Every two years, the Jump$tart Coalition issues a "personal finance" exam to high school seniors.
The test highlights the importance of personal financial literacy among America's youth and comes at an especially important juncture.
Many experts -- including Fed Chairman Ben Bernanke -- believe that basic financial knowledge is essential for (and lacking in) teenagers. Jump$tart's exam did little to disprove this.
This year, 12th graders answered 48.3% correct on average and posted the lowest scores since Jump$tart first issued the test in 1996.
A sample question from the 31-question test:
Which of the following types of investment would best protect the purchasing power of a family’s savings in the event of a sudden increase in inflation? A twenty-five year corporate bond A house financed with a fixed-rate mortgage A 10-year bond issued by a corporation A certificate of deposit at a bank
Which of the following types of investment would best protect the purchasing power of a family’s savings in the event of a sudden increase in inflation?
Find out the answer to the sample questions and 30 other questions by taking the complete Jump$tart Personal Financial Literacy test for yourself online.
The average adult scores 68%.
Posted on April 10, 2008
The Federal Open Market Committee adjourns from its two-day meeting at 2:15 P.M. ET today.
Markets expect the Fed to lower the Fed Funds Rate by 0.250 percent in its press release but it's not what the Fed does that matters to economy right now.
It's what the Fed says.
If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation. Inflation is the enemy of mortgage rates.
By contrast, if the Fed states that it will "pause" before making additional rate cuts (or hikes), mortgage rates should fall.
We'll dissect the message in full late this afternoon but the most important message to remember is this:
The Federal Reserve does not directly control mortgage rates.
The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another. The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.
Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.
If the Federal Open Market Committee votes to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans' collective credit card and home equity line debt will fall by a quarter-percent, too.
RealtyTrac released Q1 2008 foreclosure statistics and the data follows an interesting statistical phenomenon most commonly known as the "80/20 Rule".
The 80/20 Rule states that 80 percent of the effects come from 20 percent of the causes.
In this case, 80 percent of bank repossessions in the first three months of 2008 came from 20 percent of the states in the union.
Accounting for 156,463 repossessed homes nationwide:
Overall, 0.55 percent of homes were repossessed by banks in the first quarter.
Posted on April 29, 2008
Newspaper headlines rarely tell the full story and today's papers provide a terrific example.
From the Baltimore Sun (and others):
New-home sales lowest since 19918.5% March decline exceeds forecasts; prices also tumble
As always, there's more to the story than the headline.
The Census Bureau reported a 8.5 percent decline in New Home Sales last month, but in the "fine print" of the report, the Census Bureau cites a margin of error of 16.1 percent.
By including a margin of error, the Census Bureau is acknowledging that the "headline number" is not precise and that the actual change in New Home Sales data lies somewhere between the values -24.6% and +7.6%.
Notice that the range of possible reading includes positive numbers.
This means that New Home Sales could have just as easily shown growth in March -- if only the Census Bureau had interviewed a different set of home builders.
The Census Bureau acknowledges this possibility, adding that it "does not have sufficient statistical evidence to conclude that the actual change is different from zero." The data, therefore, is worthless.
The housing market may be strong or the housing market may be weak. Most likely, it is both of these things. It all depends on your street in your neighborhood because all of real estate is local.
Either way, look deeper than the headlines. They're a good source of information, but the real analysis requires a deeper look.
SourceNew Residential Sales In March 2008Census.govApril 24, 2008http://www.census.gov/const/newressales.pdf
Posted on April 25, 2008
More than 130 million Americans will receive tax rebates this year as part of Congress' $168 billion economic stimulus package.
Payments begin in about two weeks and range from $600 for individuals to $1,200 for couples, plus an additional $300 per child.
Not everyone is eligible for a full rebate, however.
For single filers earning more than $75,000 and joint filers earning more than $150,000, the tax rebate is reduced by $50 for each $1,000 of income beyond the limits.
An individual with no children, therefore, will not receive a tax rebate if income exceeds $87,000 annually. The IRS provides a tax rebate calculator that can help make sense of the math.
For tax filers using direct deposit, the rebates will be paid based on the last two digits of the social security number:
For tax filers using paper checks instead of direct deposit, payouts begin a little bit later on May 16 and extend through mid-July. The IRS makes the exact dates known on its Web site.
For late income tax filers, the IRS send rebate checks about two weeks after the returns are processed, but not before the regularly scheduled date.
Posted on April 24, 2008
The National Association of REALTORS released its Existing Home Sales report for March 2008. An "existing home" is one that is not considered new construction.
A sub-headline in the report showed that the median sales price of all homes sold in March increased by 2.5 percent to $200,700.
But don't assume that the housing market is improving because of a statistic like that because in the field of Statistics, median is just the "middle" in a group of numbers.
With respect to the Existing Home Sales, the median sales price is the price point at which half of all homes sold went for more, and half went for less.
If more homes sell in high-priced San Jose, CA than in low-priced Youngstown, OH, for example, the median will be skewed to the high-side. The reverse is true, too.
Median sales price make for good headlines, but it does nothing to talk about the local market and that's where real estate is bought and sold.
(Image courtesy: New York Times)
Posted on April 23, 2008
As mortgage lenders limit how much money they will lend and to whom, co-signing home loans is growing in popularity.
"Co-signing" a home loan is when a third-party -- usually a parent or relative -- promises to make repayments to the bank in the event that the borrower falls behind on his obligations.
Money experts usually advise against co-signing notes because of the long-term financial risks, but people still do it for a number of reasons including "wanting to help".
If you're thinking about co-signing a home loan for a friend or loved one, it's important to consider the implications of sharing credit with another person.
The four questions below may help you with your decision:
Not only can a co-signed home loan create serious financial burdens, but it's a long-term commitment, too.
Once the note is co-signed, the only way to separate the signers is terminate the note entirely. The two ways to accomplish that are to remortgage the home out of the co-signer's name, or to sell the home and retire the debt.
Co-signing on a mortgage is not "bad" but bad things can happen should the primary signer face personal and/or financial difficulties. Before agreeing to share credit, consider the implications should something go wrong.
Posted on April 22, 2008
The S&P 500 added 4.3 percent last week -- more than during all of 2007 -- in what was a good week for the economy and a bad week for mortgage rate shoppers.
After Friday's close, mortgage rates were higher by as much as 0.375% versus the Friday prior. This reversed a trend of falling rates for Americans.
In recent weeks, mortgage rates had been falling as investors fled risky stocks and parked their money in the bond markets.
A trading pattern such as this one is sometimes called "Flight to Quality" and it creates a high demand for all types of bonds. When bond demand is high, bond prices increase and that drives bonds' relative rates of return down.
Over this past week, however, the Flight to Quality unwound.
Investors saw opportunities for stock market gains and funded stock purchases by selling bonds that they had amassed over the weeks prior. This created an imbalance of bond supply versus bond demand and that caused bond prices to fall.
Naturally, the corresponding rates of return on the bonds rose.
And so, because mortgage rates are really just "rates of return" on mortgage-backed bonds, we can understand why mortgage rates suffered last week as the stock markets were gaining.
It wasn't anything fundamentally bad in the bond market as much as it was the attraction of stock market gains.
This week, there won't be much economic data to cross the wires but 160 companies in the S&P 500 will report their earnings. This could have a broad impact on mortgage rates, similar to last week.
If corporate earnings are stronger-than-expected, expect mortgage rates to continue higher as additional monies flow into stocks at the expense of bond markets.
Posted on April 21, 2008
In the world of real estate, Days On Market is the number of days between when a home lists for sale and when it goes under contract.
It is often abbreviated as DOM.
Average Days on Market is a similar statistic but instead of applying to one home in particular, it applies to all homes in a given neighborhood, ZIP code, or city.
Average DOM is calculated by adding the number of days for which every listed home in an area was available for sale, and then dividing that number by the total number of listings.
In a buyer's market, Average Days On Market is often elevated. This is because homes don't sell as fast as during a seller's market when the Average DOM can be quite low.
For buyers and sellers of real estate, Average Days On Market can be a strong indicator of home prices. When Average DOM falls, home prices tend to increase.
Posted on April 18, 2008
Credit scoring is becoming more important to mortgage pricing so now would be a terrific time to brush up on your credit education.
If you understand how the system works, after all, you can make it work to your advantage. One terrific place to start your research is at myFICO.com.
Published by credit scoring powerhouse Equifax, myFICO.com give you information right from the source. There are tens of pages of tips and tricks from which everybody can learn.
Here are some basic pointers to get you started:
Use It Or Lose It: If you don't use credit, the credit agencies can't assign you a credit score. Spend $10 monthly on your credit cards and then pay it in full to "get on the grid" and get yourself a score. 30 Is The Magic Number: Holding your credit card balances below 30 percent of their respective limits shows an ability to manage credit responsibly. Before consolidating multiple credit cards onto one credit line, consider that card's credit limit. Overload it and the consolidation could hurt your credit score. The Trend Is Your Friend: A track record of paying accounts on-time means that you're likely to continue paying on-time. Credit bureaus like on-time payments. If you've been late, catch up immediately. At 35 percent, this is the largest component of your credit score. History Is The Best Teacher: Don't close unused credit cards. Having a credit "history" accounts for 10 percent of your score.
Use It Or Lose It: If you don't use credit, the credit agencies can't assign you a credit score. Spend $10 monthly on your credit cards and then pay it in full to "get on the grid" and get yourself a score.
30 Is The Magic Number: Holding your credit card balances below 30 percent of their respective limits shows an ability to manage credit responsibly. Before consolidating multiple credit cards onto one credit line, consider that card's credit limit. Overload it and the consolidation could hurt your credit score.
The Trend Is Your Friend: A track record of paying accounts on-time means that you're likely to continue paying on-time. Credit bureaus like on-time payments. If you've been late, catch up immediately. At 35 percent, this is the largest component of your credit score.
History Is The Best Teacher: Don't close unused credit cards. Having a credit "history" accounts for 10 percent of your score.
There are more helpful hints available at the Web site so with additional credit score adjustments to mortgage rates expected later this year, the best way to protect yourself is to be proactive.
Identify potential issues in your credit profile and work to improve them.
Credit scoring is not always intuitive so if you're not getting the personal information you need from general Web sites, ask your loan officer for an in-depth analysis. The mortgage rate you save may be your own.
Posted on April 17, 2008
Average gas prices reached an all-time U.S. high Tuesday, touching $3.40 per gallon. San Francisco and Tulsa are the nation's bookends at $3.94 per gallon and $3.11 per gallon, respectively.
But before you wonder if relief is coming to your family budget, remember that "rising gas prices" is a conversation we have every April.
Using data from gasbuddy.com and looking back to 2004, we can see that gas prices tend to rise during the Spring season.
If the pattern holds, we'll should see another 10 percent increase at the pump before gas prices settle back down over the summer and fall months.
Posted on April 16, 2008
Today is Tax Day so here's some IRS-related trivia to share at the water cooler:
Did you know... President Lincoln and Congress enacted the first income tax in 1862 to pay Civil War expenses. Did you know... The Civil War income tax was repealed in 1872, revived by Congress in 1894, and ruled unconstitutional by the Supreme Court in 1895. Did you know... In 1913, Wyoming was the deciding vote in the 16th Amendment which gave Congress the authority collect income tax. Did you know... The first income tax was 1 percent on net personal incomes above $3,000. There was a 6 percent surtax on incomes over $500,000. Did you know... The first 1040 form was 4 pages long -- including instructions. Today, the instructions ALONE are 92 pages. Did you know... During World War I, the highest rate of income tax was 77 percent. Taxes were used to help finance the war. Did you know... In 1954, the tax filing date changed from March 15 to April 15. Did you know... Electronic filings started in 1986. Today, e-filings have an error rate of 0.5 percent versus an error rate of 21 percent for paper filings.
Did you know... President Lincoln and Congress enacted the first income tax in 1862 to pay Civil War expenses.
Did you know... The Civil War income tax was repealed in 1872, revived by Congress in 1894, and ruled unconstitutional by the Supreme Court in 1895.
Did you know... In 1913, Wyoming was the deciding vote in the 16th Amendment which gave Congress the authority collect income tax.
Did you know... The first income tax was 1 percent on net personal incomes above $3,000. There was a 6 percent surtax on incomes over $500,000.
Did you know... The first 1040 form was 4 pages long -- including instructions. Today, the instructions ALONE are 92 pages.
Did you know... During World War I, the highest rate of income tax was 77 percent. Taxes were used to help finance the war.
Did you know... In 1954, the tax filing date changed from March 15 to April 15.
Did you know... Electronic filings started in 1986. Today, e-filings have an error rate of 0.5 percent versus an error rate of 21 percent for paper filings.
And remember: If you don't file tax returns, the Treasury Department won't send your economic stimulus check. Happy April 15, everyone.
SourceA Brief History of the IRSIRS.govhttp://www.irs.gov/irs/article/0,,id=149200,00.html
Posted on April 15, 2008
Through 5 days of see-saw trading, mortgage rates ended last week relatively flat; the downward tick into Friday's close was a boon for home buyers this past weekend.
It may be short-lived, however.
Oil continues to sit near all-time highs and a slew of inflation-related data is crossing the wires this week.
When inflation pressures are high, mortgage rates rise.
The first piece of data is Retail Sales for March and it hits Monday at 8:30 A.M. ET.
Traders pay close attention to Retail Sales because consumer spending accounts for two-thirds of the economy. If sales growth is negative, it's unlikely that Americans will spend the economy out of its weakness.
That should bode well for mortgage rates because a sluggish economy can combat some forms of inflation.
Next, on Tuesday, markets will see the Producer Price Index from March and, on Wednesday, it will see the Consumer Price Index from March. These are "Cost of Living" measurement for businesses and consumers, respectively.
Over the past few months, rising energy costs have pushed both indices to record levels, taxing Americans on all fronts. Rising costs are the heart of inflation and this tends to push mortgage rates higher.
Another "hot" number this month will be bad for mortgage rate shoppers.
Also impacting mortgage markets this week will be the earnings reports of key financial companies including Washington Mutual, JPMorgan Chase, Wells Fargo, Citigroup, and Wachovia. This list is a Who's Who of mortgage-exposed banks and dramatic weakness will force investors to sell stocks in favor of bonds.
Because mortgage rates are based on the price of mortgage bonds, this sort of "safe haven" buying would lower rates.
Mortgage markets have been manic since the start of the year and there's no reason to expect a reprieve this week. It's data-heavy so if you see a rate you like, lock it before it's gone.
Posted on April 14, 2008
Getting approved for a conforming home loan is now tougher than before.
Again.
As home loan defaults mount, government-sponsored financier Fannie Mae has imposed new guidelines on what it will lend and to whom, highlighting the need for a strong credit profile and a downpayment.
In other words, Fannie Mae is outright declining mortgage applicants whose credit is weak and whose payment history shows signs of trouble. But, it's not just the "fringe" borrowers that are finding it harder to get a mortgage.
Buyers with strong credit profiles are being hit by new changes, too.
One such change says that owners of second homes must now have a 10 percent equity position in their homes; 15 percent if the property is in a "declining market".
This is up from 5 and 10 percent, respectively, and represents a growing trend to make homeowners have a "stake" in their own homes. Downpayment requirements are higher for all mortgage products, in general.
Fannie Mae's changes are the third set of restrictions imposed since December 2007 and more tightening is expected over the next few months. That makes now a compelling time to buy a home -- borrowing money will be more restrictive (and more costly) later.
If you are actively shopping for homes and have not been pre-qualified in the last few weeks, reach out to your loan officer and get checked against the latest set of mortgage guidelines.
It's better to know today than after you make an offer.
(Image courtesy: myFico.com)
Posted on April 11, 2008
In three weeks, the Federal Open Market Committee will meet again and markets anticipate another cut to the Fed Funds Rate.
Based on data compiled by the Federal Reserve Bank of Cleveland at the close of business yesterday, traders put the probabilities of the Fed's next move at:
Currently, the Fed Funds Rate is 2.250%.
Cuts to the Fed Funds Rate are meant to stimulate the economy by lowering borrowing costs for banks, businesses, and consumers. When less money is spent on interest payments, more money is available for goods and services and that tends propels the economy forward.
Cuts to the Fed Funds Rate, however, do not equal cuts to mortgage rates.
Mortgage rates are based on the price of mortgage bonds and -- although it exerts an influence -- the Federal Reserve does not set the prices for mortgage bonds any more than it sets the price for other investments such as stocks or mutual funds.
Since September 2007, the Federal Reserve has lowered the Fed Funds Rate by 3 percent. Over the same period of time, conforming mortgage rates have been mostly unchanged.
Posted on April 09, 2008
News sources like to use the term "credit crunch" in describing the U.S. economy, but they rarely define what a credit crunch is and what it means for Americans.
A credit crunch is when the amount of available loans suddenly decreases over a very short period of time.
Usually, it follows a period of lending which, in hindsight, becomes known for its "easy money".
The start of a credit crunch often coincides with consumer loans starting to go bad and lenders losses starting to mount.
The realization that more losses are ahead forces lending institutions to tightening their respective lending guidelines.
Since the current credit crunch began in mid-2007, Americans looking for credit now face:
And now, the newest symptom of the credit crunch: the largest buyer of mortgage loans -- Fannie Mae -- has instituted a new, 580 minimum score requirement for all mortgage applicants.
As consumer delinquencies mount and the economy continues to sputter, getting access to credit will likely get tougher for every American -- good credit and bad.
And that's the defining characteristic of a credit crunch.
SourceCredit CrunchWikipedia, April 8, 2008http://en.wikipedia.org/wiki/Credit_crunch
Posted on April 08, 2008
Mortgage rates edged lower last week, buoyed by a weak employment report for March.
After shedding 80,000 jobs last month, the number of working Americans is lower by 232,000 so far this year.
Many pundits are claiming these figures are proof of a U.S. economic recession but it's important to keep the data in perspective.
According to the government, there are 153 million people in the workforce.
The 232,000 terminated workers, therefore, represent a fractional 0.15 percent of the workforce. This is a very small percentage.
This week, there isn't much new data for markets to digest but we'll want to keep an eye on some important events.
The first is Monday's Consumer Credit report. As the Federal Reserve has lowered the Fed Funds Rate, Prime Rate has fallen, too, and that means that credit card interest rates are down.
The Consumer Credit report will show whether Americans are spending the country out of a recession. Ballooning national debt levels should cause mortgage rates to rise because more spending on the consumer level increases the likelihood of inflation later this year.
The second is Tuesday's release of the Federal Open Market Committee's March meeting minutes.
We know what the Fed said and did after its last meeting; the minutes, though, give us the "Behind the Scenes" look at the debate. There shouldn't be much in the minutes that we haven't already heard, but if there is, expect mortgage rates to swing wildly in response.
Other than that, there's not much doing this week. A few Federal Reserve speakers will be out and Friday we'll get to see the University of Michigan Consumer Sentiment survey.
The biggest threat to mortgage rates this week is ongoing news of financial stability (or instability) with large banks and investment houses.
Mortgage markets do not like it when banks go insolvent so be aware of that type of news if it surfaces because it can change the direction of mortgage rates in an instant.
(Image courtesy: The Wall Street Journal Online)
Posted on April 07, 2008
For the third month in a row, the economy shed jobs, suggesting that the U.S. is in a recession.
March's monthly loss of 80,000 jobs is the largest since March 2003 and follows January and February's losses of 76,000 each.
The weak data is edging mortgage rates lower as we head into the weekend.
The connection between poor jobs data and today's falling mortgage rates is a little bit strained, but worth discussing. It all comes down to expectations.
Prior to today, there was an expectation that the Federal Reserve's recent rate cuts would over-ignite the economy sometime this Summer. The Fed has cut 3 percent from the benchmark rate since September 2007.
Meanwhile, consumer spending makes up two-thirds of the economy and people can't spend if they don't earn.
So, after today's report showing fewer workers (and falling confidence levels to boot), the largest component of the economy is expected to sag for a while.
This lack of spending should offset the cumulative impact of the Fed's rate cuts and lowers the expectation for runaway inflation later this year.
Now for the connection: If inflation causes mortgage rates to rise, it's the absence of inflation that causes them to fall.
And that's precisely what we're seeing today.
Posted on April 04, 2008
More commonly called "points", discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates.
The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.
As a general guideline, each point paid lowers a mortgage lender's offered interest rate by 0.250%.
For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).
In addition to lowering your interest rate, discount points are usually tax-deductible, too. Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.
Lastly, as an added note: discount points should not be confused with origination points, a one-time charge for the lender's service appearing on Line 801 of the HUD-1 Settlement Statement. Origination points are not tax-deductible.
Posted on April 02, 2008
FHA stands for Federal Housing Administration, a by-product of the National Housing Act of 1934 and now a sub-group within the U.S. Department of Housing and Urban Development (HUD).
The FHA is not a lender nor does it build homes.
The FHA exists to insure lenders against loss in the event that a homeowner defaults on a mortgage.
Mortgages backed by FHA are often called "FHA loans" even though it's somewhat of a misnomer. A more appropriate name would be "FHA-insured" loans because that better describes the FHA's function.
With the FHA's guarantee, mortgage lenders are enticed to make loans on which they would otherwise pass and the explicit backing from the government holds mortgage rates low for borrowers.
FHA loans are often used by borrowers with less-than-20-percent downpayments and, therefore, tend to require mortgage insurance payments.
For FHA loans above 80%, mortgage insurance rates are 0.50% annually (paid monthly) with an up-front payment of 1.5% against the loan size and due at closing.
Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.
For all homeowners, though, when the loan balance reaches 78 percent of the home's value, the annual MI is no longer required.
Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative.
And often with lower rates.
SourceFHA LoanWikipedia, April 1, 2008http://en.wikipedia.org/wiki/FHA_loan
Posted on April 01, 2008