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Apache is functioning normally

June 7, 2023 by Brett Tams

By Peter Anderson 3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 28, 2013.

Assuming  you are investing for future retirement, you should seriously consider the Roth IRA (Individual Retirement Account).  I am already a huge fan of the Roth, but as the national debt increases with each federal bailout, the Roth is looking better all of the time.  Let me explain why.

Save Taxes on Down The Road With The Roth IRA

With the traditional IRA, you get to deduct the contribution for the tax year it was made, but you will pay taxes when you start drawing the money out for retirement.  So whatever your tax rate is in retirement, that’s what you’ll be paying.

The Roth, on the other hand, is purchased after you have paid your taxes and is therefore tax free when withdrawn. Nothing like getting tax free withdrawals in retirement and not having to worry about paying taxes, right?

When deciding which one is best for you, conventional wisdom is that if you believe you will be in a lower tax bracket when you retire, you are better off with the traditional IRA.  Why?  Because you were able to claim a tax deduction at a higher percentage, but pay those taxes later at a lower percentage.

Will Tax Rates Get Cheaper?

But I ask you: do you seriously believe that  the tax structure when you retire will be essentially the same as it is today?  Is it possible that even if your retirement income is less than your working income,  your tax rate could be higher than it is today?

I just don’t see how we can ever pay down our $10 trillion national debt without hiking taxes.  My longhand math (calculators don’t have that many zeroes) indicates that we owe $30,000 for every man, woman and child in America.

To compound the problem,  the Social Security Trust Fund is scheduled for depletion in about 30 years unless “something” is done.  That ”something” will have to be higher taxes or less benefits.

Our future tax structure is very uncertain because of our national crash course with debt.  Pay your taxes today with a Roth instead of gambling your retirement on the uncertainty of future tax rates.

Tax rates aren’t the only reason to be checking out the Roth IRA. Check out this list of 10 Reasons To Own A Roth IRA.   Among the reasons that you’ll find include the flexibility of being able to withdraw your contributions (but not earnings) at any time, being able to save for college or home costs in the account and being able to diversify your tax treatment on your retirement accounts if you continue to have a traditional IRA as well.

More Roth IRA Details

Want some more infomation on the Roth IRA, who is eligible, how much you can contribute and more?  Check out these articles on 2013 Roth IRA rule changes, phaseout limits on the Roth, who is eligible for the Roth IRA and everything you need to know about the Roth Conversion Event.

 Joe Plemon of Plemon Financial Coaching is the Money Columnist for The Southern Illinoisan.

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Source: biblemoneymatters.com

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Apache is functioning normally

June 6, 2023 by Brett Tams

Now, AI is not the future of the mortgage industry – it is the present. Shannon Johnson (pictured), product manager at Tavant, has worked in the mortgage industry for almost 35 years, starting as a loan processor, and has seen how much the field has changed technologically over the decades. “When I started in the … [Read more…]

Posted in: Refinance, Savings Account Tagged: About, AI, banks, before, big, business, crash, decades, Financial Wize, FinancialWize, future, hot, in, industry, job, learned, lending, loan, Mortgage, mortgage lending, Move, new, new technology, opportunity, present, ready, Technology

Apache is functioning normally

June 6, 2023 by Brett Tams

Save more, spend smarter, and make your money go further

Whether you know it as a snowpocalypse, a snowmageddon, or the ever-popular “oh no, not this again,” there’s no denying that giant snowstorms are a pain for just about everybody who has to deal with them.

And it’s not just because snow is cold. It’s also because a snowpocalypse can cost you a good deal of money.

If you live in the Northeast, Central North, or anywhere else that snow is prevalent, here’s what you spend each winter, on average … and how to deal with snow more cheaply.

Snow Shovels

Here’s an investment few Floridians need to worry about. Everybody who gets snowed upon has held many a shovel in their life, and has likely purchased many over the years.

No one shovel is terribly expensive, mostly running between $15 to $30.

Unfortunately, even the best shovels don’t last forever, especially if you’re dealt the “heavy slushy snow” card, so you’re likely buying at least one new shovel every winter.

After all, if all you have is an old bent shovel, you might as well scoop away the snow with your bare hands.

Scrapers

No northern vehicle is complete without at least one brush/scraper combo floating around the backseat just waiting for its inevitable use.

Most run between $5 and $20, but you always need to prepare for having to buy a new one.

Brushes bristle, scrapers lose their teeth, and suddenly you can’t get to work on time because you didn’t spend five bucks on a new scraper.

Nobody likes that, least of all your boss.

Snowblowers

If you don’t want to deal with the back-breaking work of shoveling, you can always purchase a snowblower.

Unfortunately, a decent one can run you about $800, which is the price you pay for convenience.

Luckily, you can also purchase a power shovel for far less, around $100.

They don’t chuck the snow as far away from you as a snowblower will, but if your only goal is to clear a small driveway, it might be worth the purchase.

Accidents

Though towns do their best to clear the roads during a snowmageddon, sometimes they’re just plain icy and slippery.

And that’s when bad things happen.

If you’re driving along and suddenly start sliding every which way, only stopping once you crash into a heavy snow bank, your day has just been ruined, as has your bank account.

Even a small bit of bumper damage can run you $1000, while a totaled vehicle could cost you $15,000, especially if the insurance company invents a brand-new excuse to not help out.

Heating Costs

Unless you’re fine with shivering violently until April, chances are you’re going to turn the heat up during a snowpocalypse.

Doing so will keep you toasty, but also leave your wallet empty.

Even with a multitude of ways to save on heat and lower your bill, you should still expect to pony up just under $1000 come wintertime.

Though it’s a rough estimate, and everybody’s mileage can vary, the average cost of dealing with a snowy winter is about $2500. You can cut this number down by preparing your home, reducing heating costs, and taking advantage of other wintertime hacks.

As you can see, a snowpocalypse isn’t just a simple matter of “shovel, salt, and go.” There’s a lot to think about, especially once the falling white stuff compromises your bank account.

Do you have your own Snowpocalypse savings tip? Share it with the community below.

Mary Hiers is a personal finance writer who helps people earn more and spend less.

Save more, spend smarter, and make your money go further

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Apache is functioning normally

June 4, 2023 by Brett Tams

Think mortgage rates are high now? Connie Strait remembers when she was starting her career in real estate in the early 1980s and buyers were contending with rates three times higher.

Strait recalled one couple who were actually relieved when they locked in a 30-year fixed-rate mortgage at 19% in September 1981. The couple had told her they were hoping to close on their new home before rates moved any higher.

“They were so delighted to be closing at 19%,” said Strait, who now works at William Raveis Real Estate in Danbury, Connecticut. “They said, ‘We made it in just under the wire, next week it is going to 20%!’”

The following month, in October 1981, the average weekly interest rate for a 30-year, fixed rate loan hit an all-time high of 18.6%, according to Freddie Mac. The average mortgage rate is based on a survey of conventional home purchase loans for borrowers who put 20% down and have excellent credit. But many buyers pay even more.

This week, the 30-year fixed-rate mortgage rate hit an average of 6.70%. Although it may come as cold comfort to someone who let a 3% rate slip through their fingers just seven months ago, today’s interest rates are, historically speaking, still relatively low.

“Unfortunately, now people don’t remember how Baby Boomers were getting rates of 10%, 12% and higher for most of the 1980s,” Strait said. “Meanwhile, our kids are shocked by 6%.”

Those ultra-high rates made homeownership less affordable in the early 1980s than it is now. By the mid-1980s though, mortgage rates had fallen somewhat, making financing more affordable, even with rates near 10%.

But many things have changed since the 1980s.

Given wage growth, sky-high home prices and rapidly rising interest rates, homes today are the least affordable they have been in 35 years.

Home affordability has worsened

Mortgage rates were high in the 1980s, but home prices were a lot less expensive, too.

In October 1981 a typical home cost $70,398. But with mortgage rates averaging 18.45% that month, the $870 monthly payment took up about 55% of the median income at the time, according to Black Knight, a mortgage data company.

By October 1986, rates had dropped to 9.97% and a typical home was $91,488. That brought the monthly payment down to $640, and took up just 30% of the median income.

“If you reduce interest rates by 8.5% that doubles your buying power,” said Andy Walden, vice president of enterprise research at Black Knight.

With the typical home currently costing $434,978, and rates over 6%, the monthly mortgage payment of $2,061 eats up more than 36% of the median monthly income, according to Black Knight.

“When we lower interest rates it allows home prices to grow much more quickly than incomes,” said Walden. “It gives folks the ability to buy more home with the same amount of income. So a 1% decline in interest rates allows you to buy 10% to 12% more home, with the exact same amount of money.”

Interest rates have been below 5% for the past 11 years, with the weekly average reaching an all-time low of 2.65% in January 2021. That’s part of the reason why home prices are so high today.

Incomes aren’t keeping up

Making affordability matters worse, home prices are significantly out of whack with income levels.

Over the past five years, while the average home price has gone up 60%, the average income has risen less than 15%.

“We now have the highest ratio of home price to income that we’ve seen in the past 50 years plus,” said Walden. “We have data going back to 1970 and it is the highest we’ve seen by far.”

Historically, home prices were between three to four times the median income, a ratio that remained consistent from 1975 until 2000, according to Black Knight. In 2000, as interest rates began to drop below 8%, the ratio began to rise, reaching a point in 2005 where home prices were almost five and a half times the median income.

The sharp rise in 2005 was largely fueled by expanded credit in the mortgage market, said Walden, with mortgages being offered based on a buyer’s unverified income, and through products like interest-only, adjustable-rate and negative amortizing loans.

“That allowed those shopping to buy more home than their income level would traditionally support,” he said. It also created a bubble that led to the 2008 housing crash.

Today, the typical home price is six times the median household income of about $71,000.

Credit availability has greatly increased

Another reason why rates were so high in the 1980s was that there was less credit available to borrow, making it more difficult and costly for buyers to secure a mortgage. Banks had to charge higher rates for taking on the risk. But today’s mortgages are often bundled and sold into investment products. That secondary market makes it profitable for lenders to give loans to many more people, and at lower interest rates.

“Back in the early 1980s, rates were in the mid- to upper-teens,” said Pete Miller, senior vice president for residential policy at the Mortgage Bankers Association. “Part of the reason was that the supply of mortgage credit was more constrained. We didn’t have the secondary market liquidity we have today.”

Miller – who bought his first home in California in the mid 1980s with a 13% adjustable rate mortgage – said 6% for a fixed-rate 30-year loan is historically a very good interest rate.

“I remember when interest rates went to single digits and saying, ‘I thought that would never happen.’”

Source: cnn.com

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Apache is functioning normally

June 3, 2023 by Brett Tams

It’s almost mid-December, which means it is time for another round of mortgage and real estate predictions for the upcoming year.

I think it’s safe to say that 2021 has been another stellar year for both the mortgage industry and the housing market.

But it’s going to be hard to top or even match what we’ve experienced this year in terms of mortgage origination volume and home price gains.

However, the party might not be over yet, with additional home price gains on the horizon due to similar factors in play.

Let’s see what 2022 might have in store as we once again look into the crystal ball.

1. Mortgage rates will go up, but only slightly.

Experts have been calling this for years to no avail. We have been told year in and year out that the low mortgage rates are leaving the station.

But year after year, they remain. In 2022, I do expect them to rise somewhat, but not by a meaningful amount.

Sure, your 30-year fixed rate may go from 3% to 3.5%, but that’s not a huge jump. And any 30-year fixed in the 3s is generally very favorable.

It will put pressure on prospective home buyers who also have to grapple with rising home prices and a lack of inventory.

And it will certainly dent mortgage refinance demand, as most existing homeowners have already locked in a lower rate.

However, as I said in my 2022 mortgage rate predictions post, there will likely be opportunities during the year to snag a very low mortgage rate.

Why? Because the economy continues to be a bit of a mess and we’re still sorting out COVID. Until we put that stuff behind us, interest rates could swing in both directions.

2. Home prices will continue to rise a lot

Don’t be fooled by the old mortgage rates up, home prices down fallacy. There’s not a negative correlation, despite what everyone plainly assumes.

Both can go up at the same time, and that’s exactly what I expect to happen in 2022. Granted, mortgage rates will probably only rise slightly, while home prices will continue to surge.

For some reason, a new year gives folks new hope that a trend will simply come to an end.

But why would home prices just stop going up because it’s a new calendar year? The answer is they won’t.

As I’ve said before, the same fundamentals that have been at play for some time, continue to be in play.

There’s a severe lack of inventory and a surplus of would-be home buyers out there. It doesn’t take a genius to figure out what happens with prices.

When there’s a shortage of something people want/need, a premium must be paid until production ramps up.

Unfortunately, production (new home building) is still way behind and won’t catch up for a while.

In the meantime, expect more of the same, and higher 2022 home prices across the board.

The only difference is that estimates are all over the place, with some calling for just a 2.5% increase (CoreLogic) and others saying 11% (Zillow) or even 16% (Goldman Sachs) .

Personally, I’m bullish and going with the higher figures out there, but recognize gains will probably be lower in 2022 than they were this year.

3. Cash out refinances will finally get hot

cash out share

Housing pundits have been talking about the massive pile of collective home equity we’ve been sitting on for years now.

And it has only grown even larger since then, with equity levels the highest on record.

In short, American homeowners have a ton of equity in their properties that is ripe for tapping via a cash out refinance or a second mortgage, such as a HELOC.

But we have yet to see a massive cash out boom like the one experienced in the early 2000s housing market.

I expect cash out refis and HELOCs to have their day in the sun in 2022 as more and more homeowners realize how much their properties have appreciated.

Per Freddie Mac, about 42% of refinances resulted in cash out this year, which is up a bit from prior years, but nowhere close to the 80%+ share seen in 2006 and 2007.

Despite slightly higher mortgage rates, it may still be worth unlocking this valuable equity to pay for upgrades, college tuition, and other expenses.

After all, a 3% 30-year fixed rate is still phenomenal, and many homeowners can take out a large sum of money while keeping their loan-to-value (LTV) ratio very low.

And you can expect mortgage lenders to aggressively pitch this product now that rate and term refinances have mostly been exhausted.

4. The bidding wars will remain (and may even worsen)

It won’t get any easier buying a home next year. Even if mortgage rates are slightly higher, this won’t “bring prices down to earth.”

I keep hearing that line and it just doesn’t make any sense. Financing has never been the problem here. It’s always been a lack of supply.

And there will continue to be a lack of supply well into 2022, so why should competition be any less?

If anything, I could see more desperation fueled by these expected higher interest rates as buyers won’t want to miss out on their low rate too.

If you think about the last few years, at least mortgage rates were rock bottom. Now that you’ve got to worry about a rising rate and finding a home, the panic could be even more pronounced.

As always, prepare yourself adequately, start looking for a home immediately, and be aggressive if you want to win the bidding war.

Oh, and make sure you use an experienced real estate agent who knows how to get the job done.

5. Home sales volume will be flat or even lower next year

2022 home sales

While Redfin believes new listings will hit a 10-year high next year, I’m not so sure.

As much as there is motivation to sell a home due to sky-high asking prices, there remains the dilemma of where to go next.

Sure, you might be able to move to a different state, but those “cheap states” aren’t so cheap anymore.

At the same time, supply chain issues and a lack of workers is making it hard for home builders to ramp up supply of new homes.

Collectively, this will make it difficult for home sales to increase next year, as much as we all want to make a mint selling our homes.

This also reinforces the idea that home prices will continue to go up, and that the housing market will remain super competitive.

That being said, it will be a very lively housing market in 2022, just not one that necessarily sees a lot of growth.

6. Home buyers will continue to flock to new states

2022 hot housing markets

Yes, the cheap states aren’t so cheap anymore. But that won’t stop people from getting out of town.

Many young, prospective home buyers have been priced out of their local markets in California and other hot spots.

This, combined with the work-from-home new normal (sprinkle in some politics), will fuel a continuation of migration seen in recent years.

This means more folks from the Golden State will make the move to nearby states such as Arizona, Idaho, Nevada, Texas, and Utah.

While more affordable for them, it will exacerbate those local markets and make them more expensive for the people who already rent there.

Some of the hottest housing markets of 2022 include Salt Lake City, Utah, Boise, Idaho, Spokane, Washington, Indianapolis, Indiana, and Columbus, Ohio.

Basically any metropolitan area that was/is considered cheap and desirable will be less so next year as the out-of-state home buyers storm in.

So no matter where you happen to be, expect a fierce seller’s market.

7. First-time home buyers will purchase a second home or investment property (first)

This is an interesting one that I’m borrowing from Zillow because it’s seemingly odd, yet kind of savvy. And so 2021 and beyond.

Typically, a first-time home buyer will purchase a home to live in nearby where they work.

But because the real estate market is so hot and in such short supply, high-earning, cash-rich Millennials and Gen Zers may actually buy a second home or investment property instead.

The thinking is that they can get in on the real estate market by making an investment, even if it’s not in their overpriced backyard.

For example, a well-earning Gen Zer who lives in Santa Monica that may be priced out there could purchase a more affordable second home in Phoenix, Arizona, or an investment property in Las Vegas, Nevada.

Of course, this isn’t necessarily for the faint of heart, and this is exactly the type of thing that leads to trouble down the road.

But as long as mortgage lenders don’t get too careless with underwriting standards, it doesn’t signal the start of a housing crisis.

It does tell you just how crazy real estate has gotten though.

8. Home buyers will return to the city

condo search

While the suburbs have been hot in our post-COVID-19 world, I do believe more buyers will start to consider the city life again.

We will get through this pandemic, and once life returns to mostly normal, lots of folks will wish they owned in an urban center.

Prices in many once-hot areas close to lots of cool restaurants, bars, etc. have been deflated, but I expect that to reverse course in 2022.

The urban living trend isn’t going to disappear, even if more people work from home, or desire abundant outdoor space.

So look out for condo prices to see more price gains in 2022 and beyond, and play catch up with single-family residence gains.

There’s already proof in data here – Redfin noted that users filtered searches to single-family homes only (excluding condos/townhomes) in just 28% of searches in September.

That was down from a high of 37% in July 2020, when living in a city seemed unthinkable.

Condos also tend to appreciate the most at the tail end of a housing boom, which we could be approaching, so it all kind of makes sense.

9. There will be more layoffs, closures, and mergers

While there is some hope that cash out refis and home purchase loans will keep mortgage volumes afloat, it won’t be enough for all mortgage lenders out there.

For example, Freddie Mac is forecasting $2.1 trillion in home purchase origination in 2022, up from $1.9 trillion this year.

But also expects refinance origination volume to fall from $2.5 trillion to $995 billion. That’s gonna be a problem for the shops that specialize in refinances.

Ultimately, total volume dropping from $4.5 billion to $3 billion will be an issue and there’s no way around it.

As a result, you can expect more mortgage layoffs, similar to the Better.com layoffs, along with some outright closures.

I also believe there will be more consolidation in the fragmented mortgage market, with bigger banks and lenders swallowing up smaller ones.

10. The housing market won’t crash in 2022

I already said home prices will go up, but I’ll reiterate that the housing market won’t crash in 2022, either.

There is a large group of people who believe the housing market is due for a correction, mostly just because home prices have gone up a ton.

Sure, it’s easy to raise eyebrows these days when looking up what your house is worth, or your neighbor’s.

But that alone isn’t enough to make them reverse course, especially when there is a continued, historic lack of supply.

Additionally, mortgage lenders have yet to return to the loose underwriting that dominated the space in the early 2000s, and ultimately created the mortgage crisis.

For me, that means another year of strong housing appreciation, and another year without a housing market crash.

At the same time, it does mean we will be one year closer to a crash, which as history tells us, is inevitable.

(photo: Quinn Dombrowski)

Source: thetruthaboutmortgage.com

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Apache is functioning normally

June 3, 2023 by Brett Tams

A Minsky moment is an economic term describing a period of optimism that ends with a market crash. It describes the point at which a market boom marked by speculative trading and increasing debt suddenly gives way to a freefall marked by plunging market sentiment, asset values, and economic activity.

It is named for American economist Hyman Minsky, who studied the characteristics of financial crises, and whose “financial instability hypothesis” offered reasons why financial markets were and would be inherently unstable. Minsky died in 1996, and the phrase “Minsky moment” was coined in 1998, when a portfolio manager used it in reference to the 1997 Asian debt crisis, which was widely blamed on currency speculators.

How Does a Minsky Moment Happen?

A Minsky Moment refers to something sudden, though the economist maintained that it doesn’t arise all at once. He identified three stages by which a market builds up to the convoluted speculation and complete instability that finally undoes even the longest bull markets.

1.    The Hedge Phase: This often comes in the wake of a market collapse. In this phase, both banks and borrowers are cautious. Banks only lend to borrowers with income to cover the principal of the loan and interest payments; and borrowers are wary of taking on more debt than they’re highly confident they can repay entirely.

2.    Speculative Borrowing Phase: As economic conditions improve, debts are repaid and confidence rises. Banks become willing to make loans to borrowers who can afford to pay the interest but not the principal, but the bank and the borrower don’t worry because most of these loans are for assets — stocks, real estate and so on — that are appreciating in value. The banks are also betting that interest rates won’t go up.

3.    The Ponzi Phase: The third and final phase leading up to the Minsky Moment is named for the iconic fraudster Charles Ponzi. Ponzi invented a scheme that offers fake investments, and gathers new investors based on the returns earned by the original investors. It pays the first investors from new investments, and so on, until it collapses.

In Minsky’s theory, the Ponzi phase arrives when confident borrowers and lenders graduate to a new level of risk-taking and speculation: when lenders lend to borrowers without enough cash flow to cover the principal payments or the interest payments. They do so in the expectation that the underlying assets will continue rising, allowing the borrower to sell those assets at prices high enough for them to cover their debt.

The longer the growth swing in the market, the more debt investors take on. While those investments are still rising and generating returns, the borrowers can use that money to pay off the debt and the interest payments. But assets eventually go down in value, in any market, even just for a while.

At this point, the investors are relying on the growth of those assets to repay the loans they’ve taken out to buy them. Any interruption of that growth means they can’t repay the debt they’ve taken on. That’s when the lenders call in the loans. And the borrowers have to sell their assets — at any price — to repay the lenders. When there are thousands of investors doing this at the same time, the values of the underlying assets plummet. This is the Minsky moment.

In addition to plunging prices, a Minsky moment is usually accompanied by a steep drop in market-wide liquidity. That lack of liquidity can stop the daily functioning of the economy, and it’s the part of these crises that causes central banks to intervene as a lender of last resort.

The Minsky Moment and the 2008 Subprime Mortgage Crisis

The 2008 subprime mortgage crisis offered a very clear and relatable example of this kind of escalation, as many people borrowed money to buy homes they couldn’t afford. They did so believing that the property value would go up fast enough that they could flip the house to cover their borrowing costs, while earning a tidy profit.

Minsky theorized that a lengthy economic growth cycle tends to generate an outsized increase in market speculation. But that accelerating speculation is often funded by large amounts of debt on the part of both large and small investors. And that tends to increase market instability and the likelihood of sudden, catastrophic collapse.

Accordingly, the 2008 financial crisis was marked by a sudden drop and downward momentum fueled investors selling assets to cover short-term debts. Some of those included margin calls, which are when an investor is forced to sell securities to cover the collateral needed to borrow money from a brokerage.

How to Predict the Next Minsky Moment

While Hyman Minsky provided a framework of the three escalating phases that lead up to a market collapse, there’s no way to tell how long each phase will last. Using its framework can help investors understand where they are in a broader economic cycle, but people will disagree on how much debt is too much, or the point at which speculation threatens the stability of the markets.

Most recently, market-watchers keep an eye on the high rates of corporate debt in trying to detect a coming Minsky moment. And even the International Monetary Fund has sounded warning bells over high debt levels, alongside slowing growth around the planet.

But other authorities have warned of other Minsky moments over the years that haven’t necessarily happened. It calls to mind the old joke: “The stock market has forecast nine of the last five recessions.”

The Takeaway

A Minsky moment is named after an economist who described the way that markets overheat and collapse. And the concept can help investors understand where they are in a market cycle. It’s a somewhat high-level concept, but it can be useful to know what the term references.

There’s also a framework that may help investors predict, or at least keep an eye out for, the next Minsky moment. That said, nobody knows what the future holds, so that’s important to keep in mind.

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Apache is functioning normally

June 2, 2023 by Brett Tams

Deflation is essentially the opposite of inflation. It occurs when the prices consumers pay for goods and services goes down. That means that consumers can purchase more with the same amount of money.

There are many factors that cause deflation, which happens when the supply of goods and services is higher than the demand for them. While deflation can have some benefits to consumers, it’s often a sign of trouble for the overall economy.

What Happens During Deflation?

In addition to knowing what inflation is, it’s important to understand how it impacts the economy. In a deflationary economy, prices gradually drop and consumers can purchase more with their money. In other words, the value of a dollar rises when deflation happens.

It’s important not to confuse deflation with disinflation. Disinflation is simply inflation decelerating. For example, the annual inflation rate may change from 5% to 3%. This variation still means that inflation is present, just at a lower rate. By contrast, deflation lowers prices. So, instead of prices increasing 3%, they may drop in value by 2%.

Although it may seem advantageous for consumer purchasing power to increase, it can accompany a recession. When prices drop, consumers may delay purchases on the assumption that they can buy something later for a lower price. However, when consumers put less money into the economy, it results in less money for the service or product creators.

The combination of these two factors can yield higher unemployment and interest rates. Historically, after the financial crises of 1890, 1893, 1907, and the early-1930s, the United States saw deflationary periods follow.

How Is Deflation Measured?

Economists measure deflation the same way they measure inflation, by first gathering price data on goods and services. The Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) record and monitor this type of data in the United States. They collect pricing information that they then put into buckets reflecting the types of goods and services consumers generally use.

While these buckets do not include every product and service; they offer a sample of items and services consumed. In the United States, economists incorporate these prices into an indicator known as the Consumer Price Index (CPI).

Then, economists can compare the CPI to previous years to determine whether the economy is experiencing inflation or deflation. For example, if the prices decrease in a period compared to the year before, the economy is experiencing deflation. On the other hand, if prices increase compared to the previous year, the economy is experiencing inflation.

What Causes Deflation?

Deflation comes from a swing in supply and demand. Typically, when demand dwindles and supply increases, prices drop. Factors that may contribute to this shift include:

Rising Interest rates

When the economy is expanding, the Federal Reserve may increase interest rates. When rates go up, consumers are less likely to spend their money and may keep more savings to capitalize on the increase in rates.

Also, the cost of borrowing increases with the rise of interest rates, further discouraging consumers from spending on large items.

Decline in Consumer Confidence

When the country is experiencing economic turbulence, like a recession, consumers spend less money. Because consumers tend to worry about the direction of the economy, they may want to keep more of their money in savings to protect their financial well-being.

Innovations in Technology

Technological innovation and process efficiency ultimately help lower prices while increasing supply. Some companies’ increase in productivity may have a small impact on the economy. While other industries, such as oil, can have a drastic impact on the economy as a whole.

Lower Production Costs

When the cost to produce certain items, such as oil, decreases, manufacturers may increase production. If demand for the product stagnates or decreases, they may then end up with excess supply. To sell the product, companies may drop prices to encourage consumer purchases.

Why Does Deflation Matter?

Although falling prices may seem advantageous when you need to purchase something, it’s always not a good sign for the economy. Many economists prefer slow and unwavering inflation. When prices continue to rise, consumers have an incentive to make purchases sooner, which further boosts the economy.

One of the most significant impacts of deflation is that it can take a toll on business revenues. When prices fall, businesses can’t make as much money.

The drop in business profits makes it challenging for companies to support their employees, leading to layoffs or pay cuts. When incomes go down, consumers spend less money. So deflation can create a domino effect impacting the economy at many different levels, including lower wages, increased unemployment, and falling demand.

Deflation During The Great Depression

The Great Depression is a significant example of the potential economic impact of a deflationary period. While the 1929 stock market crash and recession set this economic disaster off, deflation heavily contributed to it. The rapid decrease in demand along with cautious money hoarding led to falling prices for goods and services. Many companies couldn’t recover and shut down. This caused record-high unemployment in the United States, peaking at 25%, and in several other countries as well.

During this time, the economy continued to experience the negative feedback loop associated with deflation: cash shortages, falling prices, economic stagnation, and business shutdowns. While the United States has seen small episodes of deflationary periods since the Great Depression, it hasn’t seen anything as substantial as this event.

How to Manage Deflation

So, what can the government do to help regulate inflation? For starters, the Federal Reserve can lower interest rates to stimulate financial institutions to lend money. The Fed may also purchase Treasury securities back to increase liquidity that may help financial institutions loan funds. Those initiatives can increase the circulation of the money in the economy and boost spending.

Another way to manage deflation is with changes in fiscal policy, such as lowering taxes or providing stimulus funds. Putting more money in consumers’ pockets encourages an increase in spending. This, in turn, creates a chain effect that may increase demand, increase prices, and move the economy out of a deflationary period.

The Takeaway

Deflation refers to a period that can be thought of as the opposite of inflation. It occurs when the prices consumers pay for goods and services goes down, which means that consumers can purchase more with the same amount of money.

When the economy is experiencing some turbulence, some investors may choose to keep their money in savings. On the other hand, other investors may see falling prices as an opportunity to purchase securities at a discount, either to hold or to sell when the economy recovers. Like any other investment strategy, investors must base their investment decisions on their personal preferences since there are no guaranteed results.

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Apache is functioning normally

June 1, 2023 by Brett Tams

Damage has already occurred While it appears both sides are coalescing toward a compromise, Cohn said damage had already been done. “Fitch last week, at the end of the week, put Fannie and Freddie on warning they could lose their rating if the government were to default,” she noted as an example of the negative … [Read more…]

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Apache is functioning normally

June 1, 2023 by Brett Tams

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The Great Financial Crisis of the late 2000s was the worst economic calamity since the Great Depression. Most agree that lax regulation of banks and other financial institutions set the stage for the risky lending and trading practices that caused it. 

Congress responded to the crisis — and attempted to prevent anything similar from happening again — by passing the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Named for then-Sen. Chris Dodd and then-Rep. Barney Frank, Dodd-Frank was a sweeping piece of legislation that imposed new restrictions on how financial institutions operate and enshrined new protections for individual borrowers, bank account users, and investors.

Not everyone was happy with the outcome. Right away, banks and their Congressional allies worked to weaken it. They claimed partial victory in 2018 with the passage of the Economic Growth, Regulatory Relief & Consumer Protection Act, which eliminated or softened key parts of Dodd-Frank. 

Some argue that this set the stage for the failure of Silicon Valley Bank and a handful of other big regional banks in 2023. The truth is more complicated — and more interesting.

What Is the Dodd-Frank Act of 2010?

The Dodd-Frank Act of 2010 is a financial regulation and consumer protection law that significantly changed how banks and investment firms operated. 

For most consumers, Dodd-Frank’s most visible provisions were a slew of new protections for borrowers and the creation of the Consumer Financial Protection Bureau (CFPB), which among other things helped track and enforce those new regulations.

Less visibly but perhaps even more consequentially, Dodd-Frank fundamentally changed federal oversight and regulation of the financial industry. Along these lines, its key elements included:

  • Creating new financial oversight agencies. Dodd-Frank authorized two new financial regulatory agencies: the Financial Stability Oversight Council and the Office of Financial Research. It tasked these agencies with monitoring banks’ financial health and risk-taking behavior in the hopes of spotting trouble before it threatens the wider financial system. 
  • Giving the Federal Reserve new powers to regulate big banks. Dodd-Frank gave the Federal Reserve new powers to monitor systemically important (“too big to fail”) banks. It set the threshold to qualify as a systemically important bank at $50 billion in assets.
  • Prohibiting banks from making certain speculative investments (Volcker Rule). Named for former Federal Reserve Chair Paul Volcker, this provision banned banks from trading financial assets with their own money for the purpose of turning a profit. It also prevented banks from owning hedge funds, private equity funds, or venture capital funds.
  • Establishing a new process for winding down failed companies. Dodd-Frank created the Orderly Liquidation Authority and tasked it with winding down major corporate failures in a way that minimized economic fallout.
  • More aggressively regulating the financial instruments that caused the Great Financial Crisis. Dodd-Frank tightened regulations on credit-default swaps, the complex financial instruments that sparked the Great Financial Crisis. It didn’t ban them outright but did require that they be sold through clearinghouses or stock exchanges, similar to many other market-traded securities.

Partial Dodd-Frank Act Repeal in 2018 — Economic Growth, Regulatory Relief & Consumer Protection Act

In 2018, Congress passed the Economic Growth, Regulatory Relief & Consumer Protection Act. 

The law was specifically intended to repeal parts of the Dodd-Frank Act that were unpopular with the financial industry and other business interests. However, it left large swathes of Dodd-Frank intact, including the CFPB and some other important consumer protections.

Changes Affecting Smaller Community Banks

Most Economic Growth Act provisions applied to community banks with less than $10 billion in assets. The biggest change was exempting these banks from the Volcker Rule, but there were a lot more technical tweaks that combined to significantly reduce their regulatory burden. If you’re interested in the details, Indiana Sen. Todd Young’s office put out a comprehensive, easy-to-understand fact sheet at the time.

Notably, the Economic Growth Act didn’t exempt banks as big as Silicon Valley Bank, First Republic Bank, or Signature Bank from the Volcker Rule. However, an important Federal Reserve policy change did relax the Volcker Rule in 2020, allowing bigger banks to invest their own money in venture capital funds and other risky assets.

Change Affecting Larger Regional Banks

The act’s most consequential change applied to much larger banks. This raised the too-big-to-fail threshold from $50 billion to $250 billion in assets. Dozens of banks that previously counted as too big to fail were exempted overnight, including several banks that failed in 2023: Signature Bank, Silicon Valley Bank, and First Republic Bank. 

They were no longer subject to direct supervision by the Federal Reserve and could reduce the amount of capital they held in reserve. Silicon Valley Bank, in particular, deployed some of its now-excess capital in investments that eventually lost significant value.

Only the biggest banks in the United States — fewer than 20 at the time — remained subject to the stricter scrutiny that came with too big to fail status. Importantly, Silicon Valley Bank aggressively lobbied Congress to raise the too-big-to-fail threshold high enough to exempt it. It had a clear motive to do so, as it primarily served tech entrepreneurs and venture capitalists awash in risky investment opportunities the Volcker Rule prevented it from pursuing. 

This was the Economic Growth Act change that may have contributed to the 2023 banking crisis. Combined with the Federal Reserve’s relaxation of the Volcker Rule, it set the stage for banks to take greater risk with less supervision, which many believe contributed directly to the failures of 2023.

Did the Economic Growth, Regulatory Relief & Consumer Protection Act Contribute to the 2023 Banking Crisis

To understand the 2023 banking crisis, it’s crucial to understand the economic and regulatory environment leading up to it.

  • Looser regulatory oversight. The increase in the too-big-to-fail threshold excluded all three of the banks that failed in 2023. This meant that they were no longer subject to direct supervision by the Federal Reserve and the requisite frequent stress tests, which measure banks’ capacity to endure various hypothetical-but-realistic economic scenarios. 
  • Lower liquidity requirements. They also weren’t required to maintain as much liquidity, or capital in reserve. Essentially, they could shrink their rainy-day funds and use more of their cash to make loans or buy interest-paying bonds.
  • More freedom to take risks. With less oversight and liquidity, they were free to operate with more discretion than before. But with less cash on hand, they had less margin for error and faced graver consequences if things went wrong. For example, Silicon Valley Bank continued to hold low-interest bonds on its balance sheet even after the Federal Reserve began raising interest rates in 2022. As the value of those bonds plummeted, the bank had no choice but to declare a multibillion-dollar loss on them — just as the tech economy hit the skids, drying up a vital source of new deposits and investment income. 
  • Lots of uninsured deposits. This had nothing to do with Dodd-Frank or the Economic Growth Act, but it did mean that these banks’ financial troubles spooked investors and the banks’ own customers more than they otherwise would have. All three of the banks that failed in 2023 catered disproportionately to high-net-worth individuals and businesses with far more than the $250,000 FDIC insurance limit in their accounts. For example, many of Silicon Valley Bank’s clients were rich venture capitalists and tech entrepreneurs.
  • Vulnerability to bank runs. Lots of uninsured deposits and disproportionate exposure to specific industries increased these banks’ vulnerability to bank runs, where customers all try to withdraw their cash at once. This happened most dramatically at Silicon Valley Bank, which saw more than $40 billion in attempted withdrawals just before it failed. But many First Republic and Signature Bank customers took flight before those banks failed as well. 
  • Regulatory failures. Had these banks still qualified as too big to fail, they would have faced stricter scrutiny from regulators that may well have prevented their collapse. But it’s not like they faced none at all after 2018. In fact, reports following Silicon Valley Bank’s collapse suggest that regulators were concerned about what was going on inside the bank in 2022. They just didn’t take action early enough or decisively enough to make a difference. 

The underlying cause of these banks’ troubles — particularly Silicon Valley Bank’s — was more akin to a basic management failure than the sort of wild speculation that caused the Great Financial Crisis. In Silicon Valley Bank’s case, everyone knew interest rates were going up, so it’s not clear why Silicon Valley Bank held onto those bonds for so long. That said, Dodd-Frank existed in part to prevent such questionable decision-making, and regulators could have done more to enforce what remained of it.

All this is to say that the Economic Growth Act may have sparked  the 2023 banking crisis by weakening the too-big-to-fail standard. But its role was a supporting one at best. Rising interest rates, jumbo-sized accounts, bad management, and lax regulatory action were all more important.

FAQs About Dodd-Frank & the Economic Growth Act

We’ve seen how partial Dodd-Frank repeal may have sparked a new banking crisis, but that’s not the law’s only legacy. Conversations about Dodd-Frank and partial repeal also touch on questions like these.

Did the Dodd-Frank Act Hurt the Economy?

It depends who you ask. The Dodd-Frank Act authorized some important new consumer protections and created a new agency (the CFPB) focused solely on protecting everyday folks’ finances. 

Consumer advocates would say that’s a good thing, but many business owners and trade groups — not to mention financial institutions — argue that it increased the cost and complexity of doing business to the economy’s detriment.

Likewise, Dodd-Frank restricted or prohibited banks from engaging in certain risky financial behaviors, like proprietary trading. Those rules made markets calmer and more predictable while reducing the risk of bank failures.

But they also cut into banks’ profits and may have discouraged legitimate investment activity. Even former Congressman Barney Frank soured on his own bill over time — though, in his new career as Signature Bank director, he was hardly a neutral party.

Is the Dodd-Frank Act Still in Effect?

Yes, the Dodd-Frank Act is still in effect. However, the Economic Growth Act significantly weakened key aspects of it. By encouraging larger banks to take more risks, this may have contributed to a spate of bank failures in early 2023.

Is the Volcker Rule Still in Effect?

The Volcker Rule is technically still in effect. However, the Economic Growth Act exempted banks with less than $10 billion in assets. Unrelated rule changes adopted by the Federal Reserve in 2020 loosened some of its provisions for all financial institutions. 

Today, the Volcker Rule restrictions on proprietary trading are no longer quite so strict. Banks now also have more leeway to invest in venture capital funds and securitized loans (the sorts of instruments that contributed to the Great Financial Crisis).

Does the Consumer Financial Protection Bureau Still Exist?

Yes, the CFPB still exists. The Economic Growth Act had little direct effect on its operations. 

The Trump Administration significantly weakened the CFPB through a combination of neglect and administrative rule changes that favored financial institutions. But the Biden Administration reversed many of these changes. 

The agency remains a political football, with Republicans generally opposed and Democrats generally in favor.

What Happened to Barney Frank?

Barney Frank retired from Congress in 2013. He published a memoir in 2015, the same year he joined the board of Signature Bank. He told The Financial Times that he took the job because he needed to make money and didn’t want to become a political lobbyist. According to SEC filings, Signature Bank paid Frank about $2 million between 2015 and 2023.

What Happened to Chris Dodd?

No one knows.

Just kidding. Dodd retired from the Senate in 2011 and became chairman of the Motion Picture Association of America. He held that job until 2017, then went into private legal practice with the law firm Arnold & Porter. More recently, he advised President Joe Biden’s 2020 campaign and served on his vice presidential selection committee.

Final Word

The 2023 banking crisis was a far cry from the Great Financial Crisis 15 years earlier. Though it saw two of the biggest bank failures in history — Silicon Valley Bank and First Republic Bank — it didn’t crash financial markets or spark an economic calamity. 

The damage was minimal because the causes were different. Whereas the Great Financial Crisis was the culmination of years of irresponsible risk-taking by banks big and small, greased by the effective repeal of a longstanding law that prevented such risk-taking, the 2023 banking crisis was the regrettable result of more basic management failures at a handful of regional banks. And though the partial repeal of another law — Dodd-Frank — may have played a supporting role, the correlation is far less clear.

Add it to the pile of evidence that history often rhymes but rarely repeats.

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Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he’s not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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Apache is functioning normally

June 1, 2023 by Brett Tams

To say that mortgage rates have been on a wild Mr. Toad’s ride in 2022 is an understatement. In less than a year, we went from 2.78% on the 30-year fixed to as high as 6.28%, then recently got as low as 5% — only to have another move higher this week to 5.30%. People thought the mortgage rate drama in 2013-2014 was a lot when rates went from 3.5% to 4.5%. However, as we all know, after 2020, things are just more intense. 

The question is, can lower mortgage rates save the housing market from its recent downtrend? To understand this, we need to look back into the past to realize how different this period is from what we had to deal with in the previous expansion when rates rose and then fell.

Higher rates and sales data

We can see that when rates rise, sales trends are traditionally lower. We saw this in 2013-2014 and 2018-2019. We know the impact in 2022, working from the highest bar in recent history.

The most significant difference now from what we saw in the previous expansion is that mortgage rates never got above 5% in the previous expansion. However, more importantly, we didn’t have the massive home-price growth in such a short time. It does make an enormous difference now that home prices grew above 40% in just 2.5 years. 

This is why I focused my readers on the years 2020-2024, because if home prices only grew by 23% over five years, we would be ok. However, that got smashed in just two years, and prices are still rising in 2022. It’s savage man, truly savage with the mortgage rate rise. Yes, rates bursting toward more than 6% is a big deal in such a short time, but the fact that we had massive home-price growth in such a short time (and in the same timeframe) is even more critical.

While I truly believe that the growth rate of pricing is now cooling down, 2022 hasn’t had the luxury of falling prices to offset higher rates. So we can’t reference this period of time with rates falling as we did the previous expansion due to the massive increase in home prices and the bigger mortgage rate move. In 2018, sales trends fell from 5.72 million to the lows of January 2019 at 4.98 million. This year we have seen sales fall from 6.5 million to 5.12 million, and they are still falling.

Housing acts better when rates are below 4%

In the past, demand improved when mortgage rates were heading toward 4% and then below. Obviously, we are nowhere close to those levels today, barely touching 5% recently to only go higher in the last 24 hours.

Again, I stress that the massive home-price growth is different this time. However, with that said, considering the sales decline trends and that we have seen better-than-average wage growth, housing demand should act much better if rates head toward 4% and below. 

I stress that higher and lower mortgage rates impact the market, but it needs time to filter their way into the economy. When I talk about the duration, this means rates have to be lower for a more extended period. People don’t throw their stuff down and buy a home in a second; purchasing a home is planned for a year. Rates would need to stay lower for longer into the next calender year to make a big difference. 

Millions and millions of people buy homes every year. They have to move as well, so a traditional seller is a buyer most of the time when it’s a primary resident owner. Sometimes when rates go higher too quickly, some sellers can’t move, this takes a sale off the data line, but if rates fall quickly, they might feel much better about the process.

The downside of rates moving up so quickly is that some sellers pull the plug until rates are better. We see some of this in the active listing data as new listings are declining. Lower rates may pull some of these listings forward as people feel more comfortable with rates down; time will tell.

From Realtor.com 

From Redfin:

Of course, a 1% move lower in rates matters, but keep in context where we are coming from and how much home-price growth we have had in just 2.5 years. This isn’t like the previous expansion where home prices were working from the housing bubble crash and affordability was much better back then.

When to know when lower rates are working?

The best data line to see this take place is purchase application data, which is very forward-looking as the fastest data line we have in housing. Let’s take a look at the data today.
Purchase application data was positive week to week by 1% and down 16% year over year. The 4-week moving average is down negative 17.75% on a year-over-year basis.


This is one data line that has surprised me to a degree. I had anticipated this data to be much weaker earlier in the year. However, I concluded that 4%-5% mortgage rates didn’t do the damage I thought they would do. But, 5%-6% did, as I was looking for 18%-22% year-over-year declines on a four-week moving average earlier in the year. So, this makes me believe that if rates can get into a range of 4.125%-4.50% with some duration; the housing data should improve on the trend it has been at when rates are headed toward 6%. Again, we aren’t there on rates yet. 

The builders would love rates to get back to these levels so they can be sure to sell some of the homes they’re finishing up on the construction side. Now assuming rates do get this low; what would the purchase application data look like? Keep it simple, the year-over-year declines will be less and less, and then when things are improving, we should see year-over-year growth in this index. 

A few things about purchase apps: the comps for this data line will be much more challenging starting in October of this year. Last year’s purchase application data made a solid run toward the end of the year, which led existing home sales to reach 6.5 million. Next year we will have much easier comps to work with, so we need to keep that in mind. However, to keep things simple, the rate of change in the purchase applications data should improve yearly.

To wrap this up, lower mortgage rates should be looked at as a stabilizer first, but for them to change the market, we will need much lower rates for a more extended period. Also, we have to consider that rates moving from 3% to 6% is historical, and if rates fall, we have to look at housing data working from an extreme rise in rates that happened quickly. However, sales levels should fall if purchase application data shows negative year-over-year prints on a double-digit basis. 

Since home prices haven’t lost this year, you can see why I used talked about this as a savagely unhealthy housing market. The total cost of housing had risen in a fashion that isn’t comparable to what we saw in the previous expansion when rates went up and down due to the massive increase in home prices. Also, we have to know that we aren’t working from a high level of inventory data as well. Traditionally, total inventory ranges between 2 to 2.5 million. We are currently at 1.26 million.

NAR total inventory data

We shall see how the economic data looks for the rest of the year and if the traditional bond and mortgage rate market works as it has since 1982, then mortgage rates will head lower over time. However, as of now, it’s not low enough to change the dynamics of the U.S. housing market.

Source: housingwire.com

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