It’s a familiar story as the housing crisis continues to unfold across the country. Indeed, after Geithner’s house sat unsold for nearly 3 months, the price dropped to $1.575 million. Still there were no takers, so Geithner listed it as a rental for $7,500 a month, and has since found a tenant.

But it’s unlikely that even such a steep rent will be enough to cover the mortgage, in addition to the $27,000 in annual property taxes.

Of course, many people facing a similar situation aren’t trying to sell million-dollar homes. And many of them lack a job that pays more than $190,000 a year. At any rate, it is somewhat comforting to know that some of our leaders really are running into some problems.

Going forward, it is important to recognize that a primary residence is rarely what one would call an investment, and that it is indeed possible for real estate to lose value.

image source: Wikimedia Commons

Post from: EveryJoe

Timothy Geithner Can’t Sell His House

I’ve been hearing a lot about inflation lately. But now I’ve started to hear about deflation. What is deflation?

An excellent question! At its most basic, deflation is a fall in prices. It is the opposite of inflation. In the sense of this economy, deflation is most connected with the stock market and with housing prices — both of which are falling. (Consumer prices haven’t quite reached a state of deflation, so it’s not very helpful to household budgets.)

One of the biggest worries right now is that the economy will enter a deflation spiral. This is a great fear on the stock market, as there is a pullback in investment as  stock values (especially in the financial sector) fall. If you have a retirement account, or if you have stock investments that act as passive income, this sort of deflation is going to affect you.

Another concern is the continued fall in home values. As less equity is available in homes to provide support for spending, less spending happens. And this can create deteriorating economic conditions. Deflation also brings liquidity problems. Money does not flow as easily, and banks are not willing to lend to each other — or to you.

Inflation: the solution to deflation

As a result of deflation fears, the Federal Reserve authorized central banks around the world to release dollars into their economies (the Bank of Japan, for example, is now offering loans denominated in U.S. dollars) in order to increase liquidity. The idea is that by releasing more cash into the market, inflation will result in order to battle the deflation.

Don’t ask where the money for all this liquidity injection comes from, though. Because, basically, it comes from the promise of future returns on debts owed to the Federal Reserve. And some of it is, in fact, just being created out of thin air.

image source: Wikimedia Commons

Post from: EveryJoe

Ask the Piggy Bank: What is Deflation?

That’s right. If you buy one expensive house, you can get a less expensive house for free.

Post from: EveryJoe

Friday Fun Video: Get a Free House — When You Buy One at Regular Price

Fed rate cut and the stock market

Yesterday saw the single biggest gain by the Dow in close on five years. Stocks are going ballistic right now, with investors thrilled by the Fed rate cut. Why? Because now money costs less. Companies can borrow at lower rates, meaning that they spend less in interest charges. This means that the money goes to profits, boosting share prices.

Additionally, the Fed rate cut essentially said to investors: “The Fed is here to help. We won’t let the economy fail.” This means more confidence and higher risk appetite. So more people are buying stocks.

If you bought some stocks earlier, as the Dow was in the depths of despair (or what amounts to it these days), you are probably very happy right now. The turnaround means bigger returns. The same is true for your dollar-cost averaging retirement account (though to a lesser degree and with a smaller impact). And, if you have a lower emotional risk tolerance, you are probably breathing easier with this proof, once again, that over the long term the stock market comes out ahead.

Bond market and the Fed rate cut

The bond market usually moves opposite to the stock market. As Reuters points out:

“Bonds are down. It looks like the stock market rally is going to continue today,” said Richard Huber, economist at A.G. Edwards and Sons in St. Louis, Missouri.

So, that means that if you bought the long-term Treasuries not too long ago, you are in a good place since the yield has dropped (and you locked it in before). Now may not be the most auspicious time to buy, since inflation concerns are emerging, and that can erode the value of bonds.

Housing market and the Fed rate cut

Even the Fed rate cut may not be enough to stave off a housing recession. Of course, the main idea was to reduce the impacts from an economy-wide recession, limiting most of the damage to the housing market. While some mortgage rates are dropping (especially helped will be jumbo loans), many people won’t actually benefit from the Fed rate cut in terms of home mortgages.

Those most likely to benefit from the Fed rate cut are those whose mortgages will reset to higher rates (and payments) in the next year. While the payments will be higher, they won’t be as high, and that small difference may save a few thousand people from foreclosure by making the new mortgage payments manageable.

Unfortunately for those saddled with subprime loans, the Fed rate cut is unlikely to help a whole lot. Rates may drop, but they’ll still be high. And with poor credit, many may not qualify to refinance out of a subprime loan. And, if even they do manage to qualify, the other issue is prepayment penalties. Many a subprime loan comes with these penalties that make it too expensive for most people to refinance.

Other effects of the Fed rate cut

Credit card interest rates are likely to drop (although they’ve already been raised) slightly on this news, and you will find that the forex market (if you’re into that sort of thing) is doing well. Commodities are seeing an interesting effect, with inflation fears leading to increased investment in gold and other precious metals, as well as rising oil prices (which actually could be causing inflation fears as well — it’s a vicious cycle with oil prices).

So, right now, the “safer” investments are the ones struggling. Riskier investments tend to be returning more, and risk appetite is on the rise. But be careful. Even though it may seem bullish today, the next crisis could take it bearish. Make sure your investments are well-diversified.

Post from: EveryJoe

Fed Rate Cut Affects a Variety of Markets — And Possibly You

“The bounce-back in the financial markets is probably going to be smaller than it was in 1998,” when the Dow Jones industrials surged 20% from its close on Oct. 1 through the end of the year, says Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. “We should expect further problems in the financial markets from the housing troubles.”

A Fed rate cut may not be enough to overcome housing market troubles that have led the mortgage industry down. And, while the cut will make getting a mortgage loan more palatable for some, tighter standards may mean that fewer will qualify for the lower interest rates.

And it doesn’t look like the stock market is doing as well as one would hope with such news, either. The Dow is down this morning. But, on the bright side, that means bargain hunters may still be in luck.

Post from: EveryJoe

Are Housing Market Troubles Too Much for a Fed Rate Cut?