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President Obama and Congress Extend the $8,000 Home Buyers’ Credit

by Flexo on November 6, 2009

in Real Estate and Home

It’s official. Today President Obama will sign a bill into law that extends the $8,000 First Time Home Buyers’ Tax Credit, recently set to expire on November 30, until April 30 next year. The tax credit, originally part of the American Recovery and Reinvestment Act of 2009 was intended to stimulate the real estate industry, and Congress has been talking about extending the credit for months.

1.8 million home buyers have qualified for the $8,000 first time home buyers’ tax credit so far or will qualify by the end of November. According to the National Association of Realtors (who have a vested interest in seeing the credit be extended and expanded) says 335,000 of those home buyers would not have purchased a new house if not for the credit.

With house prices still lower than their highs and not much activity in the market, the industry wants more stimulation. And the industry is getting more than the $8,000 stimulus. Formerly, the tax credit was available only to home buyers who hadn’t owned a house in the past three years. The new bill adds a $6,500 tax credit for current home owners who buy a new house, and who have lived in their current house for at least five years. The extensions comes at a cost of $10.8 billion over 10 years according to the Joint Committee on Taxation

In order to qualify for either credit, the purchase contracts need to be signed by April 30, 2010 and the closing must take place by June 30, 2010. The value of the purchased house must be less than $800,000. There is an income limitation as well, but it has been increased with the passing of this bill into law. If your adjusted gross income is above $125,000 (single filers) or $225,000 (joint filers), the maximum credit you are allowed to claim is phased out.

The extension of the home buyers’ credit was included within H.R. 3548 (Unemployment Compensation Extension Act of 2009), a bill which increases unemployment benefits for Americans for up to 20 weeks.

Do you think this extension is a good idea or with the economy beginning to improve, should we cease creating more stimuli?

Photo credit: pnwra

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GMAC Asking for a Third Bailout From Taxpayers

by Flexo on October 29, 2009

in Economy

Through today, GMAC has received government bailout funds totaling $12.5 billion. The company is asking the Obama administration for $5.6 billion more. One might say that in a true democracy, GMAC would need to ask permission from each taxpayer whose funds would go towards shoring up the company’s balance sheet, a move that would make GMAC appear more stable on paper. But we have a representative democracy, where Congress makes decisions that occasionally reflect the will of the members’ constituents.

GMAC might receive their third bailout. Industry analysts agree that the failure of GMAC would have a devastating ripple effect throughout the rest of the economy. If GMAC fails, so would the companies who depend on GMAC to offer loans to customers, General Motors and Chrysler. The failure of these companies in turn would result in the failures of suppliers and dealers. The government has already pumped so much taxpayer money into these companies that their failure would signal a broader failure of the entire bailout process. Also, GMAC’s total bailout is still less than the financial injections Citigroup and Bank of America have received.

In personal finance, an additional bailout for a failing company would be similar to throwing good money after bad. For example, if one makes a poor purchasing decision while buying a car, costly repairs might be necessary. Rather than cutting the losses and getting rid of the car, one might continue putting money into the black hole, and after time, the money that you spent on the purchase and repairs could have purchased a nicer car that ran without problems.

There is no guarantee that another bailout will save GMAC in the long run.

GMAC is the parent company of Ally Bank, formerly known as GMAC Bank, an online bank that has drawn in more customers with a savvy advertising campaign and high interest rates. The American Bankers Association forced the FDIC to request Ally Bank to lower its rates because other banks couldn’t compete with Ally’s new strength acquired with the help of taxpayers.

If GMAC were to fail, Ally Bank depositors should be safe as long as they have stayed within FDIC’s coverage limits.

I think it may be time to start allowing companies like GMAC, those who require funding from taxpayers to improve their balance sheets and who have little prospect for paying taxpayers back, to fail. There are signs the economy is recovering. Maybe it is time to let the market and capitalism work itself out. Those companies who remained conservative will survive and those who chased bad loans and complex derivatives without sufficiently considering risk will step aside.

Do you think GMAC should receive another bailout?

Photo credit: jim.greenhill
3rd Rescue Considered for GMAC, Eric Dash, New York Times, October 28, 2009

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Pay Czar Ordering Bailed Out Companies to Reduce Pay

by Flexo on October 22, 2009

in Economy

The executives of these companies had to see this coming. When a company is “too big to fail,” it becomes a public institution in senses of the phrase but the most literal. And for a number of banks and other financial companies in the past year, the public has become a partial owner thanks to infusion of cash from the government bailouts.

A company has a responsibility to do what is in the best interest of its stakeholders. For these bailed-out companies, taxpayers hold more of that stake than ever before. Those who own shares of stock in these companies want nothing more than the companies to be self-sustaining and profitable, but taxpayers, all who have lent money to the companies to help prop up their balance sheets and create liquidity, just want these loans paid back regardless of profit.

The government officially represents the taxpayers, not the shareholders, but you can be sure the government wants to see these companies profit, too. The Obama administration’s “pay czar,” Ken Feinberg, is going to determine the compensation for the highest 25 paid individuals in each of the companies that have not yet repaid government funds. The new compensation plans would reduce total pay by an average of 50% per individual and would reduce the cash portion of pay by an average of 90%.

Wall StreetThis could benefit both taxpayers and shareholders in the short term:

  • Pay reductions create an incentive for companies to pay back the taxpayers and become fully private.
  • Lowering pay lowers companies’ expenses so they can report bigger profits in their quarterly an annual financial statements.

The challenge with government-mandated compensation restriction is that executives and boards of directors believe that bailed-out companies will be less appealing to the best and brightest talent. Corporate leaders who find they can only earn $40 million at Company A but could earn $80 million or more by moving to a company not partially controlled by the public might defect for greener pastures.

That sounds like a solid threat, but it’s not likely on a large scale. There are enough talented and qualified senior-level executives out there who would be happy to take the reins of a company partially owned by the government. At least, that is what Ken Feinberg is hoping.

It’s unlikely taxpayers will see bailed-out companies repay all of the money that they received. The government’s job right now is to get back as much of those funds as possible while still, to a point, preventing the companies from failing.

Photo credit: epicharmus
Wall Street Pay Cuts Stoke Debate About Washington’s Reach, Julianna Goldman, Ian Katz and Robert Schmidt, Bloomberg, October 22, 2009

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How to Prepare for the Demise of the Dollar

by Flexo on October 6, 2009

in Economy

Since the middle of the twentieth century, the U.S. dollar has been the currency that has dominated the world. Governments have held dollars in reserve, and borrowed dollars when necessary, because this currency can buy just about anything, anywhere. In particular, dollars can easily buy oil, a commodity currently necessary for the progress of developed societies.

Countries have attempted to reduce their dependence on the dollar. Iraq began pricing its oil in euros rather than dollars in November 2000. It wasn’t long after that the United States invaded the country and took control of oil production, adjusting the pricing back to the dollar. Iran announced it plans to hold its reserve currency in euro, and this might prove to be more successful.

There might be a coalition of countries ready to move away from using the dollar as their reserve currency. I’m not usually drawn into conspiracy theories, but I think, considering the state of the economy in the United States, the strength of the dollar, and the country’s massive governmental debt, there is a strong possibility that several decades in the future the United States will not be the economic superpower it once was.

Here are some details reported by the Independent, but since denied by governments:

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars… [This] augurs an extraordinary transition from dollar markets within nine years…

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil -– yet again turning the region’s conflicts into a battle for great power supremacy.

Amplifying the importance of the currencies used for trading oil is the idea that at some point in the future — and there have been many disagreements about when dating back to the 1970s — the earth will no longer provide new sources of oil. Supply will eventually begin to shrink and unless major reforms in energy gain momentum, competition for the commodity and its price will increase.

Prepare for the dollar’s demise

Let’s assume this is true for a moment. If the dollar continues to decline, what are options for individuals who would like their wealth to grow over the course of the next thirty years or more?

Ignore the problem. It is possible that despite these obstacles, the dollar may end up victorious. It would take a lot of political might, and I expect more wars, for this to happen. What would a war with China look like?

There is also a reasonable argument that most of us, confined to little exposure to the world outside of our own country, will continue to build wealth in dollars. The external value of a dollar to other currencies could be irrelevant. I do think that as societies continue to progress, globalization continues and it is more difficult to exist in isolation.

Buy gold. Gold has for a long time been considered “real” currency compared to money issued by governments. In the earlier days of the United States, the government issued paper currency backed by gold reserves, so you could theoretically trade in your dollars for gold. Gold may be used as an interim reserve currency while the world loses confidence in the dollar and governments make other plans.

Gold has already shot up in price compared to the dollar and it probably will continue to do so.

Buy euros. If governments are looking to the euro as the basis for their reserves, perhaps you should as well. One option may be to keep a portion of your savings in CDs denominated in euros. Everbank offers this service but I have not yet tried these products.

Invest in China. Another article from The Independent suggests that for most of the next decade, China’s economy will grow 10 percent a year while the United States’ will grow only 2 percent a year. If true, this might be a good time to invest in China. If you want to take this bet, Vanguard’s best option is their Emerging Markets Stock Index Fund (VEIEX) with an expense ratio of 0.39%. Four of the top ten holdings in this fund are based in China making China the fund’s biggest representative. Over the past year, the China-based holdings increased to account for 18.4% of the entire portfolio from 12.4%.

And since buying the fund in dollars pits the strength of that currency against the others, you’ll benefit from both the dollar’s decline and other currencies’ success.

This is probably one of the riskiest bets of the century, but it may pay off.

Much ado about nothing

Saudi Arabia has denied that there have been “secret meetings” as cited above. The United States might quickly recover from the recession and other countries might relent with a stronger dollar. Recent studies suggest the United States will still be the primary global economic superpower in 2020.

What do you think? Is this the time to start thinking about how you might prepare for an economy decades in the future in which the United States is not the most primary economic superpower in the world? And how do you prepare for this?

The Demise of the Dollar, Robert Fisk, The Independent, October 5, 2009

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America’s Total Net Worth is Up. Is Yours?

by Flexo on September 21, 2009

in Personal Finance

The total net worth among Americans has risen to $53 trillion, the highest this measure has been since the end of 2007. At that point, Americans were worth $65 trillion. The increase this past quarter of $2 trillion was the first increase in this measure since 2007.

I am taking this as a good sign for the economy. In addition to this increase, overall personal debt is not increasing. Even though some markets are still slow and unemployment is still high, when consumers start feeling better about the economy, these should improve. I’m still waiting for interest rates for savings accounts to start climbing again more than just a few hundredths of a percentage point like Ally Bank.

On the other hand, the stock market has been the primary driver behind the increase in net worth, and it’s quite possible that stocks have recovered too much too quickly. If the current recession is over, another might be around the corner. The stock market helped my net worth increase, in addition to income, over the past few years, but this might just be the result a temporary rally.

Has your net worth been increasing over the last few months, and if so, how are you increasing it?

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Congress Plans to Extend the First-Time Home Buyers’ Tax Credit

by Flexo on September 18, 2009

in Real Estate and Home

The $8,000 tax credit for first-time home buyers is set to expire at the end of November, but lawmakers don’t want this benefit to end. While there have been some positive signs in the real estate market, the current credit hasn’t done much to stimulate house prices or the economy overall. All year, some senators and representatives have been suggesting improvements designed to further jump-start the real estate industry, none of which have been passed yet. Here are some of the enhancements they have been considering.

  • Extending the deadline from November 30, 2009 to May 30, 2010 or November 30, 2010.
  • Expanding the credit to all home buyers rather than just those who have not owned a house in the past three years (otherwise known as “first-time” home buyers).
  • Increasing the credit from $8,000 to $15,000.
  • Eliminating the income cap for qualification of $75,000 (or $150,000 for married filers).

These changes, if signed into law, would redirect the focus of the credit from the average consumer who needs a little boost to purchase a primary residence to investors and speculators. Flippers would still be discouraged because the bills currently under consideration in the House and the Senate both call for paying back the credit if the house is sold within two years or if the purchaser is not a primary resident sometime within two years.

For many people, $8,000 is not a big enough incentive to buy a house if they aren’t financially ready to do so. I don’t think increasing this to $15,000 would change much. This credit, if the changes become law, is a bailout of the housing industry, just like Cash for Clunkers was a benefit for the auto industry.

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Consumer Confidence Above Expectations: Are We Out of the Woods?

by Flexo on August 26, 2009

in Consumer

Depending on which newspapers and news websites you read, the Consumer Confidence Index either soared, jumped or surged this month. The headlines as you would expect don’t tell the whole story.

The Conference Board calculates this index by performing a random survey by phone of 5,000 households in the United States, selected because they represent the country as a whole. The questions in the survey ask the respondents how they feel about the economy as they look towards the next six months. Will there be more jobs available? Will they receive a raise?

The results of this questionnaire moved the Consumer Confidence Index from 47.4 in July to 54.1 in August, significantly beating the economists’ expectation of 48. Economists are calling this a major win for the economy, but to me it just looks like those in charge of the predictions got it wrong. If the expected August index was 55, we would see disappointed headlines rather than the exuberance expressed today and yesterday.

Consumer confidence becomes a “self-fulfilling prophecy” in some ways and a feedback loop in others. Those who respond to the surveys with a favorable outlook cause the Index to move upwards, and the news of the index moving upward encourages businesses to start operating as if the economy is heading soon towards recovery.

But let’s keep this in perspective. While the economists are joyous about the Consumer Confidence Index’s jump, the index is significantly below the level one would consider “good.” According to CNN, we would need to see an index of 90 before the economy can be considered solid. We’re only at 54.1. We have a long way to go before jobs start appearing in the market and before people start spending more.

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10 Percent of U.S. Post Offices Under Evaluation, 700 to Be Closed

by Flexo on August 4, 2009

in Economy

The U.S. Postal Service has not been a thriving business for a while, and the recession has worsened its condition. In order to save $7 billion, the government is evaluating about 3,200 offices out of the total of 32,741, and 700 of these are currently marked for closure.

Personally, I am a fan of the U.S. Postal Service. I’ve found their services to be less expensive than other shipping options and just as reliable. The biggest drawback I have experienced is when visiting the facilities. The lines are often too long and the hours are inconvenient. Post office employees, those that I have seen, often seem disgruntled, frustrated and overworked. There are never enough works available to assist customers, and from what I understand, my experiences are not unique.

The U.S. Postal Service is disadvantaged against the capital available for their competitors like UPS and FedEx. They have no competition for the millions of people who first began communicating my phone rather than letter, and later, by email and text messaging. There are many people, possibly even a majority, who would be happy to see the U.S. Postal Service disappear.

People living in the areas served by the 700 offices slated for closing might be the first to experience life without USPS. If not, they will have to travel farther to the post office, make use of more expensive mailing options, and possibly receive mail less often. But the complete disappearance of the U.S. Postal Service would have a devastating effect. Households receive mail every day. Much of it is unwanted marketing, but it’s unlikely that will stop. Without the Postal Services, other companies will have to fill the void with standard daily mail delivery. And the great pricing that the U.S. Postal Service offers customers for this mail — and the even better pricing offered for bulk mail and non-profit organizations (and religious organizations) — would disappear as well.

If the website is available, you should be able to download the list of the 700 stations to be closed here. More information is available at the Postal Regulatory Commission’s website.

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