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Storm #3
Auto Sales Down 44 Percent!

At their peak in February 2007, U.S. and foreign-owned companies sold automobiles in America at an annual pace of 16.6 million units.

Last month, their sales pace plunged to 9.3 million, a decline of
44 percent (including the best performers like Toyota and Honda).

Again, as with housing, we saw a tiny uptick in the prior month, hailed by high officials as a “sign” of improvement. Yet, as with housing, it was weaker than all prior “signs of a turn” over the past 26 months – each of which was followed by a sharper plunge.

Any lights at the end to Detroit’s dark tunnel? Only those of three speeding freight trains:

• The Chrysler bankruptcy, despite all the talk of a “quick and easy” procedure, is not only frightening U.S. car buyers away from the Chrysler brand, it’s also scaring them from other U.S. and foreign makers. And it’s not only hurting auto dealers and parts suppliers, but also smacking auto lenders. Meanwhile …
  
  
• GMAC, the nation’s largest auto lender, is already in its death throes, with the government now estimating it could suffer additional losses of a whopping $9.2 billion over the next two years. Will the Obama administration bail it out? Perhaps. But it would still have to downsize its operations, throwing another monkey wrench into General Motors’ sales. Meanwhile …
  
  
• General Motors is now sinking even more rapidly toward bankruptcy than it was just a few months ago. According to last week’s New York Times column, G.M., Leaking Cash, Faces Bigger Chance of Bankruptcy …

“Even after receiving $15.4 billion in federal loans, General Motors is once again on the brink of financial collapse.

“The automaker’s first-quarter earnings released Thursday showed that G.M. was losing more money and sales than it was in late December, when the government began its bailout.

“With its cash reserves down to the bare minimum and its revenue plunging, G.M. seems more certain each day to be heading toward a bankruptcy filing. …

“The company’s chief financial officer, Ray Young, called the drop … ‘a staggering number,’ and said consumers were showing increasing concern about G.M. products because of the potential for bankruptcy.”

General Motors’ CFO added: “Once you start losing revenues, you get yourself into a vicious cycle from which you cannot recover.”

Sound familiar? It should. It’s the same vicious cycle I’ve been warning about for many moons – falling revenues prompting mass layoffs, and mass layoffs driving down revenues.

Storm #4
Biggest Decline in Consumer
Credit Ever Recorded!

Any economist counting on the consumer to get things going again had better go back for some more Rorschach tests …

… because you don’t need a therapist to interpret the image depicted in my chart below. It shows very clearly how the nation’s lenders are dumping consumers and making a mad dash for the exits:

In the third quarter of 2007, banks dished out $44 billion in net new loans on credit cards, autos, and other consumer credit (excluding mortgages).

Then, just 12 months later, in the third quarter of 2008, that giant credit machine collapsed to a meager $8.7 billion, a decline of 80 percent!

But the collapse didn’t end there. In last year’s fourth quarter, not only did new credit disappear, but lenders actually pulled out of the consumer credit market to the tune of $19.5 billion.

And they did it AGAIN in the first quarter of this year, pulling out another $12.2 billion.

It is the biggest collapse in consumer credit ever recorded.

Now do you see why I’m recommending a shrink for any economist fixated on a recovery?

They know how important credit is. They know that few Americans have the savings to splurge on consumer goods. And they’re tired of knowing that a recovery is virtually impossible without credit.

And yet here we are, with the biggest-ever collapse in consumer credit – and they’re still searching for the “signs”!

Storm #5
Big Banks!

Whether the government lets big banks fail or not, the impact on the economy is similar: A massive contraction of bank loans and credit, sabotaging attempts to revive credit flows and stimulate the economy.

Reason: These banks must build capital quickly, and the only realistic way to do so is by cutting back on their lending.

The official stress test results released Thursday on 19 U.S. bank holding companies were supposed to help determine exactly how much capital they’ll need, and the total came to $75 billion.

That’s no small amount. But the stress tests will go down in history as the world’s most elaborate effort to paint lipstick on a pig.

To show you why, first, let me provide our analysis based on data from TheStreet.com Ratings, the Comptroller of the Currency (OCC), and the banks’ first-quarter financial statements. Then I’ll show you why I believe the official results grossly underestimate how much capital the banks will need and how much pressure they’ll be under to slash lending.

We find that …

• Seven institutions – JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp – are at risk of failure and may have to cut back lending dramatically to stay alive.
  
  
• Eight institutions – Bank of America, Morgan Stanley, PNC Financial Services Group, US Bancorp, BB&T Corp., Regions Financial Corp., American Express Co., and Keycorp – are borderline, meaning they could be at risk of failure with worsening economic or financial conditions and will also have to cut back on lending.
  
  
• Only four institutions – MetLife, Bank of NY Mellon Corp., Capital One Financial Corp., and State Street Corp. – appear to have adequate capital to withstand worsening conditions. But even they may voluntarily cut back their lending in an attempt to maintain their current financial health.

Moreover, of the $11.6 trillion in assets held by the 19 institutions, those likely to cut back dramatically represent $6.56 trillion, or 56.5 percent, of the assets; while borderline institutions hold $4 trillion, or 34.7 percent.

Only $1 trillion – just 8.8 percent – of the assets are held by institutions with adequate capital, based on our analysis.

In contrast, the government is trying to persuade us that most have plenty of capital … the rest can easily raise it … and none will have to slash lending in a way that would sabotage the prospects for an economic recovery.

So what explains this vast discrepancy between the official conclusions and ours?

The simple answer: Three unmistakable deceptions in the government’s stress tests …

First deception: The assumptions.

To come up with estimates of future losses, the government assumed what they call “a more adverse” scenario. But their more adverse scenario is actually less adverse than the current reality!

Hard to believe? Then just look at their own numbers in the chart the Fed published recently:

• Their “more adverse” scenario is predicated on the presumption that the GDP will contract no more than 3.3 percent this year. But in actuality, the GDP is already contracting at an annual pace of 6.1 percent!
  
  
• Their “more adverse” scenario also assumes that unemployment will average 8.9 percent this year. But unemployment has already reached 8.9 percent in April, and no one – not even economists fixated on recovery signs – is anticipating anything but a further rise.

Either they’re delusional. Or they’re cheating at solitaire.

Second deception: No mention of systemic risk!

The banking regulators have published two major white papers on the stress tests – “Design and Implementation” plus “Overview of Results.” However, in these papers, they have failed to even mention the greatest risk of all: systemic risk.

This is the risk that …

• A few key players in highly leveraged instruments like derivatives could default on their trades.
  
  
• These defaults could set off a series of failures, with the most severe impacts felt by banks that hold the largest share of the derivatives in the country.

This is the giant risk that the Government Accountability Office (GAO) wrote about in its landmark 1994 study, “Financial Derivatives: Actions Needed to Protect the Financial System,” warning of “a chain reaction of market withdrawals, possible firm failures, and a systemic crisis.”

This is the giant risk that triggered the collapse of Bear Sterns, the failure of Lehman Brothers, and the $180 billion bailout of America’s largest insurer, AIG.

It’s the giant risk that AIG executives themselves wrote about in their recent memorandum, “AIG: Is The Risk Systemic?,” warning of a “cascading impact on a number of life insurers already weakened by credit losses” … and “a chain reaction of enormous proportion.”

It’s the giant risk that the International Monetary Fund is most concerned about when it warns of another $3 trillion in global losses due to the banking crisis.

It’s the giant risk that prompted former Treasury Secretary Henry Paulson to literally drop to his knees last September, begging Congress for $700 billion in bailout funds for the banking industry.

Since that day, the U.S. economy has suffered the worst back-to-back GDP declines in over 50 years, burning the nation’s fuse even closer to a blow-up.

And yet, suddenly, in a massive undertaking that was supposed to accurately evaluate the banks’ exposure to these dangers, it’s also the giant risk that has been scrupulously scrubbed from 59 pages of official white papers, a half dozen press releases, plus multiple public pronouncements – all about the stress tests, all without a single mention of systemic risk.

This omission is both deliberate and unforgivable.

It means the stress tests have failed to fairly evaluate the credit exposure of each bank to defaults by their trading partners. And it means the tests are creating a false sense of security for investors and the public that can only lead to greater mistrust, more loss of confidence, even panic.

The omission is especially misleading for large banks that dominate the derivatives market … would be at ground zero in any meltdown … and would therefore be among the first to suffer massive losses.

The prime example: The OCC reports that, at year-end 2008, JPMorgan Chase (JPM) held $87.4 trillion in notional value derivatives, including $8.4 trillion in credit default swaps.

(To see for yourself, click here to download the OCC’s latest report; scroll down to page 22; and check out the top line “JPMorgan Chase Bank NA.” Note: The next to the last column “Total Credit Derivatives” is 99 percent made up of credit default swaps, according to the OCC.)

Why is this such a big problem? For several reasons:

• Although it’s cut back a bit, JPM still has 43.6 percent of all the derivatives held by all U.S. commercial banks, or $17 trillion more than Bank of America and Citibank combined. Among the 19 bank holding companies in the stress tests, that puts JPM closer to ground zero than any other bank.
  
  
• It’s well known that credit default swaps are the highest-risk sector of the derivatives market. And yet, in this sector, JPM has 52.8 percent of the total held by all U.S. commercial banks, or nearly double the total held by BofA and Citi. This puts JPM even closer to ground zero.

• JPM execs insist they’re smart and know how to handle their risks very neatly. But if that were the case, why did they suffer a whopping $2.5 billion loss in their credit default swaps in the fourth quarter? (OCC, page 27, Table 7, line 1, last column.)
  
  
• The OCC also reports that, for each dollar of capital, JPM still has $3.82 in total credit exposure. Mind you, that’s JPM’s exposure to just one kind of risk (defaults by trading partners) in just one kind of instrument (derivatives). In addition, JPM is also assuming market risks in derivatives plus a series of risks in its other investing and lending operations. (OCC, page 13, table at bottom of page, line 1, last column.)
  
  
• Despite all this, in their “more adverse” scenario, the banking regulators estimate JPMorgan Chase’s total “counterparty and trading losses” will not exceed $16.7 billion, a fraction of the true potential losses in a financial crisis.

With the fatal omission of systemic risk from their analysis, the government concludes that JPMorgan Chase is in good shape and does not need any additional capital.

The same omission leads to a similar conclusion for Goldman Sachs, despite the fact that Goldman has over $10 in total credit exposure per dollar of capital, or nearly triple the credit risk of JPMorgan Chase.

The only realistic conclusion: Both these institutions will need huge amounts of capital, driving them to cut back massively on new lending.

Systemic risk is the elephant in the room. Everyone knows it’s there. Everyone understands the dangers. But they’re afraid of the answers. So they dare not ask the questions.

The fundamental answer, though, is clear: Systemic risk is what drove the financial markets into a deep freeze seven months ago; and it was that storm which helped drive the economy into a tailspin.

Today, systemic risk is not gone. If anything, it’s far worse.

Third Deception: Improper influence.

In its white paper, the Federal Reserve admits that the stress tests were based, to a large extent, on each bank’s self-evaluation – not only for loan loss estimates that can be derived from past data, but also for the future performance of trading accounts, which can be far more subjective.

Moreover, each institution was allowed to appeal the final results, and several banks strenuously negotiated for more favorable grades. They even got regulators to accept their projections of future revenues, treating those future revenues almost as if they were cash in the kitty.

In contrast, we never permit the companies we evaluate to influence our evaluation process or our results. To do so would defeat the entire purpose of the exercise. But much like conflicted Wall Street rating agencies, that’s essentially what the bank regulators have done – from start to finish.

Put simply, the stress tests were too easy; the banks took the exams home with cheat sheets; and if they didn’t like their final grade, they could get the examiners to give them a better one.

Yet despite all these fudge factors, the government still estimates these institutions could suffer $600 billion in additional losses over the next two years.

And this is being portrayed as another “sign” of recovery?!

My view: We will have a recovery someday. But only AFTER we honestly recognize the grave mistakes of the past and own up to the hard sacrifices still ahead.

Until that happens, I’m staying the course, investing my own money in a way that protects me from the dangers and gives me an opportunity to profit from the next decline … which, by the way, promises to be the biggest of all.

If you want to follow along with me, check your inbox for an alert that I’ll soon be sending you personally – with the sender name “Martin D. Weiss, Ph.D.”

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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Any economist fixated on so-called “signs of a recovery” needs to have his head examined.

As I’ll prove to you in a moment, the hard-nosed reality is that five major economic cyclones are in progress at this very moment.

The storms are not abating. Nor are they changing direction. Quite the contrary, what you see today is, at best, merely a deceptive calm before the next, even larger tempests.

For investors who follow Wall Street, it could be fatal.

For contrarian investors, however, this insanity opens up some of the greatest opportunities in many years: Precisely when we see plunging barometers all around us, we also have a new surge of hype on Wall Street, driving stock prices higher.

Result: The rally has lowered the cost of contrary investments precisely when their prospects are best. Consider the five storms, and you’ll see exactly what I mean …

Storm #1.
Plunging Jobs

On Friday, the Bureau of Labor Statistics announced that job losses were running at a slightly slower pace than in the first quarter. So Wall Street cheered.

But it’s a joke, and the 539,000 additional Americans out of work aren’t laughing.

Nor are the 23 million people – 15.8 percent of the work force – who are officially unemployed … are struggling with lower paying part-time jobs … or have given up looking for work entirely.

Look. In December 2007, there were 138.1 million jobs in America. Now, there are only 132.4 million.

So even if you accept the government’s tally of the narrowest unemployment measure, 5.7 million jobs have been lost.

Plot those figures on a chart and the picture is absolutely unambiguous: Jobs in America are collapsing. Right here and now!

Where’s that “slightly slower pace of collapse” they’re raving about? You’d need a microscope to see it.

Storm #2
U.S. Housing Starts Down 77.6 Percent!

Housing is the nation’s largest industry. With it, the entire global economy boomed in the mid-2000s. Without it, a recovery is next to impossible.

The big picture: Housing starts, the best measure of the industry’s health, peaked at an annual pace of 2.3 million units in early 2006.

Now, they’re running at barely more than a 0.5 million units.

That’s a decline of 77.6 percent – three-quarters of America’s largest single industry wiped out.

Yes, back in February, there was a tiny uptick: Starts rose from 488,000 to 572,000. And everywhere we heard voices cheering the “spectacular” jump in housing starts.

What they didn’t tell you is that the so-called “jump” was actually smaller than six of the seven minor upticks we’ve seen in housing starts since 2006. Nor did you hear them say much when this measure fell anew in March.

Subscriber, this industry is not recovering. It remains in a state of near total collapse.

The only major change: Lenders have given up waiting for a recovery that never comes. So they’re throwing in the towel, unloading huge inventories of foreclosed properties at fire-sale prices. And they’re calling that a “recovery”?

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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With all that’s happening in the current market and so many conflicting opinions in the news everyday, how do you recommend people approach investing today?

The most important thing is to NOT invest emotionally, but rather objectively. The average investor is panicking now and piling into low yielding investments like CDs, savings and money market accounts – the equivalent of socking cash under the mattress. For some wealthy individuals, late in retirement, this may be prudent. However, for most investors, significant future damage may be occurring from this seemingly comfortable, short-term, benign strategy. The problem is that life expectancies are stretching; boomers/retirees are more active, and inflation (i.e. healthcare, food, vacation, etc.) will eat away at these so-called safe investments. The fact of the matter is there are a lot of opportunities now – especially as fear levels have risen so dramatically. And the opportunities do not only lie in the stock market. There are a lot of excellent investment prospects in the fixed income market as well.

Is it true that people haven’t actually lost their money if they don’t sell their stocks for a lower price?

Stocks in some respect are no different than other asset classes. You can think about stocks in the same way you think about the value of your house. If you are in the process of selling your home and the house price craters, you will experience a loss in home value. The prospective buyer will encounter a simultaneous gain, in the form of a lower price (the buyer gets to keep more money in his/her pocket). It is true that lower stock prices on unsold positions are only “paper losses,” and if prices rebound above the prices purchased then there will be “paper gains.” True gains or losses will not occur until the stock positions are sold.

The media buzz is that this is a great time for people to make a lot of money; can you explain that?

The old adage of “buy low, sell high” rings true during volatile periods like now. Most domestic equity indexes corrected by more than -40% from the peak levels experienced in late 2007. Historically these terrifying periods have been the best times to buy. For example, take the 1974 bear market, which experienced a price correction of about 50%. During that period we were in a deep recession with 9% unemployment, we had just come out of the Vietnam War, and President Nixon resigned after impeachment hearings. At the time, the S&P 500 index bottomed out at a level of approximately 61. Last Friday (2/6/09), the same index closed around 868, a 1,300%+ increase over that period (excluding dividends). Not too shabby.

The economic environment wasn’t pretty either if we fast forward to the 1990-91 period when we were knee-deep in the first Iraqi war, going through a recession (8% unemployment), and digging our way out of the S&L Crisis (Savings & Loan). Yet again, this was a great opportunity to invest as the markets have about tripled over that period, excluding the benefit of dividends (S&P 500 bottomed at around 295 in late 1990).

After the 2008 mark downturn, many people are afraid to invest. What do you suggest for them?

Unfortunately, there is no silver bullet. Everybody’s situation is different. My suggestion for a 29 year old in the wealth accumulation phase of his career would be dramatically different from a 79 year old retiree that is in the distribution phase of her investing cycle.

The best thing people can do is to educate themselves about investments. There are a lot of aggressive sharks out in the investment waters and to survive in the long run investors need to equip themselves with relevant questions to ask financial advisors and institutions in order to protect their investments. There are some great low cost tax efficient products (e.g. index funds and exchange traded funds) and strategies that I discuss in more detail in my book.

In light of current events, how can investors improve investment performance over the long run?

The low hanging fruit for investors is to drive down excessive fees and transaction costs charged by brokers and financial institutions. John Bogle, the very successful founder of The Vanguard Group, did an eighteen year study (1984-2002) showing that individual investors underperformed the “do-nothing” index strategy by more than 10%…PER YEAR. The cause, a standard fee structure of approximately 2.5% (1% load, 1% management fee, .5% transaction costs) that many investors pay, which doesn’t even account for additional tax expenses. The annual -10% underperformance is not only due to fat fees, but also from poor emotional decisions tied to the “herd” trading mentality. A sensible, unemotional approach to investing should also incorporate a “dollar-cost-averaging” strategy that purchases additional shares for each dollar invested as prices decline.

What should people do that have stocks that took a nose dive?

It really depends on the particular investment. Each stock should be thoroughly reviewed on a case by case basis. If fundamental investing is the driving force behind your investments, then I believe individuals need a systematic strategy to buy securities and sell securities. As part of this disciplined approach, I urge investors to have a thesis (basis) for ownership and if that thesis changes you can use that dynamic as a foundation for your sell signal. There will be winners and losers as we work our way through this financial crisis and recession, but with each recession and bear market there is a renewal of leadership that builds for the ensuing bull market. Tax loss considerations can play a role in the sale decision of underperforming stocks, but should not be the key determinant.

Lastly, do you have any tips for someone who may be considering investing for the first time in the current economic climate?

Now is a great time to start investing relative to a year ago. Don’t get discouraged by the market volatility. First time investors have extremely long investment horizons, therefore heightened volatility can be viewed in a beneficial light. Diversification through fund investing is another important principle that new investors should embrace. As experience levels expand for newbie investors, expanding exposure to individual stocks can become a larger priority. Until then, my advice to first-timers is to take a more conservative stance.

NOTE:

Wade is also offering a free ebook which shares excerpts from his book, for a limited time. Be sure to stop by his website to get a copy www.Sidoxia.com. This is your chance to take a look inside the book and to learn additional information about Wade Slome and his business.

For more information about Wade Slome and his virtual tour, check the schedule at http://virtualblogtour.blogspot.com/2008/12/how-i-managed-20000000000-by-age-32-by.html

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Jon Waraas mentioned Provident-Direct.com, in a recent blog post. What’s special about them is that they probably offer the highest APY on a savings account.

Jon said “Signing up with them isn’t hard at all. You just have to fill out a few pages of personal info and then give them your current banking info so they can deposit a few small deposits into your account. Once you see them in your account you then confirm the deposits and then your ready to go. It total it took me 3 days to sign up.

High Yield Online Savings Accounts (Again, I am not making any money if you sign up with one of these banks)
Providentdirect = 3.25%
ING Direct = 2.50%
E-Trade (affiliate link) = 3.01% (I know a few happy people using e-trade) “

No minimum Balance and No Monthly fees !!

What are you waiting on ? If you’re looking for other competitive online bank rates, you should take a look at these savings account rates. Rates aren’t as high as they once were, which is all the more reason to find a good rate. You can also take a look at the best CD rates to lock in a rate if you find a worthwhile rate.

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Most people understand how to bargain for a lower insurance premium based on the equipment present on their vehicles. Do you have an air bag ? You can get a discount. Same for anti-lock brakes and anti-theft devices, but there are some lesser known options that can also save you money if you know how to ask the right questions or supply the right information to get cheap car insurance rates.

• Level of Education Some studies indicate lower risk profiles for given degree holders, in particular those with degrees in engineering, science or math. Savings fall in the range of 10 to 30 percent when available.

• Current Occupation Did you know that teachers and farmers have the lowest risk-associated occupations? Farmers might have to press the point, but it’s fairly simple for educators to score discounts of 10 to 30 percent.

• Military Service Many insurance providers, including GEICO, give discounts of 2 to 15 percent to military personnel, both active and retired. An additional attractive option is decreased coverage levels during periods of deployment when the insured vehicle is placed in storage.

• Age In general, people who are retired can avail themselves of a considerable level of discounts. Hartford, for instance, offers a AARP Auto Insurance Program with savings of as much as 45 percent. (Membership in AARP can benefit drivers in a number of ways regardless of the insurance company involved. Members should investigate this angle fully before negotiating their policies.)

• Continuing Driver’s Training Defensive driving courses and other driver’s safety programs can be used to lower premiums with almost all insurers. Normally this is an option people look at after a traffic citation, but the classes can be taken at any time for insurance purposes. (Note that these classes can now be taken online or via CD or DVD.

Drivers should also remember to investigate procedure-based discounts like those awarded to multiple policy holders in a single family (husband, wife, and a teenage driver, for instance.) Family rates on premiums can lower costs considerably. Also, don’t neglect new programs offered by some insurers for teenage drivers when monitoring or GPS systems are placed on the car. Car leases may come with a substantially lower insurance premiums, but be aware that this option has become much more rare as automakers have been forced to retreat from leasing due to the current economic climate. Above all, insurance customers should conduct their own research and ask as many questions as needed to be comfortable with the coverage offered. Always comparison shop. Never be uncomfortable about haggling. Simply telling an agent that you’ve been offered a better rate by the competition can go a long way toward opening up the discounts you need to get the most affordable coverage possible. Just remember to shop around and request car insurance quotes from multiple providers…

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From CNN: “During his campaign for the presidency, Barack Obama explained where he stands on many of the economic issues that matter most to Americans.”

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Current Dow Jones Industrial Index Value: 8,577.91
Trade Time: 4:04PM / 15/110/2008

We already know that Jim Cramer suggested stock owners should get rid of stock if they need it desperately within the next 5 years. What do you plan to do ?

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Video from Iwillteachyoutoberich.com on what you can do about today’s economy

Ramith cover’s some fundamentals we should all be aware of.

Technorati : Iwillteachyoutoberich.com, crash, loans, market, save
Del.icio.us : Iwillteachyoutoberich.com, crash, loans, market, save

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Guest post by Melanie Taylor of Loan specialists Think Money.

These are strange times for would-be homeowners. On one hand, property prices have dropped, bringing the dream of homeownership within the grasp of many who couldn’t afford prices at their peak. On the other hand, no-one knows how much further they’ll fall, so buying property does take a certain amount of courage – assuming you can get a mortgage.

At a time like this, in other words, ‘knowing your stuff’ is more important than ever.

You might feel there’s no way you can keep on top of all the news in the housing market, but the good news is you don’t have to. Get a handle on just four areas and you should be able to make an informed choice.

1. The housing market’s future

2. Your future

3. Renting vs. buying

4. Interest rates

1. The housing market’s future

The house price speculation you hear in the news every day is largely that – speculation. No-one can really know where prices are headed, partly because prices depend partly on confidence, so the very act of publishing predictions (as long as they’re from credible sources) can have a positive or negative effect on them.

Anyone can see trends in prices once they’re underway, but spotting a high or low is a different matter altogether – and that’s what everyone really wants to know, as selling property in a slump or buying in a boom can cost you a frightening amount of money.

Anyway, even owning a crystal ball wouldn’t necessarily mean you’d benefit from house price changes. Even if you knew when prices would bottom out, you might be unable to get the right mortgage at the right time at the right price. (The same is true when you’re selling a house – even if you knew when prices were going to peak, there’s no guarantee you’d be able to find a buyer at the right time.)

Your future

In all probability, you’ll have a clearer idea about your own future than the housing market’s. If you’re thinking about buying, maybe you should pay less attention to housing market hearsay and more attention to your own finances:

Income

• Work. Is your job secure? Are you expecting a promotion / pay-rise?

• Benefits. Do you receive anything from the government? Could you? Is this likely to change for any reason?

• Windfalls. Any one-off sums of money coming your way (inheritance, sale of assets, insurance pay-outs, etc.)?

Expenditure

• Debts. Do you owe money? How soon will it be repaid – and how much extra will you have to spend when it is? Could you do it any faster?

• Spending. Is there anywhere you could cut back? Could you cut back enough to save up for a deposit and / or create a buffer against negative equity and fluctuations in mortgage costs?

• Change. Any major lifestyle changes coming up? Marriage, divorce, starting a family… Would it make sense to assess their impact before you think about buying?

You can’t know what’ll happen to your finances in the next year, but your own future’s probably more predictable than the housing market’s. It’ll probably have more of an impact on you, too: losing $15,000 on a house might be bad news, but losing your job / having a baby / getting married could have a much larger impact on your lifestyle – and your finances. Plus, that $15,000 wouldn’t really be ‘lost’ unless you were forced to sell before the housing market picks up again.

Renting vs. buying

You might be worried about losing money by buying property in a slump. It’s a valid concern, but these two questions could help you make your mind up:

1. How much am I paying in rent per month?

2. How much are house prices in my area going down per month?

There’s no guarantee that prices won’t start dropping faster, but if you keep on renting, you know you’ll be losing money. Property slumps don’t last forever, so house prices will go up again – it’s just a question of when. On the other hand, a mortgage is a big commitment, so if your own future’s looking uncertain it might make more sense to rent for a while longer.

Interest rates

If you do decide to buy, understanding interest rates is absolutely crucial, as your mortgage’s interest rate determines how much your monthly payments will cost you.

Never underestimate the difference 1% can make. Remember that 6% is actually 20% higher than 5% – not 1%. Given the size of most mortgages, and the sheer number of years you’ll be paying interest, that extra 20% can make a huge difference.

Say you take out a $200,000, 20-year mortgage*. The interest on:

1. a 5% mortgage deal might be around $117,000

2. a 6% mortgage deal might be around $144,000

In other words, that 1% makes a difference of around $27,000 – over $100 per month.

* You probably won’t take out a single 20-year mortgage. Most homeowners sign up to a succession of shorter deals (often two or five years), which lets them reassess the situation when economic conditions change. But sometimes, when interest rates are really low, it can make sense to sign up to a 20-year fixed-rate mortgage – guaranteeing yourself 20 years of (relatively) low payments!

Guest post by Melanie Taylor of Loan specialists Think Money

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