MONEY

This One (Missing) Word From Yellen Could Change Your Finances

Federal Reserve Board Chair Janet Yellen
Alex Wong—Getty Images Federal Reserve Board Chair Janet Yellen

How less "patience" could change everything.

The news is in: The Fed dropped “patient” from its most recent statement, and that’s got financial pundits talking. Why is that one word so important?

Well, contrary to the impression you might be getting from the headlines, the Federal Reserve didn’t actually do much of anything today. Instead, the world is excited because the word “patient”—or in this case, the lack thereof—is being read as a coded signal about what the Fed will do some months down the road.

Specifically, everyone wants to know how patient Janet Yellen and her Fed colleagues will be before raising interest rates in the face of mounting positive economic reports. The conventional wisdom said that if the Fed dropped that word from today’s statement, it would mean that a rate hike could come as soon as June. And, indeed, “patient” was conspicuously absent from today’s statement.

Why does that matter to the average Joe? Because an interest rate hike is likely to have wide-reaching effects on your finances—some good, some bad. And even though the Fed won’t raise rates today, the market is likely to respond if it thinks an increase is incoming. So far the market has reacted positively because, while the Fed did remove the patient language, it also appeared more dovish about the economy, and signalled any rate change would be more gradual than previously expected. That said, higher rates are still really a matter of time, and it’s worth thinking about effect that would have.

Here’s what higher rates could mean for you:

  • Bond prices will go down and yields will go up. Higher interest rates mean higher bond yields, and a corresponding drop in bond prices. That’s good for anyone who is about to buy bonds and for those living on savings, who want their investments start throwing off more income. On the other hand, higher interest rates will decrease the value of current bond holdings.
  • The stock market may take a hit. Interest rates near zero have meant easy money for investors, and some argue this has inflated the stock market beyond justifiable levels. A rate hike would signal loose monetary policy is coming to a close, and that could put a chill on equities.
  • Savings and CDs will look better. If more risky investments are hurt by higher rates, the opposite is true with the really safe stuff. Savings accounts and CDs should start giving higher returns, and the difference between a checking and savings account may start to actually matter again.
  • Mortgage rates. Because the federal funds rate affects the price banks can borrow at, higher rates mean it’s more expensive for you to borrow as well. With interest rates near zero, mortgage rates are currently close to a historic low. If the Fed decides it’s feeling less patient, expect buying a home to get more expensive. And if you have an adjustable rate mortgage, you could see the size of your monthly payments start to increase.

One could be forgiven for wondering why the Fed would ever raise rates if it could cause this much turbulence. The truth is the Fed can’t let things run hot forever without causing even more problems. Low interest rates combined with a strong economy is a recipe for inflation.

The Fed also wants to make build up some ammunition to fight future economic battles: If interest rates remain are close to zero, they can’t be easily be lowered to spur a recovery if another crisis comes along. That’s why, ultimately, rates will have to go up at some point, and that will certainly require some getting used to. And when that does happen, patience will be a virtue.

MONEY buying a home

‘Boomerang’ Buyers Set to Surge Back Into Housing Market

Normandy Shores open house for sale, Miami Beach, Florida, 2014
Jeff Greenberg—Alamy The Miami area is one that could see an influx of 'boomerang' buyers—those who lost a home to foreclosure but are ready to get back in the market.

More than 7 million homeowners who suffered a foreclosure or short sale during the housing crisis are poised to become buyers again.

Over the next eight years, nearly 7.3 million Americans who lost their homes in the housing crash will become creditworthy enough to buy again, according to a new analysis.

RealtyTrac, a real estate information company and online marketplace for foreclosed properties, estimates that these “boomerang buyers”—those who suffered a foreclosure or short sale between 2007 and 2014—are rapidly approaching, or already past, the seven-year window “conservatively” needed to repair their credit.

This year, the firm expects, more than 550,000 of these buyers could be in a position to get back into the market. The number of newly creditworthy individuals will then top 1 million between 2016 and 2019 and gradually decline to about 455,000 in 2022.

Screenshot 2015-01-27 10.30.07

RealtyTrac notes that the return of these former homeowners could have a strong effect on housing markets with a particular appeal to the boomerang demographic: areas with “a high percentage of housing units lost to foreclosure but where current home prices are still affordable for median income earners” and a healthy population of Gen Xers and Baby Boomers, “the two generations most likely to be boomerang buyers.”

Based on those criteria, the analysis targets metro areas surrounding Phoenix (with an estimated 348,329 potential boomerang buyers), Miami (322,141), and Detroit (304,501) as the most likely to see an uptick in return buyers.

Chris Pollinger, senior vice president of sales at First Team Real Estate, told RealtyTrac that previously foreclosed Americans shouldn’t rule out another try at homeownership. “The housing crisis certainly hit home the fact that homeownership is not for everyone, but those burned during the crisis should not immediately throw the baby out with the bathwater when it comes to their second chance,” Pollinger said.

Here are the top 10 areas that could see a boom in boomerang buyers:

RealtyTrac

 

MONEY Housing Market

Why More Home Buyers May Be Trading Up to Bigger Digs This Spring

fish jumping into bigger fishtank
Phil Ashley—Getty Images

A tight inventory of houses for sale has been stymying buyers who want to trade up. That could change soon.

Joe and Debbie Valerio, a couple in their 60s, put their Westport, Conn., home of more than 20 years on the market because it was getting too big for them.

When they found a nearby condo they loved, they pounced. That set off a chain reaction allowing Peter and Leah Baiocco, a couple in their 30s, the ability to trade up.

The Baioccos lived a few miles away, contemplating a future move to a bigger home once kids came along. With favorable economic conditions, they jumped at the chance to buy the Valerios’ $2.7 million house last April. After renting it out for nearly a year, the Baioccos’ starter house in Fairfield, Conn. is on the market for $739,000.

This seemingly simple sequence of events is still relatively rare in the U.S. housing recovery. Despite an improving economy and rock-bottom rates, inventory of available homes is inconsistent. Anything more than a trickle of listings sends prices down, causing sellers to pull their homes off the market.

Then prices go up again because competition gets fierce, and sellers re-emerge. As a result, a bustle of trade-up activity is expected for this spring’s selling season, before conditions change again.

“I think a lot of people have made a lot of money in the stock market the last few years. People who want to enjoy a luxury home, now is the time. Everyone has more cash available to them,” says Ken Barber, a real estate agent in Wellesley, Mass.

Other positive signs: new single-family housing starts are at a high since 2008, according to the Commerce Department’s latest report.

Also, fewer homeowners are renting out their homes to delay selling them, down to 35% in 2014 from 39% in 2013, according to Redfin, a real-estate brokerage.

And more consumers have positive equity. Last spring, 19% of homeowners in Redfin markets (such as Atlanta and Philadelphia) had low or negative equity. That was down to 11% in November. Nela Richardson, Redfin’s chief economist, expects it to hit 8% by March 2015.

Even better for buyers, interest rates are near-historic lows below 4%. “The question of staying versus leaving is shifting. For people who were afraid to leave their mortgage because they thought it was the best they’re ever going to get, now there is another good mortgage around the corner,” Richardson says.

Those trading up in 2015 should hit a sweet spot of selling near the top but not buying at the top, says Margaret Wilcox, an agent from agent in Glastonbury, Conn., for William Raveis.

Wilcox says a client couple recently traded up from a $500,000 house to a $1 million home. They did not get quite the price they wanted for the sale of their old home, but they got a discount of nearly $300,000 on their new purchase, Wilcox says.

There are a few red flags for buyers and sellers. Seller confidence is still low, with just 35% of sellers thinking now was a good time to sell, versus 48% the previous year, according to Redfin.

Keith Jurow, a housing market analyst who writes the Capital Preservation Real Estate Report, is something of a doomsayer and thinks talk of a housing recovery “is phony and only an illusion,” he says.

Given the number of mortgages originated between 2004 and 2010, he feels that too many of the people who would like to trade up still have little or no equity in their homes and are not prepared to do a sale below their purchase price.

“Unless you bring more cash to the table, you can’t trade up,” Jurow says.

Also, foreboding makes some people want to act now. They do not want to be the family that missed their chance, adds Bob Walters, chief economist for Quicken Loans. “People won’t delay forever,” he says.

The Valerios and the Baioccos have only happy thoughts about their real estate choices. They love their new homes.

“In our mind, it’s the house we’re going to be in forever,” says Peter Baiocco.

MONEY mortgages

Half of Home Buyers Make This $21,000 Mistake

rows of model houses
Jonathan Kitchen—Getty Images

47% of buyers aren't comparison shopping for a mortgage, and it's costing them tens of thousands of dollars.

When it comes to purchasing a home, most buyers generally don’t have trouble comparison shopping. According to a recent study, 22% of house hunters even described themselves “addicted” to online listings. But while home buyers love shopping for homes, they aren’t doing the same with mortgages. And it’s costing them tens of thousands of dollars.

A new report from the Consumer Financial Protection Bureau shows that 47% of home buyers seriously considered only a single lender or broker before deciding where to apply for a mortgage. And 77% of buyers only applied with one lender or broker instead of applying with multiple lenders and selecting the best offer.

Granted, shopping for a mortgage isn’t nearly as fun as shopping for a house, but rushing this part of the process can cost consumers an enormous amount of money. The bureau’s research showed that a borrower looking for a conventional 30-year fixed rate loan could be offered rates that differ by more than half a percent. According to BankRate’s mortgage payment calculator, the difference between a 4% and 4.5% interest rate for a conventional 30-year fixed-rate mortgage of $200,000 is slightly more than $21,000 over the lifetime of a loan. Put another way, comparison shopping for a mortgage can save you enough money to buy a second car.

Why don’t most buyers make the effort? Aside from the obvious—comparing financial instruments isn’t exactly a day at the beach—the CFPB found that being informed has a lot to do with consumer behavior. Borrowers who felt confident about their knowledge of available interest rates were nearly twice as likely to comparison shop as those who were unfamiliar with the interest rates they could expect to receive.

To solve that problem, the bureau has created a website to educate prospective buyers on the home purchasing process. Among other tools, it offers a page that lets consumers check interest rates for their particular situation using their location, credit score, down payment, and other factors.

For more answers to your mortgage questions, check out our Money 101 on home-buying:
What mortgage is right for me?
How do I get the best rate on a mortgage?
What will my closing costs be?

MONEY real estate

Obama Cuts Mortgage Insurance Premiums to Help Low-Income Home Buyers

aerial view of subdivision
David Sucsy

The changes will save borrowers an average of nearly $1,000 a year.

The White House announced on Wednesday plans to reduce government mortgage insurance premiums in an effort to make homeownership more affordable for low-income buyers. President Obama is scheduled to talk about the policy in a speech Thursday in Phoenix, Arizona.

In the announcement, Housing and Urban Development Secretary Julián Castro said the Federal Housing Administration would slash insurance fees by more than a third, from 1.35% of the loan amount down to .85 percent. The FHA had a 30% share of the mortgage insurance market in the third quarter of 2014, according to Bloomberg.

Mortgage insurance, required of FHA borrowers, is meant to protect the lenders in case of default by allowing them to recoup some of their losses.

Over the next three years, the FHA projects the rate drop will allow 2 million borrowers to save an average of $900 a year when they purchase or refinance a home. The agency also estimates these savings will encourage 250,000 first-time buyers to enter the market.

The move marks a trend of recent policy changes meant to help low-income Americans get into the housing market. In December, mortgage providers Fannie Mae and Freddie Mac announced that certain first-time buyers could now qualify for a loan with a down payment of just 3 percent of the home’s value.

Taken together, today’s announcement and lower down payment requirements should make the housing market far friendlier for the economically disadvantaged. However, David Stevens, CEO of the Mortgage Bankers Association, told CNBC that the effect of the new policy may not spur an especially large increase in home buying.

“I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc,” Stevens told the network. “Changes in affordability only impact how much home they can buy.”

While Democrats have been supportive of policies that aid low-income and new homebuyers, Republicans are concerned that lower insurance premiums could put the government at risk if borrowers once again default in large numbers. The FHA has previously required billions in taxpayer assistance, and while the agency is no longer losing money, its capital requirements will not meet the legal limit until 2016.

Find more answers to your home-buying questions in Money 101:
What mortgage is right for me?
How to I get the best rate on a mortgage?
What are the steps in a home purchase?

MONEY buying a home

Sound Advice for Home-Buyers…From a TV Detective

Telly Savalas of the TV series 'Kojak.'
Photoshot Telly Savalas in "Kojak."

The NYPD's legendary Theo Kojak has some wise words for a young couple ready to purchase their first home.

Terri and David came in for a meeting with me. They were expecting a baby and wanted to buy a house.

“I’m a contractor,” David said. “I do painting.” Terri was an attorney with a law firm. Together they made about $150,000.

They had their eye on a $500,000 house, and wanted to make a down payment of 5%, or $25,000. Their question for me: “How should we make the down payment?”

David, who had $30,000 stashed in a safe deposit box, wanted to use that cash for the down payment. Terri wasn’t quite sure that was a good idea. Terri hugged her chair nervously.

Their basic problem was becoming clear: David worked in a business that can be largely cash. Terri liked to follow rules. She wanted to know whether showing up at the closing with a pile of $100 bills would get them into trouble later.

It’s at times like this that you need to remember Telly Savalas. That’s right, the actor who played the detective Kojak in the 1970s TV series of that name. He was famous for sucking on a lollipop and saying, “Who loves ya, baby?

“You’re asking the wrong question,” I said to them.

I had their attention.

“What both of you should be worried about is that you can’t comfortably afford this house,” I said. “I don’t care where the down payment is currently located. Let me be clear: You’re buying too much house.”

“But the mortgage guy said that we could swing it,” said David. “I should be able to replace the cash in a year. I’ve calculated it all out and we can do it before the baby arrives.”

This is when we need Telly Savalas.

The answer to the question “Who loves ya baby?” is not “your mortgage broker” or “your realtor.”

This is a lesson I learned the hard way.

Before I started working as a financial planner, I didn’t know what I know today. I made a big mistake.

I bought a house I couldn’t afford. That’s not what I intended to do. It’s just that I was listening to the wrong people and not to Telly Savalas.

I focused on how much mortgage a bank would lend me. Here’s what my experience taught: The bankers don’t love me. They don’t give a rip about me. All they care about is making the most money for themselves. They got their money, but I was miserable.

I made the decision in a month or two and locked myself into the expenses for years to come.

In retrospect, this was predictable. A good rule of thumb is that a home is out of your price range if it costs more than two or two-and-a-half times your annual income. The house I bought was way over this range of affordability.

Housing costs soaked up my disposable income and made it tough to save. Living paycheck-to-paycheck, I couldn’t afford a decent vacation. When an emergency arose, I didn’t have adequate funds. So I felt the stress of both the emergency and scrambling to pay for the emergency.

All this stress was unnecessary.

If I did it right, I would have bought a condo that cost less than 2.5 times my annual income — say, $150,000 instead of the $200,000 I spent. And I would have saved up and made a 20% down payment, not the 10% payment I made.

Yes, the location wouldn’t have been as nice. And I wouldn’t have had an extra half-bath and an icemaker, both of which I enjoyed having — but which I didn’t really need.

Mortgage people and realtors will tell you there isn’t much of a difference. Let’s run some numbers, though: what I did, and what I should have done.

What I did What I should have done
Home price $200,000 $150,000
Down payment 20,000 30,000
Monthly mortgage and tax payments 1,400 860
Monthly assessment 140 110
Monthly utilities 95 75
Monthly maintenance 165 125
Total monthly cost $1,800 $1,170

Spending $1,170 a month on housing would have been fine. Spending $1,800 made me feel “house poor.” It wasn’t the mortgage. It was everything else.

My message to Terri and David: David, report your income. Then, Terri, it doesn’t matter if the money is stored in a savings account, safe deposit box, or plastic baggie in the basement freezer. Don’t worry about it. And for the question that you didn’t ask: When buying a house, remember who loves ya, baby!

———-

Bridget Sullivan Mermel helps clients throughout the country with her comprehensive fee-only financial planning firm based in Chicago. She’s the author of the upcoming book More Money, More Meaning. Both a certified public accountant and a certified financial planner, she specializes in helping clients lower their tax burden with tax-smart investing.

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