November 2010 Finance in Focus

Posted on 4th November 2010 by Trevor in Finance in Focus

QE2 and then what?

I am still struggling as to how the Fed and/or the rest of the authorities are convincing the market on the effectiveness of further Quantitative Easing. As I commented before, it is not the price of credit, but the availability of credit is the key to an economic revival. I would take that statement a couple of steps further. The Fed can print all the money they want, but I highly question the consequences of their programs. If the money they print just piles up in the corner or it is invested in Treasury Bonds, it will not achieve any stimulus for the economy. It is preposterous to think that more credit, leverage and loose monetary policy will get us out of the mess that was created by too much credit in the first place. It was weird to see that a couple of Fed officials seem to actually agree with me.

From a fiscal point of view, of the 50 US states, we really have 20 Portugals, 10 Italys, 9 Spains, 5 Irelands, 5 Greeces, and only 1 California. And according to the International Monetary Fund, Japan’s debt accounted for 218.6% of its 2009 gross domestic product, making it the largest public debt of all industrialized nations.


 Whohoo!  GOLD  — time to BUY more! 

ALL US HOME OWNERS with a Mortgage should read this: Wondering if you are one of those paying a mortgage in limbo, with all the payments due to some non-existent mortgage note holder getting retained at the servicer banks? Well, if you can spare 3 minutes then “Where’s the Note” is for you. The website, which is on the verge of a viral break out, has a simple message: “Whether you are facing foreclosure, have an underwater mortgage, or are just a concerned homeowner, it’s important that you contact your bank and demand to see the original note on your mortgage.It only takes a few minutes using our free online tool.” Quick, simple and easy. And in a few days your mortgage bank will have no choice but to tell you if they do in fact have your original mortgage note. And if not – welcome to cost-free living, courtesy of MERS and millions of rushed and fraudulent mortgage note assignments. Yes, it will mean the end of the GSEs, but it will also mean the accelerated write downs on thousands of MBS tranches which will rapidly collapse into insolvency (there is only so much Mark to Unicorn can cover up) and eventually take the insolvent banks with them.

Mortgage Math

Some people save up their whole lives in order to have $50,000 to put down on a $250,000 home with a $200,000, 30-year mortgage at 6% so they can make 360 monthly $1,200 payments ($432,000) while maintaining the home and paying all the taxes on the land.  If they pay nothing to repair the home and just $5,000 in taxes that’s still $1,600 a month plus the $50K down.   You can play with these figures as they apply to you using this nice Bankrate Mortgage Calculator and this Compound Interest Calculator

If those same people could find a place to rent for $1,200 a month and put the $50K + $400 a month into something that just made 5% a year, they’d have $550,000 at the end of 30 years.   That’s at 5% compounded once.  If they got the 8% historical stock market average,  that would be over $1M!  A lot of people today have homes since the 70s that haven’t doubled, let alone gone up 4 times and I’ll bet they spent a good $2K a year on repairs minimum.  Another $200 a month added to the $50K at 8% is $1.4M after 30 years.

Another look at housing: Let’s back up for a second and review where the great bull market of 1950-2007 came from. That’s when a mere 50 million members of the “greatest generation”, those born from 1920 to 1945, were chased by 80 million baby boomers born from 1946-1962. There was a chronic shortage of housing, with the extra 30 million never hesitating to borrow more to pay higher prices.

Since 2005, the tables have turned. There are now 80 million baby boomers attempting to unload dwellings on 65 million generation Xer’s who earn less than their parents, marking down prices as fast as they can. As a result, the Federal Reserve thinks that 50% of American homeowners either have negative equity, or less than 10% equity, which amounts to nearly zero after you take out sales commissions and closing costs. That comes to 70 million homes. Don’t count on selling you house to your kids, especially if they are still living rent free in the basement.

The good news is that the next bull market in housing starts in 20 years. That’s when 85 million millennials, those born from 1988 to yesterday, start competing to buy homes from only 65 million gen Xer’s. By then, house prices will be a lot cheaper than they are today in real terms. The next interest rate spike that QEII guarantees will probably knock another 25% off real estate prices. Think 1982 again. Fannie Mae and Freddie Mac will be long gone, meaning that the 30 year conventional mortgage will cease to exist.

Isn’t this getting interesting?

If I couldn’t talk you out of buying that home and saving the extra money, I hope at least I have led you to consider buying a more affordable home and saving that extra money. 

And by the way, for all you parents out there, please consider putting $800 a month into your child’s account from the day they are born.  Saving $9,600 a year for 30 years gives them a nice $1,293,820.58 to buy their own first home with (or deposit for the next generation if, hopefully, they don’t need it).  With an 8.5% annualized return, putting just $300 a month into your child’s account until they are 18 gives them $153,595  for that first car (or one hell of a prom night!) or help going to university!  

Teach your children well and perhaps when they turn 18 you can arrange to match them 2:1 and they come up with $150 and you with $300 and you maintain that deal for 12 more years.  Using the Calculator, put the $153,266 as an initial deposit and add $5,400 a year ($450/month) for 12 more years at 8.5% and what do we get?  $523,360.75 to get your kid or grand-kid started in life at age 30.  All you have to do is commit yourself to $300 a month and, aside from the cash, perhaps you will also teach your children a very valuable life lesson in investing that will be passed down to generations of wealth builders in your family.

Call Banner today we can help 03 5724 5100

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