Some investors are impatient for the Fed to raise interest rates. They may want to be a little more patient after hearing what happened to Sweden.
If you’re a saver, or if bonds make up a sizable portion of your portfolio, chances are you’re not the biggest fan of the Federal Reserve these days.
That’s because ever since the financial crisis, the nation’s central bank has kept short-term interest rates at practically zero, meaning your savings accounts and bonds are yielding next to nothing. The Fed has also added trillions of dollars to its balance sheet by buying up longer-term bonds and other assets in an effort to lower long-term interest rates.
Thanks to some positive economic news — like the recent jobs report — lots of people (investors, not workers) think the Fed has done enough to get the economy on its feet and worry inflation could spike if monetary policy stays “loose,” as Dallas Fed President Richard Fisher recently put it.
If you want to know why the argument Fisher and other inflation hawks are pushing hasn’t carried the day, you may want to look to Sweden.
Like most developed nations, Sweden fell into a recession in the global financial crisis. But unlike its counterparts, it rebounded rather quickly. Or at least, that’s how it looked.
As Neil Irwin wrote in the Washington Post back in 2011, “unlike other countries, (Sweden) is bouncing back. Its 5.5 percent growth rate last year trounces the 2.8 percent expansion in the United States and was stronger than any other developed nation in Europe.”
Even though the Swedish economy showed few signs of inflation and still suffered from relatively high unemployment, central bankers in Stockholm worried that low interest rates over time would lead to a real estate bubble. So board members of the Riksbank, Sweden’s central bank, decided to raise interest rates (from 0.25% to eventually 2%) believing that the threat posed by asset bubbles (housing) inflated by easy money outweighed the negative side effects caused by tightening the spigot in a depressed economy.
What happened? Well…
Per Nobel Prize-winning economist Paul Krugman in the New York Times:
“Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.”
And deflation is a particularly nasty sort of business. When deflation hits, the real amount of money that you owe increases since the value of that debt is now larger than it was when you incurred it.
It also takes time to wring deflation out of the economy. Indeed, Swedish prices have floated around 0% for a while now, despite the Riksbank’s inflation goal of 2%. Plus, as former Riksbank board member Lars E. O. Svensson notes, “Lower inflation than anticipated in wage negotiations leads to higher real wages than anticipated. This in turns leads to many people without safe jobs losing their jobs and becoming unemployed.” Svensson, it should be noted, opposed the rate hike.
Moreover, economic growth has stagnated. After growing so strongly in 2010, Sweden’s gross domestic product began expanding more slowly in recent years and contracted in the first quarter of 2014 by 0.1% thanks in large part to falling exports.
As a result, Sweden reversed policy at the end of 2011 and started to pare its interest rate. The central bank recently cut the so-called “repo” rate by half a percentage point to 0.25%, more than analysts estimated. The hope is that out-and-out deflation will be avoided.
So the next time you’re inclined to ask the heavens why rates in America are still so low, remember Sweden and the scourge of deflation. Ask yourself if you want to take the risk that your debts (think mortgage) will become even more onerous.
Citigroup paid $7 billion as part of a settlement with the Justice Department, but homeowners affected by toxic mortgages are still struggling.
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Q: Should I use savings to pay off car loans or make a down payment? — Carmella F., Pittsburgh
A: The first line of business is to make sure you have enough savings for an emergency fund, a minimum of four months if both spouses are working, six months if one isn’t, says Pittsburgh financial planner Diane Pearson.
Paying off the $30,000 in two car loans you told us you have would deplete your savings. Not only does that leave you vulnerable to unforeseen expenses, plowing money into assets that only lose value as they age doesn’t make sense, says Pearson. When applying for a mortgage, banks would prefer to see $30,000 in savings plus car loans over no savings and vehicles owned free and clear.
Mortgage rates declined slightly over the past week.
Average rates notched down slightly to 4.14% with an average of 0.5 points, down from last week’s 4.17%, according to Freddie Mac. A year ago, rates on 30-year mortgages were 4.46%.
The rate on an average 15-year mortgage was 3.22% with 0.5 points, down from 3.50% a year ago. For adjustable rate mortgages, a five-year ARM this week averaged 2.98% with 0.3 points and a one-year ARM averaged 2.40% with 0.4 points.
Financial experts reveal the one thing you must do to build wealth.
Among young adults, a savings gender gap is starting early. Are you ahead or behind?
You’ve probably heard that Millennials are doing better than previous generations in saving for retirement—those who landed jobs, anyway. But here’s something you may not have heard so much about: young men are saving significantly more than young women.
That’s the finding from a new Wells Fargo survey on Millennial savings habits, which found that overall 55% of young adults are saving for retirement. But that number disguises a wide gender gap. More than 60% of men are stashing money away, compared with just 50% of women.
“We were surprised to see the gap in this generation, when they have such similar profiles,” said Karen Wimbish, director of retail retirement at Wells Fargo. She points to the relatively few number of women in high-paying positions as a key reason for the disparity. For college-educated Millennial men, the median household income is $77,000, according to the survey; for women, it’s $63,000. (Those figures are similar to 2012 data from the Bureau of Labor Statistics, which found that women ages 20 to 24 earn just 89% the median earnings of their male counterparts.)
Given that difference in pay, it’s not that surprising that 26% of young men manage to save more than 10% of their incomes, compared with just 9% of women. The majority of women surveyed (53%) put away only 1% to 5% of their pay.
For both men and women, debt loads are making it more difficult to save. Some 40% of Millennials say they feel overwhelmed by debt. Nearly half say more than 50% of their pay is going toward debt repayment, and 56% “live from paycheck to paycheck,” the survey reported. The largest payments were owed to credit cards (16% of debt), followed by mortgages (15%), student loans (12%), auto loans (9%), and medical bills (5%).
Still, paying off debt, especially high-interest credit-card balances, can be a smart move, even if it delays saving, says Dan Weeks, a financial planner at Sound Stewardship in Overland Park, Kansas. But for many Millennials, those payments are likely to slow their ability to buy a house and start a family.
One bright spot: Millennials are becoming less risk averse—nearly one-third are invested in the stock market. Among college-educated young men, median financial assets, including stocks and bonds, were $58,500; for women, $31,400. And more than two-thirds of Millennial expect their life after retirement to be better than that of their parents. They could be right about that.
In some cities, a huge number of homes are worth less than what their owners owe on their mortgage. See where the market is hardest hit — and how first-time homebuyers are suffering.
And the 5 most expensive places, too
Getting restless in your current state? Check your bank balance before you move. We compiled data on over 100 million homes to find the three priciest (and least pricey) states for buying a house.
Note that we used final sales prices—not list prices—and that all numbers are from February, 2014.
48. West Virginia – $95,000
While West Virginia’s Jefferson County includes several high-priced properties, Nicholas and Wood County are home to some of the most affordable houses in the nation, with median selling prices of $55,000 and $60,000, respectively. As a general rule, houses in West Virginia tend to get more expensive to the north and east (nearer to Washington DC) and less expensive to the south and west.
49. Ohio – $91,450
West Virginia’s northern neighbor, Ohio, earns the second-to-last spot on the list, with a median home selling price of just $91,450. The two counties most responsible for Ohio’s depressed market include Adams ($25,750), which lies just north of the Kentucky border, and Paulding ($33,675), which sits just south of #50 on this list.
50. Michigan – $82,000
Despite the auto industry’s resurgence, Michigan houses remain the cheapest in America, particularly near Flint and Detroit. During the 2007/2008 downturn, homes in Michigan’s largest county, Wayne, dropped from over $100,000 to under $15,000 in a matter of months. Recovery has been slow. Today, those same houses sell for a median price of only ~$25,000. (Note that Michigan home selling prices are particularly volatile from month to month—depending on sales, median values can jump up and down $50,000 every 30 days.)
1. Hawaii – $412,400
The country’s youngest state is also the most expensive, with a median home selling price of $412,400. The biggest offender is Honolulu County, which includes the state’s capital and many of the priciest oceanfront properties—most houses in Honolulu sell for over $450,000. Popular tourist destination Maui is Hawaii’s next most-expensive county, with the median house going for $426,000.
2. California – $355,000
California is home to some of the priciest individual counties in America, including San Francisco ($960,000), Marin ($760,000), and San Mateo ($762,000). Silicon Valley might house some of the most successful entrepreneurs in the world, but for the rest of us, it’s quickly becoming impossible to afford. Those determined to live in The Golden State at a reasonable price should prospect north and east of the Bay Area in countries like Modoc, Lassen, and Del Norte, each of which offer houses at prices well under $100,000.
3. New York – $314,000
An international business center and perennial tourist favorite, New York City and its surrounding counties make New York state a particularly pricey region. Manhattan ($830,000) features New York’s most expensive properties, while Westchester County ($550,000) and Brooklyn ($525,000) also clock in far higher than national averages. Even with more affordable houses along the outskirts of the state, the median home selling price remains $314,000, good enough for third in the nation.