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Personal Finance Blog By MoneyRates - September 2012

New housing data may signal a passing opportunity

September 27, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The latest housing information indicates that home prices have continued to make a slow and steady recovery. That's good news for the economy in general, and specifically could help homeowners and depositors in savings accounts. However, it should be a call to action for potential home buyers, who otherwise could miss a rare opportunity.

The S&P/Case-Shiller Home Price Index rose in July, according to figures released on September 25. It's too early to call this a rally, but then again, an orderly recovery in the housing market may be better than a return to the runaway increases of the housing boom.

Healthier than people think?

Overall, the housing market may be healthier than many realize. The S&P/Case-Shiller Home Price Index has now increased for six consecutive months. Certainly, prices are nowhere near back to where they were during the peak of the housing boom, but that may be an unrealistic -- and unhealthy -- target.

Looking longer term, the S&P/Case-Shiller Index is up about 40 percent from where it was in January of 2000. So, if you look at the housing boom as an aberration, what you see is that housing prices have still made solid gains over the long run. Ultimately, modest price increases are much healthier for the housing market than a steep hike in prices, which can freeze many potential buyers out of the market and cause some actual buyers to get in over their heads.

Action at the low end

The New York Times reported earlier this week that recent progress in the housing market is primarily at the low end. Prices in the lowest tier of the housing market are rising faster than those for mid-priced or expensive homes. This too is a sign of health: The lower end represents a much broader base of homeowners than the middle or upper tiers of the market. That signals wider support for the housing market, and for the economy as a whole.

A fleeting opportunity

Good news for the economy might even translate into good news for savings accounts and other deposits, which have seen interest rates driven down to near zero by weak loan demand and Federal Reserve intervention.

Conversely though, the potential benefit to savings and money market rates is a reminder of why the opportunity for would-be home buyers might be fleeting. Right now, conditions for buyers are exceptionally good, because current mortgage rates are at record low levels, and housing prices are still well off their peaks.

Already though, recent numbers indicate that housing prices are starting to move. If this continues, mortgage rates might follow. In particular, if lower-end housing prices are now making the strongest gains, people looking to enter the housing market for the first time should prepare to act.

Again, the housing market may be better off than people know. As many found out during the housing boom, waiting until everyone knows the market is healthy before you buy can be an expensive proposition.

Posted in: Mortgage

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The wrinkle in Bernanke's plan

September 21, 2012

| MoneyRates.com Senior Financial Analyst, CFA

It's likely that few people were happy to see last Friday's Consumer Price Index (CPI) report, but no one should have been more miserable about it than Ben Bernanke.

Inflation may be the most direct threat to the Federal Reserve's quantitative easing program, and last Friday's report signals that inflation could be coming back with a vengeance.

Oil fuels a possible inflation revival

The Bureau of Labor Statistics reported that the CPI rose by 0.6 percent in August. That's the highest single-month inflation number in more than three years, and a rate of inflation that would project to more than 7 percent over the course of a year.

To temper that a little bit, it should be noted that monthly inflation numbers are subject to some pretty severe swings. There is no reason to believe that inflation will continue to rise at a 7 percent annual rate in the months to come. Still, this flare-up of inflation is especially troubling because it was fueled primarily by gasoline prices, which rose by 9 percent in a single month. This is not only a steep increase in its own right, but one that could creep into the prices of many other things that require oil and gas in their production and transportation.

It was a bad month for inflation, but that's not to say a new trend has taken hold. Due to low inflation in prior months, year-over-year inflation through August was just 1.7 percent. More recently, oil prices have begun to fall, which could take the pressure off inflation.

Somewhere, though, one senses Ben Bernanke's fingers are firmly crossed.

Not good for QE3

Why Bernanke in particular? Just the day before the inflation report, the Federal Reserve announced that it was expanding its monetary stimulus program with a third round of quantitative easing. In making the announcement, the Fed noted that a quiet inflation environment allowed for such a move.

Now, it seems, inflation may not be so quiet. Inflation would not only destroy the stimulative impact of QE3 by discouraging lenders from making loans at low rates, but it might also force the Fed to reverse course and raise interest rates to head off inflation.

A saver's perspective

If Ben Bernanke was unhappy to see inflation rear its ugly head, depositors in savings accounts, money market accounts and other bank products should give him company in his misery. Yes, it could be argued that higher inflation would force higher interest rates, but that would be an empty victory because at best, higher prices would negate the improvement in rates. More likely, savings and money market rates would be slow to catch up with inflation, leaving depositors trailing badly behind.

Thus, you might find yourself joining Bernanke in spirit by anxiously awaiting the next inflation report, which will come out in the middle of October. If inflation is here to stay, it would add an ugly new wrinkle to an already troubled economy.

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4 possible costs of the debt-ceiling debate

September 17, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Famed Watergate reporter Bob Woodward's latest book, "The Price of Politics," deals with 2011's standoff between Democrats and Republicans about raising the debt ceiling. This week, the bond rating agency Moody's provided a reminder that the price of politics may yet get steeper.

While not yet downgrading the U.S. credit rating, Moody's warned that the prospect for a downgrade seemed likely unless the U.S. government found a constructive way to address its debt situation. While a downgrade by Moody's alone is unlikely to directly impact the interest rates the U.S. government must pay when it borrows money, the warning by the rating agency is reflective of growing concern within the financial community about the fiscal condition of the U.S. That rising level of concern could eventually affect borrowing costs.

A tough needle to thread

In its comments on the challenges facing the government, Moody's correctly put its finger on the two variables that must be managed. Moody's called for the U.S. to produce a plan that would stabilize and then reduce the ratio of debt to Gross Domestic Product (GDP). Given the slow economy, this is a tough needle to thread: Budget cutting or tax increases could reduce debt, but doing either too severely could also drag down GDP. The trick will be to come up with a credible debt reduction plan that isn't seen as too damaging to economic growth.

This would be a tough challenge under any circumstances, but it is made all the more difficult by the dysfunctional relationship between Democrats and Republicans in Congress. As Woodward's book recaps, that relationship brought the nation to the brink of a fiscal crisis last year.

Paying the price in multiple ways

If the two parties can't make the compromises and sacrifices necessary to solve the fiscal challenge, then Americans could find themselves paying the price of politics in multiple ways:

  1. Credit concerns will eventually cause the U.S. to pay higher interest rates. In this instance, U.S. could also be written as "us" -- that is, American taxpayers.
  2. Savings accounts could get the worst of both worlds. Continued economic sluggishness could mean that savings accounts continue to pay minimal interest rates -- even as the government has to pay rising interest rates.
  3. Entitlements are on track to get out of control. Without funding and benefit reform, costs will escalate sharply as the American population ages.
  4. A stock market setback could cost more than a tax increase. The investment community seems likely to embrace a plan that includes steady cost-cutting with selective revenue increases. Such a compromise could very well result in a stock rally that rewards the wealthy by far more than the cost of any tax increase. Failure to find such a solution, however, could have the opposite effect.

Unfortunately, major elections tend to polarize political parties rather than bring them together. Unless that changes soon after the election, expect the price of politics to go up in 2013.

Posted in: Personal Finance

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Battling banks raise hopes for higher interest rates

September 10, 2012

| MoneyRates.com Senior Financial Analyst, CFA

It all started when SmartyPig raised its rate on savings accounts to 1.00 percent. Then American Express Bank raised its rate to 0.90 percent. Next, Ally Bank upped its rate to 0.95 percent.

If this is a rate war, it might be the best news for bank depositors since before the financial crisis.

Swimming against the tide

These rate moves are remarkable for two reasons. Firstly, they go against the prevailing tide of interest rate changes over the past four years. With lending and investment opportunities limited, banks have little desire to attract deposits these days -- and rates on savings accounts certainly aren't very attractive.

Add in the efforts of the Federal Reserve to drive down interest rates in an attempt to revive the economy, and the result has been a sustained falling interest rate trend that has driven CD, savings and money market rates down to extraordinarily low levels.

Those low rate levels are the second reason that the small batch of rates around 1 percent stands out so much. According to FDIC data, the average interest rate on savings accounts these days is 0.08 percent. Thus, those few high-end rates offer a chance to earn 11 or 12 times the national average. All things considered, that's a great opportunity for depositors.

Assessing the opportunity

Of course, another way to earn around 1 percent on deposits would be to choose a long-term CD. According to the FDIC, five-year CD rates now average 0.98 percent, or right around the high end for savings account rates. There are advantages and disadvantages to either approach.

The advantage of a CD is that it would lock in the rate. In contrast, banks are free to lower savings account rates any time they want, so if you sign up for a high savings account rate, there is no guarantee you'll still be earning as much in a few months.

However, that locked-in rate is also a potential disadvantage of choosing a long-term CD. If interest rates generally start to rise, savings account rates will typically follow them upward before long, while in a long-term CD you'd be locked into your rate for a few years -- unless you pay a penalty for early withdrawal.

Online banks lead the way

It's no surprise to see online savings accounts leading the way toward higher rates. Online banks are not burdened with the extensive overhead of a traditional branch system, which gives them cost advantages they can often pass along to customers in the form of higher rates and lower fees. In addition, many online banks are actively seeking business growth, which means they will do things like offer higher rates to attract customers.

The phrase "rising interest rates" has barely been heard in the last four years. If the rate war among these banks heats up, we may be hearing more of it in the months ahead, and that should be music to the ears of depositors.

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