Published: Tuesday, May. 19, 2009 / Updated: Tuesday, May. 19, 2009 04:49 PM
Kathy's Korner - May 20, 2009
Well-placed sources. Shhh!
Do I sound like Deep Throat? My sources are knowledge-able, though not infallible - their projections are based on solid economic principles and hard data - and that's as good as it gets without a crystal ball.
U.S. Gross Domestic Product, the Consumer Confidence Index, Durable Goods Orders, Industrial Production and the Index of Leading Economic Indicators are slowly, but steadily, increasing. Monthly Retail Sales are still a bit iffy, but not dropping precipitously as they were.
Unemployment will increase as we pull out of the recession - it is the caboose that follows the economic train.
So what does this mean to you? Well, resale home sales will strengthen due to the lack of speculative new construction. This is good if you own a home.
Interest rates will rise. Our current rock bottom rates are unsustainable. This will make housing more expensive: the monthly principle and interest payment on a $200,000 loan at 4.5 percent for 30 years is $1,013. At 7.5 percent it is $1,398. And at 10 percent it is $1,755. Housing prices flatten with higher interest rates because of the higher cost of the loan and the monthly payment.
Back in the old days - before the 1997 bill that permitted home owners to exclude up to $250,000 per person ($500,000 per couple) in home sale gain every two years - people saved their money (a rather novel concept these days), put a down payment on a home, and planned to stay there at least two to three years, many times much longer. I can remember when interest rates dropped to 10 percent.
Look at this another way. Let's bake a cake. Take two cups of stimulus package, one cup of increased government spending, and a cup of reduced supply due to several years of reduced demand. Stir vigorously with a pinch of media attention and, voila! We have inflation. And, historically, what is our best hedge against inflation? Real estate. If you own a home.
The federal government has just opened the door for first time home buyers to use the $8,000 tax credit for their down payment now rather than as a credit later. If you have a solid job and expect to stay here several years, now is the time to buy.
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