Is The Economy Finally Improving?

July 17, 2009
Is The Economy Finally Improving?
Economic News and Information for Consumers

There was finally some decent news today regarding the outlook for the economy.  Earnings reports came in from numerous industry heavyweights including Mattel and Goldman Sachs, both showing strong earnings. More importantly though is data that came from the housing industry.

Housing starts have begun to increase for the first time in many months.  This is a great sign because it shows that builders are confident enough to invest and break ground in new areas.  They would only do so if they believe that the economy was on its way to turning around.

Some factors that could be affecting this new turnaround could be interest rates and tax incentives.

Interest rates continue to hover around 5%, which is extremely low though some would rather see rates at 4.5%.  The threat of inflation is on every one’s mind so buyers probably want to take advantage of low rates while they can.  It’s very possible that we could see rates like we had in the ’70s in coming years.

Tax incentives come from state and federal sources.  The federal tax incentive is an $8000 tax credit for first time homebuyers, this is a refundable credit that expires at the end of the year.  Many states are also offering incentives.  For example, California offers a $10000 tax break for those that buy a new home.  There is one caveat though, this money is due to run out very soon.

The economy will improve eventually but not until housing takes off again.  We expect employment to follow last.

Unemployment to be at least 10% through next year

July 15, 2009
Unemployment to be at least 10% through next year
Economic News and Information for Consumers

Do you think the unemployment picture is going to get better?  The FOMC says no, in fact, no improvement through all of next year.  Can you wait that long?

The economy isn’t quite recovering they way the Fed had hoped or expected.  Initially Obama had said that the stimulus package would prevent unemployment from rising above 8%.  That number is long gone as nationwide we hit 10% rather easily.  In some areas, like California, we have 13%, which when adding in part time workers and those that have given up looking for work should be closer to 16%.

Unemployment is largely affected by the retail market.  When people aren’t buying, jobs are lost, when jobs are lost, people aren’t buying.  It’s a nasty cycle that needs to be stopped through opening up credit markets and fixing the housing debacle.

Credit markets should have eased by this time but they haven’t because banks have held onto free government money instead of loaning to consumers as they were supposed to do.  This was another massive problem of lack of oversight.

Furthermore, banks are holding onto extensive inventories of foreclosed homes until the money they received through the TARP program also runs out.  Some sources believe this could happen later this year though that will differ from bank to bank.

When these problems are fixed, we’ll see employment numbers improve.  Until that time, they will likely continue to move upward.

U.S. Inflation Fears Level Market

July 14, 2009
U.S. Inflation Fears Level Market
Economic News and Information for Consumers

The Commerce reported today that wholesale inflation jumped 1.8% in June, which is almost double what the market thought was going to happen.  After taking out food and fuel the rate is .5%, also well above what the street had wanted.

Why the market is surprised is well, surprising.  The government has taken actions to increase spending more than  all previous administrations combined.   Yesterday the U.S. surpassed the $1 Trillion debt mark, which is just a number but still a significant one because it has never happened before and is poised to keep rising.

Why is inflation important?  Everything gets more expensive, which can stall even the best of economic recoveries.  Furthermore, the only way out of inflation is to have another recession and we definitely don’t need another one of those.

But even more worrisome is the overall impact inflation will have on mortgage rates.  Currently 30 year rates are just under 5% for many banks but this can easily skyrocket like rates did in the ’70s.  If you think rates are high when they reach 6% just wait until they double that mark because it can definitely happen with the spending we’ve had going on in the government.

If you’re in the market to buy a home, you’ll need to balance rates, price and government incentives for first-time home buyers.  Remember the $8000 tax credit expires at the end of the year.

California Pushed to Issue IOUs

June 30, 2009
California Pushed to Issue IOUs
Economic News and Information for Consumers

California is facing a budget deficit of $24 billion.  With the fiscal year ending tomorrow and no budget in place, California will be forced to issue IOUs to many of its contractors including those in IT and even food vendors that support the prisons.  It’s a cash shortfall mess to say the least with this being the worst deficit since the Great Depression.

The Governor said he will veto any budget that crosses his desk that raises taxes without reforming the state’s governement.  But is this possible?

In California, taxes seem to be the only way to go.  However, a problem that many aren’t considering is how much tax they can collect during this economic downturn.  To tax the residents, they have to have the means to pay.  The reality is today that most people don’t.  They’ve lost their jobs or are barely making it with much reduced wages.  The only true way out is for California to massively cut its spending and programs that are not needed.  It needs to happen soon, or the IOU’s won’t be worth they paper they’re written on.

Adding to the financial woes in California is the housing market that continues to decline, eroding value for current homeowners and forcing many out altogether.

With rates edging higher, moratoriums holding strong and foreclosures continuing, California has a very long way to go to get back to being the wealthiest state in the union.

Southern California Housing Stalls

June 25, 2009
Southern California Housing Stalls
Economic News and Information for Consumers

Foreclosures are higher than ever, evictions have been occurring at an alarming rate and yet there are still barely any homes on the market.  Those that are on the market have sat at the same price for months with little or no price reduction.

The original problem we had with inventory was a moratorium that was put in place around November.  The goals were to keep homeowners in their homes during the holidays and to stop the foreclosure process to create an opportunity to refinance or do a loan modification.

Refinancing didn’t happen, over 60% of loan modifications failed within the first year.  The program was determined to be a failure so the moratoriums were finally lifted in March.

April and May went by quickly with no sign of this inventory being released.  It was reported that approximately 70% had been held back and many more were on the way.  Many in the industry, those in control of the inventory, leaked to agents that inventory would come out in waves starting at the beginning of June.  Realtors lined up with the hopes that their income would come back up but to their dismay, it did not.

The market still sits at a standstill.  To make matters worse, rates have risen to much higher levels than needed to really spark any interest in home buying.  We saw rates reach as low as 4.5% but now they have drifted closer to 6%, which results in about 10% less buying power.

What is the cause of the continued housing stall?  No one really knows but it likely goes back to government intervention and control over what the banks are doing.  Consider this, bank balance sheets are hurting. They need to remove these assets soon to survive so the only reason they would hold on to deteriorating assets would be due to intervention.

If you’ve been looking for a house in Southern California, you probably are aware of what’s going on.  Until inventory is released and cash flows, the recession will remain.

Nationalized Health Care, Where do you stand?

June 24, 2009
Nationalized Health Care, Where do you stand?
Economic News and Information for Consumers

If you’ve read any of the news over the last 3 months you know there is a huge push for nationalized health care.  The goal is to bring affordable health care to millions that are currently uninsured but there are problems with the plan in getting it passed.

First, the program needs to be paid for, which can only come from one place, taxpayer dollars.  The bill for this program is enormous but Obama is pressing forward anyway.

Second, some democrats and most republicans are against the spending that is tied to the program so it’s possible that it will not pass at all.

But beyond these two problems there is the core issue of being able to select your own provider versus what the government feels is necessary for you.  If the government controls health care, they can dictate prescriptions, treatments, surgery and more.  Now some systems work in a similar fashion like Kaiser Health Care of California.

Kaiser has been the top-rated health care program in California for many years because people are happy with it.  Everything is done in-house, from your procedures to your prescriptions.  It works for many people. On the other hand, imagine being diagnosed with a disease like cancer and being forced to visit one doctor or center over another.  Wouldn’t you want the option to visit the best possible center in the country for your health?

Furthermore, treatments can be reduced or you may be stuck with one type of surgery (open) over one that creates less trauma and blood loss (robotic).

Nationalizing seems like a program that could work if benefits are plentiful and people have good choices but what happens if this breaks down, people are limited in their treatments and they start getting sick or losing their lives?  Therein lies the debate on this issue.  What do you think?  Sound off below:

$4500 Cash For Clunkers and $8000 to Buy New Home

June 22, 2009
$4500 Cash For Clunkers and $8000 to Buy New Home
Economic News and Information for Consumers

Not everyone is happy about the cash for clunkers program but most are, particularly those in the auto industry.

The government has tried just about every way possible to light a fire under the auto industry but not much of it has worked.  Initially it was believed that easing credit markets would bring buyers but the reality is that people were losing their jobs so access to credit didn’t matter at all.

Now the new cash for clunkers program is about ready to pass.  Don’t be misled by the term “clunkers” either because cars over 25 years old aren’t eligible.  Most of those who take advantage of this program will likely turn in vehicles that are less than 10 years old.  The hitch?  Your vehicle must do less than 18 mpg combined highway and local driving.  To get the maximum benefit of $4500, you’ll need to buy a vehicle that gets 10 mpg better than what you’re turning in, but there are some variations to the discount.  Your best option is to check with your local dealer when the incentive is passed.

Not everyone is pleased with this proposal though.  Some believe that it only helps the rich get richer because most people can’t afford a new car even with the maximum $4500 rebate.  What could happen is the richer community will turn in their 5 year old Tahoes for the newer hybrid version and take the smaller rebate.  Only time will tell.

In the housing market we’ve see some serious ups and downs with the rates.  The historically low 4.5% rates have gone away and been replaced by rates in the low 5’s, any higher and the “recovery” will be doomed for sure as it will stop refinances and new home purchases.

One light of hope is the $8000 tax credit that continues for new home buyers.  This means you have not owned a home within the last 3 years.  Some states are also offering tax incentives but beware that many of them are running out of funds fast and will likely not last through the end of the year as hoped.

When Will Mortgage Rates Drop Again?

June 17, 2009
When Will Mortgage Rates Drop Again?
Economic News and Information for Consumers

Mortgage rates have been big news for over a year now because they can be the primary catalyst for bringing this recession to an end.

Many efforts have been made to keep mortgage rates as low as possible, primarily the purchase of treasury securities.  These purchases affect the 10 year bond rate, which is directly tied to mortgage rates.  For a period of about 3-4 months we saw rates hovering around 4.5%.  During this same time, select members of Congress provided suggestions to getting rates even lower, down to 4% but these never came to fruition.

We thought rates would stay low but they didn’t.  In recent weeks we’ve seen rates jump back to around 6%, which is not a bad rate but during a difficult recession, it reduces buying power and eliminates those who wanted to refinance.

The recent jump in rates has slowed down any possible recovery but it’s also killing the real estate market where prices are already down 30% nationwide and 50% in some hard hit areas like California, Nevada and Florida.  The result will be continued downward pressure on housing prices.  This hurts the balance sheets of banks but it also eats away at any remaining equity homeowners still have.

In recent days we’ve seen interest rates retreat a bit, where they are back down to about 5.25% for FHA guaranteed loans but this still results in about 10% less buying power when compared to a rate of 4.5%.

If rates stay high, prices will need to adjust accordingly, which may happen anyway as foreclosures tied up in moratoriums are finally being released.  Inventory should be at its highest this Summer so if you’re looking for a home, keep your eye on the rates and watch as inventory increases.

Your Employer-Owned Cell Phone Tax

June 16, 2009
Your Employer-Owned Cell Phone Tax
Economic News and Information for Consumers

The IRS has rarely been on the side of taxpayers, but now there is discussion of repealing the burdensome and outdated cell-phone tax.

The cell phone tax effectively taxes users of cell phones that were provided by businesses, but the only calls taxed are those for personal use.  The reason for the tax is that businesses were taking write-offs that were too large, they bundled personal use calls with business use calls.

But this law was enacted twenty years ago when not many people had cell phones.  Anyone who did have a cell phone was considered to have acquired a major perk equivalent to having a company car.  Today, everyone has a cell phone including school age kids.  The law is outdated and needs to be eliminated.

But the problem with the IRS and Congress is that getting anything done takes too long.  There are bills sitting that were created to eliminate this tax plus the Obama administration has requested specifically to Congress to have the law eliminated.

In the meantime, some taxpayers are stating that the IRS is doing exactly the opposite of what they claim and actually enforcing the law now more than ever.

No one really knows what the IRS is doing but we do know that the Obama administration has opened up significant funding for the IRS to perform more enforcement of collections.

How do you feel about the cell phone tax, IRS enforcement and the IRS in general?  Sound off below:

California Home Buyer Tax Credits Running Out Fast

June 12, 2009
California Home Buyer Tax Credits Running Out Fast
Economic News and Information for Consumers

Have you heard of the Obama and California home-buyer tax credits?  They’re a fantastic incentive to buy but they could be running out fast.

Presumably the tax credit put forth by the Obama administration won’t run out because the Fed can always print more money but that doesn’t mean it won’t be axed somewhere along the line particularly given the new “paygo” program implemented earlier this week.

“Paygo” as they call it was designed to only spend money when money comes available.  Money becomes freed up and ready for use from 2 different sources, an increase in taxes or a cut in spending.  It’s the spending cuts that could easily derail a program like the first-time home-buyer.  Don’t be surprised if it goes away.  Remember you have until the end of the year before this one expires anyway.

California, on the other hand, is in very deep trouble financially.  Plus, the state can’t print its own money as the Governor pointed out to us several weeks ago.  Programs are being cut fast!

One of these programs is the first time home-buyer incentive where buyers receive a $10,000 tax credit much like the $8000 credit offered by Obama.  However, this program has a limitation and it’s one that has never been mentioned in the media.

There was only $100 million set aside for the incentive.  We’re only 5 months into the year and there is only 17% of the fund left.  Basically this fund will be out before we know it, which could stall a housing recovery in California.

To make matters worse, interest rates have steadily climbed from their low of about 4.5% just over a month ago.  The increase in rate effectively reduces the buying power by 10%.

If you’re a first time home-buyer and you’ve been preparing to buy and take advantage of federal and state tax credits, do it soon.  The absolute latest you can buy to be eligible is the end of the year but funds will undoubtedly run out before then.

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