Common Real Estate Scams and How to Avoid Them

Just like with most other areas of business, the real estate industry has been the target of many types of very creative and successful scams. While scammers are an unfortunate part of all industries where the exchange of money is involved, real estate especially has been a focus in recent years, likely because many more real estate investors these days are not local, and instead invest from afar. When someone can afford to invest in lucrative real estate across the country without ever leaving their home, they gain valuable convenience, while at the same time opening up themselves to risk.

One of the common scams is referred to as a "land contract sale" scam. A land contract is a document that spells out the legally-binding agreement between a seller and buyer, in which the seller of the property agrees to finance the buyer's side of the sale. Basically, the seller of the property becomes like a bank, in situations where the buyer doesn't have the credit history to get a real bank loan. So, instead of getting a mortgage and paying the interest and principal to the bank over an average of 30 years, they work out a payment plan where they pay the seller "mortgage-like" payments over 30 years (or often a shorter period, with a balloon payment at the end).

The existence of land contracts is important in the real estate industry, in that it allows people with little credit history to start down the path to home ownership earlier than they normally would be able to. Unfortunately, because of how the contracts are designed, sometimes sellers are able to take advantage of their buyers. The seller will put extremely strict requirements in the contract, intended to force the buyer to break the restrictions, thus making the property revert back to the seller's ownership. Or, they might make the interest rate on the payments much higher than any rate a bank would set. Sometimes, they even choose not to file the land contract and take out loans against the property, until it gets foreclosed upon. Land contracts don't always have bad outcomes, but if you're ever in a situation where you might need one, you should have your legal representation take a thorough look.

Lending scams tend to be very common as well, especially among people with little credit history (or very bad credit scores). Some (often unlicensed) lenders will be willing to lend an investor a lot of money to purchase a property and fix it up but will charge a much higher interest rate and have a shorter period in which the borrower must pay back the loan. They will also often charge high upfront fees for "loan insurance." The way to avoid this type of scam is to be wary. If a lender doesn't have very many questions for you, or if they don't ask for your credit information, it's probably a scam. As the saying goes, "If it seems too good to be true, then it probably is."

Rental scams, which don't necessarily affect real estate investors directly, do affect people in the real estate industry quite often. The scammer will find vacant houses, often for sale or for rent, and will post their own listings, claiming to be looking for tenants. A potential renter will sign a fake lease created by the scammer, will wire or mail a security deposit and the first month of rent, and will never receive the keys to the property in response. The scammer will tell their target that they live out of town, which is how they explain why they can't give the prospective tenant a tour. They also quote a rent price significantly less than the going market rate, to help convince tenants to move fast on the "opportunity." It is suggested that homeowners looking to sell or rent should clearly place signage with contact information, in a location that can be clearly seen by prospective tenants.

One of the most costly scams out there is a classic. The scammer (sometimes the actual seller, or sometimes just a random person), will convince the prospective buyer (usually an out-of-town investor) that the property is of higher condition than it actually is. They accomplish this by insisting on using their own inspectors, who give the prospective buyer a false report. They will also not disclose liens on the property or significant unseen damage (like termites or mold in the walls). One way to avoid this scam (though not foolproof by any means) is to only purchase properties listed on trusted platforms like the Multiple Listing Service (MLS). Additionally, out-of-state investors who aren't able to come and actually see every property they invest in should still visit the area at some point and find real estate agents and inspectors who they can trust to be honest. There's no perfect way to stop yourself from getting scammed in any industry, but being careful in all of your business decisions is a good start.

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Outdated or Incorrect Information Could be Holding Back Your Credit Score

Credit is probably the most important aspect of your financial identity. Your credit score can tell lenders how trustworthy of a borrower you are, or how likely it is that they will make their money back. A good credit score can mean the difference between a low interest rate and an exorbitantly high one, and a bad enough score could even get your application for a loan dismissed entirely. There are a few major aspects that determine your score: length of credit history, total amount of debt, and the regularity of debt repayment tend to be the biggest factors. By adjusting those variables, you can raise or lower your score over time. According to an L.A. Times article by David Lazarus, changes to the largest credit agencies' calculation may have recently upped your score, but that doesn't necessarily mean it will stay that way in the near future.

Lazarus writes that some of the larger agencies recently went through their data, and removed a lot of incorrect or outdated information, which presumably improved the scores of those borrowers being held back by such data. But, even though some of the information has been expunged, that doesn't mean they got all of it. In fact, it doesn't even mean they got most of it. The three biggest credit agencies are Experian, TransUnion, and Equifax, and just like all corporations, these companies exist to make money.

Credit agencies serve a necessary purpose. Without them, lenders would have many difficulties figuring out who to lend money to. This would likely lead to them reducing the number of people they loan to, which would, in turn, prevent innovators from getting loans they need to start a business or undertake some other financial activities that could positively stimulate the economy. That being said, although they serve an important utility, the agencies tend to have a lot of outdated information that can be a terrible hassle to get fixed. Various borrowers have reported issues with misspelled business names, which can be troublesome if not disastrous. Many others have had issues with incorrect reports of a trashed apartment or a late credit card payment, which could wreck their credit scores for years to come.

It is very difficult to get such mistakes removed from your credit report. One study showed that over a quarter of customers had at least one potentially harmful error, and another study showed that even after those customers went through 3 years of paperwork, the majority of those errors still remain. Although the odds are not in your favor (at least the way current laws work), there are some steps you can take to fix issues with your credit score.
1) Submit an online complaint to the credit agency.
2) Contact the "furnisher" (the entity that provided the incorrect information).
3) If all else fails, hire a lawyer who specializes in the Fair Credit Reporting Act.

All of those options take time to sort out, but with enough patience, you should be able to eventually settle the issues associated with your account. Unfortunately, that could mean that you get stuck with very high interest rates for the foreseeable future. Try reaching out to your local lawmakers. Maybe with enough pressure from enough of their constituents, lawmakers may introduce policies that force the credit-reporting agencies to take customer complaints more seriously.

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Long-Term Government Bonds Seen as "Safest" Investment

Although the global economy's struggles have made success more difficult for investors this year, many are trying new, riskier methods to multiply their money. Some, however, have decided to take the safe route, since very few investment opportunities remain with high payouts. So, the majority of "safe" investors have been going after utilities and bonds, which have the most stable profits, albeit slow ones. Tom Petruno, in his L.A. Times article, discusses some of the options that investors have been left in an economy with ever-dropping interest rates.

Options like utility stocks provide at least some semblance of "certainty," which has investors paying higher prices than they would expect to earn back in the short-term. All appearances seem to point to many investors playing the long game, more willing to take less profit than risk losing money. Additionally, because many investors have been focusing more on high-yield bonds as a safe haven for their money, government-backed bonds have been suffering. In about half a year, the US Treasury note yield has dropped from 2.27% to 1.37%.

Even in Japan and several countries in Europe, government bonds, which are known for being safer than most investments, have taken a hit. The market is so shaky in those countries that yields on bonds are somewhat negative, which means a bond owner is losing money on their investment. Because of this phenomenon, Japanese and European investors are looking to US bonds. While the American bonds only have a rate of 1.5%, it's better than losing money, so investors are rushing in.

According to economists, owning bonds is a representation of an investor's belief that the economy is improving. By holding onto one's bonds, an investor can be suffering through low-yield years in order to benefit greatly in the long run. Long-term bonds are described as an "insurance policy," no benefits for years, but great to have at the end of the road. Stocks have begun recovering again, and while stocks may hit all-time highs in the coming months, some companies fear that profits will still take a while to get back to normal levels.

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CFPB Proposes New Regulations on Payday Loans

In an attempt to avoid situations in which borrowers get stuck in an endless cycle of debt, the Consumer Financial Protection Bureau (CFPB) released a set of new proposals this Thursday to regulate the market for payday loans and certain types of credit known as being "debt traps." James Rufus Koren, in his L.A. Times article, discusses the new rules and the effects they may have on the economy.

A payday loan is a special type of loan with very high interest rates that is made on the condition that the borrower will pay it back as soon as they receive their paycheck. Unfortunately, according to CFPB Director Richard Cordray, lenders often make the loans knowing that borrowers can't pay them back and will end up stuck in a never-ending cycle of debt. The new rules aim to limit the number of loans a consumer can take out in a year and make the lenders review the finances of potential borrowers much more thoroughly before making a loan. In a healthy credit market, lending and borrowing money should be a win-win situation. Both parties, not just the lender, should benefit from the transaction, and that is the situation the CFPB is trying to remedy.

Lenders have been outraged by the proposed changes, claiming that it will make their business more costly and will cause most of their loans to become unprofitable. The CFPB has responded that it isn't looking to put lenders out of business. Rather, the organization is trying to make sure that customers don't get stuck in debt traps, where they pay off a loan just to find out that they need to take out another loan to have enough money for day-to-day living costs. The new regulations will force the lenders to do in-depth analysis on income and living expenses to determine whether they will be able to make the payments every month without running out of money.

Already, the CFPB has enacted similar regulations for banks and mortgage lenders, but payday lenders may be right in complaining that the new rules are unfair or insensible. Many claim that the process will add time and cost, which hurts everyone. Under current practice, a borrower can walk into a loan branch and leave 20 minutes later with a $250 loan. A detailed analysis of "take-home pay" and expenditures would probably add a lot of cost in the form of fees, which could drive away potential borrowers. Those borrowers could end up going elsewhere to find their loans.

It is likely that the new regulations will naturally stop some people from getting loans. Some people worry about where those people will have to turn to make ends meet. Perhaps some will be forced to get a handle on their finances and will end up much better off in the long-run. Others will have to go to pawn shops or family members for help. Still others may turn to installment lenders, which are not covered under the new rules. The installment lender gives much larger sums of money, with smaller monthly payments over a long period of time, but the borrowers often end up paying more in interest on the loan than the actual value of the loan itself. Analysts believe that the regulations will help somewhat, but only in that they will stretch the debts out onto a longer time line, rather than reducing such debts altogether.

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FICO Introducing Alternative Credit For Those With Poor or Nonexistent Credit History

4/3/15 - Individuals with low credit scores struggle to get a credit card, or to obtain a mortgage or other loan. Some see this as a fair system, especially since a low credit score usually means that the individual has a history of late payments or outstanding balances. It only makes sense that those with sketchy credit history should be trusted with more credit less readily. However, what about people without any credit history? A recent L.A. Times article discusses the options available for such individuals.

To build up a credit score, someone gets a credit card or loan, then pays back the loan on time, so as to show the credit company that they can be trusted. The length of a person's credit history is a substantial factor in determining how much money a bank or credit company would be willing to lend them. Unfortunately, without credit history, it can be difficult to get a loan in the first place. Without that first loan, the aspiring borrower can't build up a history of timely payments, and will therefore be unable to get a loan. This seemingly endless cycle has many newcomers wondering what to do.

Fortunately for young, first-time borrowers, Fair Isaac Corporation, known for its FICO credit score, has been working together with LexisNexis Risk Solutions and Equifax to create an alternative system for determining credit scores for individuals with little to no credit history. According to their research, someone with a good record of paying utility bills on time would also likely pay credit card bills in much the same pay. Using payment history instead of credit history, this system will create alternative credit scores and provide them to the top credit card issuers. Fair Isaac has yet to release information as to which banks have decided to participate in this program.

This currently unnamed new program is not meant to replace the FICO credit score. Instead, it will provide information only to credit card companies, in order to give credit-less consumers, usually young people, the opportunity to get a credit card and start building up their credit. Once credit has been built up through a history of timely payments, the consumer will be able to rely on the standard FICO credit score in order to get a mortgage or other loan.

According to a representative of LexisNexis, all collected data will be protected under the Fair Credit Reporting Act, so everyone involved will be able to dispute negative events on their credit reports, such as disputed bills. This system appears to have positive effects for all involved. New borrowers will be able to get credit cards with much less of a struggle. Banks will gain access to millions of previously non-existent customers and their interest payments. It's a win-win situation for everyone.

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Plunging Gas Prices May Not Last Long

1/30/15 - Drivers throughout the state and the country have noticed the recent decline in gasoline prices and are hoping that this trend continues for as long as possible. While gasoline was over $3 in most areas a year ago, the cost of gasoline is now at $2 or even less, a nice change for everyone filling up at the pump. Unfortunately, says Don Lee, in his article in the Los Angeles Times, these low prices are unlikely to last long. In fact, he predicts that they will begin to climb within the next few months.

Lee first addresses the main question: why did the oil prices fall in the first place? One of the main answers involves development and usage of new technologies. A somewhat new process called hydraulic fracturing, also known as “fracking,” has become increasingly prevalent in the industry for use in forcing extra oil out of otherwise dry wells. Furthermore, the development of shale oil techniques, which allow for the conversion of organic matter within rocks into synthetic fuels, helps to increase supply.

Following the laws of supply and demand, the increased supply will likely lead to increased demand. This increased demand can give producers of gasoline a reason to increase their prices, which is why Lee expects the price of crude oil to be back on the rise before the year is half-over. Lee does admit, however, that it is possible for prices to stay low, if oil production continues to increase. Otherwise, waning supplies would force prices higher, just as they have done in previous years.

Reduced gasoline prices could have dramatic effects on economies around the world. Countries that produce and export oil, like Iran, Russia, Venezuela, and Nigeria, are likely to suffer because reduced prices mean less income. On the other hand, countries that don't rely on the export of crude oil, like the United States, Japan, South Korea, and China, are predicted to benefit because they pay less for the crude oil they import. Also, their citizens will pay less for gasoline, and will have more money to contribute to the economy in other ways.

Some states in the U.S. Will benefit more than others. Similarly to the situation in the global setting, oil-producing states like North Dakota and Texas will be harmed by low prices, while other states, and the companies within those states, will be unhurt. In fact, the low prices could even lead to an boost in job growth. Even with increases in employment, lowered gas prices could be disastrous in the long run. A lowered price of gas could lower prices for all commodities, which could force the Federal Reserve to increase interest rates. Inflation is a huge risk when dealing with drastic price decreases.

Lee concludes that the huge quantities of oil being produced in Saudi Arabia, which is another factor in the price decrease, may be an attempt by the Organization of Petroleum Exporting Countries (OPEC) to force the United States out of the picture. If Saudi oil prices stay low enough for long enough, it could become economically illogical for the United States to continue producing via shale and fracking. Whatever the true reason for the decline in prices, people are enjoying it for however long it may last.

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Where Have All the Workers Gone?

1/16/15 - Unemployment rates have been found to be decreasing throughout the country. The labor force participation rate, on the other hand, which shows the number of people working or not working, rather than just those classified as “unemployed,” has also been shown to be on a downward slope. So, what causes the seeming paradox between these two measurements. According to Michael Hiltzik, in his Los Angeles Times article, this discrepancy is due to a significant number of “missing” workers: those workers who are not working, and at the same time are not considered “unemployed.” Where have these so-called “missing workers” really gone?

How is it possible for both participation rates and unemployment rates to go down? Some economists believe that this phenomenon is due to a lack of effectiveness in current governmental policies meant to create and fill necessary jobs. Such economists theorize that the extreme difficulty many people are having in finding work has led them to stop searching altogether, to drop out of the labor force completely. Hiltzik, on the other hand, disagrees with this conclusion, preferring an alternative explanation.

Hiltzik presents sources in the article that seem to show that up to three-quarters of the perceived decline in participation rate is actually due to such factors as the retirement of baby boomers and the enrollment of workers in universities and other institutions of higher learning, both of which have little to do with the state of the economy. Over the past few decades, participation rates have been steadily declining, for both men and women. Statistics show that as the economy improves, the participation rate should improve as well.

Whatever the reason for the current employment trends, it is evident that the economy needs to get better. Hiltzik concludes his article as such: while the participation rate is declining, there is still room for it to recover. Workers may be out of the labor force due to the Great Recession, or lowering wages, or a variety of other possible reasons, but as the economy improves, workers should return.

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Home Equity Used For Long-Term Investments

12/12/14 - A decade ago, before the Great Recession hit in full effect, it was common for people to take out a line of credit on the equity of their homes. This “quick cash” was spent non-productively, used to buy groceries or spent on vacations, rather than being used as an investment. Over time, people began to cease such “wasteful” ventures and have slowly been learning to use Home Equity Lines of Credit (HELOCs) in a smarter manner. In his article in the Los Angeles Times, Kenneth Harney describes how a recent increase in the use of such lines of credit is a good thing for the economy.

Although such HELOCs were once a way for people to pull money out of their homes for regular expenses, people have generally learned not to jeopardize the equity of their homes unless investing in something safe. For example, most of those who took money through a HELOC used it to make improvements on their homes, or to pay off higher-interest debts, such as those on credit cards. Both of these provide long-term benefits for the home-owner. Thus, it is shown that tapping into home equity is not always a bad thing. For those who make smart investments using the line of credit, home equity can be used and quickly earned back.

Until recently, most home-owners were wary of HELOCs, remembering the negative consequences that had arisen from the use of such funds for day-to-day expenses. Now, though, equity lines are up 21%, which, according to Harney's sources, could mean that people are starting to become more confident in the economy's stability. With less fear of economic collapse and an improvement in equity and interest rates, more home-owners consider a line of equity to be a “safe investment.”

Besides a stabilizing economy, HELOCs have become safer because of a crackdown by lenders. Lenders have become more careful as to who they lend to, making sure that credit scores and financial reserves are up to par. As Harney concludes, now is the time to look into home equity lines of credit. Such money, if used right, could have a dramatic economic impact, both personally and nationally.

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Credit Unions Providing Home Loans

11/21/14 - While home loans were once the responsibility of major financial institutions like banks, the post-recession mortgage loans have slowly but surely been making their way into the realm of the credit unions. Such credit unions have been amassing members, and currently own over 8% of all mortgages, three times as much as were owned before the Great Recession. Lew Sichelman's L.A. Times article goes into how these credit union loans can actually be preferable to those provided by “standard” institutions.

Credit unions, which are member-controlled, provide an alternative to common loan institutions that commonly increase the cost of a loan through miscellaneous fees. Anyone can join a credit union, and their non-profit standing keeps people interested in their loans, especially with our currently troubled housing market. During the recession, while many lenders pulled back and restricted the loans they were willing to grant, credit unions stayed open, making their loans available to those whom they deemed a worthwhile risk.

These lenders are different; they are run by the people. Every member has a say in how the union should be run, and this is a big part of why credit unions have been increasing in success. While mortgage loans were once a minimal area of focus for credit unions, new interest has led to mortgage loans encompassing over 40% of all loans provided by such institutions. The interest rates on credit union loans may be the same as those from other lenders, but a more personal touch of a credit union appears to be one of the factors drawing in new customers. Borrowers, of late, tend to have more faith in them, rather than in the banks and other lenders that once held the vast majority of mortgages and other such loans.

Although they are still relatively new to most, credit unions are gaining ground as they accomplish various goals. The common mortgage loan from a credit union is the normal, 30-year fixed rate, but many of these institutions have been applying innovative new techniques to make these loans more manageable. From ways of scheduling your mortgage so that you finish at a specific time, to loans that reset their interest rates to market level every five years, credit unions have developed ways to make their loans as consumer-friendly as possible. All in all, a standard banking institution may be great, but credit unions might be an option for many potential borrowers to seriously consider.

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Buying vs. Renting: Pros and Cons

9/19/14 - Prior to the Great Recession, the question of buying versus renting was never really an issue at all. If you could get a mortgage, then buying was the best way to go. Even after the housing market crash, there was still plenty of interest in buying rather than renting. If people had some money to do it, then buying was generally their course of action. However, with real estate prices, especially in Southern California, on the rise, and very few “bargain homes” available, potential buyers are being much more careful in deciding whether they really want to enter the market. In a Los Angeles Times article, Tim Logan discusses the potential positive and negative aspects of either buying or renting.

The decision is a hard one for many. Yes, the housing prices have gone up dramatically, but the interest rates on mortgages are lower than they have been in years. Renting makes it easier to pick up and leave, but owning a home has a huge payoff in the long term. According to Logan, a survey of renters showed that most do plan to buy, but are unsure as to how soon. Furthermore, some statistics presented by Logan show that, over the span of seven years, buying can cost you over 20% more money than renting.

The prices of homes are not the only thing deterring potential buyers. It's all about location, location, location. In some areas in Southern California (Lancaster, San Bernardino, etc.), foreclosures make the monthly mortgage payments lower than average rent payments. In other areas (San Marino, Newport Beach, etc.), the return of seven-figure price tags make rent much more affordable than mortgage. Besides the costs of homes and apartments in certain areas, differences in construction choices can limit a home-hunter's options. For example, some areas are busy building new apartment buildings, while others are designing condos and houses. If there are very few houses available in your area, then buying might not be an option. According to Logan's sources, new construction has been mostly for rental properties, likely due to developers' fears of another housing crash.

Apparently, members of the younger generation are statistically more likely to want to rent, not yet willing to “tie themselves down” to something like home ownership. However, even “prime” first-time buyers (married, early 30s, income of at least $95,000) have lately become hesitant toward buying property. Logan's sources claim that this hesitation is due to the housing crash. These first-time buyers witnessed the colossal blow that the recession made on their parents' financial situation, and are leery as to how good of an investment home ownership really is.

As Logan states, this hesitation can be a good thing, preventing buyers from jumping into the realm of home-ownership without the necessary means to make their monthly payments. By making sure that they know what they are getting into, this new, more realistic, outlook of buyers will hopefully prevent another crash in the near future.

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Account Fees, Money Down the Drain

9/2/14 - While certain checking accounts can be cost-free, the vast majority of checking account holders are forced to pay penalties, fees, and monthly maintenance charges. Apparently, as described in an article by E. Scott Reckard, of the L.A. Times, based on information from a personal finance website called MoneyRates.com, average costs of owning a checking account are on the rise, and there's not much that any of us can do about it.

While more than one-third of all checking accounts were fee-free at the end of 2012, recent statistics show that such accounts now encompass only 28% of the total checking accounts, while the rest are drowning in new increases in “maintenance costs.” Average monthly costs for such accounts are now over $12, meaning such account holders have to pay around $150 a year just to keep an account open. Throwing away $150 a year for no real reason doesn't seem like such a good investment.

While the above statistics come from MoneyRate's surveying of 100 brick-and-mortar banking institutions, Reckard presents further evidence that a large percentage of checking accounts in credit unions and online banking institutions get through each month without any maintenance fees. According to Reckard, as much as two-thirds of all such online checking accounts are free to the user, and yet individuals still seem hesitant in trusting their checking accounts to such institutions.

People tend to dislike change, and it appears that many consumers would rather stick to a checking account they have had for years rather than shop around for an account with fee-free options, such as those for students and seniors. However, from rises in overdraft fees to a startling increase in the amount required to open a new checking account, new fees and raised prices may actually hurt banking institutions in the long run. Once individuals begin to see that the costs for accounts through such “traditional” banks are prohibitively high, we may begin to see an abrupt shift to more “unconventional” online accounts in the search for lower fees, reduced charges, and a general decrease in expenses.

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High End Home Sales: On The Rise

8/15/14 - Recent housing statistics show that, while the housing market as a whole has been at a bit of an impasse, home sales on the upper end of the spectrum appear to be steadily increasing. In the aftermath of the Great Recession, lenders have become more cautious, preferring to fund mortgages for borrowers with cash on hand and access to credit, as compared to the average American home-buyer. This split between buyers has led to a split in housing sales, thus resulting in this recent trend of increased million-dollar home sales, especially in California. In an L.A. Times article, writer Tim Logan discusses this phenomenon and what it means for attempted rebuilding of California's housing market.

Logan looks into how first-time buyers, what with much stricter loan regulations and a not-so-stable jobs market, are having trouble taking their first step into the realm of home ownership. On the other hand, wealthy investors, with available cash, are more able to benefit from current low interest rates. While average California housing prices are getting toward the high six-figures, it appears that from the San Francisco Bay Area to Southern California, seven-figure home sales have become more common than ever.

Even for older home buyers, of the “Baby Boomer” generation, purchases of homes with seven-figure price tags have become all the more prevalent. For these buyers, looking to downsize, the cash that they gain from selling a large house goes into the purchase of a high-end condominium, such as those produced by City Ventures, which go for around $1.5 million on average. However, while these buyers pay all cash for such properties, Logan presents statistics showing that 70% of recent million-dollar home sales in California were accompanied by a mortgage, illustrating the way in which buyers are taking advantage of historically-low interest rates.

Logan shows throughout this article how beneficial the current housing market is – at least, for wealthy, high-end buyers. Even for the average buyer, although they have more difficulty getting loans, these low interest rates can help them to purchase homes on the upper end of the housing spectrum, since low interest rates mean more affordable monthly payments over the course of a mortgage. Thus, while this article shows that lower interest rates have been helping those with cash on hand, individuals looking for a fancier home or an investment property, perhaps lenders will soon enough loosen their grip, allowing for the average home-buyer to also benefit from these lower interest rates.

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Saving Versus Spending: The Ultimate Conundrum

8/8/14 - In times of financial hardship, it is quite common for individuals to build a wall around their finances, to save rather than invest, and statistics show that consumers have been squirreling away any extra cash on hand, ever since the Great Recession first hit. With low interest rates on savings accounts and constant fluctuation of the stock market, it appears that, at this point in time, consumers have little choice but to pad their checking accounts rather than risk losing their savings. An article by E. Scott Reckard of the L.A. Times discusses the economic implications of this phenomenon of consumer saving as opposed to spending and investing.

Before the Great Recession hit, the average American was known for extravagant spending, for commonly over-drafting his/her checking account, and for holding very little savings in a “just in case” account. After we were hit hard by the economic downturn, it seems as if consumer saving has gone into overdrive, as if to compensate for their previous lax attitude toward their finances. While this new development in consumer saving is helping individuals to ride out the ups and downs of economic recovery, this situation does not bode well for continued economic stabilization.

According to Reckard, about two-thirds of economic recovery is represented by consumer spending. Thus, if consumers are saving rather than spending, the recovery is doomed to slow, maybe even halt altogether. With more individuals holding onto money rather than funneling it back into the economy, businesses have less capital on hand to hire new employees. While employment-to-active-searcher rates have improved markedly in past months, the so-called employment-to-population rates are still suffering, and these high rates of unemployment make people want to save even more, in fear that one day their employment might also be terminated.

Thus, while this new development is helping consumers to pay off debt and to learn to keep a “rainy day” fund, this cautious practice of high saving and low spending is not having such a great effect on the economy as a whole. However, as Reckard states, with inflation going down and income going up, it may just be a matter of time before consumers decide to invest once again. All in all, the main message is this: consumers have turned their manner of economic thinking on its head. While these sudden increases in responsible spending and lower rates of overdraft should be celebrated on the individual level, the economy now needs to find some other way to help its recovery.

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Sale Price vs. Mortgage Rate: Which Would You Prefer?

7/31/14 - Which is worth more: a lower price on a home, or lower monthly mortgage payments? An article by Kenneth Harney of L.A. Times takes a shot at answering this question. What with slowing sales, price erosion, and rising of mortgage rates, realtors and home sellers are looking for better and newer ways to stimulate the housing market.

A relatively new topic for home resale, it appears that a strategy called “interest rate buy-down” has become more prevalent in the housing market of recent years. This method, as described in detail by Harney, involves the seller making a cash payment to the buyer's lender in order to lower the buyer's interest rate and thus reduce the size of monthly mortgage payments. In this way, both sides win.

Since the buy-down lowers the monthly payments, the buyer is able to afford a higher sale price on their dream home. Since the buyer pays more than they would have previously paid, the seller has the capital necessary to pay off the lender. The more a seller buys off, the lower the monthly payments are and the higher the sale price a buyer can afford. An extra positive for the seller: the money they pay for the interest rate buy-down is a deductible expense under IRS rules!

While buy-downs may be the way of the future for some, other buyers prefer a lower sales price than lower mortgage rates. Furthermore, according to Harney, a buy-down of half a percent of the mortgage price could cost the seller two percent or more, thus lowering net income and making the scenario less than ideal.

Basically, although an interest rate buy-down isn't the best choice for all sellers and buyers, it certainly should be available for those who want it. While a mortgage buy-down may mean a higher sale price, the lower interest rates and monthly payments can definitely make the trade-off worthwhile. That being said, if interest rate buy-downs sound interesting to you, look into it and talk to your local loan officer to find out more!

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Lowering Interest Rates: A Continuing Trend?

7/14/14 - Interest rates are a large part of measuring an economy's strength, stability, and ability to recover. For the average American, there is no ideal interest rate; it all depends on one's status. For older Americans, relying on the interest accrued from a pension fund or savings account, low interest rates can be devastating, helping very little to increase their principal investment. On the other hand, low interest rates can mean lower mortgage rates, more affordable loans, and improvement of the stock market. In his article, Tom Petruno of the Los Angeles Times investigates interest rates, their effect on the economy, and predictions of future changes.

In most countries, the interest rates are controlled by a main federal banking organization: the Federal Reserve, the European Central Bank, or the Bank of Japan, to name just a few. These organizations command changes in the short-term interest rate, and as of recently, have been holding them as low as possible, in an attempt to stimulate economic growth in the form of real estate, corporate loans, and stock market investment.

Although the Federal Reserve publicly predicts interest rates to be up to 2.5% by 2016, several members of the policy committee remain skeptical as to the magnitude of this rate increase. While they disagree as to the amount, they seem to concur as to one main idea: America of the post-Great Recession era will take quite a while to regain its previous economic stature. Of the many sources Petruno cites in this article, one message stands out: don't rely on a return to “normal” interest rates, for the economy still has a ways to go.

While central banks control short-term interest rates, such long-term rates as on bonds are affected more by the principle of supply and demand. As demand for bonds decreases, the banks offer higher interest rates as an incentive to increase demand, and as demand increases, banks have more leeway to lower interest rates without affecting sales too drastically. Thus, the interest rates on bonds have been falling lower and lower due to increased consumer demand for such “safer” investments.

According to Petruno, even though interest rates have been at all-time lows, inflation could reverse this trend. As prices and wages increase, long-term interest rates could be driven up markedly by bond investors. According to the Federal Reserve, the current national inflation rate is at target levels, around 2%. While some analysts believe that the inflation rate will continue to increase, in the long run, it appears to remain steady, especially given that wages aren't increasing along with the costs of goods and services. Due to high unemployment, and a dramatic shift to more part-time work, the current rise in prices is predicted to decrease, given that lower wages can't fuel a sustained increase in costs.

In concluding the article, Petruno brings up the following point: while the funneling of money into central banks has not, as of yet, triggered a dramatic improvement in the national economy, such an improvement due to this money could have negative consequences, namely high inflation. It seems like the solution to fixing the American economy relies mainly on time and patience. Interest rates are slowly climbing, and the economy appears to be healing, albeit slowly. Thus, all we can really do is watch and wait.

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