What a crazy market!

With this crazy market, there are many concerns and fears about personal savings.  It is very frustrating to watch hard earned dollars evaporate, but sometimes a historical perspective can help.  We are clearly in the midst of a brutal bear market that began on October 9th of 2007.  Since that time, Stocks have declined by a staggering 41% as measured by the S&P 500.  A decline of 20% constitutes a bear market…and a 10% decline is a “correction”.  The last bear market which occurred between March 24th of 2000 and October 9th 2002 (yes, October 9th), and saw a 49% drop.  Overall, the average bear market lasts for 12.3 months, with the average decline being 32%.

 

The current bear market is right in line with the average historical time frames, and the extent of the decline is worse than previous bear market averages, but still slightly better than the bottom made in 2002.  So the historical data might suggest that we could be nearing a bottom.  Many people will say that it’s different this time, and that we have never had a financial crisis like we are seeing.  While that is true, it’s always different, and it’s always something.  The last bear market was driven by fears of terrorism and fueled by a dot com/tech bubble…both of which had never been seen before either. 

 

As for the date October 9th, which was yesterday, it’s interesting to note that October 9th of 2002 marked the end of the last bear market.  And October 9th 2007 was the beginning of the present one.  While it may just be coincidence, it will be interesting to see if yesterday’s low has some significance in stock market history. 

  

One bright spot is that oil prices are plunging, falling from a high of $147 last July to current levels of around $80 – at least making a trip to fill up at the gas station slightly more “bearable.”   (Yes, a little pun intended there.)

 

As far as mortgage rates go, the news isn’t much better than it is for stocks.  The weird part of this is usually when the stock market is having a bad day, mortgage rates will have a good day as investors are pulling money out of stocks and parking it in bonds.  But money is flowing out of bonds as well.  Where is the money going?  Maybe under mattresses – who knows.  But it is important to note that even though rates are rising, they are not high.  As I write this the 30 year mortgage rate is right around 6.375%.  That is not a bad rate.  In fact, it is a very good rate to borrow money for a home. 

 

Let’s all keep our chins up.  This, too, shall pass.

A $7,500 tax refund? Better read the fine print.

Congress passed and the President recently signed into law H.R. 3221, the Housing and Economic Recovery Act of 2008.  There is a lot of good stuff in it, including all mortgage originators (including those that work at banks and credit unions) must register in a national registry.  But there is one part of the Act that might be embellished by originators to generate more loans.

The Act provides for a First Time Homebuyer tax credit of 10% of the purchase price or a maximum of $7,500.  Sounds great, and it is a good thing.  But just like a piece of cake that is tasty and delicious, there are calories to count once you eat it.  The calories for the tax credit is you have to pay the tax credit back to Uncle Sam.  It is not a freebie.  You have to pay the entire tax credit back with $500 added to your taxable income until paid back or if you sell your home and earn a profit, you pay back the remaining tax credit balance. 

I anticipate for the next 6 months you will see many ads from mortgage originators and real estate agents saying “Buy a home today and get a $7,500 tax refund!”  Will the rest be disclosed once the new home buyers are at the agent’s or originator’s desk?  I hope so.  But logic tells me this is another buyer beware and many first time homebuyers will be lured into buying a home based on only a half disclosure.  If you have any questions on this, please call or comment on my site.

Some upsides to the downturn

There is a lot of negative news about the economy to read these days.  Home prices are decreasing (nationally), banks are failing, GDP is down, gas prices are at an all time high and the unemployment rate is increasing.  But sometimes when there is so much news it is easy to lose sight of the forest through all of the trees.  In other words, yes, times are bad, but there are some positive items to note.

First, if you are an investor, stocks are cheap.  Have you ever heard the expression “buy the recession”?  Stocks are much cheaper than they were last year and the stock market has always rebounded.  The bargain stocks you buy now will most likely be worth a lot more next year or the year after when we come out of our bad times. 

If you are looking to buy a house, boy, it sure is a buyers market.  Many sellers are very desperate to sell their homes and giving incentives or dropping prices, or both, to get their homes sold.  Of course you must have good credit to buy a house in this market, but if you do, you can get a great buy right now.

The other good news that we take for granted is the geopolitical situation, which is the underpinning of our financial stability and prosperity, is at least holding steady and maybe even getting better.  We haven’t had a terrorist attack on US soil since 2001.  The North Koreans haven’t set off any nuclear test detonations since 2006.   Andd things appear to be getting better in Iraq.  

And finally, the US economy is still growing.  Sure, the financial markets are taking a beating, but part of the purpose of having financial markets is to act as a buffer for the real economy.  And the real economy keeps chugging along.  It might be a little slower than we have seen in the recent past, but it is still growing.  Anyone who calls this time a recession has to admit it is one of the mildest recessions we have seen.

So keep your head up – there is always as silver lining if we look for it.