http://www.bloomberg.com/news/2010-08-24/u-s-has-realistic-chance-for-japan-style-stagnation-s-p-s-wyss-says.html
Negative pundits are cropping up every where, and some who were never too optimistic to begin with are getting even a bit more pessimistic. Take Joseph Stiglitz, for example, this Nobel Prize winning economist (I found one I like) thinks Europe has a serious threat of a double-dip recession due to its attempts to reign in government deficits to be less than 3% of GDP per year, a target he considers arbitrary and an objective he considers ill-conceived in the current environment.
http://www.bloomberg.com/news/2010-08-24/stiglitz-says-government-cuts-set-to-push-europe-into-double-dip-recession.html
I frankly agree with him. I am not a big fan of stimulus spending beyond what is need to maintain stability (and I have problems with where much of it is spent) but a heavy attack on government deficits at the moment is not the solution. Yes, to the extent a given sovereign is perceived by its lenders as problematic to the point it can no longer borrow on reasonable terms, that is a problem that might need to be attacked with austerity measures, but otherwise the goal should be to stabilize the economy with some government dollars and let it fix itself. Withdrawing government dollars now only worsens the GDP (ask Ireland) and exasperates the sovereign debt issues by lowering taxes and increasing unemployment. And when this takes place in multiple economically connected countries in the EU all at the same time there is a real chance of a nasty spiral effect throughout the entire EU, which may explain why investor confidence in Germany, a pretty well off country financially, is the worst it has been in 16 months.
Given that the EU is the largest single economy on earth if you treat it as one union, then you can see where it heading into a double-dip is not good for the rest of the world. Unless you still believe that decoupling thingy, we can all be in for a world of hurt if the EU has significant problems - i.e. above and beyond the problems we are facing here as well. And even though China has now passed Japan in terms of the size of their economies, now third to the EU and the U.S., it is still not nearly big enough to lift all these boats.
Refinance Debate
Okay, no real debate here; with mortgage loans at historic lows - 30 years fixed below 4.5% and adjustables under 4% - there is no question that if your rate is more than a couple of years old you should consider refinancing if you can. Sure, every one's situation is different. If your loan is close to being paid off or if monthly payments are already pretty small because you bought cheap, the savings may not pay the closing costs off very quickly or at all. But most folks looking at it would like to refinance if they can.
There are plenty of folks who cannot refinance for a multitude of reasons. These include:
- they are underwater on their homes or at least do not have enough equity to qualify;
- they have no job;
- they have poor credit;
- they cannot afford the closing costs; or
- they do not expect to be in their homes long enough for it to make sense.
Some of these reasons have no easy cure. If your credit rating is too low you need to do what you can to improve it and that can take time. No job - well you have worse things to worry about than refinancing. You cannot afford closing costs is one that is not a big problem. So long as you have enough equity and decent credit there are plenty of low to no closing costs options still available, so start looking and do the math. The problem I am personally dealing with is that due to price decreases, I do not believe I have 80% equity in my home. Absent 80%, I am looking at higher rates and/or PMI, which takes the benefit out of refinancing.
So here is the debate, do I take money out of my investments to increase my equity to 80% so I can refinance. I have come to the conclusion that I should, but this is personal to me and my situation. Let's say that I need around $10,000 to bring my house back up to the 80% mark. Add to that probably a couple thousand in closing costs and you have $12K up front to refinance. I calculate that refinancing will save me around $150 a month in payments. Accordingly, some would say, don't do it, it will take around eight years just to break even. But I do not see it that way.
Here is my logic. I figure the $10,000 more I sink into my house I will not lose unless my house somehow becomes worth less than $10,000. Barring a nuclear war, I do not see this happening. Sure, my house could lose $10,000 more in value but that loss will happen whether I put $10,000 more in or not. It has nothing to do with the $10,000 I put in. Accordingly, from my view, my principal, the $10,000, is about as safe as it can get locked up in my house.
Now I say "locked up" as that is the major issue with putting it into my house. Assuming you have the money, the question is whether you want to make it illiquid, perhaps very illiquid, by locking it up in your house. You need to consider how much savings you have, how many months you need to have set aside, etc. But if the money is not for liquidity needs but rather for long term investment, I propose that shifting it into the house - if needed to refinance - is not the worst investment you can make.
Back to my example, I am hypothetically putting $12 K up front into refinancing. $2000 of that is for closing costs, so that is out the window until I recoup it through reduced payments. With payments going down $150 a month, I will recoup that in just over a year, so not a big problem. If recouping it will take years, I would need to consider various other issues, including the years left on my existing loan, the years I plan to be there, etc. I am okay on these fronts.
But recouping the whole $12 K will take over 12 years and I do not plan on being in my current house 12 years, so does it make sense? I think for me it does. After a year the closing costs are paid off. After that I am getting an $1800 return on my $10,000 investment and, as explained above, the invested principal is very safe, though very illiquid. So I have to ask, where else can I get a guaranteed annual return of 18% (assuming I keep my house and do not default)? I am reducing my interest tax deduction minimally on the one hand but the 18% is in after tax money on the other, so the real return is much more than 18%. And so, I ask my readers, what am I missing here?
I know I need to consider the pros and cons of replacing a loan with a remaining term under 30 years with a loan with a 30 year term. Another alternative, however, is to cut several years off the loan term and keep my payments the same. My returns at that point are in eventual increased equity that is harder to quantify, but it should still be a good return that is quantifiable. Either way, I think I can trade in a very uncertain return on the $10,000 invested in equities for an investment with a defined very good return and very low risk to principal.
Obviously, few people are probably in my situation and everyone's situation is different, so everyone has different considerations they need to consider, but for me, when I figured out I could take some long term holdings I do not need to be liquid and turn them into a guaranteed high rate of return, it seems like a no brainer. The point being, if your home is below the 80% LTV figure and you think it makes no sense to refinance, you should look at other holdings, do the math, and see what works for you.
Disclosures: None.
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