Amanda Clark

Archive for April, 2010|Monthly archive page

And the moral of the story is?

In Uncategorized on April 23, 2010 at 6:01 pm

Interest Rates Have Nowhere to Go but Up

By NELSON D. SCHWARTZ
Published: April 10, 2010

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”

Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.

Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.

From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.

Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.

Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.

The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.

“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”

Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

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We are flooded with insurance concerns…

In Uncategorized on April 12, 2010 at 5:51 pm

NAR to Press Congress for Immediate Action on Flood Insurance Renewal

Washington, April 06, 2010

The National Association of Realtors® said today that it will continue to press Congress for speedy action to renew authority for the Federal Emergency Management Agency to issue flood insurance under the National Flood Insurance Program that expired March 28.

Congress is on its spring recess and will return April 12.

Flood insurance is required by law for home sales mortgages on properties located in the 100-year floodplain areas, which are left unprotected by this lack of congressional action. Until Congress renews this program, worthy buyers will be left without access to mortgages,” said NAR President Vicki Cox Golder, owner of Vicki L. Cox & Associate in Tucson, Ariz. “In addition, given the many challenges financial and real estate markets are facing, now is not the time to create another, but avoidable, obstacle to real estate transactions.”

Golder cited the recent heavy floods in Rhode Island and the near miss in North Dakota last week when the Red River finally crested just below flood stage. She also said that home buyers and property homeowners in those states and others, such as Florida, still need adequate protection from flood damages.

Floods and flash floods happen in all 50 states and are the No. 1 natural disaster in the U.S., but most property casualty homeowners insurance policies do not cover flooding. According to FEMA, more than 5 million people currently hold flood insurance policies in more than 20,000 communities across the country. Since 1978, the NFIP has paid out $31.4 billion for flood insurance claims and related costs.

NAR praised the actions of Fannie Mae and Freddie Mac to temporarily accept mortgages on homes while flood insurance is not available. Both announced last week that they will continue to purchase loans secured by property in special flood hazard areas that do not have an active flood insurance policy as long as certain conditions are met. NAR also cited FHA efforts to maintain public confidence in the lending market during this time.

The Fannie Mae policy applies to mortgage loans closed, so long as Congress reauthorizes the program on or before April 20, 2010, and that the program is retroactive to March 29, 2010, the day after the present expiration.

Until evidence of active flood insurance is obtained, a lender may deliver a mortgage loan to Fannie Mae on the condition that the borrower can provide acceptable evidence of a completed application for flood insurance and a copy of a check, or the final HUD-1 Settlement Statement reflecting payment of the initial premium, or the assignment of an existing flood insurance policy from the property seller to the purchaser.

Freddie Mac has provided similar guidance.

“As soon as they return, we expect Congress to act quickly to correct this problem,” Golder said. Congress is expected to renew the FEMA authority eventually, but until Congress acts, FEMA may not issue new or renewal flood insurance policies to property owners.

Realtors® can contact their members of Congress and participate in a Call for Action.

Read more on the flood issue.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

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Information about NAR is available at www.realtor.org. This and other news releases are posted in the News Media section.

Organic Landscaping

In Uncategorized on April 12, 2010 at 5:49 pm

Courtesy of HGTV.com:

Going organic in your garden doesn’t have to be a difficult process – if you know where to start. Follow these steps to help you get started on the “green” path to organic gardening.

Getting Started From the Soil Up

So where does a gardener begin the process of going organic? Where the plants do: the soil. “The place you want to start is the soil because everything comes from the soil,” says Phil Radspinner, vice president of a northern California farm-and-garden supply store. “In fact, there is a saying in organic farming and gardening – feed the soil, not the plant.”

Soil-test kits give you a general idea of the nitrogen, phosphorous and potassium levels in your soil so you can customize your fertilizer and amendments to fit the plants’ needs. For more specific information, send a soil sample to a qualified lab. “From a lab test, you’re going to get an accurate reading of what your nutrient levels are so that you can make the proper adjustments to have the optimum soil.”

Taking a soil sample is easy. Remove the top layer of grass or weeds and take a scoop of the soil a few inches underneath that. Repeat that in eight to 12 places throughout the yard, placing all the soil into one container. If there’s a spot in the yard where nothing seems to grow, place that sample in a separate container.

Then smash the clumps and mix it all up to get a nice homogonous representation of your soil. “Once the soil sample bag is ready, I avoid touching the soil with my hands. If I’ve eaten something with salt on it, that could throw off the test and indicate salt in the soil when there isn’t any.”

Call your nearest cooperative extension office for information on where to send the soil sample and send it out. The results will tell you which organic fertilizers and amendments are necessary to add to improve the soil. Those nutrients then invigorate hard-working soil organisms called microbes.

Reduce the Use of Synthetic Fertilizers

“A lot of [organic] fertilizers can be processed through the soil’s buffering ability, the natural microbial process in the soil,” Phil says. “Conventional fertilizers typically go directly to the plant, and then there can be a side effect on the microbes and the soil chemistry that can become detrimental in the long run.”

Organic Pest Control

There are several ways to deal with pests organically and without the use of conventional pesticides. Organic pest control methods typically are milder than conventional pesticides and, as a result, cause less shock to the plants’ systems. One such product, insecticidal soap, is very mild, much like the soap you use in the kitchen or bathroom. An “OMRI” on the label indicates its review by the Organic Materials Review Institute.

Brew Your Own Compost Tea

One of the best ways to naturally boost your soil chemistry is with compost. Adding compost to your soil improves its tilth, drainage and microbial activity. Making your own compost pile is an easy and cheap way to recycle yard and kitchen waste. As an alternative to the time and effort involved in making your own compost, you can also purchase it at most garden supply stores.

Compost can be made into a soupy soil salve called compost tea. “Compost tea is a great addition to your garden fertilizer management program. It has beneficial nutrients and microbes, and it can be applied as a foliar spray or directly to the soil. People have seen phenomenal results from compost tea, both large and small growers alike.”

You can make your own in a compost tea brewer. For best results, use the tea within a day of brewing. Many garden supply stores also sell freshly brewed one-gallon containers.

Organic Weed Control

Weeds can be a problem in the organic garden. There are methods, such as hand weeding and digging out weeds with tools, that work, but consider burning the weeds out, if local conditions permit. A propane flamer works by rupturing the plant’s cell walls, eventually killing it. It doesn’t disturb the soil surface so there’s less erosion. Plus, buried weed seeds aren’t exposed which would start the whole cycle over again. Warning: Exercise caution when using this tool, and never use when risk of wildfire is present.

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Buying Vs. Renting

In Uncategorized on April 12, 2010 at 5:38 pm
  Advantages Considerations
Buy Property builds equity Responsible for maintenance
Sense of community, stability, and security Responsible for property taxes
Free to change decor and landscaping Possibility of foreclosure and loss of equity
Not dependent on landlord to maintain property Less mobility than renting
 
Rent Little or no responsibility for maintenance No tax benefits
Easier to move No equity is built up
  No control over rent increases
  Possibility of eviction

 

Buy vs. Rent Comparison
The chart below shows a cost comparison for a renter and a homeowner over a seven year period.

  • The renter starts out paying $800 per month with annual increases of 5%
  • The homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000
  • After 6 years, the homeowner’s payment is lower than the renter’s monthly payment
  • With the tax savings of homeownership, the homeowner’s payment is less than the rental payment after 3 years

 

Years
Rent Payment
Mortgage Payment
Monthly Difference
After Tax Savings
Yearly Difference
After Tax Savings
1 800 1000 -200 -50 -2400 -600
2 840 1000 -160 -10 -1920 -120
3 882 1000 -118 +32 -1416 +384
4 926 1000 -74 +76 -888 +912
5 972 1000 -28 +122 -336 +1464
6 1021 1000 +21 +171 +252 +2052
7 1072 1000 +72 +222 +864 +2664
8-30     Savings increase every year