The Weekend Guide for February 25 - February 28, 2010

What to Do This Weekend!
The Weekend Guide for February 25 - February 28, 2010.

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Bernanke Says ‘Nascent’ Recovery Requires Low Rates

Federal Reserve Chairman Ben S. Bernanke said the U.S. economy is in a “nascent” recovery that still requires low interest rates to encourage demand by consumers and businesses once federal stimulus expires.
By: Craig Torres: Bloomberg.com
“A sustained recovery will depend on continued growth in private-sector final demand for goods and services,” Bernanke told the House Financial Services Committee today in Washington at the start of his two days of semi-annual testimony before Congress. “Private final demand does seem to be growing at a moderate pace.”

The 56-year-old Fed chairman, who began his second four- year term this month, said slack labor markets and low inflation will allow the Federal Open Market Committee to keep the benchmark lending rate, which has been in a range of zero to 0.25 percent for more than a year, low “for an extended period.” He said the Fed will need to start tightening policy “at some point.”
“The FOMC continues to anticipate that economic conditions - including low rates of resource utilization, subdued inflation trends, and stable inflation expectations - are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” he said.

The Standard & Poor’s 500 Index rose 1 percent to 1,105.05 at 10:50 a.m. in New York. The yield on the benchmark 10-year note fell two basis points, or 0.02 percentage point, to 3.66 percent in New York, according to BGCantor Market Data.

Decision Last Week

Bernanke’s testimony follows the Federal Reserve Board’s decision last week to raise the cost of direct loans to banks by a quarter-point to 0.75 percent. The Fed portrayed the move as a “normalization” of bank lending and said it didn’t change the outlook for the economy or monetary policy, a message the Fed chairman reiterated today.

Bernanke cited “tentative” signs of stabilization in labor markets such as fewer job losses, a rise in manufacturing employment, and stronger demand for temporary help.

“Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” Bernanke said. He said the 40 percent of the unemployed who have been without work for six months or more are a “particular concern.”

Policy makers are trying to ensure a durable expansion that will start generating enough jobs to bring down an unemployment rate they forecast to end the year at 9.7 percent, above their estimate of full employment of around 5 percent. At the same time, they want to convince investors that they can start withdrawing $1.1 trillion in excess cash from the banking system in time to keep inflation at bay.

Inflationary Pressures

“As the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” the Fed chairman said. “Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time,” he said.

Manufacturing is leading the rebound from the worst recession since the 1930s as companies prevent inventories from being further depleted and invest in new machinery and equipment to take advantage of a rebound in global demand.

The economy grew at a 5.7 percent annual pace in the fourth quarter of last year, the fastest in six years. Fed officials last month forecast growth in 2010 of 2.8 percent to 3.5 percent, and minutes of their January meeting showed they are seeking more evidence the recovery is sustainable.

Conditions Improved

Bernanke said that conditions in financial markets have improved, making equity and debt financing available for larger firms. “In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects,” he said.

The Fed has expanded its balance sheet to $2.28 trillion in an attempt to supplement credit to the economy. U.S. central bankers are finishing up a $1.43 trillion program of mortgage- backed securities and housing agency debt purchases next month.

“The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets,” Bernanke said.

The actions by the central bank haven’t stimulated private bank credit. Total loans and leases by banks in the U.S. have fallen 7 percent for the 12 months ending January. Consumer loans have fallen 6.5 percent over the same period.

‘Sustained Job Growth’

“They want to see sustained job growth and credit growth to small businesses,” Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut, said before the testimony was released. “The Fed is going to keep rates low and the balance sheet big until you see those two things start recovering.”

The Fed’s actions to combat the financial crisis have led to scrutiny of the central bank in Congress, which is drafting the biggest overhaul of financial regulation since the 1930s.

The House voted Dec. 11 to approve a proposal by Representative Ron Paul, a Republican from Texas, to end a ban on audits of monetary policy. House legislation would also strip the Fed of consumer-protection powers and give the authority to a new agency. A Senate discussion draft proposed stripping the Fed of all bank supervisory powers.

Emergency Powers

Bernanke said the use of emergency powers to support businesses and firms other than banks created a “special obligation” to the Congress and the public. He invited the Government Accountability Office to inspect the Fed’s facilities.

“We are also prepared to support legislation that would require the release of the identities of the firms that participated in each special facility after an appropriate delay,” he said.

Monetary policy, he said, must be shielded from political pressures to protect independence.

“It is vital that the conduct of monetary policy continue to be insulated from short-term political pressures so that the FOMC can make policy decisions in the longer-term economic interests of the American people,” he said.

Industrial production in the U.S. rose more than anticipated in January as factories churned out more consumer goods and equipment. The 0.9 percent increase followed a 0.7 percent gain the prior month, according to Fed data.

Analysts’ Estimates

Deere & Co., the world’s largest maker of farm machinery, posted first-quarter profits Feb. 17 that topped analysts’ estimates and raised its 2010 forecast as projections improved for agricultural-equipment sales in the U.S. and Canada.

Job losses are damping the confidence of consumers whose spending accounts for 70 percent of the world’s largest economy. The Standard & Poor’s 500 Stock Index has fallen 1.8 percent this year, after rising 23 percent in 2009.

Consumption rose at a 2 percent annual pace in the final three months of 2009, below the 2.8 percent pace the previous quarter. The New York-based Conference Board said yesterday that its consumer confidence index fell this month to the lowest level since April 2009.

Wal-Mart Stores Inc., the world’s largest retailer, reported fourth-quarter sales on Feb. 18 that trailed its projection after cutting grocery and electronics prices, and predicted a “challenging” first quarter for U.S. stores.
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For Landlords, the Numbers Are Starting to Look Better

Home prices are falling, rents are tumbling, and apartment vacancies are rising. So why are thousands of small investors becoming landlords?
By: M.P. MCQUEEN: wsj.com
Because real-estate prices have fallen much faster than rents, the math of buying a rental has actually improved substantially in most parts of the country.
Money invested in an apartment complex today typically generates annual returns of 7% to 8% right off the bat, up from less than 6% at the peak of the housing bubble in 2006.

If your property appreciates in value or rents rise, you could end up with double-digit annualized returns when you sell it. But higher returns usually come with higher risks. If you overpay for a rental property or you buy in the wrong market at the wrong time, you can lose a lot of money.

In general, landlords should pick communities where real-estate prices and rents appear to have nearly bottomed out, and jobs are stabilizing. Some of the best deals are in places like Fort Worth, Texas, or Columbus, Ohio, where prices never went wild. Markets like Las Vegas and Phoenix, both plagued by overbuilding, and Detroit, hurt by auto-industry woes, still look dicey.

But other markets like San Francisco or Chicago can still be attractive for landlords who find the right neighborhoods. Fred Bertucci, 50 years old, has been investing in small apartment properties in the Chicago suburbs since 1990. In August, he and his business partner, Kevin Moriarty, 54, bought a six-unit apartment house out of foreclosure for $280,000. It brings in about $25,000 per year in net operating income, he says, or about a 9% yield on the dollars invested. That's up from roughly a 5% yield several years ago when prices were higher, he says.

Being a landlord now isn't easy. You need good credit and plenty of cash—as much as 50% of the purchase price—because banks are still skittish about lending. You need extra cash for handling repairs and vacancies, and you must have the patience to deal with difficult renters.

If you buy an investment property, you should expect to hold it for three to five years or more. Much of the big money from quickly flipping properties already has been made, and conditions now favor long-term owners who want an investment that will throw off income and slowly gain value over time.

"It's a great time for someone who is focused on increasing his net worth, rather than doubling his money in a short period of time," says John Burns, a real estate consultant in Irvine, Calif.

Geoffrey Koblick, 55, who has been investing in residential and commercial real estate for many years, recently scooped up two apartment buildings in Northern California. He didn't buy any properties from 2003 through 2007, when "prices were too high based on the income the properties were generating," he says.

Mr. Koblick says he and his partners paid $3.3 million in May 2009 for a 23-unit building in Berkeley that generates $199,500 in net operating income, for a 6% return. They are upgrading the property, and Mr. Koblick expects its value to increase dramatically over the next seven to 10 years, when he hopes to sell it. Since they bought the building with a 33% down payment, he projects the partners will end up with an annualized return of 15%.

Of course, things often don't go as planned in real estate. J.P. Botha, 33, bought a new one-bedroom condo in Manhattan for $775,000 in 2007. Property values were rising, and he figured he'd sell it for a profit. Instead, its value on completion fell more than 25%. So he rented it out. His first tenant bailed after five months when she lost her job. He had to make a price concession to find and keep a second tenant.

"I'm hemorrhaging over a grand a month," said Mr. Botha, who took out a 30-year mortgage to finance his investment. Still, he says he is taking the long view on his investment: "Once I pay off the loan I will have an income-generating property for the rest of my life."
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U.S. Mortgage Delinquencies Edge Down

Fewer people fell behind on their home-mortgage payments in last year's fourth quarter, a sign that the default crisis may be peaking, the Mortgage Bankers Association reported Friday.
By: JAMES R. HAGERTY: wsj.com
Separately, the Obama administration announced plans to provide $1.5 billion to housing agencies in five states hit hardest by the crisis that would fund programs to help people avoid foreclosure.

The trade group said 3.63% of mortgage borrowers were between 30 and 59 days overdue in the fourth quarter, down from 3.79% in the third quarter, based on its quarterly survey of lenders. Normally, that rate rises in the fourth quarter as heating bills and holiday expenses cause some people to fall behind.

The decline in this category of newly delinquent borrowers reflects a drop in the number of people losing their jobs, said Jay Brinkmann, the MBA's chief economist.

But the overall number of people in trouble with their mortgages—those behind on payments or in the foreclosure process—continued to grow. At the end of the fourth quarter, 15% of home loans on one-to-four-family homes were in that category, up from 11% a year earlier. For the latest quarter, that equates to about 7.8 million households.

"We have fewer problems coming into the system," Mr. Brinkmann said. But "we still have a big problem we have to deal with."

The overall number continued to rise because people delinquent on their loans are staying in their homes longer before losing them to foreclosure. Lenders are overwhelmed with paperwork from foreclosure cases. At the same time, federal and state programs aimed at saving many borrowers mean that lenders are going through lengthy procedures to determine which people are eligible for easier loan terms. While waiting to be helped or evicted, many people don't make payments.

Some borrowers say they have trouble getting in touch with employees at lenders and often are asked to provide the same documents repeatedly.

About 2.9 million households are 90 days or more behind on payments, but not yet in foreclosure, nearly triple the total of two years ago, according to LPS Applied Analytics, a data provider. On average, those households are nine months behind on payments.

There is no guarantee that the number of households newly behind on payments will continue to shrink. LPS, which uses separate data from lenders, estimated that 3.4% of borrowers were 30 to 59 days behind in January, up slightly from 3.3% in December.

The default problem is largely concentrated in states hit hardest by falling home prices—Arizona, California, Florida, Nevada and Michigan. Those are the states that are designated to get portions of the latest $1.5 billion federal program, dubbed Help for the Hardest-Hit Housing Markets.

Those funds will be awarded to state and local housing-finance agencies that propose programs meet federal criteria. The money is to be spent helping unemployed homeowners and those whose home values have dropped far below the amount they owe on their mortgages.The administration said the agencies "may experiment with programs that would assist borrowers to negotiate with lenders to write down mortgages."

The money also can be used to help resolve problems arising from home-equity loans and other second-lien mortgages; in such cases, conflicts between the holders of the first- and second-lien mortgage often stymie efforts to work out a plan to lower payments. In addition, the funds could go to "other programs encouraging sustainable and affordable homeownership," the administration said.

The funds will come from the federal Troubled Asset Relief Program. Administration officials said they believed state and local housing agencies could design relief programs tailored to local needs.

The new program is the latest in a wide array of federal efforts to prop up the housing market, including the $47 billion Home Affordable Modification Program, known as HAMP, which gives lenders incentives to reduce payments for struggling borrowers. That program, launched a year ago, is often criticized for failing to do enough for people who have lost their jobs or owe far more than the current value of their homes.
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More Benefit From Loan-Mod Program

The U.S. Treasury said its foreclosure-prevention program has cut mortgage payments for about 947,000 households, at least temporarily.
By: JAMES R. HAGERTY: wsj.com
That was the number of households benefiting from easier loan terms at the end of January through the Obama administration's Home Affordable Modification Program, known as HAMP.
The total was up about 11% from a month earlier. The administration estimates that 1.7 million households—about 3% of those with mortgages—are eligible for the program.

HAMP, announced a year ago by President Barack Obama, gives lenders incentives to help struggling borrowers avoid foreclosure by shrinking their payments through a reduction in the interest rate to as low as 2%. In some cases, loan terms are extended to 40 years.

Participants first are given three-month "trial" modifications. If they make payments on time and meet other requirements, including documentation of their income, they are given permanent modifications. As of Jan. 31, about 116,000 borrowers had such permanent fixes, up 75% from a month earlier.

On the Rise
Permanent loan modifications granted under the Obama plan.

September 1,711
October: 5,181
November: 31,382
December: 66,465
January: 116,297
Source: U.S. Treasury


The Treasury said 60,000 trial modifications have been canceled. Many more are likely to fall out of the program this month because extensions of the time available to verify incomes have run out.

For those who fail to qualify, lenders may proceed with foreclosure or seek other solutions, including short sales, in which homes are sold for less than the loan balance due.

The program's dropout rate is likely to be high, partly because lenders allowed many people into trials without first making sure they qualified. Wells Fargo & Co. said 92,000 of the borrowers it services had made three trial payments by Jan. 31. It expects about half of them to get permanent modifications. Others failed to provide all or some of the required documents or were found to be ineligible after the paperwork was reviewed.

Among loans with permanent modifications, the median monthly savings is about $522, the Treasury said. It said borrowers in trial and permanent modifications have saved more than $2.2 billion so far.

Prodding lenders to saving more borrowers, the Treasury is publishing monthly comparisons of their performance. As of last month, it said Citigroup Inc. had provided modifications to 50% of the estimated number of eligible borrowers. Both J.P. Morgan Chase & Co. and Wells Fargo were at 38%, and Bank of America Corp. was at 22%.

In a statement, Bank of America said it had made stronger gains than rivals last month in providing trial modifications and converting trials into permanent fixes.
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What's ahead for the housing market?

Will your house hold its value as a financial investment and a good place for you to live during the next decade? What's ahead for the housing market?
By: Marcie Geffner: Bankrate.com
To answer those questions, homeowners and homebuyers should watch four trends:

1. Echo boomers' entry into their peak homebuying years.
2. Baby boomers' entry into their peak home-selling years.
3. The new demand for smaller homes.
4. The new demand for more energy-efficient homes.

More demand, but more supply, too
The demand for housing has diminished as unemployment and other financial pressures have forced college graduates to stay with their parents and whole families to move in with their relatives. But longer term, that demand is expected to be "extremely sound," says Steve Melman, director of economic services at the National Association of Home Builders, or NAHB, in Washington, D.C.
Melman expects a resurgence to occur as economic conditions improve and the children of the baby boomers, called the echo boomers, enter their peak homebuying years.

Demand for housing already has returned to some extent and may increase further in 2010. The National Association of Realtors, or NAR, recently reported that pending home sales rose for nine consecutive months through October 2009. NAR Chief Economist Lawrence Yun said in a statement that existing home sales should number 5.5 million to 6 million annually based on population growth, but that sales were "well below the 5 million mark" before the federal homebuyer tax credit was offered.

Yet even an increase in demand may not be enough to match the number of sellers, warns Dowell Myers, a professor of urban planning and demography at the University of Southern California School of Policy, Planning and Development in Los Angeles.

"Before, there was an unlimited supply of buyers because of the baby-boom generation," he says. "But now that unlimited supply of buyers is going to turn into an unlimited supply of sellers."

Myers says sellers eventually will outnumber buyers, unless a greater effort is made to "cultivate" them.

"There is a shortage of young people all over the country relative to the number of seniors in the future, so they'll all need to step up to meet the supply of homes for sale," says Myers.

The implications for current homeowners could be dire if Myers' read is correct as a supply-and-demand imbalance of such magnitude could cause home prices to decline. The solution? Myers recommends a greater investment in education so more young people will be able to afford to own a home in the future.

New homes to be compact, energy-efficient
As the population ages, again due to the baby boomers, smaller homes may be in greater demand. As Melman points out, empty-nesters need one spare bedroom for visiting grandchildren, not four bedrooms for growing teenagers. Smaller homes are also cheaper and easier to maintain and should be less costly to heat and cool.

An NAHB report, "Home of the Future," states that the size of new single-family homes reached a 35-year record of more than 2,400 square feet in 2006. But that growth spurt isn't expected to continue into this decade. Instead, the average size of a new home will range from about 2,300 to 2,500 square feet in 2015.

Myers says new houses will be more compact, more efficiently designed in their use of space and richer in amenities inside the home and nearby in the neighborhood. These trends are seen as another likely result of an aging population and the push toward more efficient land use.

"The new house will be an efficient house that's easy to live in for one or two people only and may be located in more dense configuration, so people can walk to nearby amenities," he says.

New homes also will be more energy-efficient in terms of windows, doors, insulation and even site planning due to concerns about climate change and the need to reduce energy consumption and emissions.

Homebuyers generally are willing to pay about 2 percent to 2.5 percent of the purchase price of the home for greater energy efficiency, Melman says. After that, the willingness to pay more for green-built features wanes.

That desire for energy-efficiency doesn't necessarily mean current homeowners should invest heavily in such upgrades in 2010. Instead, Myers suggests, homeowners should study up on new technologies and be ready to adopt them when the time - and the price - seems right.

"I don't think there is a big rush because the technology keeps evolving," he says.

Buyers also might start to think more about utility and transportation costs when they purchase a home, Melman suggests.

"If you look at prices and interest rates, affordability has never been better for a long time. But people are also looking at the operating costs and energy efficiency of a home. You want to make sure you can afford the mortgage payment, but you also don't want to have $1,000-a-month utility bills," he says.
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6 keys to first-time homebuyer tax credit

Most people welcome any extra cash when buying a home. And, thanks to a government tax credit of up to $8,000 for first-time homebuyers and up to $6,500 for move-up buyers, they're getting it
By:Tracey C. Velt: Bankrate.com
But, you have to act quickly. The tax credit applies to a principal residence bought by April 30, 2010, and you must close by June 30, 2010.
However, there are many misconceptions about who qualifies and for how much. Here are six essential facts about the tax credit.

1. In some cases, you can use it as a down payment or for closing costs. For the most part, homebuyers can't use the tax credit as an automatic down payment, although "tax credit funds can be used for the basic down-payment requirement (3.5 percent) on an FHA-insured loan only when it's handled through a state housing finance agency (HFA)," says Lemar Wooley, a spokesman for the U.S. Department of Housing and Urban Development.

If the home loan is handled through an FHA lender (and not an HFA), the tax credit can be "used to add to the down payment above the 3.5 percent required amount. It can also be used for closing costs," says Wooley.

Many state HFAs are running or sponsoring programs that will use a tax credit for a down payment. These programs often place a second lien on the home as collateral to secure the eventual repayment of the tax credit funds. Some HFAs lend directly to homebuyers while others work through networks of state-approved lenders. For a list of what state HFAs are doing, go to www.ncsha.org.

2. You don't get a check at closing. Many homebuyers assume that the $8,000 is given to them at closing. Not true, says Winter Park, Fla.-based accountant David Keeler.

"Taxpayers need to wait until they've actually filed their income tax return to receive the tax credit," says Keeler. "The homebuyer credit reduces one's tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund."

The IRS says first-time homebuyers who purchased a home in 2009 can claim the tax credit on either a 2008 return, due April 15, 2009, or a 2009 return, due April 15, 2010. The credit may not be claimed before the closing date. But, if the closing occurs after April 15, 2009, a taxpayer can still claim it on a 2008 tax return by requesting a filing extension or by filing an amended return.

3. You don't always get the full credit. "This is one of the biggest misconceptions out there," says Maynor Perez, a real estate sales associate with Positive Realty in Doral, Fla. "If you pay $50,000 for a home, you will not get the full $8,000 tax credit."

In fact, the top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10 percent of the residence's purchase price - whichever is less. So, for a $50,000 home, the homebuyer would receive a $5,000 tax credit. And, if you buy a house for $800,000 or more, you're not eligible for the tax credit.

4. You may have to pay it back. Taxpayers who claim the credit must use the home as a principal residence for the next three consecutive years. If you sell the house before living in it for three years, you may have to pay back the tax credit.

Who doesn't have to pay back the tax credit? Qualified military service members who sell or move from a tax credit home within three years of the initial purchase, due to official extended duty, are exempt from paying back the money, says Lisa Ellis, sales manager of Century 21 Prestige Real Estate Inc. in St. Robert, Mo.

"Members of the military don't have control over how long they stay in one place. At Fort Leonard Wood, the typical military member stays only two to three years," says Ellis.

5. You don't have to be a first-time homebuyer. A first-time homebuyer is defined as someone who hasn't owned a principal residence in the past three years. If you have owned a home before but haven't owned one recently, you may still qualify for the full $8,000.

If you currently own a home, the tax credit was recently amended to include move-up buyers. As a move-up buyer, you may qualify for up to $6,500. Vacation homes and rental properties are not eligible.

6. There are income limits. "The homebuyer credit is available to higher income taxpayers," says Keeler. "For purchases after Nov. 6, 2009, the homebuyer credit phases out over higher modified adjusted gross income levels, making the credit available to a much bigger pool of buyers."

For homes purchased after Nov. 6, 2009, and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

The tax credit expansion can give you incentive to start looking. But, act quickly and carefully to ensure you receive the full benefit.
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