytime in the near future!
Looking out three years and beyond Hirschhorn cites several areas of concern: (1) The Fed is going to have to reign in the money supply at some point in order to avoid double digit inflation. If it moves too quickly to restrict the money supply (i.e., raises interest rates too quickly) it could cause a double dip recession. (2) Over the next three years we will run trillion dollar deficits. If the Chinese cut back on the amount of US debt they are willing to purchase, interest rates will have to rise to attract buyers. (3) Taxes are going to have to go up to pay for the government’s efforts to restart the economy. And (4) there will be a government restructuring and regulation scheme for the entire US financial system. This will be, according to Hirschhorn, the largest change to the US financial system since the Federal Reserve System was created almost 100 years ago. There will be winners and there will be losers.
Wrapping it up look for continued modest improvements over the next 2 years but keep an eye out for longer term prospects. Personally, after listening to Hirschhorn (and taking copious notes of which you are the direct beneficiary) I feel pretty good. Hirschhorn recommends for the next two years that investors have a position in commodities and real estate. I sell homes. I like his thinking!
As always it would be my pleasure to help you or anyone you know with their real estate needs in the greater Boston area. Feel free to call or email me the next time you know someone buying or selling in my market. It will be my pleasure to assist them.
Monday, August 24, 2009
Boston Real Estate - 2nd Quarter 2009 Synopsis
Boston’s real estate market stabilized in the second quarter of 2009, experiencing a release of pent-up demand that had built up through the period of uncertainty that began in late 2008. This demand has been structural in nature. Gone are the rush of buyers who in past years were purchasing property they could only marginally afford, aided by the banks whose relaxed lending standards facilitated those transactions.
Rather, many of the second quarter purchase were made by buyers who had delayed making a move during the previous six months. This movement in the real estate market paralleled the change observable in equity and capital markets. The psychological boost of the stimulus was likely more of a factor than the stimulus dollars themselves as much of that money has yet to work its way through the economy. Other market trends that agents have reported include buyers rewarding properties in better condition and focusing more heavily on properties that are in superior locations. This flight to quality tends to occur in both equity and real property markets during uncertain times.
These trends are evident when we compare the city-wide 2nd quarter statistics with those for the more prime neighborhoods of Back Bay, Beacon Hill, South End, and Charlestown in which Keller Williams specializes. According to the Listing Information Network (LINK), 648 property transactions were completed, a drop of 35% compared to the same period last year, while prices declined 12.64% for the same period .
While the drop in volume was similar in the core city, the change in price was not as extreme. In Back Bay, volume was down more than 52% with 80 transactions taking place, but prices actually increased 1.85%. This increase in price is a bit statistically anomalous and reflects a strong showing by the low end of the Back Bay market.
South End Sales volume dropped 32%, with 167 transactions being completed at an average price of less than 1% off the level observed during the same period last year. The statistics were similar for Beacon Hill, with a 29% drop in deal volume, but a price drop of also less than 1%. Charlestown saw a 23% lower deal volume, but an increase in average price of 7%.
What do these statistics imply for the future of Boston’s real estate market? Well for one thing, equilibrium has been maintained in the market place, as the level of inventory remained quite low across the city. Optimists point to a lack of desperation among sellers and continued demand from both the stroller set and the empty nesters for downtown real estate. Rates have also continued to cooperate and the outlook for the middle term is for a relatively stable interest rate environment. This rate forecast is supported by the fact that inflation remains contained at the the wholesale level and the fed is not likely to boost rates while still contending with a fragile broader economy and the still struggling housing sector. Furthermore, recent productivity gains and the downward pressure on wages that is a byproduct of higher unemployment levels suggest that we may enjoy and extended period of lower rates before the inflationary effects of an increased money supply manifest.
Those who are more bearish on Boston’s real estate market point to the drop in volume as a possible precursor to a further drop in price. The liquidity created by the stimulus will eventually need to be pulled back of the system through higher rates once growth resumes. Additionally, the lower levels of property inventory are partly due to sellers who may wish to move, not even trying to do so in the current environment. Ghost inventory also exists in several downtown condos which are not attracting buyers but do not have their product listed through MLS or LINK and therefore not counted among available inventory.
What is clear is that with rates low, and prices at least a bit more attractive, it is probably a good time to buy if one plans to stay put for a few years. Should rates stay low, then the market will perform reasonably. If rates should begin an upward spiral, then buyers who have positioned themselves at fixed rates in homes they love and can afford will be the beneficiaries of the inflationary environment.
Rather, many of the second quarter purchase were made by buyers who had delayed making a move during the previous six months. This movement in the real estate market paralleled the change observable in equity and capital markets. The psychological boost of the stimulus was likely more of a factor than the stimulus dollars themselves as much of that money has yet to work its way through the economy. Other market trends that agents have reported include buyers rewarding properties in better condition and focusing more heavily on properties that are in superior locations. This flight to quality tends to occur in both equity and real property markets during uncertain times.
These trends are evident when we compare the city-wide 2nd quarter statistics with those for the more prime neighborhoods of Back Bay, Beacon Hill, South End, and Charlestown in which Keller Williams specializes. According to the Listing Information Network (LINK), 648 property transactions were completed, a drop of 35% compared to the same period last year, while prices declined 12.64% for the same period .
While the drop in volume was similar in the core city, the change in price was not as extreme. In Back Bay, volume was down more than 52% with 80 transactions taking place, but prices actually increased 1.85%. This increase in price is a bit statistically anomalous and reflects a strong showing by the low end of the Back Bay market.
South End Sales volume dropped 32%, with 167 transactions being completed at an average price of less than 1% off the level observed during the same period last year. The statistics were similar for Beacon Hill, with a 29% drop in deal volume, but a price drop of also less than 1%. Charlestown saw a 23% lower deal volume, but an increase in average price of 7%.
What do these statistics imply for the future of Boston’s real estate market? Well for one thing, equilibrium has been maintained in the market place, as the level of inventory remained quite low across the city. Optimists point to a lack of desperation among sellers and continued demand from both the stroller set and the empty nesters for downtown real estate. Rates have also continued to cooperate and the outlook for the middle term is for a relatively stable interest rate environment. This rate forecast is supported by the fact that inflation remains contained at the the wholesale level and the fed is not likely to boost rates while still contending with a fragile broader economy and the still struggling housing sector. Furthermore, recent productivity gains and the downward pressure on wages that is a byproduct of higher unemployment levels suggest that we may enjoy and extended period of lower rates before the inflationary effects of an increased money supply manifest.
Those who are more bearish on Boston’s real estate market point to the drop in volume as a possible precursor to a further drop in price. The liquidity created by the stimulus will eventually need to be pulled back of the system through higher rates once growth resumes. Additionally, the lower levels of property inventory are partly due to sellers who may wish to move, not even trying to do so in the current environment. Ghost inventory also exists in several downtown condos which are not attracting buyers but do not have their product listed through MLS or LINK and therefore not counted among available inventory.
What is clear is that with rates low, and prices at least a bit more attractive, it is probably a good time to buy if one plans to stay put for a few years. Should rates stay low, then the market will perform reasonably. If rates should begin an upward spiral, then buyers who have positioned themselves at fixed rates in homes they love and can afford will be the beneficiaries of the inflationary environment.
Friday, August 7, 2009
Should you be putting money in savings or investments at the same time you're paying off a loan? -www.kiplinger.com
Should you be putting money in savings or investments at the same time you're paying off a loan?
That's one of the most frequently asked questions we get at Kiplinger, and the answer isn't always obvious. Even if you have run up a balance on a high-rate credit card, you may hear a nagging voice in your head urging you to keep plowing money into savings for retirement, college for the kids or a new home.
The simplistic solution – to invest if you can earn a higher interest rate than you're paying on your loans – can be downright dangerous. That became clear when, in the late '90s, a wave of questionable advice suggested that homeowners actually create more debt to invest in the booming stock market – by pulling out some equity via a cash-out refinancing or home-equity loan. Then came the bear market.
The best answer lies in separating good debt from bad debt. It's almost always a good idea to get rid of credit card and other high-interest loans before you start setting aside cash. However, you probably don't want to accelerate mortgage or student loans at the expense of saving for retirement.
Begin by making a list of all your debt and the interest rates on those debts to prioritize which ones you should pay first, says Deena Katz, president of Coral Gables, Fla., financial planners Evensky, Brown and Katz. Then look at your alternatives for saving and investing and, if necessary, reset your priorities.
Step 1: Pay off the high-interest debt
If you have high-interest credit card debt, tackle that first. It doesn't make sense to start saving or investing until you've paid off this debt. You'd have to make more than 20% after-tax return on stocks, bonds or mutual funds to make them a better investment than paying off a credit card with an interest rate above 15%, says Clark Randall, a financial planner with Lincoln Financial Advisors in Dallas.
There is one exception to that rule of thumb: If your employer offers a 401(k) plan and will match your contributions up to a certain level, fund it up to that level – even if you have credit card debt – because you're getting a 100% return on your investment, says Randall. Contribute more than the match level once you've paid off your consumer debt.
If you're drowning in debt, liquidate assets such as stocks and use your savings – but not a 401(k) or IRA – to pay off your credit cards. If you're in dire straits, you can borrow up to 50% (no more than $50,000) from a 401(k). Although you pay yourself back with interest, you give up tax-free compounding, and you will have to pay back the loan immediately if you leave your employer.
Step 2: Identify the good debt
For the most part, it's usually not a good idea to pay off your home mortgage unless you have a lot of extra cash. After all, Uncle Sam refunds part of your interest payment if you itemize your deductions on your tax return.
Use your money instead to invest in liquid assets. However, Randall recommends paying off your mortgage (and any other debt you might have) by the time you retire so you can get by on less money.
Don't be in a rush to pay off student loans, either. The old rule that allows a tax deduction only for interest paid during the first five years of repayment is ending. Qualifying interest on student loans can be written off no matter how long it takes to pay off your loans.
However, you can ease the burden of repaying your loans. Thanks to recent legislation, you can now shop around for the best terms. For example, lenders may offer a rate reduction if you elect to have your loan payments automatically deducted from your bank account. And some lenders will knock more off your rate after 24 or 36 months of on-time payments. Compare deals at ConsolidationComparison.com.
Step 3: Save and invest
Once you've eliminated high-interest consumer debt, start saving as much as you can. The best place to begin is a 401(k). The next best option is an IRA (see Open Your First IRA).
In addition to putting money into a retirement account, you need cash that's readily available in an emergency so you don't have to rely on credit cards. (If you are paying down your credit card balances and still paying high rates, it is probably better to keep paying off the cards and borrow from them in case of an emergency, says Katz.)
Set aside enough money to tide you over for three months if your paycheck suddenly stopped. If you have less-than-steady income, such as from a commissioned sales position, or a job that has more exposure to economic fluctuations, consider setting aside six months' income. (Use our calculator to see how much you should save.)
Sock it away in a high-yield savings account or money market fund on a monthly basis until you reach your desired amount.
Reprinted with permission. All Contents © 2009 The Kiplinger Washington Editors. www.kiplinger.com
That's one of the most frequently asked questions we get at Kiplinger, and the answer isn't always obvious. Even if you have run up a balance on a high-rate credit card, you may hear a nagging voice in your head urging you to keep plowing money into savings for retirement, college for the kids or a new home.
The simplistic solution – to invest if you can earn a higher interest rate than you're paying on your loans – can be downright dangerous. That became clear when, in the late '90s, a wave of questionable advice suggested that homeowners actually create more debt to invest in the booming stock market – by pulling out some equity via a cash-out refinancing or home-equity loan. Then came the bear market.
The best answer lies in separating good debt from bad debt. It's almost always a good idea to get rid of credit card and other high-interest loans before you start setting aside cash. However, you probably don't want to accelerate mortgage or student loans at the expense of saving for retirement.
Begin by making a list of all your debt and the interest rates on those debts to prioritize which ones you should pay first, says Deena Katz, president of Coral Gables, Fla., financial planners Evensky, Brown and Katz. Then look at your alternatives for saving and investing and, if necessary, reset your priorities.
Step 1: Pay off the high-interest debt
If you have high-interest credit card debt, tackle that first. It doesn't make sense to start saving or investing until you've paid off this debt. You'd have to make more than 20% after-tax return on stocks, bonds or mutual funds to make them a better investment than paying off a credit card with an interest rate above 15%, says Clark Randall, a financial planner with Lincoln Financial Advisors in Dallas.
There is one exception to that rule of thumb: If your employer offers a 401(k) plan and will match your contributions up to a certain level, fund it up to that level – even if you have credit card debt – because you're getting a 100% return on your investment, says Randall. Contribute more than the match level once you've paid off your consumer debt.
If you're drowning in debt, liquidate assets such as stocks and use your savings – but not a 401(k) or IRA – to pay off your credit cards. If you're in dire straits, you can borrow up to 50% (no more than $50,000) from a 401(k). Although you pay yourself back with interest, you give up tax-free compounding, and you will have to pay back the loan immediately if you leave your employer.
Step 2: Identify the good debt
For the most part, it's usually not a good idea to pay off your home mortgage unless you have a lot of extra cash. After all, Uncle Sam refunds part of your interest payment if you itemize your deductions on your tax return.
Use your money instead to invest in liquid assets. However, Randall recommends paying off your mortgage (and any other debt you might have) by the time you retire so you can get by on less money.
Don't be in a rush to pay off student loans, either. The old rule that allows a tax deduction only for interest paid during the first five years of repayment is ending. Qualifying interest on student loans can be written off no matter how long it takes to pay off your loans.
However, you can ease the burden of repaying your loans. Thanks to recent legislation, you can now shop around for the best terms. For example, lenders may offer a rate reduction if you elect to have your loan payments automatically deducted from your bank account. And some lenders will knock more off your rate after 24 or 36 months of on-time payments. Compare deals at ConsolidationComparison.com.
Step 3: Save and invest
Once you've eliminated high-interest consumer debt, start saving as much as you can. The best place to begin is a 401(k). The next best option is an IRA (see Open Your First IRA).
In addition to putting money into a retirement account, you need cash that's readily available in an emergency so you don't have to rely on credit cards. (If you are paying down your credit card balances and still paying high rates, it is probably better to keep paying off the cards and borrow from them in case of an emergency, says Katz.)
Set aside enough money to tide you over for three months if your paycheck suddenly stopped. If you have less-than-steady income, such as from a commissioned sales position, or a job that has more exposure to economic fluctuations, consider setting aside six months' income. (Use our calculator to see how much you should save.)
Sock it away in a high-yield savings account or money market fund on a monthly basis until you reach your desired amount.
Reprinted with permission. All Contents © 2009 The Kiplinger Washington Editors. www.kiplinger.com
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