The housing market showed a glimmer of hope last month as most markets showed a little uptick in prices.
As you hear everyday by callers nearing retirement age on the Dave Ramsey Show, more and more couples who should be retiring are caught up in debt due to the financial crisis.
Here are the top financial stories of the day:
1) Stocks rally after Germany upholds bailout plan-From The AP
U.S. stocks rallied for the first time in three days Wednesday after a German court backed the country's role in bailing out other European countries. The ruling renewed hopes that Europe will find a solution to its long-running debt problems.
The Dow Jones industrial average jumped 253 points, or 2.3 percent, to 11,392 at 2:30 p.m. EST. The
Dow and other U.S. indexes fell over the previous three days on worries about Europe's debt woes and weakness in the U.S. jobs market. All 30 stocks in the Dow rose.
"The market has been pricing in an out-and-out recession, so any hints that policy issues might be solved is a plus," said Brian Gendreau, market strategist at Cetera Financial Group
The Standard and Poor's 500 index jumped 31, or 2.7 percent, to 1,197. All 10 company groups that make up the S&P index rose. The Nasdaq composite shot up 70, or 2.8 percent, to 2,544.
European indexes rose broadly after the German court ruling eased fears that Europe's bailouts of Greece and Ireland could be stalling. Germany's DAX index surged 4.1 percent; France's CAC-40 jumped 3.6 percent.
The ruling also pushed the prices of Treasury securities lower as investors were more willing to hold risky assets like stocks. Treasury prices have been rising over the past week, sending their yields lower, as demand for lower-risk investments increased.
The yield on the 10-year Treasury note rose to 2.04 percent. It traded at 1.97 percent late Tuesday, one of the lowest rates since the Federal Reserve Bank of St. Louis began keeping daily records in 1962. Gold, another traditional safe haven, fell $56, or 3 percent, to $1,817 an ounce. It closed at $1,891 on Aug. 22.
Historically low Treasury rates are prompting some institutional investors to see stocks as a better value. The yield on the benchmark 10-year Treasury note began plunging from just over 3 percent on July 27 to 2.2 percent by the end of August. Investors were piling into lower-risk assets as the stock market swung wildly.
The yield has hovered around 2 percent this week. An investor who buys the S&P 500 index, meanwhile, earns a 2.38 percent yield in the form of dividends.
"Market sentiment has actually been worse than economic data lately, and now you are seeing institutional investors saying, `I can get a better yield from the S&P 500 than I can from a 10-year Treasury'," said Howard Ward, portfolio manager of the GAMCO Growth Fund.
Yahoo and Bank of America rose sharply after announcing the departures of key executives after the market closed Tuesday. Yahoo gained 5 percent, to $13.57, after announcing that CEO Carol Bartz had been fired. Some analysts said the move made the company a takeover target. Bartz spent nearly three years steering the company.
Bank of America jumped 7.5 percent, to $7.51, after the bank announced a management reorganization that will result in two top officers leaving. The changes were seen as one of chief executive Brian Moynihan's most dramatic moves to reshape the embattled bank. Bank of America shares have fallen 48 percent this year through Tuesday, compared with a 7 percent drop in the S&P 500 index.
Financial companies were the top performing group in the S&P 500 index. JP Morgan Chase & Co., Goldman Sachs and Wells Fargo each rose more than 2 percent.
Urban Outfitters fell 3 percent, to $25.14, after the retailer said its sales were slipping in the current quarter. Computer graphics company Nvidia Corp. jumped 10 percent, to $14.47, after the company said it expects its revenues to be higher than Wall Street analysts forecast.
A Federal Reserve survey found that that the economy grew modestly in its 12 bank regions in July and August as consumers spent more.
2) Has the Housing Market Finally Found Its Footing? The US News and World Report
For those looking for a bright spot amid the barrage of depressing data recently, news that housing prices were up for the third month in a row might have buoyed morale a bit.
The latest data from the Standard & Poor's/Case-Shiller home price index showed that home prices in the nation's largest metropolitan areas ticked up 1.1 percent, on average, in June, following a 1 percent increase in May.
Chicago and Minneapolis saw the largest month-over-month increases, both recording 3.2 percent increases in home values, on average. Even metro areas hit hard by the foreclosure crisis saw incremental gains: Atlanta posted a 1.5 percent increase, while Phoenix saw a 0.3 percent gain.
So has the housing market finally found its footing?
Maybe not. While prices have been on the rise for a few months, experts don't expect the upward trend to continue. Most predict home values will fall in the coming months, not bottoming out until the first half of next year. "I would expect that prices fall a little bit more," says Celia Chen, senior director at Moody's Analytics.
"Any improvement in stability is temporary."
U.S. News talked to experts about why the housing outlook might not be so rosy after all:
Seasonal bump. One reason home prices have seen a temporary bump has to do with the time of year. Even in this weak market, more homes tend to be bought and sold in spring and summer, which boosts demand and gives real estate values a lift. "A seasonal kick accounts for the recent strength in the indexes," wrote Patrick Newport, economist at IHS Insight, in a recent report. "The kick will wear off in the fall when demand weakens and sellers have to give way on price, and prices will start dropping again."
Even with the seasonal uptick, prices are down 4.1 percent compared with June 2010, and down 33 percent from their 2006 peak, meaning the housing market still has a lot of ground to make up. And it faces stiff headwinds. More foreclosures and excess supply coupled with weak demand could drive prices down another 10 percent, Newport predicts. The outlook is even worse if the economy slips into another recession--a 40 percent probability, he says. "The unemployment rate will climb, driving foreclosures up, leading to an even larger drop in home prices."
Underwater mortgages, distressed properties. The housing market meltdown has left millions of Americans owing more on their mortgages than their homes are worth, and until sagging prices stop draining home equity, that debt overhang will continue to bottleneck the housing market. The number of Americans facing serious delinquency on their mortgages is rising as well, another troubling fact that could translate into even more foreclosures flooding the market.
On top of fresh foreclosures expected to hit the market, properties held up for legal reasons are likely to stream onto the market in the coming months as well. Finally, abandoned or vacant homes--the product of overbuilding--only add to the glut of supply and will pull down home prices for the foreseeable future.
Index methodology. Although Case-Shiller numbers have become one of the most popular metrics used to measure house prices, critics argue that the indices shouldn't be used to gauge the health of housing market from a consumer point of view, primarily because they lag signed contract data by about six months.
"It's equivalent to waking up in the morning at the end of August and deciding what clothes you're going to wear based on the average temperature in February," says Jonathan Miller, president of New York City-based Miller Samuel Real Estate Appraisers. "If that's what you want to know, then it's helpful, but that's not how the index is being applied."
Since the end of June--as far as the data goes back--the country has endured a slew of natural disasters, a debt downgrade that shook consumer confidence, and reports that America could be slipping into another recession, none of which have been factored into the most recent Case Shiller numbers.
What does this forecast mean for consumers? According to experts, sellers shouldn't hold out for better times in the coming months. If your goal is to make a profit off the sale of your home, now is probably not the time to sell, says Daisy Kong, spokeswoman for Trulia, a real estate information website.
But if you have to move, the key is price your home aggressively to attract what little demand there is in the market. "Make sure [your home is] priced to sell based on [comparable homes] from the local neighborhood. Maybe price it even a little lower," Kong says. "Don't focus so much on trying to make a profit as much as just trying to recoup costs."
3) Debt Hobbles Older Americans- From The Wall Street Journal
More Americans are reaching their 60s with so much debt they can't afford to retire.
Most people used to pay off their debts before retiring. But as wages have barely kept up with rising prices over the past 35 years Americans have pushed debt higher, living beyond their means. Now, people are postponing retirement, cutting living standards or both.
All kinds of debt held by this age group have risen, but the big problem is mortgages. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20% had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights' MacroMonitor. That was up from just 22% and 12%, respectively, in 1994.
The housing crash has made things worse. A few years ago, homeowners in their 60s with big mortgages could sell their homes for a profit and buy smaller places or rent. But the drop in housing values means that many homeowners have little equity, and some now owe more than their houses are worth.
People have tried to reduce debt since the financial crisis, with limited success. Americans of all ages owed $11.4 trillion at the end of the second quarter, based on data from the Federal Reserve Bank of New York.
That's down about 15% from 2007 but nearly double what they owed in 1999, adjusted for inflation and population.
Older Americans also have struggled to dig out in the past four years. "Relative to the value of their homes, the amount of indebtedness if anything has gone up because house prices have fallen faster than mortgages have been reduced," says Christopher Herbert, director of research at Harvard's Joint Center for Housing Studies.
Many have little choice but to keep working. "I imagine I'll be working until I'm 70," says Christine Shiber, a 59-year-old Methodist minister in California's Bay Area, struggling to pay off her mortgage, credit-card debt and a loan she took against her retirement account.
Debt isn't the only issue clouding retirement prospects. People aren't saving enough either. As calculated in a Wall Street Journal article earlier this year, the typical American household nearing retirement with a 401(k) retirement account has less than one-quarter of what it needs in that account to maintain its standard of living in retirement.
Four out of five households with heads in their early 60s and with mortgages had too little savings in 2008 to pay off debts without dipping into retirement accounts, according to Boston College economist Anthony Webb.
Instead of boosting their savings as they approach retirement, a period when people usually make their largest retirement contributions, some older people are stopping contributions in order to service debts.
Some who had already retired are going back to work because they can't make the financial numbers add up.
The combination of easy credit, low interest rates and a consumption-oriented culture helped fuel a spending binge for Americans until the financial crisis. People with problems aren't just those who took subprime loans or spent foolishly on lavish lifestyles. They are people from all backgrounds, including some with six-figure incomes.
"We have gotten into this 'debt's OK' mentality and it is going to be very hard to get out of it," says financial planner Greg Heller of Heller Capital Resources in Los Angeles, who says he has wealthy clients in their 50s with problems.
The Rev. Shiber and her husband borrowed to buy a home and for their children's education, something many Americans have done. They divorced in 2007 and sold the home, repaying debts.
But Ms. Shiber needed a place to live. In 2008, she took out a fresh mortgage to buy a condominium. The down payment, together with her son's college costs, used a big chunk of her remaining savings.
Soon, Ms. Shiber realized that she wasn't making ends meet. She had trouble paying credit-card bills and started running a balance. Her 2001 Ford Focus needed a big, unexpected repair. She borrowed against her retirement account.
To her relief, Ms. Shiber negotiated a raise late last year. She then got a letter from her bank saying it had under-calculated her property-tax obligations. It raised her monthly mortgage bill, including property taxes, by an amount slightly more than the raise.
To Ms. Shiber, the debt burden began to seem biblical. "Even with Job, there weren't these coincidences," she laments. "I said, 'Now, God, you are really messing with me!'"
After consulting with a financial adviser, Ms. Shiber cut living expenses. She travels less to visit her mother and daughter in New York and has fewer meals out. To her adviser's dismay, she also has cut most of her contributions to her retirement plan.
Christine and Mark Nordell, a couple in their 60s, have put off retirement for at least two more years as they struggle to pay down their mortgage and credit-card debt and a daughter's student loan.
Their plan was to sell their house in a Minneapolis suburb, pay off their debt and retire to a second home near a lake. But the Minneapolis home's value plunged in the housing collapse and their plans went on hold.
Then Mr. Nordell lost his job when the nonprofit entity he founded to help African immigrants in the U.S. lost its funding. His new job as a part-time minister provides less income. The family lives mainly on Ms. Nordell's income as a speech pathologist.
Despite efforts to cut spending and pay down debt, their credit-card debt sometimes has crept higher. Their home requires improvements before it can be sold, and they can't afford them. They refinanced the mortgage and increased the loan balance to reduce high-interest credit-card balances.
They have retirement savings and a pension, which they think will cover retirement needs, but only after they get rid of the debt. Ms. Nordell hopes that the housing market recovers enough so they can sell their Minneapolis home, which would solve some problems.
"We did have some good stock investments, which have really saved us," she says. "I have gradually had to cash them all in to help us with living expenses."
Debt levels of older Americans have been rising for more than two decades. Of households with heads aged 62 through 69 and with mortgages, the median amount of mortgage debt hit $71,000 in 2007, five times the 1987 inflation-adjusted median, according to a study by William Apgar, then at Harvard's Joint Center for Housing Studies.
Most people make their biggest salaries in their 50s and 60s, which should permit them to make their biggest retirement-savings contributions. But partly because of debt payments, many are missing out on the end-of-career push that is supposed to boost retirement savings to where they need to be.
Fidelity Investments, one of the largest managers of 401(k) retirement accounts, says participants aged 55 to 60 contributed a median 8% of salary in the first quarter of this year, down from 10% in the same quarter of 2006. Some cut contributions to zero. Even the 8% level is well below the double-digit contribution rate financial planners recommend for older workers.
In addition, some people, like Ms. Shiber, have borrowed against existing retirement savings. Others have withdrawn savings early. TIAA-CREF, another large retirement-money manager, says that new loans taken out by participants of all ages against retirement accounts rose by 18.8% in 2010 over 2009.
Debt problems are so pervasive that they are affecting retirement expectations even of people far from retirement.
Rob Salvaggio of Glencoe, Ill., won't turn 50 until later this month, but he already is expecting a financial hit when he retires.
Mr. Salvaggio, who works for a real-estate manager, once dreamed of retiring at 55, but his mortgage, auto and credit-card debts are so high that he is aiming now at something more like 65. Because of heavy monthly debt payments, his wife has stopped contributing to her 401(k) and he is making only minimal contributions to his.
"We aren't going to be able to maintain or increase our standard of living in retirement," he says. "We are going to go backwards."
Mr. Salvaggio and his wife, Wendi, make good incomes and their financial adviser has urged them to cut back on their standard of living to reduce their debt. But Mrs. Salvaggio, who works for a multinational technology company, went through a difficult divorce before they married. Now, to provide stability for her son, they are determined to remain in the neighborhood where they live, even though it is expensive. When the landlord took back their rental home, they decided to buy another home, take on a mortgage and cut back on retirement savings.
"We all agreed that it wasn't the optimal idea," he says, although he hopes his home's value will rise, permitting him to sell at a profit when he retires. "We thought it was better for our son to stay here."
Quote of the Day from Dave Ramsey.com:
You've got to think about big things while you're doing small things, so that all the small things go in the right direction. — Alvin Toffler
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