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Archive for Thursday, August 11, 2011

Fed’s continued low rates are no fix for economy, retirees

August 11, 2011

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— The Federal Reserve’s plan to keep interest rates super-low for at least two more years is great news for mortgage refinancers and other borrowers.

For retirees and others who need interest income, it’s a threat.

Nor will low rates likely revive a depressed home market, energize a weak economy or reassure frightened consumers.

They’re also putting pressure on Americans’ pensions. The consulting firm Milliman Inc. said this week that 100 of the nation’s largest pension funds were $254 billion short of what they need to meet obligations to retirees July 31, up from a $186 billion shortfall at the end of June. Low interest rates were the main reason for the widening gap.

The sinking rates flow from the Fed’s federal funds rate, which the Fed has kept near zero since the depths of the financial crisis in December 2008. The funds rate is the rate banks charge each other for overnight loans. It indirectly affects rates for credit cards and some business loans.

Longer-term yields are determined by traders. These yields are also near record lows, driven down by investors seeking the safety of U.S. Treasurys.

The yield on the 10-year Treasury note, which influences long-term mortgage rates, set a record low of 2.03 percent after the Fed’s announcement Tuesday. Earlier in the day, the yield had been 2.34 percent. As recently as Friday, it was 2.56 percent.

The average rate on a 30-year fixed loan fell last week to a yearly low of 4.39 percent and likely dropped further this week after the Fed’s announcement.

Mortgage brokers say refinancers are rushing to lock in those rates. In Greenwich, Conn., Tuck Bradford of Mortgage Master says his office is so swamped he’s extending the lock-in period that guarantees rates from 45 to 90 days so there’s time to process the volume.

Applications to refinance jumped nearly 22 percent last week from the week before, the Mortgage Bankers Association said. Refinancing made up more than 75 percent of mortgage applications, it said.

But tantalizing mortgage rates aren’t luring many buyers into a broken housing market. Even as refinancing soars, home purchase applications have barely budged.

Potential buyers have plenty of reason to stay on the sidelines. Many can’t buy because the home they live in is worth less than the mortgage they owe on it. Or they can’t sell their house.

In Cincinnati, Jeff and Jo Ann Hawkins slashed the price on their home by $100,000 in the course of a year. They got zero offers. Same for Danielle DeGrazia in Bethel, Conn.

Low rates are also squeezing retirees who typically keep most of their savings in safe but low-yielding certificates of deposit money market accounts.

Typically, investors would be advised at age 65 to keep at least 60 percent of their money in such safe investments. Investing in stocks could expose them to losses, if they had to withdraw their money before the market had time to recover. Older investors are commonly advised to have 70 percent or more in fixed-income investments.

Top-yielding one-year CDs are paying an average of just 1.2 percent. Five-year certificates are topping out at 2.4 percent. Inflation is running at an annual rate of about 3.6 percent, so these instruments won’t even keep up with the cost of living.

The meager returns are forcing some retirees to take on more risk. Carol Clemens, 65, of Edmond, Okla., has given up super-safe fixed-income investments. She’s putting more of her retirement savings in stocks of companies that pay dividends yielding at least 4 percent.

“That security is difficult for people to give up, but when you have no choices you have to take calculated risks,” she says. “That’s what it’s forcing a lot of retired people to do.”

Comments

Ron Holzwarth 3 years, 4 months ago

"Inflation is running at an annual rate of about 3.6 percent"

Everything in this article appeared to be accurate until I saw that statement. That is simply flat out wrong.

It is very possible that Mr. Paul Wiseman is parroting the "official government statistic", but that does not reflect reality at all. Anyone who has purchased items at the grocery store lately knows that particular "official government statistic" is a flat out lie.

In determining the "official government statistic" for inflation, the U.S. government uses some very basic manipulation tricks to fudge the number.

A clip, I've verified this from more than one source: "Core inflation is a measure of inflation which excludes certain items that face volatile price movements, notably food and energy."

It's quite obvious to me, and I'm sure many others, that when looking at prices in the grocery store, gas pump, electric costs, and heating costs, that the prices are volatile, all right.

But they are volatile in only the upward direction.

Ron Holzwarth 3 years, 4 months ago

Another measure of inflation is to track the price of gold, silver, palladium, or copper. Or, compute it by comparing it to other currencies.

If you compute the inflation rate using either of those techniques, you'll quickly realize that inflation is so high that you're going to get nervous, and reconsider what you should invest your money in.

You will certainly realize that financing a house with a 30-year fixed loan at 4.39 percent is an incredible offer that simply can't last. If inflation keeps on at this rate, a few years into the loan, your payments will be laughably low. You'll be able to rent the house out for one and half times the payments within just a few years. And quite likely, within 10 years, twice the monthly payment!

And no matter what, you're going to have a house once the dust settles from the present mess. As long as you keep it insured, of course.

I believe that if you are in a position to take advantage of this incredible offer you should do it by purchasing a house very soon, because the payment is fixed but the value of the dollar is not. And later, you'll have a house instead of money in a savings account that is worth very little. Or stocks? You never know about them because they are a gamble. You might win, but it's not a for sure.

The dollar has never increased in value except for very brief interludes. But it has dropped, and is dropping, in value very quickly.

Except of course, in the "official government statistic".

Richard Heckler 3 years, 4 months ago

This plan is what assisted in creating the reckless and inflated "real estate boom town economy" that have homeowners owing more on their homes than market value will bring.

BTW that problem is still a monster problem as we speak. Foreclosures galore are still on the table and may well be for years to come.

Bush/Cheney the RINO's = wreckanomics as did Reagan/Bush.

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