NEW YORK (CNNMoney.com) - December 23, 2010
Economists are evenly split on whether the Federal Reserve's current policies are helping the economy. But they're in agreement on one point -- the Fed won't be raising interest rates anytime soon.
A CNNMoney.com exclusive survey showed that economists expect the Fed funds rate -- the central bank's key overnight interest rate used as a benchmark for a wide range of loans -- to remain near 0% for at least another year.
Only seven out of 25 participants are forecasting a rate hike in the next twelve months, and most of those expect it to come in the final three months of 2011. Another nine expect the next rate increase to come in the first quarter of 2012, while eight more are expecting a hike later that year.
Just one economist, John Ryding of RDQ Economics, predicts that the Fed will keep rates near zero all the way into 2013. He believes unemployment will stay above 8% until the following year, prompting the Fed to keep rates low.
Persistently high unemployment is one reason the economists think rates will remain low. While their forecasts for growth are improving, unemployment is expected to stay at about 9% through the end of 2011. But low inflation pressures will also allow the Fed to keep the low rates in place. The economists believe prices will rise only 1.7% over the next 12 months.
The Fed cut the fed funds rate to near 0% for the first time in its history in December 2008 in response to the economic meltdown. Since lowering rates is the typical tool the central bank uses to spur economic growth, it has had to find other means to encourage growth since then.
In November of this year, the Fed announced a plan to buy $600 billion more in long-term Treasuries to try and spur growth. The move prompted widespread attacks from critics who believe the Fed risks devaluing the dollar, a return of high inflation and creating asset bubbles.
But the survey showed disagreement among the economists, with 12 out of 25 expecting no significant economic impact from the Fed's controversial policy.
Another 11 believed the policy would boost growth, although two of those said it would be at the price of high inflation.
But even some of those who expect the Fed's policy to work still have their doubts about the move.
"Growth ... is likely to be later than we hope -- in the second half of 2011 and into 2012," said David Berson of PMI Group. "Unfortunately, we won't need the boost then."
Almost all the economists think the Fed's current plan will run its course, as 22 of the 25 expect the central bank to purchase the full $600 billion in Treasuries. Just two economists surveyed predict that the Fed will pull the plug early, although a third believes that it should.
And despite some ambiguous comments from Fed Chairman Ben Bernanke on 60 Minutes earlier this month, the economists don't expect another round of purchases after this one, with only one predicting that outcome.
Buying a home now is a no-brainer
MONEY Magazine - December 10, 2010
Is now the right time to invest in a house?
Trick question. Actually, it's two questions.
Question No. 1: Is now the time to buy?
Question No. 2: Is buying a house a good investment?
The first answer is easy: With a few exceptions, if you have 20% to put down and good credit, now is a great time to buy. That's been the case all year, and I'd argue that we're probably closer to the end than to the beginning of the really great time. Let me explain.
Back in January home prices had dropped 28% from their peak. More important, interest rates were at historical lows. By locking in a mortgage for 15 or 30 years on a value-priced home, you were getting an incredible deal, even if home prices decreased. (I took my advice and bought a New York City apartment.)
At the time, I thought that prices and rates were more likely to rise than fall. I was half right: Home values have been inching up since the spring, but mortgage rates, incredibly, dropped further.
By August (the latest numbers available) the median home price had risen 1% over a year ago, but 30-year rates had dropped a half-point to 4.5%. Assuming 20% down and a 30-year mortgage, the total cost of owning a median-priced home is now down $16,000 from a year ago.
Home values may waffle over the coming year, but because Americans take out such large, long mortgages, rates are what really matter. And I am more likely to grow hair than see 30-year mortgage rates drop below 4%. It's far more likely that rates (and the cost of ownership) will rise.
Now for question No. 2: Is a house a good investment?
How much home can you afford?
First, it depends on what you mean by investment. If your definition is strictly about dollars returned, a house probably won't be a great use of your capital. If you bought the median-priced house today with 20% down, to recoup your total costs (and I'm not including property taxes and maintenance here) over three decades, the home's value would have to rise about 3% a year.
That's likely, but you'll almost certainly (we all hope) do much better than that in the stock market. The fact is, however, that that's the normal case for housing; the booms that began after World War II and in the late 1990s were the exceptions.
Of course, there are places where you might do better. I bought my condo in Manhattan, a small island that, by virtue of the business done on it, has a sustained demand for property. And smaller, energy-efficient housing in cities or inner suburbs around San Francisco or Chicago is likely to be in higher demand than big, outer suburban homes with long commutes to Las Vegas or Atlanta.
According to urban and environmental planning professor William Lucy of the University of Virginia, this move toward urbanization in American housing is the reversal of a trend that's been in place since 1945. Keep it in mind when making your buying decisions.
That said, the key point to remember is this: Buying a fairly priced home at today's rates may be the best deal you will ever get. And who knows? It may even turn out to be a good investment.
Is now the right time to invest in a house?
Trick question. Actually, it's two questions.
Question No. 1: Is now the time to buy?
Question No. 2: Is buying a house a good investment?
The first answer is easy: With a few exceptions, if you have 20% to put down and good credit, now is a great time to buy. That's been the case all year, and I'd argue that we're probably closer to the end than to the beginning of the really great time. Let me explain.
Back in January home prices had dropped 28% from their peak. More important, interest rates were at historical lows. By locking in a mortgage for 15 or 30 years on a value-priced home, you were getting an incredible deal, even if home prices decreased. (I took my advice and bought a New York City apartment.)
At the time, I thought that prices and rates were more likely to rise than fall. I was half right: Home values have been inching up since the spring, but mortgage rates, incredibly, dropped further.
By August (the latest numbers available) the median home price had risen 1% over a year ago, but 30-year rates had dropped a half-point to 4.5%. Assuming 20% down and a 30-year mortgage, the total cost of owning a median-priced home is now down $16,000 from a year ago.
Home values may waffle over the coming year, but because Americans take out such large, long mortgages, rates are what really matter. And I am more likely to grow hair than see 30-year mortgage rates drop below 4%. It's far more likely that rates (and the cost of ownership) will rise.
Now for question No. 2: Is a house a good investment?
How much home can you afford?
First, it depends on what you mean by investment. If your definition is strictly about dollars returned, a house probably won't be a great use of your capital. If you bought the median-priced house today with 20% down, to recoup your total costs (and I'm not including property taxes and maintenance here) over three decades, the home's value would have to rise about 3% a year.
That's likely, but you'll almost certainly (we all hope) do much better than that in the stock market. The fact is, however, that that's the normal case for housing; the booms that began after World War II and in the late 1990s were the exceptions.
Of course, there are places where you might do better. I bought my condo in Manhattan, a small island that, by virtue of the business done on it, has a sustained demand for property. And smaller, energy-efficient housing in cities or inner suburbs around San Francisco or Chicago is likely to be in higher demand than big, outer suburban homes with long commutes to Las Vegas or Atlanta.
According to urban and environmental planning professor William Lucy of the University of Virginia, this move toward urbanization in American housing is the reversal of a trend that's been in place since 1945. Keep it in mind when making your buying decisions.
That said, the key point to remember is this: Buying a fairly priced home at today's rates may be the best deal you will ever get. And who knows? It may even turn out to be a good investment.
Financial Market Update
This Week: after a huge and swift increase in interest rates over the past two weeks that has left many in the mortgage business and real estate world scratching their heads, the bond and mortgage markets will likely start the week with not much change from Friday's closes. Both treasury and mortgage markets are overdue for some retracement as most all of our key momentum oscillators are at oversold levels. That said, we do not expect much improvement early this week with Treasury auctions beginning on Tuesday through Thursday; a total of $66B, $32B of three year notes Tuesday, $21B of 10 yr notes Wednesday and $13B of 30 yr bonds on Thursday. Recent Treasury auctions have been a little disappointing in terms of demand but with the recent increase in rates demand may increase.
Not much economic data this week, giving the markets a possible respite. The debt problems in Europe remain but will likely take a back seat this week, the ECB and EU won't let Portugal and Spain slip into default, yet the bailout plans not yet totally formulated will keep traders focused.
The recent spike in rates may be a little too aggressive measured in the near term but we firmly believe the decline in rates is over and the path is up for rates. What remains now is how to deal with retracements, as we get a bounce talking heads and media will paint a rosy picture; many that missed out on locking up lower rates will again likely miss, waiting for more improvement and wishful thinking. The economic outlook is improving, the Fed wants inflation somewhat higher; hard to expect lower rates with those hurdles. Putting some perspective on it; even at the current level of interest rates they remain historically low, a look at history should help putting it all in perspective; rates at these levels haven't been seen since the late 50s and are unsustainable.
Not much economic data this week, giving the markets a possible respite. The debt problems in Europe remain but will likely take a back seat this week, the ECB and EU won't let Portugal and Spain slip into default, yet the bailout plans not yet totally formulated will keep traders focused.
The recent spike in rates may be a little too aggressive measured in the near term but we firmly believe the decline in rates is over and the path is up for rates. What remains now is how to deal with retracements, as we get a bounce talking heads and media will paint a rosy picture; many that missed out on locking up lower rates will again likely miss, waiting for more improvement and wishful thinking. The economic outlook is improving, the Fed wants inflation somewhat higher; hard to expect lower rates with those hurdles. Putting some perspective on it; even at the current level of interest rates they remain historically low, a look at history should help putting it all in perspective; rates at these levels haven't been seen since the late 50s and are unsustainable.
Market update & advice from our brokerage
Happy Holidays! During this holiday season, we wish you and those close to you a peaceful and enjoyable holiday season. Best wishes for a healthy and prosperous 2010.
During November 2010 the number of active listings fell and so did the number of newly opened escrows and contingent sales but overall the turnover rate improved slightly. Prices are in the neutral range and will most likely remain in this range through the holiday season. The seasonal slow-down in sales began in September and will run through mid-January. Comparing year-over-year numbers shows some continuing weakness in the San Diego County market. Sales of single-family, re-sale homes were down 14.2% from last September. Yet the median sales price continues to steadily increase each month.
During November 2010 the number of active listings fell and so did the number of newly opened escrows and contingent sales but overall the turnover rate improved slightly. Prices are in the neutral range and will most likely remain in this range through the holiday season. The seasonal slow-down in sales began in September and will run through mid-January. Comparing year-over-year numbers shows some continuing weakness in the San Diego County market. Sales of single-family, re-sale homes were down 14.2% from last September. Yet the median sales price continues to steadily increase each month.
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