Our discussion on economic fault lines will now cover the housing market.
During the first quarter, the housing market showed signs of improvement, thanks to government assistance like the $8,000 first-time-homebuyer tax credit and the Federal Reserve's purchase of more than $1 trillion in mortgages. Now that those programs have come to an end, what will happen to the housing market?
Already we have seen a drop in construction. Last month, home construction dropped 10%, to the lowest level since December. Applications for new building permits, an indicator for future activity, have also fallen to the lowest level in a year.
Foreclosures are still on the rise. A record 14.7% of mortgage loans in the 1st quarter were either delinquent or in foreclosure. Which means that people are still struggling to make payments. Locally we had 300 homes placed in foreclosure in Winnebago County last month, which puts us on pace for a yearly record, if this trend continues. Let's hope that this is a short-term trend.
We have entered into a difficult cycle where we need jobs to spend money, pay bills, and buy houses. With the job outlook being bleak, it may be some time before we turn around. It could take years before we see a turn in housing. However, the good news is that real estate is as cheap as it has been in years! Who would have ever thought that real estate which increased in value for 40 consecutive years would drop in value for now 3 years in a row?
Last week I discussed some money management tips that are relevant in your 20's and 30's. This week we'll talk about tips for your 40's and 50's.
In your forties, you're probably pretty comfortable handling your finances, but it may be difficult with so many expenses. You are most likely dealing with homeownership, your children and their education, debts, and possibly even your parents' finances. But despite all of this, now's the time to get serious about retirement. 60% of people have workplace retirement plans or individual retirement accounts; which is good, but not good enough. The 40's is a crucial decade for building wealth. Make retirement a real goal. At the very least, take advantage of workplace retirement accounts and contribute enough to get the full match your employer offers. You need this money because the average monthly Social Security benefit received by retired workers is $1,160.
If you're in your 50's, you can't afford to waste any time. You are probably at the highest income level of your career. If you know you haven't saved enough for retirement, take advantage of catch-up contributions to your 401k, 403b, or IRA. The IRS allows individuals who are age 50 and over to make annual catch-up contributions of up to $5,500.
Another thing you can do is get rid of any remaining debt; start freeing up cash flow and reducing expenses. Also, consider your estate plan. You probably drafted a will back when you had children and haven't reviewed it since. Now's the time to update it and make sure it's complete.
Managing money is a life-long commitment. Make sure you are on track. If you are interested in more information on saving and investments click here>> Thanks for reading.
I'm starting a series of messages on investing and retirement. I'm doing this because there are a lot of us baby boomers out there that will be dealing with retirement. We should have been planning on this event for years , but as is the case with most of us, we haven't. These messages will also apply to younger people because the earlier you start this process, the better off you will be in retirement. I hope that you will find this information useful.
Let's get started with topic #1: Four simple steps to savvy investing.
Step #1: Cable TV. You might find all of these programs interesting, funny and even somewhat informing, but I've seen too many of the next big thing turn into the next big letdown. Do your own research and know what you are investing in.
Step #2: Diversification. Sounds boring, but it's definitely for the long term investor. Gambling should stay in Las Vegas. Prudent investing requires diversification.
Step #3: Know the costs. Understand expense ratios, commissions, sales charges, and other costs. Just like shopping for a car, understand the costs.
Step #4: Keep your emotions out of your investment strategy. This is harder than it looks as moving in and out can cause more problems. Establish your investment risk tolerance and invest accordingly.
Our first step is investing. Next week we will look at: How much money do I need to retire?
It's Christmas; let's be thankful. We have just come through the Great Recession. We made it! Last week I covered Black Friday and its impact on retailers. Christmas sales can account for between 40 to 80% of annual revenue for many retailers.
What has the Great Recession done to our outlook? 70% of consumers are expected to change their shopping behavior because of the recession. The average shopper is expected to buy 21 gifts this year versus last year's average of 23. Seems like a lot, but add up your numbers; you might be surprised. 81% of us say that we intend to buy more sale items. Isn't everything on sale this time of the year?
Two bright spots should help. The first is online shopping. Web shoppers spent 11% more in November than they did last year. Cyber Monday, the Monday after Black Friday, had the largest day ever for online sales, at slightly over $900 million for the day! The second bright spot is that consumers are showing renewed interest in consumer items. Jewelry showed a 4.6% increase in November, the third consecutive month it showed an increase. Electronics are still leading the pack. Sales here were up 6.6% over last year. So those are some bright spots. Primary areas of decline are clothing, both for men and women. I'm not going to comment on this one, as I might get too many emails on spending habits of the genders.
Enjoy the holidays, remember those less fortunate and the real reason for the season!
We have been exploring the question, "Now what do I do?" What steps do I take to ensure I will never be as affected by a financial setback again like the one we have just suffered? One of those steps is to make a spending plan, or budget.
Why create a budget? A budget allows you to see where your money is being spent, how much you are spending and how much you have leftover to save. By creating a budget are you able to determine what you can really afford.
Along with keeping track of your finances, a budget allows you to plan for short- and long-term goals. You can learn how to save for your vacation in one year, a bigger house in five years or your retirement in twenty years; it's all there in black and white so there will be no surprises later on.
Creating a budget is simple: It involves comparing your total income to your total expenditures. There are three steps to creating a budget:
- 1. Identify how your money is currently being spent.
- 2. Evaluate that spending to see if it meets the financial priorities you have established, and
- 3. Track your spending to make sure it stays within those guidelines.
When projecting the amount of money you can live on, don't include dollars that you can't be sure you'll receive, such as year-end bonuses, tax refunds, or investment gains.
If your budget tells you that you are spending more than you earn, you need to make adjustments, fast. Continuing to do so is a surefire way to engross yourself in debt. Eliminate any unnecessary spending on personal items, entertainment, and luxuries you can live without.
Stick to your budget-it is the essential tool for ensuring that your money gets used the way you need it to.
I want to cover some reasons for optimism in my next few posts. We have been in a terrible recession for the last year, but there are some faint signs of recovery. Let's look at them and be optimistic.
Economic stability, and our perception of what that means, has taken a beating during this recession. But just as people can get overly optimistic in good times, they can become too pessimistic in bad times. Bernanke's reports of green shoots may not have been enough for all of us to perk up our heads, but there are other reasons to think positively in times like these. It is prudent to prepare for all possible outcomes including positive ones.
Recessions can be good for growth in the long-term. Old dying businesses are swallowed up forcing people to focus on growing sectors. Recessions are a necessary part of the business cycle. Over the last year, the American consumer has changed. We are no longer taking extreme overleveraged risks and paying for unaffordable lifestyles with IOU's and debt. And we are actually starting to save money. There is even hope for the housing market. Sales of existing homes have risen for three straight months, the inventory of unsold homes has decreased, and more homeowners are selling at or near their asking price.
The Cash-for-Clunkers program has jump-started real personal consumption expenditures, which wasn't expected to break into positive territory until the fourth quarter. And new estimates for GDP predict a 1% growth in the third quarter followed by a 2.2% growth in the fourth. Instability leads to stability. We will get there.
In a previous post, I mentioned analysts believe there will be a resumption of real growth in the economy in the fourth quarter of this year. This is still true. But, when the economy begins to grow, will you be able to feel it? Probably not. The recovery is expected to be feeble.
The Fed has predicted unemployment will rise to between 9.8% and 10.1% in 2009 before declining modestly next year. The Fed believes that GDP will decline between 1 and 1½ percent in 2009. Hiring of workers is yet to begin, but the rate of firing may have slowed. Jobless claims jumped to 554,000 last week, up 30,000 from the week before. The increase was lower than estimates. Continuing claims fell 88,000 to 6,225,000.
The fuse for our current economic meltdown was the mammoth housing sector bust. Now, there are signs that home sales have bottomed. Housing affordability is still at a record high. Sales of new and existing single-family homes may have bottomed back in January. And what about the production of houses? Is there any sign that production will pick back up? The inventory to sales ratio seems to have peaked and as people buy homes, the inventory will shrink and production will pick up to make up for it. Housing starts rose to an annual rate of 582,000 in June from 562,000 in May. Starts were expected to drop.
How do you feel about the economic recovery? Does it seem to be getting any better for you? Or is it still getting worse? Our area has faced tough times for a while now. Let us know your perspective.
Let's talk about housing this week. This is an industry that has been hurt significantly over the last twelve months. The real estate affordability index is at a six year low, which means that home purchases are more affordable now than in 2003. This index takes into consideration the median price of homes as well as the current borrowing rate. New family home sales are one fourth of the levels that they were in 2003. One fourth! That means that there are a lot more homes on the market now than there were then or even one year ago. The median price of a home has declined almost 18% since its high in 2005.
The drastic reduction in home prices has attracted enough buyers to start working on the excessive inventory that has been weighing down the market. At the end of April, there was an estimated 10.1 months' supply of new homes for sale. Down from the 12.4 months of supply on the market in January.
Housing is critical to economic growth. Housing sales mean more jobs; more jobs mean a stronger economy. Real estate appears to be a good investment due to this severe contraction. Homes are still a good long-term investment. Now is the time to buy because of price and interest rates. Certainly the $8,000 tax credit recently approved by Congress will stimulate home sales for first-time home buyers as we lead into the summer busy season for residential real estate sales. Do we expect another housing boom? Not yet! Expect a gradual increase in activity brought on by lower prices, lower mortgage rates, and tax incentives.