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Buy a home now or wait for a recession?

By | 2018, Money Moxie | No Comments

The U.S. housing market is hot and home prices are going through the roof. This is due to a growing economy. Utah is especially impacted by Silicon Slope companies that are bringing in a lot of high-paying tech jobs; i.e. high demand compared to supply.

With home prices continuously increasing, people are questioning if this is the right time to buy a home or if they should wait for a time when the housing market cools off.

There are always ebbs and flows to the economy and markets, including the housing market. Many people remember all too well the housing collapse that we had in 2008, even though that was a decade ago.
We don’t expect another housing collapse like that one in the next few years, but we do expect the overall market to soften up. Maybe we will have a smaller recession in 1-3 years. When that recession happens, housing prices will come down. The question for potential home buyers is, “How far will they come down?”

If housing prices in the area you are looking do become cheaper than they are now, then you may be better off to wait. This is a probability, but there is a chance that even though house prices decrease at that time, they will still be higher than they are today.

The other piece of the equation that many people frequently forget to consider is interest rates.
A 1 percent move in interest rates means you can afford roughly 89 percent of the home you could before. If you were looking at $400,000 homes before, now you can only afford to buy a $356,000 home for the same monthly payment.

The Federal Reserve has indicated that they plan to raise the fed funds target interest rate by 0.25% several more times this year and in 2019 as well. These are short-term rates, but they will impact the longer-term rates that determine your mortgage interest and payment.
We have been at historically low-interest rates for the last decade and once that ship sails I don’t expect to see interest rates this low for a very long time. However, an economic slowdown could bring rates lower again.

If you are moving, at least you have the increase on your existing home to help offset the increase on the home you are buying, unless you are moving from a depressed area to a hot area.

If you are buying for the first time and plan to stay longer than 3 years, now might be the right time to buy just to lock in low-interest rates. However, you still need to seriously consider your financial situation and whether you can afford the home you want. Don’t jump into something that is too much money just because you feel the pressure to get a deal done. Know your limits and be willing to back out if the deal gets too hot.

Renting may feel like you are throwing your money away, but it also provides flexibility. If you only do it for a few years you won’t be that far behind financially. In a few years, you may even be in a better financial situation. Who knows? You might be able to buy a home at a cheaper price than you can today.

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Payment calculation based on a 30 year mortgage, loan of $400,000, principal and interest payment of $1,961 and interest rate of 4.25% vs. 5.25%. Data in graphics and tables from Federal Reserve Bank of St Louis.

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Stocks Stand Alone

By | 2018, Money Moxie | No Comments

If you could go back in time 100 years and pick an asset in which to invest, which would you choose? Knowing of events like the Wall Street Crash of 1929 and the Great Depression, 7% inflation in the 1970’s, and the stock market crash of 2008, would you still choose to put your money in stocks? If so, you would be making a wise decision.

I recently came across an article posted in the March 2018 issue of The Wall Street Journal regarding the average annual returns of 10 popular investments over the last century. (I included a graph showing these investments and their average historical returns above inflation.)

At first glance, I noticed the negative returns of diamonds. Although diamonds are quite popular, especially on the finger of a loved one, they have been a poor investment if appreciation is the goal.

Bonds, which happen to be fifth on the list behind collectable stamps and high-end violins, show an average annual return of 2%.

Gold, a popular investment among some investors, has historically fallen short when compared to fine art and fine wine; the latter of which post returns over 500% more than that of gold.

Stocks have had the highest returns, and by a large margin. Despite the crashes, recessions, and economic contractions, stocks have had the best return in the last 117 years.

As we face volatility in the markets in 2018, we know that a diversified portfolio of stocks and bonds has weathered the storms of years past.

Despite the risks of recession and downturn in the future, I plan to keep my diamonds on my wife’s finger and my long-term investments in stocks.

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5 Predictions for 2015

By | 2015, Money Moxie, Viewpoint | No Comments

Oil

The Dow Jones Industrial Average crossed 18,000 for the first time in December 2014. No one knows where it will end in 2015, but I thought it would be appropriate to begin the year with 5 predictions I am comfortable with.

(1) Oil prices will remain near their lows until a major supplier cuts production. Oil prices matter as much as any price. When they drop, it is generally considered to have a positive impact on the economy. This time feels different because prices are dropping so fast. Since June 20, 2014, the price of oil has dropped over 55 percent.

Gas prices at the pump are at levels last seen in the spring of 2009 and stockpiles of oil are at record levels. Demand is down and there is no shortage anywhere.

So far, members of OPEC, Russia, and other major suppliers have been unwilling to slow the flow. Many are just too desperate for money to be the first to cut production.

As the abrupt drop in prices slows it will become clear that low energy prices are good for the U.S. economy. Americans are already reaping the benefits as sales for new cars rose by 6 percent (16.5 million cars sold) in 2014.

If you are thinking about a new car please remember that prices will eventually rise.

(2) The trend in job growth and moderate wage growth will continue. Over 5.2 million unemployed Americans were hired in 2014—the most since 1999. With unemployment at 5.6 percent, employers may have to increase wages in order to bring in more productive workers. Keep your eye on wages!

(3) The Federal Reserve will be more patient with rates than most investors expect. With slow global growth, low inflation, and a strong U.S. dollar, there just may not be a compelling reason to raise rates this summer.

(4) Increased volatility will continue in 2015. The third year of a president’s term is hands down the best historically, but we expect this year to have above average volatility. Momentum has become so positive that 2015 is unlikely to be as good as 2014.

In the coming year, we expect positive results but with greater interruptions. In other words, we expect more frequent drops like those experienced in October and December of 2014 as investors digest a combination of factors: a slow global recovery, positive job creation numbers and high domestic stock valuations.

(5) The world will not pull the United States of America into recession. The strength of the U.S. economy is the envy of the world. We are more likely to lift the global economy than to sink with it. For at least 100 years our economy has led the world and there is no reason to think that things will be any different in 2015!

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