The Basics
Dividend stocks for low excitement, high returns
Boring? Maybe. But here's a screen for finding dividend stocks that will have you yawning all the way to the bank.
By Harry Domash (Author of "Fire Your Stock Analyst")
It's time to make the case for "boring" dividend stocks.
From a tax perspective, they're hard to beat: Thanks to recent tax-law changes, most dividends are taxed at only 15%. Previously, dividends were hit at full income-tax rates.
And these stocks have been anything but boring when it comes to returns. According to Standard & Poor's, dividend-paying companies returned 18.4% last year, compared with 13.7% for those that didn't pay dividends and 8.6% for the Nasdaq, home to so many of the tech stocks investors find so exciting.
I've devised a screen for finding promising -- and, yes, boring, but only in the sense that they won't keep you up at night -- dividend-paying candidates. The screen pinpoints well-established companies that have solid earnings and dividend growth track records.
You won't get-rich-quick with these stocks. But most are expected to grow earnings between 10% and 15% annually over the next five years. So, over time, you can expect their share prices to move up at about the same rate. Combine that expected -- though by no means guaranteed -- price appreciation with 2% to 5% dividend yields, and you can expect annual returns in the 12% to 20% range, or roughly 16% per year.
To put that in perspective, at a 16% compounded annual return, $1,000 turns into $2,100 in 5 years. The S&P 500 ($INX) managed less than an 11% average annual return, and the Nasdaq Composite ($COMPX) returned around 4% over the past 10 years.
I've intentionally excluded higher-yielding stocks such as mortgage REITs (real-estate investment trusts that invest in mortgages) and royalty trusts (trusts, frequently based in Canada, that invest in oil and natural-gas resources) that often pay dividends equating to double-digit yields. These may be worthwhile investments, but require special analysis that I don't have room to cover here.
Here's how the screen works. You can use it as is, or as a starting point which you can revise to suit your needs.
Dividend yield: Set upper limits, too
If you're rusty on your stock-market math, dividend yield is a company's next 12 months' dividends divided by its current share price. For example, your yield would be 10% if you paid $10 per share for a stock expected to pay out $1 per share over the next year ($1/$10). However, another investor's yield would only be 9.1% if he bought the same stock a week later for $11 per share ($1/$11).
I arbitrarily set my minimum yield at 2.25%, which was the prevailing return on low-risk money market funds when I researched this column. Obviously, the lower the minimum yield, the more stocks you'll get. For example, 1,688 U.S.-listed stocks currently pay at least 2.25%. But reducing the minimum to 1.5% increases the field to more than 2,200 stocks.
Screening Parameter: Current Dividend Yield >= 2.25
For dividend yield, higher is not always better. High-yielding stocks get that way because many investors see them as risky.
Think about it.
Say a stock is expected to pay $1 per share in dividends over the next year and is changing hands at $10 per share, equating to a 10% yield. Given current money market rates, buyers would flock to buy a stock yielding 10% if they thought the dividend was rock-solid. The buying pressure would push the share price up until the yield dropped closer to market rates. In my experience, stocks with dividends seen as safe don't trade at yields much above the 4% to 4.5% range.
So I set my maximum acceptable dividend yield at 5%. Increase the maximum to 8% if you want to see riskier stocks. Sometimes cigarette makers such as Altria Group (MO, news, msgs) pay yields in the 7% range.
Screening Parameter: Current Dividend Yield <= 5
Look for dividend growth
You win two ways if one of your stocks ups its dividend. The higher payouts increase your yield and the dividend hike usually drives the share price higher.
History is truly the best teacher when it comes to evaluating dividend growth prospects. Companies with a record of strong historical dividend growth usually are committed to continuing that policy. Conversely, companies that haven't consistently increased dividends probably prefer to use their extra cash for other purposes.
I require at least 5% average annual dividend growth over the past five years. Ideally, you'd like to see even higher growth, but the recent recession prevented many firms from increasing their payouts. Increase the requirement to 7% or 8% if your screen turns up too many candidates.
Screening Parameter: 5-Year Dividend Growth >= 5
Profits power dividends
Since dividends come from earnings, you should draw your dividend candidates from the ranks of profitable companies. Return on equity (ROE), which is net income divided by shareholders equity (book value), is a widely used profitability gauge. But profitability standards vary between industries. So instead of setting an arbitrary minimum, I require that passing candidates must at least equal their industry average ROE.
Screening Parameter: Return on Equity >= Industry Average ROE
Stick to the strongest banks
Banks have been good dividend-payers in recent years, so my first try using this screen turned up several bank stocks. However, many small or regional banks enjoyed exceptionally strong profits from making and servicing home mortgages. Rising interest rates are squeezing their mortgage profit margins and reducing the demand for new mortgages. So this phase of the economic cycle is not the time to bet heavily on banks.
The leverage ratio measures debt by dividing total assets by shareholder's equity, and it's useful here. A company with no debt would have a 1.0 leverage ratio. The higher the debt, the higher the ratio. Banks are often highly leveraged, many with ratios in the 10-to-15 range, which is understandable, considering that cash is a bank's inventory.
I set my maximum allowable leverage at 10, in order to find only those banks with relatively strong balance sheets. Adjust that limit up if you want your screen to turn up more banks, and down for fewer banks.
Screening Parameter: Leverage Ratio <=- 10
Avoid future losers
A company like General Motors (GM, news, msgs) may have great dividend history, but a dismal outlook. In fact, many analysts expect GM to cut its dividend in the not-too-distant future.
You don't need to spend your time evaluating each candidate's future prospects because stock analysts do that all day long. So I piggyback on their efforts and rely on analysts' long-term earnings forecasts and buy/sell recommendations to rule out stocks likely to cut future dividends.
First, since dividends come from earnings, I look for consensus forecasts calling for at least 10% minimum average annual earnings growth over the next five years. Even if the forecasts are wrong, the likes of GM and Eastman Kodak (EK, news, msgs) are unlikely to pass this test.
Screening Parameter: EPS Growth Next 5Yr >= 10
As a backup check, I also look at analyst's consensus buy/sell recommendations.
Something's fishy if analysts are forecasting strong long-term earnings growth, but advising investors to sell the stock. Dividend investing is about avoiding unnecessary risk. It doesn't make sense to consider stocks that analysts say you should sell.
Screening Parameter: Mean Recommendation >= Hold
Follow the pros
Institutional buyers such as mutual funds and pension plans more tuned-in to what's happening in the market than you and I will ever be. If the big boys won't own a stock, we shouldn't either.
Institutional ownership is measured as a percentage of outstanding shares and can range from zero to 95%. There's no cast-in-concrete number that says a stock has enough institutional ownership. As a rule of thumb, I set a 40% minimum. Reduce the minimum to as low as 30% if you don't get enough candidates.
Screening Parameter: % Institutional Ownership >= 40
My screen turned up 19 stocks in a variety of industries. The list included one savings and loan and three regional banks. However, MBNA (KRB, news, msgs), which is listed as a regional bank, is primarily a credit card issuer. As always, the results of this or any screen should be considered research candidates, not a buy list.
Dividend Winners
Company----Price*----Industry
Abbott Laboratories (ABT, news, msgs)
47.2
Drug manufacturers - major
Allstate (ALL, news, msgs)
54.63
Property & casualty insurance
Autoliv (ALV, news, msgs)
46.9
Autoparts
Avery Dennison (AVY, news, msgs)
61.21
Paper & paper products
Bemis (BMS, news, msgs)
31
Packaging & containers
Eaton Vance (EV, news, msgs)
23.08
Asset management
Fidelity National Financial (FNF, news, msgs)
32.45
Surety & title insurance
General Electric (GE, news, msgs)
35.5
Conglomerates
Harbor Florida Bancshares (HARB, news, msgs)
33.59
Savings & loans
Kinder Morgan (KMI, news, msgs)
76.24
Gas utilities
Limited Brands (LTD, news, msgs)
24.65
Apparel stores
Lincoln Electric Holdings (LECO, news, msgs)
29.56
Machine tools & accessories
Masco (MAS, news, msgs)
34.65
Industrial equipment & components
MBNA (KRB, news, msgs)
24.9
Regional - mid-Atlantic banks
PartnerRe (PRE, news, msgs)
64.27
Property & casualty insurance
Spartech (SEH, news, msgs)
19.32
Rubber & plastics
Synovus Financial (SNV, news, msgs)
27.78
Regional - mid-Atlantic banks
U.S. Bancorp (USB, news, msgs)
28.57
Regional - Midwest banks
Worthington Industries (WOR, news, msgs)
19.2
Steel & iron
*Price of position at the time of original publish date.
Even though these stocks look good now, circumstances change over time. Check your stocks every six months or so, and sell any that analysts are advising selling or that no longer have strong long-term earnings-growth forecasts.
At the time of publication, Harry Domash did not own or control positions in any of the stocks mentioned in this article. Domash publishes the Winning Investing stock and mutual fund advisory newsletter and writes the online investing column for the San Francisco Chronicle. Harry has two investing books out, the most recent being "Fire Your Stock Analyst," published by Financial Times Prentice Hall.
http://articles.moneycentral.msn.com/Investing/InvestingForIncome/DividendStocksForLowExcitementHighReturns.aspx
Saturday 6 December 2008
US Job Losses by month in 2008 (A Lagging Indicator)
Job losses by month in 2008
Month---Jobs lost
November* -533,000
October * -320,000
September -403,000
August -127,000
July -67,000
June -100,000
May -47,000
April -67,000
March -88,000
February -83,000
January -76,000
Total 2008 1,911,000
* Preliminary.
Month---Jobs lost
November* -533,000
October * -320,000
September -403,000
August -127,000
July -67,000
June -100,000
May -47,000
April -67,000
March -88,000
February -83,000
January -76,000
Total 2008 1,911,000
* Preliminary.
Source:
Bureau of Labor Statistics
DECEMBER 6, 2008: Job Losses Worst Since '74: 533,000 Shed in November
Friday 5 December 2008
China lectures US on economy
China lectures US on economy
By Geoff Dyer in Beijing
Published: December 4 2008 04:32
The US was lectured about its economic fragilities on Thursday as senior Chinese officials urged the administration to stabilise its economy, boost its savings rate and protect Chinese investments.
The message went to Hank Paulson, the US Treasury secretary, in Beijing for the strategic economic dialogue he helped launch to discuss long-term issues between the two countries.
EDITOR’S CHOICE
Lex: US-China dialogue - Dec-04
US rescue plan to push down home loan rates - Dec-04
Treasury tackled over Tarp concerns - Dec-03
Record contraction in US services sector - Dec-03
Paulson in last stand against weaker renminbi - Dec-03
As expected, Mr Paulson urged Beijing not to abandon efforts to let the renminbi appreciate, said US officials, amid fears China might want to let its currency weaken to help local exporters weather the global slowdown.
But Mr Paulson also found himself facing calls for the US to address its own economic problems. Wang Qishan, a vice-premier and leader of the Chinese delegation at the two-day talks, called on the US to take swift action to address the crisis.
“We hope the US side will take the necessary measures to stabilise the economy and financial markets as well as guarantee the safety of China’s assets and investments in the US,” he said.
The dialogue was dominated by the global crisis. Zhou Xiaochuan, governor of the Chinese central bank, urged the US to rebalance its economy. “Over-consumption and a high reliance on credit is the cause of the US financial crisis,” he said. “As the largest and most important economy in the world, the US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”
Although China also faces a rapidly slowing economy and rising unemployment, the tone of the comments reflected an underlying shift in power.
Eswar Prasad, a senior fellow at the Brookings Institution, said: “One result of the crisis is that the US no longer holds the high ground to lecture China on financial or macroeconomic policies.”
Copyright
The Financial Times Limited 2008
http://www.ft.com/cms/s/0/48ac15fc-c1bc-11dd-831e-000077b07658.html
By Geoff Dyer in Beijing
Published: December 4 2008 04:32
The US was lectured about its economic fragilities on Thursday as senior Chinese officials urged the administration to stabilise its economy, boost its savings rate and protect Chinese investments.
The message went to Hank Paulson, the US Treasury secretary, in Beijing for the strategic economic dialogue he helped launch to discuss long-term issues between the two countries.
EDITOR’S CHOICE
Lex: US-China dialogue - Dec-04
US rescue plan to push down home loan rates - Dec-04
Treasury tackled over Tarp concerns - Dec-03
Record contraction in US services sector - Dec-03
Paulson in last stand against weaker renminbi - Dec-03
As expected, Mr Paulson urged Beijing not to abandon efforts to let the renminbi appreciate, said US officials, amid fears China might want to let its currency weaken to help local exporters weather the global slowdown.
But Mr Paulson also found himself facing calls for the US to address its own economic problems. Wang Qishan, a vice-premier and leader of the Chinese delegation at the two-day talks, called on the US to take swift action to address the crisis.
“We hope the US side will take the necessary measures to stabilise the economy and financial markets as well as guarantee the safety of China’s assets and investments in the US,” he said.
The dialogue was dominated by the global crisis. Zhou Xiaochuan, governor of the Chinese central bank, urged the US to rebalance its economy. “Over-consumption and a high reliance on credit is the cause of the US financial crisis,” he said. “As the largest and most important economy in the world, the US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”
Although China also faces a rapidly slowing economy and rising unemployment, the tone of the comments reflected an underlying shift in power.
Eswar Prasad, a senior fellow at the Brookings Institution, said: “One result of the crisis is that the US no longer holds the high ground to lecture China on financial or macroeconomic policies.”
Copyright
The Financial Times Limited 2008
http://www.ft.com/cms/s/0/48ac15fc-c1bc-11dd-831e-000077b07658.html
Enterprise Value
Enterprise Value
Enterprise value (EV) is a company’s market capitalization plus net interest-bearing debt.
In other words, it is the amount of cash required to buy the company at its current price and retire all interest-bearing debt less the cash assets of the business.
EV = Market Capitalization + Net interest-bearing Debt
or
EV = Market Capitalization + Borrowings - Cash
Although used for various reasons by stock analysts, the only useful purpose for calculating EV is as a tool to determine the maximum price a company is prepared to pay to acquire another business.
For instance, one company had a policy of limiting the EV it was prepared to pay to an EBIT multiple of 5. So if EBIT was $20 million, EV should be no more than $100 million. If interest-bearing debt happened to be $50 million, then $50 million would be the maximum price it would pay for the equity of the business.
EV = Market Capitalization + Borrowings - Cash
$100m = Market Capitalization + $50m - $0
Market Capitalization = $100 m - $50 m + $0 = $50 m
-----
Let’s see the ROE on the acquisition cost of $50 million.
Acquisition cost = $50 million. Calculate ROE
EBIT = $20 m
Interest-bearing debt = $50 m
Interest cost of 8 percent on the debt
Corporate tax rate = 30 percent
Interest cost = $50 m x 8 percent = $4 m
Post-tax profit = EBIT x (100 percent – Corporate tax rate) = [($20 m - $4 m) x (70 percent)] = $11.2 m
ROE = ($11.2 m/ $50 m) = 22.4 percent on an equity cost of $50 million.
-----
If the company to be acquired had no debt and
acqusition cost was $50 million:
Interest-bearing debt = $ 0
Post-tax profit = EBIT x 70 percent = $20 million x 70 percent = $14 million
Return on cost of $100 million would be 14 percent.
The acquired company would then be geared up by borrowing $50 million.
Interest cost = $50 m x 8 percent = $4 m
Post-tax profit = EBIT x (100 percent – Corporate tax rate) = (20m – 4m) x (70 percent) = $11.2 m
ROE = $11.2m / $50m = 22.4 percent return on the net $50 million acquisition cost.
-----
EBIT multiple and ROE
From the examples above:
EV = EBIT x EBIT multiple
EBIT multiple = EV/EBIT
EBIT multiple of 5 produces a ROE of 22.4 percent.
Determine the EBIT multiple beyond which debt of 8 percent would produce a return (ROE) of less than 8 percent.
Answer: 1 / (8 percent) = 12.5
Therefore,
Paying an EBIT multiple MORE THAN 12.5, produces Return on Equity (ROE) LESS THAN the interest cost of debt of 8 percent.
Paying an EBIT multiple LESS THAN 12.5, produces Return on Equity (ROE) MORE THAN the interest cost of debt of 8 percent.
-----
Also read:
http://www.horizon.my/2008/12/malaysian-airlines-is-mas-cheaper-than-air-asia/
Malaysian Airlines – Is MAS Cheaper than Air Asia?
Enterprise value (EV) is a company’s market capitalization plus net interest-bearing debt.
In other words, it is the amount of cash required to buy the company at its current price and retire all interest-bearing debt less the cash assets of the business.
EV = Market Capitalization + Net interest-bearing Debt
or
EV = Market Capitalization + Borrowings - Cash
Although used for various reasons by stock analysts, the only useful purpose for calculating EV is as a tool to determine the maximum price a company is prepared to pay to acquire another business.
For instance, one company had a policy of limiting the EV it was prepared to pay to an EBIT multiple of 5. So if EBIT was $20 million, EV should be no more than $100 million. If interest-bearing debt happened to be $50 million, then $50 million would be the maximum price it would pay for the equity of the business.
EV = Market Capitalization + Borrowings - Cash
$100m = Market Capitalization + $50m - $0
Market Capitalization = $100 m - $50 m + $0 = $50 m
-----
Let’s see the ROE on the acquisition cost of $50 million.
Acquisition cost = $50 million. Calculate ROE
EBIT = $20 m
Interest-bearing debt = $50 m
Interest cost of 8 percent on the debt
Corporate tax rate = 30 percent
Interest cost = $50 m x 8 percent = $4 m
Post-tax profit = EBIT x (100 percent – Corporate tax rate) = [($20 m - $4 m) x (70 percent)] = $11.2 m
ROE = ($11.2 m/ $50 m) = 22.4 percent on an equity cost of $50 million.
-----
If the company to be acquired had no debt and
acqusition cost was $50 million:
Interest-bearing debt = $ 0
Post-tax profit = EBIT x 70 percent = $20 million x 70 percent = $14 million
Return on cost of $100 million would be 14 percent.
The acquired company would then be geared up by borrowing $50 million.
Interest cost = $50 m x 8 percent = $4 m
Post-tax profit = EBIT x (100 percent – Corporate tax rate) = (20m – 4m) x (70 percent) = $11.2 m
ROE = $11.2m / $50m = 22.4 percent return on the net $50 million acquisition cost.
-----
EBIT multiple and ROE
From the examples above:
EV = EBIT x EBIT multiple
EBIT multiple = EV/EBIT
EBIT multiple of 5 produces a ROE of 22.4 percent.
Determine the EBIT multiple beyond which debt of 8 percent would produce a return (ROE) of less than 8 percent.
Answer: 1 / (8 percent) = 12.5
Therefore,
Paying an EBIT multiple MORE THAN 12.5, produces Return on Equity (ROE) LESS THAN the interest cost of debt of 8 percent.
Paying an EBIT multiple LESS THAN 12.5, produces Return on Equity (ROE) MORE THAN the interest cost of debt of 8 percent.
-----
Also read:
http://www.horizon.my/2008/12/malaysian-airlines-is-mas-cheaper-than-air-asia/
Malaysian Airlines – Is MAS Cheaper than Air Asia?
Thursday 4 December 2008
**Why Stocks Are Dirt Cheap
Jeremy Siegel, Ph.D. The Future for Investors
Why Stocks Are Dirt Cheap
by Jeremy Siegel, Ph.D.
Posted on Friday, October 31, 2008, 12:00AM
No one can guarantee the future of the stock market. But I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months.
Valuations Low Worldwide
The case for equities at these levels is compelling. The last time we have seen prices this low was more than 30 years ago, when the US economy was in far worse shape than today.
The table below lists the price-to-earnings ratios of the world's major stock markets as of October 29. It is taken directly from the Bloomberg World P-E Ratio (WPE) screen. These P-E ratios are calculated based on 2008 earnings, of which the first two quarters have already been reported and the 3rd and 4th quarters' earnings are estimated. Keep in mind that the average historical P-E ratio of the US stock market has been 15 and that when P-E ratios are ten or lower, investors have reaped generous rewards from investing in stocks.
COUNTRY/INDEX----P-E RATIO
North America
Dow Jones Industrials....10.7
S&P 500 Index....11.7
Nasdaq....16.6
Canada ....9.3
Mexico ....9.7
Europe
Euro Stoxx 50 ....7.9
UK....7.3
France....7.8
Germany....9.5
Spain....7.7
Italy....7.2
Netherlands....5.7
Switzerland....17.3
ASIA
Nikkei (Japan)....11.4
Hong Kong....8.8
Shanghai....12.3
Australia....8.9
Singapore....8.2
Except for the tech-laden Nasdaq, the US markets are selling at 10 to 11 times 2008 estimated earnings while European markets, save Switzerland, are selling between 7 and 9 times earnings. Asian stocks are also very cheap, as the Japanese Nikkei Index is selling at 11.4 times earnings, not much different than stocks in Hong Kong, Australia, and Singapore. The Chinese market, which had been selling at over 50 times earnings last year is now selling at a far more modest 15 times earnings.
Bears will claim that these P-E ratios are too low, since earnings will sharply deteriorate over the next twelve months. Indeed, the last 12 months of reported earnings on the S&P 500 Index have fallen to $51.37 from $84.92 a year earlier. On those numbers, the US market is selling at about an 18 multiple.
But this gives a very distorted picture of the market. Aggregate earnings over the past year are greatly depressed by huge write-offs not only in the financial sector but in other firms. For example, Ford, GM, and Sprint, whose aggregate market value is less than 0.2% of the S&P 500 Index, lowered the S&P's reported earnings by about $12.00, more than 20% of the current aggregate earnings.
Even if these firms all go bankrupt and their stock prices go to zero, it would have a negligible impact on the market value of a well-diversified stock portfolio. The same is true of the financial sector as S&P adds the huge losses in banks that now have almost no value today to the earnings of profitable firms. This means that the P-E ratio of firms that are still profitable is far lower than the ratio calculated for the whole index.
Furthermore, it is a major mistake to use earnings in a recession when calculating the right valuation of the market going forward. That is because stock values are dependent on earnings far in the future, not just those estimated over the next 12 month. (Comment: An important point to note.)
Since stocks have historically sold at 15 times annual earnings, the earnings of the next twelve months contribute only 1/15 of the value of the firm, or less than 7%. The other 93% of the value of stock is realized beyond the next twelve months. Right now the "normal" level of earnings, based on trend analysis of past 15 years of earnings on the S&P 500 Index is $92 a share.
If the average 15 price-earnings ratio applied to these $92 per share normalized earnings, the S&P 500 Index would be selling at 1380, which is almost 50% above its current level. Even if it takes two, or even three years for earnings to return to the trend line, the normalized valuation of the market is far above what it is today.
Worse Economy in the 1970s
The last time the market was at ten times earnings or less was in the late 1970s and early 1980s. Although the financial stocks are more stressed today, the economy was in much worse shape then. Inflation hit 14.8% in the early 1980s and interest rates on perfectly safe, long-term government securities soared to 15.9%. It is little wonder that nobody wanted stocks when you could pocket nearly 16% per year by just investing in treasury bonds. Short term interest rates soared even higher and some money funds were offering yields near 20%.
To get inflation down from these wrenching levels required an extreme tightening by the Fed, which set the Fed funds target at 20% in both 1980 and 1981. These high rates caused a severe recession and the unemployment rate soared to 10.8%, more than 4 ½ percentage points higher than the current level. As soon as inflation abated and interest rates eased, the stock market soared. From 1982 onward began the biggest bull market in the history of stocks.
Final Word
Markets go to extremes in both directions. The prices of tech and internet stocks were unjustified in 1999 and 2000, as the Nasdaq soared beyond 5000. But the Nasdaq fell too low in 2002 when it sank to 1100. Similarly, the irrational exuberance in the housing market in 2005 has turned to unjustified despondency for all world stock markets in the fall of 2008. Chew on this fact: The total losses in the world stock markets have been over $30 trillion dollars over the past year. That is about ten times the entire size of subprime mortgages issued over the past five years, the purported cause of the current crisis. I believe a year from now we will be looking back on this October, kicking ourselves for not having the courage to buy stocks.
Source:
http://finance.yahoo.com/expert/article/futureinvest/118916
Also read:
20.11.2008 - KLSE MARKET PE
Why Stocks Are Dirt Cheap
by Jeremy Siegel, Ph.D.
Posted on Friday, October 31, 2008, 12:00AM
No one can guarantee the future of the stock market. But I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months.
Valuations Low Worldwide
The case for equities at these levels is compelling. The last time we have seen prices this low was more than 30 years ago, when the US economy was in far worse shape than today.
The table below lists the price-to-earnings ratios of the world's major stock markets as of October 29. It is taken directly from the Bloomberg World P-E Ratio (WPE) screen. These P-E ratios are calculated based on 2008 earnings, of which the first two quarters have already been reported and the 3rd and 4th quarters' earnings are estimated. Keep in mind that the average historical P-E ratio of the US stock market has been 15 and that when P-E ratios are ten or lower, investors have reaped generous rewards from investing in stocks.
COUNTRY/INDEX----P-E RATIO
North America
Dow Jones Industrials....10.7
S&P 500 Index....11.7
Nasdaq....16.6
Canada ....9.3
Mexico ....9.7
Europe
Euro Stoxx 50 ....7.9
UK....7.3
France....7.8
Germany....9.5
Spain....7.7
Italy....7.2
Netherlands....5.7
Switzerland....17.3
ASIA
Nikkei (Japan)....11.4
Hong Kong....8.8
Shanghai....12.3
Australia....8.9
Singapore....8.2
Except for the tech-laden Nasdaq, the US markets are selling at 10 to 11 times 2008 estimated earnings while European markets, save Switzerland, are selling between 7 and 9 times earnings. Asian stocks are also very cheap, as the Japanese Nikkei Index is selling at 11.4 times earnings, not much different than stocks in Hong Kong, Australia, and Singapore. The Chinese market, which had been selling at over 50 times earnings last year is now selling at a far more modest 15 times earnings.
Bears will claim that these P-E ratios are too low, since earnings will sharply deteriorate over the next twelve months. Indeed, the last 12 months of reported earnings on the S&P 500 Index have fallen to $51.37 from $84.92 a year earlier. On those numbers, the US market is selling at about an 18 multiple.
But this gives a very distorted picture of the market. Aggregate earnings over the past year are greatly depressed by huge write-offs not only in the financial sector but in other firms. For example, Ford, GM, and Sprint, whose aggregate market value is less than 0.2% of the S&P 500 Index, lowered the S&P's reported earnings by about $12.00, more than 20% of the current aggregate earnings.
Even if these firms all go bankrupt and their stock prices go to zero, it would have a negligible impact on the market value of a well-diversified stock portfolio. The same is true of the financial sector as S&P adds the huge losses in banks that now have almost no value today to the earnings of profitable firms. This means that the P-E ratio of firms that are still profitable is far lower than the ratio calculated for the whole index.
Furthermore, it is a major mistake to use earnings in a recession when calculating the right valuation of the market going forward. That is because stock values are dependent on earnings far in the future, not just those estimated over the next 12 month. (Comment: An important point to note.)
Since stocks have historically sold at 15 times annual earnings, the earnings of the next twelve months contribute only 1/15 of the value of the firm, or less than 7%. The other 93% of the value of stock is realized beyond the next twelve months. Right now the "normal" level of earnings, based on trend analysis of past 15 years of earnings on the S&P 500 Index is $92 a share.
If the average 15 price-earnings ratio applied to these $92 per share normalized earnings, the S&P 500 Index would be selling at 1380, which is almost 50% above its current level. Even if it takes two, or even three years for earnings to return to the trend line, the normalized valuation of the market is far above what it is today.
Worse Economy in the 1970s
The last time the market was at ten times earnings or less was in the late 1970s and early 1980s. Although the financial stocks are more stressed today, the economy was in much worse shape then. Inflation hit 14.8% in the early 1980s and interest rates on perfectly safe, long-term government securities soared to 15.9%. It is little wonder that nobody wanted stocks when you could pocket nearly 16% per year by just investing in treasury bonds. Short term interest rates soared even higher and some money funds were offering yields near 20%.
To get inflation down from these wrenching levels required an extreme tightening by the Fed, which set the Fed funds target at 20% in both 1980 and 1981. These high rates caused a severe recession and the unemployment rate soared to 10.8%, more than 4 ½ percentage points higher than the current level. As soon as inflation abated and interest rates eased, the stock market soared. From 1982 onward began the biggest bull market in the history of stocks.
Final Word
Markets go to extremes in both directions. The prices of tech and internet stocks were unjustified in 1999 and 2000, as the Nasdaq soared beyond 5000. But the Nasdaq fell too low in 2002 when it sank to 1100. Similarly, the irrational exuberance in the housing market in 2005 has turned to unjustified despondency for all world stock markets in the fall of 2008. Chew on this fact: The total losses in the world stock markets have been over $30 trillion dollars over the past year. That is about ten times the entire size of subprime mortgages issued over the past five years, the purported cause of the current crisis. I believe a year from now we will be looking back on this October, kicking ourselves for not having the courage to buy stocks.
Source:
http://finance.yahoo.com/expert/article/futureinvest/118916
Also read:
20.11.2008 - KLSE MARKET PE
Yes, Stocks Are Dirt Cheap
Jeremy Siegel, Ph.D. The Future for Investors
Yes, Stocks Are Dirt Cheap
by Jeremy Siegel, Ph.D.
Posted on Monday, December 1, 2008, 12:00AM
Yes, Stocks Are Dirt Cheap
by Jeremy Siegel, Ph.D.
Posted on Monday, December 1, 2008, 12:00AM
I knew that my last article in Yahoo! Finance, “Why Stocks are Dirt Cheap,” would elicit strong opinions, but little did I imagine how controversial it would prove to be! The column attracted comments ranging from “Off with his head!” to “Bravo!”
The article also attracted considerable attention from finance professionals. Henry Blodget disagreed with my analysis, stating that other well-known financial analysts, such as Jeremy Grantham, John Hussman, Andrew Smithers, and my good friend Robert Shiller of Yale University, put fair value of the S&P 500 Index around 1000, far below where I think it should trade. Ned Davis Research, a well known and respected research firm, also took exception to my earnings estimates.
I have nothing but the highest respect for all these individuals and I believe their work must be taken seriously. But I believe their criticisms are wrong and here I explain why I get a significantly higher fair value estimate for stock values than they do.
Trend Earnings
In last month’s article, my fair-value estimate for the S&P 500 Index was derived from a “normalized” earnings of $92 a share for the S&P 500 Index times a 15 average price-to-earnings ratio for the stock market. “Normalized” earnings are earnings stripping away the effects of business cycle, so that normalized earnings are higher than actual earnings in recessions, such as now, and lower at the top of booms. Currently, Standard and Poor’s is projecting that operating earnings for the S&P 500 Index in 2008 will be $64.14 while reported earnings, which contains very large write-offs from a few firms, are at $49 per share.
My estimate of $92 for normalized earnings drew considerable criticism, partially because it was based only on earnings over the past 18 years. If one looks at considerably longer-term time spans, some believe the trends forecast much lower earnings.
The farthest back we have historical earnings is 1872, based on valuable data that Prof. Robert Shiller brought to light in his book Market Volatility, published in 1989. These historical data are based on splicing together data from Standard and Poor’s that goes back to 1928 to earlier data compiled by Cowles Foundation researchers.
The graph below depicts those earnings per share data for the US stock market from 1872 through the present, corrected for inflation. Looking at this graph, it certainly appears that earnings over most of the past 20 years have been far above average and that these earnings may now correct to the mean of only $56.40 per share, not far from reported earnings projections this year. If we apply the historical P-E ratio of 15 to $56.40, we get a projected level of the S&P 500 Index of only 840.
Flaw in Analysis
But there is an important flaw in using a single trend line to project the future. Doing so assumes that there has been a constant growth rate of real per share earnings over the entire period, an assumption that depends, among other factors, on an unchanging dividend policy of firms.
Yet dividend policy of firms has changed dramatically. The ratio of dividends paid to earnings, called the payout ratio, has dropped significantly over the past thirty years. The decline in the payout ratio has substantially boosted the growth rate of earnings per share. Failure to take this into account will result in a serious underestimate of trend earnings.
The article also attracted considerable attention from finance professionals. Henry Blodget disagreed with my analysis, stating that other well-known financial analysts, such as Jeremy Grantham, John Hussman, Andrew Smithers, and my good friend Robert Shiller of Yale University, put fair value of the S&P 500 Index around 1000, far below where I think it should trade. Ned Davis Research, a well known and respected research firm, also took exception to my earnings estimates.
I have nothing but the highest respect for all these individuals and I believe their work must be taken seriously. But I believe their criticisms are wrong and here I explain why I get a significantly higher fair value estimate for stock values than they do.
Trend Earnings
In last month’s article, my fair-value estimate for the S&P 500 Index was derived from a “normalized” earnings of $92 a share for the S&P 500 Index times a 15 average price-to-earnings ratio for the stock market. “Normalized” earnings are earnings stripping away the effects of business cycle, so that normalized earnings are higher than actual earnings in recessions, such as now, and lower at the top of booms. Currently, Standard and Poor’s is projecting that operating earnings for the S&P 500 Index in 2008 will be $64.14 while reported earnings, which contains very large write-offs from a few firms, are at $49 per share.
My estimate of $92 for normalized earnings drew considerable criticism, partially because it was based only on earnings over the past 18 years. If one looks at considerably longer-term time spans, some believe the trends forecast much lower earnings.
The farthest back we have historical earnings is 1872, based on valuable data that Prof. Robert Shiller brought to light in his book Market Volatility, published in 1989. These historical data are based on splicing together data from Standard and Poor’s that goes back to 1928 to earlier data compiled by Cowles Foundation researchers.
The graph below depicts those earnings per share data for the US stock market from 1872 through the present, corrected for inflation. Looking at this graph, it certainly appears that earnings over most of the past 20 years have been far above average and that these earnings may now correct to the mean of only $56.40 per share, not far from reported earnings projections this year. If we apply the historical P-E ratio of 15 to $56.40, we get a projected level of the S&P 500 Index of only 840.
Flaw in Analysis
But there is an important flaw in using a single trend line to project the future. Doing so assumes that there has been a constant growth rate of real per share earnings over the entire period, an assumption that depends, among other factors, on an unchanging dividend policy of firms.
Yet dividend policy of firms has changed dramatically. The ratio of dividends paid to earnings, called the payout ratio, has dropped significantly over the past thirty years. The decline in the payout ratio has substantially boosted the growth rate of earnings per share. Failure to take this into account will result in a serious underestimate of trend earnings.
The table below confirms that the fall in the payout ratio has boosted earnings growth. The shift in dividend policy took place in the early 1980s when firms, because of liberalized rules for share repurchases, taxes favoring capital gains, and the proliferation of management stock options, reduced the amount of earnings paid out as dividends. The average payout ratio before 1982 was 64.7%, about 40% higher than the 46.6% payout ratio after 1982. As the payout ratio declined, the dividend yield declined and the growth of earnings accelerated.
Finance theory predicts, and historical data confirms, that if a firm pays a lower proportion of its earnings as dividends, then these unpaid earnings must be used to either repurchase shares, lower debt, or invest in capital. In any of these cases, per share earnings growth will increase.
Table 1. Selected Stock Market Variables
Financial Variable
1871-2007...1871-1981...1982-2007
Payout Ratio
61.2%...64.7%...46.6%
Dividend Yield
4.52%...4.96%...2.66%
EPS Growth
1.56%...1.41%...4.5%
A higher rate of earnings growth from lowering the dividend does not imply that investors obtain a higher return on their investment when management lowers the dividend payout. The return to shareholders is the sum of the dividend yield and price appreciation. On average, a dollar of retained earnings will yield investors a return that compensates the investor for the lost dividend income. But dividend policy will impact earnings growth.
A higher rate of earnings growth also means that using “smoothed” earnings, derived by averaging ten years’ of past data as Prof. Shiller and others advocate, will yield a distorted valuation of the market. If earnings growth has accelerated, the average of the past ten years will result in a greater underestimate of earnings in more recent decades.
Look back at the long-term chart again. A new trend line has been drawn covering the period of faster earnings growth that occurs after 1981. According to the new trend, the normalized level of 2009 earnings is a far higher $87.66 than predicted by the single trend line. This earnings figure is slightly below the $92.00 that I estimated in my previous article using analysis over the past 18 years, but it is not appreciably different.
If we apply a 15 P-E ratio to $87.66 level of earnings, we get a fair value of the S&P 500 Index at 1315, almost 50% above the level the market closed on the Wednesday before Thanksgiving. Furthermore, with the ten year government bond rate falling below 3%, we are in the lowest interest rate environment we have had over the past 50 years. Normally, when interest rates are this low, stocks sell for a higher-than-average P-E ratio. To obtain 1380 fair value of the market that I estimated last month, the P-E ratio would need to be less than one point above its long run average of 15.
Objections to My Analysis
Some analysts, such as Robert Arnott and Peter Bernstein have claimed that earnings do not grow faster when the payout ratio is reduced since the retained earnings are wasted on unproductive investment and excess executive compensation. Yet the higher earnings growth from 1981-2007 contradicts their objections.
Others may object to my use of “operating earnings” rather than reported earnings, in making my projection. Operating earnings exclude some of the big write-offs that arise from restructuring, pension revaluations, impairment charges, and portfolio losses, although they do include many of the recent write-offs of financial firms.
Although operating earnings are only reported back to 1988, the earnings data before that date are, according to sources I have contacted at Standard and Poor’s, closer to the concept of operating earnings than reported earnings. This is because FASB has sharply increased the number and type of charges that firms must write off and this has depressed reported income, especially during recessions.
Other Distortions in Earnings Data
The increasing number of large write-offs has also led to a distorted look at the earnings levels for the S&P 500 Index. In another article, I have discussed how there are major distortions in the official earnings numbers provided by index providers like S&P. Six firms (AIG, Wachovia, Sprint, GM, Merrill Lynch, and Citigroup) with over $170 billion dollars in losses over the past year, lowered aggregate earnings on the S&P 500 Index by nearly $20 per share. Yet these firms are tiny and represent less than 1% of the S&P 500 by weight. That is to say over 99% of the S&P 500 had earnings that were closer to $70 per share when the officially reported results are more like $50 per share.
I have proposed a new method for calculating earnings for the index that more logically takes into account the weight of each firm in the index when considering their earnings or losses. Using a weighted average method for estimating earnings for the S&P 500 index, I find that trailing 12-month reported earnings on the S&P 500 are closer to $78 per share and operating earnings are $83, despite the economic slump. Using the $83 figure and my 1380 fair value estimate of the S&P 500, would give only a 16.6 times P/E ratio, a conservative valuations given the very low interest rate environment.
Bottom Line
I maintain that the stock market is significantly undervalued even when you use very long-term trends to analyze earnings growth. Moreover, the officially reported results are understating the true profitability of the market. The low level of stocks today is not a result of investors expecting current depressed levels of earnings will persist, but rather a result of record risk premiums in the debt and equity markets. When these extraordinary risk levels return to normal, we can expect much higher stock prices.
Financial Variable
1871-2007...1871-1981...1982-2007
Payout Ratio
61.2%...64.7%...46.6%
Dividend Yield
4.52%...4.96%...2.66%
EPS Growth
1.56%...1.41%...4.5%
A higher rate of earnings growth from lowering the dividend does not imply that investors obtain a higher return on their investment when management lowers the dividend payout. The return to shareholders is the sum of the dividend yield and price appreciation. On average, a dollar of retained earnings will yield investors a return that compensates the investor for the lost dividend income. But dividend policy will impact earnings growth.
A higher rate of earnings growth also means that using “smoothed” earnings, derived by averaging ten years’ of past data as Prof. Shiller and others advocate, will yield a distorted valuation of the market. If earnings growth has accelerated, the average of the past ten years will result in a greater underestimate of earnings in more recent decades.
Look back at the long-term chart again. A new trend line has been drawn covering the period of faster earnings growth that occurs after 1981. According to the new trend, the normalized level of 2009 earnings is a far higher $87.66 than predicted by the single trend line. This earnings figure is slightly below the $92.00 that I estimated in my previous article using analysis over the past 18 years, but it is not appreciably different.
If we apply a 15 P-E ratio to $87.66 level of earnings, we get a fair value of the S&P 500 Index at 1315, almost 50% above the level the market closed on the Wednesday before Thanksgiving. Furthermore, with the ten year government bond rate falling below 3%, we are in the lowest interest rate environment we have had over the past 50 years. Normally, when interest rates are this low, stocks sell for a higher-than-average P-E ratio. To obtain 1380 fair value of the market that I estimated last month, the P-E ratio would need to be less than one point above its long run average of 15.
Objections to My Analysis
Some analysts, such as Robert Arnott and Peter Bernstein have claimed that earnings do not grow faster when the payout ratio is reduced since the retained earnings are wasted on unproductive investment and excess executive compensation. Yet the higher earnings growth from 1981-2007 contradicts their objections.
Others may object to my use of “operating earnings” rather than reported earnings, in making my projection. Operating earnings exclude some of the big write-offs that arise from restructuring, pension revaluations, impairment charges, and portfolio losses, although they do include many of the recent write-offs of financial firms.
Although operating earnings are only reported back to 1988, the earnings data before that date are, according to sources I have contacted at Standard and Poor’s, closer to the concept of operating earnings than reported earnings. This is because FASB has sharply increased the number and type of charges that firms must write off and this has depressed reported income, especially during recessions.
Other Distortions in Earnings Data
The increasing number of large write-offs has also led to a distorted look at the earnings levels for the S&P 500 Index. In another article, I have discussed how there are major distortions in the official earnings numbers provided by index providers like S&P. Six firms (AIG, Wachovia, Sprint, GM, Merrill Lynch, and Citigroup) with over $170 billion dollars in losses over the past year, lowered aggregate earnings on the S&P 500 Index by nearly $20 per share. Yet these firms are tiny and represent less than 1% of the S&P 500 by weight. That is to say over 99% of the S&P 500 had earnings that were closer to $70 per share when the officially reported results are more like $50 per share.
I have proposed a new method for calculating earnings for the index that more logically takes into account the weight of each firm in the index when considering their earnings or losses. Using a weighted average method for estimating earnings for the S&P 500 index, I find that trailing 12-month reported earnings on the S&P 500 are closer to $78 per share and operating earnings are $83, despite the economic slump. Using the $83 figure and my 1380 fair value estimate of the S&P 500, would give only a 16.6 times P/E ratio, a conservative valuations given the very low interest rate environment.
Bottom Line
I maintain that the stock market is significantly undervalued even when you use very long-term trends to analyze earnings growth. Moreover, the officially reported results are understating the true profitability of the market. The low level of stocks today is not a result of investors expecting current depressed levels of earnings will persist, but rather a result of record risk premiums in the debt and equity markets. When these extraordinary risk levels return to normal, we can expect much higher stock prices.
**Exploring Durable Competitive Advantage
Company with Durable Competitive Advantage 1
Selling a unique product 2
Selling a unique service 3
Low-cost buyer and seller of a product or service 4...
Warren's durable competitive advantage companies 5...
Buffett versus Graham 6
Durability is the Ticket to Riches 7
Financial Statement: Where the Gold is Hidden 8
Durable Competititve Advantage - Conclusion 9
Calling a bottom more than once!
Reuters
"Bottom's been made" in stocks: Legg Mason's Miller
Wednesday December 3, 5:05 pm ET
By Jennifer Ablan and Herbert Lash
NEW YORK (Reuters) - Legg Mason's (NYSE:LM - News) Bill Miller, a celebrated value investor but whose stock picking is far off the mark this year, said on Wednesday the "bottom has been made" in U.S. equities, and forecast opportunities for strong gains once markets rally.
He said the Federal Reserve should buy stocks and junk bonds to avert a deeper financial crisis, adding "the taxpayer would make a killing" as markets rebound. (!!!!!!)
Speaking at Legg Mason's annual luncheon for media, Miller said that all long-term investors believe that stocks today are cheap, but credit markets must regain health before equity markets can rally.
It "looks as if the bottom has been made" in U.S. stocks, he said.
Miller's comments were given partial credit for Wednesday's 172.60-point rise in the Dow Jones industrial average (DJI:^DJI - News).
Miller, who runs Legg Mason's $7.6 billion Value Trust fund, told Reuters the year has been "terrible, a disaster and awful," yet he held out his past performance in down markets as a reason why he should not be counted out.
"We've performed in most of the financial panics that we've had -- the last one being the three-year bear market ending in 2002 -- we outperformed all the way through that," he said.
"So even though we lost money, we lost a lot less money than the market did," Miller added.
However, Miller acknowledged that his performance has been worse than in past downturns.
"When you're underperforming and losing more money than the market in a down market, then that's a much more problematic situation. We've performed far worse than I would've predicted we would," he said.
For the year, Miller's flagship Value Trust (NASDAQ:LMVTX - News) fund was down 59.7 percent as of Tuesday, compared to a 41 percent decline in the reinvested returns of the S&P 500 index, according to Lipper Inc., a unit of Thomson Reuters.
Performance over the year-to-date, one-, three- and five-year periods for Value Trust put it at the bottom of the barrel among its peers, Lipper data shows.
Miller's track record of calling market bottoms also hasn't been so hot.
In late April, one month after Bear Stearns' spectacular fall, Miller told his shareholders: "I think we will do better from here on, and that by far the worst is behind us."
All told, the severe market sell-off has provided ample opportunities.
"This market is very unusual because since the end of the second quarter, it has been a pure scramble for liquidity, which accelerated obviously post-Lehman Brothers and people sold without regard to value at all," Miller said.
"So at the end of the end of this quarter, every sector in the market has companies that represent what we think are exceptional value."
(Editing by Leslie Adler)
http://biz.yahoo.com/rb/081203/business_us_funds_leggmason.html?.v=4
Comment: The experts are so divided. The market remains extremely volatile. It is difficult to know that the market has reached the bottom, but one can agree that there are many stocks that are trading at fair or exceptional bargain valuation.
"Bottom's been made" in stocks: Legg Mason's Miller
Wednesday December 3, 5:05 pm ET
By Jennifer Ablan and Herbert Lash
NEW YORK (Reuters) - Legg Mason's (NYSE:LM - News) Bill Miller, a celebrated value investor but whose stock picking is far off the mark this year, said on Wednesday the "bottom has been made" in U.S. equities, and forecast opportunities for strong gains once markets rally.
He said the Federal Reserve should buy stocks and junk bonds to avert a deeper financial crisis, adding "the taxpayer would make a killing" as markets rebound. (!!!!!!)
Speaking at Legg Mason's annual luncheon for media, Miller said that all long-term investors believe that stocks today are cheap, but credit markets must regain health before equity markets can rally.
It "looks as if the bottom has been made" in U.S. stocks, he said.
Miller's comments were given partial credit for Wednesday's 172.60-point rise in the Dow Jones industrial average (DJI:^DJI - News).
Miller, who runs Legg Mason's $7.6 billion Value Trust fund, told Reuters the year has been "terrible, a disaster and awful," yet he held out his past performance in down markets as a reason why he should not be counted out.
"We've performed in most of the financial panics that we've had -- the last one being the three-year bear market ending in 2002 -- we outperformed all the way through that," he said.
"So even though we lost money, we lost a lot less money than the market did," Miller added.
However, Miller acknowledged that his performance has been worse than in past downturns.
"When you're underperforming and losing more money than the market in a down market, then that's a much more problematic situation. We've performed far worse than I would've predicted we would," he said.
For the year, Miller's flagship Value Trust (NASDAQ:LMVTX - News) fund was down 59.7 percent as of Tuesday, compared to a 41 percent decline in the reinvested returns of the S&P 500 index, according to Lipper Inc., a unit of Thomson Reuters.
Performance over the year-to-date, one-, three- and five-year periods for Value Trust put it at the bottom of the barrel among its peers, Lipper data shows.
Miller's track record of calling market bottoms also hasn't been so hot.
In late April, one month after Bear Stearns' spectacular fall, Miller told his shareholders: "I think we will do better from here on, and that by far the worst is behind us."
All told, the severe market sell-off has provided ample opportunities.
"This market is very unusual because since the end of the second quarter, it has been a pure scramble for liquidity, which accelerated obviously post-Lehman Brothers and people sold without regard to value at all," Miller said.
"So at the end of the end of this quarter, every sector in the market has companies that represent what we think are exceptional value."
(Editing by Leslie Adler)
http://biz.yahoo.com/rb/081203/business_us_funds_leggmason.html?.v=4
Comment: The experts are so divided. The market remains extremely volatile. It is difficult to know that the market has reached the bottom, but one can agree that there are many stocks that are trading at fair or exceptional bargain valuation.
Home Prices Seem Far From Bottom
Home Prices Seem Far From Bottom
by Vikas Bajaj
Friday, October 17, 2008
The American housing market, where the global economic crisis began, is far from hitting bottom.
Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.
In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.
More from NYTimes.com: • Don't Be Rushed Into Buying Stock • Start-Ups Give Idaho an Identity Beyond Potatoes • The Frugal Teenager, Ready or Not
Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates -- all of which will reduce the already diminished pool of would-be buyers.
"The No. 1 thing that drives housing values is incomes," said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. "When incomes fall, demand for housing falls."
Despite the government's move to bolster the banking industry, home loan rates rose again on Tuesday, reflecting concern that the Treasury will borrow heavily to finance the rescue.
On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.
As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data.
At the same time, the number of people who are losing jobs or seeing their incomes decline is rising. The unemployment rate has climbed to 6.1 percent, from 4.4 percent at the end of 2007, and wages for those who still have a job have barely kept up with inflation.
In New York and other cities that rely heavily on the financial sector, economists expect that job losses will increase and that pay heavily tied to year-end bonuses will decline significantly.
One reliable proxy of housing values -- the ratio of home prices to rents -- indicates that in many cities prices are still too high relative to historical norms.
In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody's Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.
The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.
It increased the most on the coasts and somewhat less in the middle of the country.
Economy.com's calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.
The current housing downturn is much more national in scope and severe than any other in the postwar period, partly because of the proliferation of risky lending practices. Today, foreclosures are running ahead of the downturn in the economy, a reversal of previous housing slumps.
"We are in uncharted waters," said Brian A. Bethune, an economist at Global Insight, a research firm.
Colleen Pestana, a real estate agent in Orange County in California, said many people losing their homes in Southern California used to work at mortgage and real estate companies. Many of them bet heavily on real estate by upgrading to bigger houses every few years. Now, many are losing their homes.
At the same time, Ms. Pestana said, her clients who are looking to buy are having a harder time lining up financing. One of her clients recently had to give up on a home after the lender that had offered a pre-approved loan changed its mind -- a frequent occurrence, according to real estate agents and mortgage brokers.
"I am working harder than I have ever had to work to get a deal together and keep it together," said Ms. Pestana, who has been a real estate agent for seven years.
To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.
Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)
Higher interest rates result in bigger monthly payments, pricing some potential buyers out of the market. For example, monthly payments are $2,700 on a 6 percent 30-year, fixed-rate loan of $450,000. If the interest rate rises to 7 percent, those monthly payments jump to $3,000. All things being equal, when rates rise prices generally fall.
This month, Fannie and Freddie canceled a fee increase that would have applied to markets where home prices are falling, but the companies still have many other fees in place. In an effort to help drive down rates, the Treasury Department has announced plans to buy mortgage-backed securities issued by Fannie and Freddie. The government also recently increased the amount of loans the companies can buy and hold.
Still, those efforts will take time to have an impact and it is not clear whether they will be sufficient to get banks to lend more freely, especially in areas where jumbo loans make up a bigger percentage of lending, like New York and parts of California and Florida. Economists say that prices in those places will probably fall further.
In some of those places, price declines are being driven by a sharp increase in sales of foreclosed homes.
More from Yahoo! Finance: • Towns That Could Be Hit Hardest by the Financial Crisis • Most And Least Expensive U.S. Cities For Homeowners • Top 5 Inexpensive Ways to Boost Your Home's Value
Visit the Real Estate Center
Hudson & Marshall, a Dallas-based auctioneer that holds sales for lenders, reports that banks are accepting prices that they refused to consider just 12 months earlier. In a recent auction of 110 foreclosed homes in the Las Vegas area, for instance, the auctioneer's clients accepted 90 percent of the bids submitted by buyers, up from 60 percent a year earlier, said David T. Webb, a co-owner of the company.
Single-family home prices in Las Vegas have already fallen 34 percent from their peak in the summer of 2006, according to the Standard & Poor's Case-Shiller home price index. Prices in San Diego have fallen 31 percent since late 2005.
While those declines have been painful to homeowners in those cities, economists said the quick decline might help the markets reach bottom faster than in previous housing cycles, said Edward E. Leamer, an economist at the University of California, Los Angeles. In a previous boom, home prices peaked in the Los Angeles area in 1990 but did not hit bottom until 1996. Prices remained near that low for more than a year before starting to climb again.
"In some areas of California, we are really at appropriate levels," Mr. Leamer said of current home prices. But he added: "The risk is that we are going to get some overshooting, meaning that prices will be lower than they ought to be."
In Florida, Jack McCabe, a real estate consultant, said that while some cities, like Fort Myers, are showing tentative signs of a rebound, others like Miami and Fort Lauderdale are still under pressure. Two homes on his street in Fort Lauderdale that sold for about $730,000 apiece in 2005 recently sold for $400,000 -- a 44 percent decline.
"The rocket has run out of fuel, and now it's plunged back down to earth," he said.
Tara Siegel Bernard contributed reporting.
http://finance.yahoo.com/real-estate/article/105964/Home-Prices-Seem-Far-From-Bottom
by Vikas Bajaj
Friday, October 17, 2008
The American housing market, where the global economic crisis began, is far from hitting bottom.
Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.
In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.
More from NYTimes.com: • Don't Be Rushed Into Buying Stock • Start-Ups Give Idaho an Identity Beyond Potatoes • The Frugal Teenager, Ready or Not
Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates -- all of which will reduce the already diminished pool of would-be buyers.
"The No. 1 thing that drives housing values is incomes," said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. "When incomes fall, demand for housing falls."
Despite the government's move to bolster the banking industry, home loan rates rose again on Tuesday, reflecting concern that the Treasury will borrow heavily to finance the rescue.
On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.
As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data.
At the same time, the number of people who are losing jobs or seeing their incomes decline is rising. The unemployment rate has climbed to 6.1 percent, from 4.4 percent at the end of 2007, and wages for those who still have a job have barely kept up with inflation.
In New York and other cities that rely heavily on the financial sector, economists expect that job losses will increase and that pay heavily tied to year-end bonuses will decline significantly.
One reliable proxy of housing values -- the ratio of home prices to rents -- indicates that in many cities prices are still too high relative to historical norms.
In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody's Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.
The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.
It increased the most on the coasts and somewhat less in the middle of the country.
Economy.com's calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.
The current housing downturn is much more national in scope and severe than any other in the postwar period, partly because of the proliferation of risky lending practices. Today, foreclosures are running ahead of the downturn in the economy, a reversal of previous housing slumps.
"We are in uncharted waters," said Brian A. Bethune, an economist at Global Insight, a research firm.
Colleen Pestana, a real estate agent in Orange County in California, said many people losing their homes in Southern California used to work at mortgage and real estate companies. Many of them bet heavily on real estate by upgrading to bigger houses every few years. Now, many are losing their homes.
At the same time, Ms. Pestana said, her clients who are looking to buy are having a harder time lining up financing. One of her clients recently had to give up on a home after the lender that had offered a pre-approved loan changed its mind -- a frequent occurrence, according to real estate agents and mortgage brokers.
"I am working harder than I have ever had to work to get a deal together and keep it together," said Ms. Pestana, who has been a real estate agent for seven years.
To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.
Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)
Higher interest rates result in bigger monthly payments, pricing some potential buyers out of the market. For example, monthly payments are $2,700 on a 6 percent 30-year, fixed-rate loan of $450,000. If the interest rate rises to 7 percent, those monthly payments jump to $3,000. All things being equal, when rates rise prices generally fall.
This month, Fannie and Freddie canceled a fee increase that would have applied to markets where home prices are falling, but the companies still have many other fees in place. In an effort to help drive down rates, the Treasury Department has announced plans to buy mortgage-backed securities issued by Fannie and Freddie. The government also recently increased the amount of loans the companies can buy and hold.
Still, those efforts will take time to have an impact and it is not clear whether they will be sufficient to get banks to lend more freely, especially in areas where jumbo loans make up a bigger percentage of lending, like New York and parts of California and Florida. Economists say that prices in those places will probably fall further.
In some of those places, price declines are being driven by a sharp increase in sales of foreclosed homes.
More from Yahoo! Finance: • Towns That Could Be Hit Hardest by the Financial Crisis • Most And Least Expensive U.S. Cities For Homeowners • Top 5 Inexpensive Ways to Boost Your Home's Value
Visit the Real Estate Center
Hudson & Marshall, a Dallas-based auctioneer that holds sales for lenders, reports that banks are accepting prices that they refused to consider just 12 months earlier. In a recent auction of 110 foreclosed homes in the Las Vegas area, for instance, the auctioneer's clients accepted 90 percent of the bids submitted by buyers, up from 60 percent a year earlier, said David T. Webb, a co-owner of the company.
Single-family home prices in Las Vegas have already fallen 34 percent from their peak in the summer of 2006, according to the Standard & Poor's Case-Shiller home price index. Prices in San Diego have fallen 31 percent since late 2005.
While those declines have been painful to homeowners in those cities, economists said the quick decline might help the markets reach bottom faster than in previous housing cycles, said Edward E. Leamer, an economist at the University of California, Los Angeles. In a previous boom, home prices peaked in the Los Angeles area in 1990 but did not hit bottom until 1996. Prices remained near that low for more than a year before starting to climb again.
"In some areas of California, we are really at appropriate levels," Mr. Leamer said of current home prices. But he added: "The risk is that we are going to get some overshooting, meaning that prices will be lower than they ought to be."
In Florida, Jack McCabe, a real estate consultant, said that while some cities, like Fort Myers, are showing tentative signs of a rebound, others like Miami and Fort Lauderdale are still under pressure. Two homes on his street in Fort Lauderdale that sold for about $730,000 apiece in 2005 recently sold for $400,000 -- a 44 percent decline.
"The rocket has run out of fuel, and now it's plunged back down to earth," he said.
Tara Siegel Bernard contributed reporting.
http://finance.yahoo.com/real-estate/article/105964/Home-Prices-Seem-Far-From-Bottom
Your Once-in-a-Lifetime Investing Opportunity
Your Once-in-a-Lifetime Investing Opportunity
By Chuck Saletta
December 3, 2008
"Panic" might be too weak a word for what's going on out there. It's not just that the stock market has been affected -- the far larger lending market has seized up as well. Banks don't want to lend to each other, much less those of us out here in the real world, and the bond markets remain off-limits to all but the strongest of borrowers.
And all of that is leaving everyone terrified. The long-term future simply doesn't matter all that much to a company that risks oblivion in the next week if it can't roll over its maturing debt or cover tomorrow's margin call.
The companies hit hardest by this mess have been the ones that were built on the presumption of easy, cheap, and unlimited credit. Homebuilders like Centex (NYSE: CTX) are in a world of hurt, and even the strongest automobile titans like Toyota (NYSE: TM) are feeling the impact of the credit crunch. But it was investment banks and financial institutions -- the largest and fiercest players on Wall Street -- that were literally ground zero for this implosion.
The list of companies brought down by the implosion -- Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac -- includes some of the most notable names on Wall Street. The list of companies struggling to survive the economic downturn grows longer by the day. And that's creating a once-in-a-lifetime investing opportunity -- for you.
It's your turn There are unbelievable bargains available now, the likes of which we haven't seen since the days of Benjamin Graham. Under less unusual circumstances, Wall Street's financial wizards would be leveraging themselves to the hilt to take advantage of the market's current conditions. But with their funds cut off, redeemed, or diverted into mere survival, they're forced to sit on the sidelines, rendered completely unable to act.
That's where you come in. As long as you have the patience to wait out the volatility, you can buy those very same bargains (without the leverage) and be richly rewarded when things return to normal.
The country, the stock market, and the strongest companies of the era survived the Great Depression. We'll get through this mess, too. Much the way Benjamin Graham and his protege Warren Buffett did after past catastrophes, the superinvestors of this generation will make their fortunes buying on the heels of this one.
Where to play
Even if you don't aspire to be the next Graham or Buffett (and don't have $5 billion sitting around with which to invest in a struggling company), there are plenty of bargains available to you right now.
But be careful out there -- not every company that has fallen is legitimately cheap. We're in the throes of a global economic rout, after all, and many companies deserve their slashed share prices.
Those whose prices have dropped as a result of forced selling or general market malaise, on the other hand, are the most likely to reward their shareholders for holding on through this mess.
http://www.fool.com/investing/value/2008/12/03/your-once-in-a-lifetime-investing-opportunity.aspx
Also read:
http://financialfellow.com/2008/11/24/yet-another-reason-to-start-saving-for-retirement-early/
By Chuck Saletta
December 3, 2008
"Panic" might be too weak a word for what's going on out there. It's not just that the stock market has been affected -- the far larger lending market has seized up as well. Banks don't want to lend to each other, much less those of us out here in the real world, and the bond markets remain off-limits to all but the strongest of borrowers.
And all of that is leaving everyone terrified. The long-term future simply doesn't matter all that much to a company that risks oblivion in the next week if it can't roll over its maturing debt or cover tomorrow's margin call.
The companies hit hardest by this mess have been the ones that were built on the presumption of easy, cheap, and unlimited credit. Homebuilders like Centex (NYSE: CTX) are in a world of hurt, and even the strongest automobile titans like Toyota (NYSE: TM) are feeling the impact of the credit crunch. But it was investment banks and financial institutions -- the largest and fiercest players on Wall Street -- that were literally ground zero for this implosion.
The list of companies brought down by the implosion -- Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac -- includes some of the most notable names on Wall Street. The list of companies struggling to survive the economic downturn grows longer by the day. And that's creating a once-in-a-lifetime investing opportunity -- for you.
It's your turn There are unbelievable bargains available now, the likes of which we haven't seen since the days of Benjamin Graham. Under less unusual circumstances, Wall Street's financial wizards would be leveraging themselves to the hilt to take advantage of the market's current conditions. But with their funds cut off, redeemed, or diverted into mere survival, they're forced to sit on the sidelines, rendered completely unable to act.
That's where you come in. As long as you have the patience to wait out the volatility, you can buy those very same bargains (without the leverage) and be richly rewarded when things return to normal.
The country, the stock market, and the strongest companies of the era survived the Great Depression. We'll get through this mess, too. Much the way Benjamin Graham and his protege Warren Buffett did after past catastrophes, the superinvestors of this generation will make their fortunes buying on the heels of this one.
Where to play
Even if you don't aspire to be the next Graham or Buffett (and don't have $5 billion sitting around with which to invest in a struggling company), there are plenty of bargains available to you right now.
But be careful out there -- not every company that has fallen is legitimately cheap. We're in the throes of a global economic rout, after all, and many companies deserve their slashed share prices.
Those whose prices have dropped as a result of forced selling or general market malaise, on the other hand, are the most likely to reward their shareholders for holding on through this mess.
They typically have
- Strong balance sheets,
- Reasonable or cheap valuations, and
- Moats protecting their core businesses.
Companies like these, for instance:
Company/Moat/Value proposition
Wal-Mart
(NYSE: WMT)
Unparalleled supply chain.Scale to leverage best prices.
Trailing P/E below 16;$5.9 billion in cash on hand.
Microsoft
(Nasdaq: MSFT)
So dominant, it's routinely classified as a monopoly.Nobody likes Vista, but they're buying it anyway.
Trailing P/E below 11;$19.7 billion in cash on hand.
Altria
(NYSE: MO)
In spite of knowing better, people still smoke.Government-enforced market-share protection thanks to master settlement agreement.
Forward P/E around 9;more cash on hand than total debt.
Oracle
(Nasdaq: ORCL)
Dominant position in database market gives it leverage in related business software categories.
Trailing P/E below 15;more cash on hand than total debt.
Verizon
(NYSE: VZ)
Captive markets for line-based phone services.Already built-out cellular network.
Trailing P/E below 15;total debt less than 1/2 of revenue.
Although these companies are likely to be affected by the U.S.'s newly declared year-old recession and the general tightening of consumer credit, their basic businesses are solid. Solid businesses, clean balance sheets, and cheap prices compared to intrinsic value mean these are the types of opportunities you should be taking advantage of right now -- while you still can.
This won't last forever
In ordinary times, companies this strong would not be available at such attractive prices. These deals are available only because the global financial meltdown has knocked out so very many of the institutional investors who would ordinarily bid these companies up much higher.
If you want to pay bargain-basement prices for some of the strongest businesses around, this is when you should pounce. It's not easy to buy when everyone is panicking, but it's precisely how generations of successful value investors have made their fortunes.
At Motley Fool Inside Value, we're taking advantage of the brief window we've been given -- and we're excited to buy companies like these at such reasonable prices. You can get a free, 30-day trial, with all of our recommendations but no obligation to subscribe, just by clicking here.
At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Microsoft. Wal-Mart and Microsoft are Motley Fool Inside Value selections. The Fool's disclosure policy knows the corporate American Express number but isn't telling.
http://www.fool.com/investing/value/2008/12/03/your-once-in-a-lifetime-investing-opportunity.aspx
Also read:
http://financialfellow.com/2008/11/24/yet-another-reason-to-start-saving-for-retirement-early/
Wednesday 3 December 2008
The Future for Home Prices (For Property Investors)
DECEMBER 2, 2008
The Future for Home Prices
Americans still see real estate as their best shot at wealth. It may be wishful thinking.
By JAMES R. HAGERTY
Over the past few years, Americans have had a brutal lesson in the risks of real estate. House prices have crashed more than 35% in some parts of the country, millions of people are losing their homes to foreclosure, and banks are failing.
The takeaway?
Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now.
The Journal Report
See the complete Your Money Matters report.
Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years.
Down the Road
And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again -- but, on average, probably not nearly as much as they've averaged over the past decade. That isn't to say that some places won't experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.
Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.
Other experts make similarly modest predictions. William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody's Economy.com, a research firm, expects house prices to increase an average of around 4% a year over the next couple of decades.
Some experts say it's a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.
For all of those forecasts, many Americans are undaunted. Consider three surveys, all from October.
In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.
Real Time Economics
The S&P/Case-Shiller home-price index showed accelerating price declines in September. See a sortable chart of home prices, by metro area.
"I just believe in real estate," says Jason Schram, a lawyer in Chicago who has bought two rental properties this year at what he considers fire-sale prices. "I've seen over and over people I know build wealth through rental real estate, and that's the path I intend taking, even though it's a bit bumpy at the moment."
Location, Location
So, as homeowners and buyers look ahead, what factors will determine whether their homes are really likely to rise in value, rather than just in their dreams? What are some of the bullish signs -- and some of the bearish ones?
In the long term, house prices are driven by fundamentals that are hard to predict:
The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live. (My Comment: Selangor, Malaysia :) )
William Frey, a demographer and senior fellow at the Brookings Institution, a think tank in Washington, says young people and immigrants are likely to flow to Florida, Georgia, the Carolinas, Tennessee, Virginia, Nevada, Arizona and some of the more affordable interior parts of California.
These areas generally have lower housing costs than the Pacific Coast or Northeast and job growth from modern industries and leisure businesses, he says. Areas with little immigration and low growth or falling populations are likely to include Michigan, Ohio, the Dakotas, Iowa, western Pennsylvania and upstate New York, Mr. Frey says.
Hit Parade
Newland Communities LLC, a San Diego-based planner and developer of neighborhoods, employs a full-time researcher to study long-term housing demand and ranks metro areas in terms of their growth prospects. Among those near the top of Newland's hit parade are Washington, D.C., Raleigh and Charlotte, N.C., Atlanta, Dallas, Houston, Phoenix and Las Vegas, says Robert McLeod, the developer's chief executive.
All of them, Newland believes, will keep growing because they have well-diversified regional economies and other attractions, including mild climates. With the exception of Washington, they all have fairly affordable housing costs. Washington has a highly educated work force, high incomes, a stable source of government-related jobs and rapidly expanding technology firms, Newland says.
"The older industrial cities are going to suffer" from shrinking employment and forbidding weather, says Mr. Rosen of the University of California. Some Sun Belt cities, including Atlanta, also could languish if traffic jams and sprawl ruin their charms, he says.
Among metro areas that Mr. Rosen expects to do well in the long run are Albuquerque, N.M.; Boise, Idaho; Salt Lake City; Seattle; Portland, Ore.; Denver and Colorado Springs, Colo. He says those places generally offer "urban vitality" and "easy access to outdoor activities" combined with affordable housing and good job-growth prospects from modern industries, such as biotechnology.
Still, just looking at population trends isn't enough. Prices in the crowded coastal areas tend to be more volatile, rising and then falling much faster during booms and busts than do inland areas, Mr. Case notes. Shortages of land and building restrictions make it hard for builders to respond quickly when demand for housing rises in coveted neighborhoods near the coasts; further inland, it's usually much easier to find vacant homes or land, and so sudden movements in prices are less likely.
For instance, despite rapid growth, home prices in Texas cities have tended to climb only gradually. Those cities typically have plenty of room to sprawl, and Texas regulates land use less strictly than many other states. Supply swells to meet demand.
The Wonder Years
What's more, no one can assess the outlook for housing without considering the effects of 78 million aging baby boomers. For instance, some housing experts believe the boomers will be much less likely than their parents to settle for sun and golf in their retirement; they may prefer urban settings with lots of cultural life or to live nearer friends and families. That could mean higher demand -- and increased prices -- for housing in urban neighborhoods.
Most of this is just guesswork, though. "A lot of people have theories about the baby boomers," says Mr. Frey, the Brookings demographer, but boomers always have tended to confound expectations.
Dowell Myers, a professor of urban planning and demography at the University of Southern California, warns that the retirement of boomers over the next two decades is likely to depress house prices in many areas. As boomers relocate to retirement homes and cemeteries, there will be a lot more sellers than buyers in parts of the country, he says.
"It's going to really mess up the housing market," says Mr. Myers. He predicts that this "generational correction" will be larger and longer-lasting than the current slump.
To get a sense of the effects of aging boomers, Mr. Myers looks at the number of Americans 65 and over per 1,000 working-age people. He sees that number soaring to 318 in the year 2020 and 411 in 2030 from 238 in 2000.
Many people over 65 buy homes, of course, but as they get older they become more likely to sell than buy. People aged 75 to 79 are more than three times as likely to be sellers than buyers, Mr. Myers says.
In some areas, younger people will be happy to buy (and probably renovate) those boomer nests. The problem, Mr. Myers says, will be in places where lots of older people are selling and few young people are settling down. He says the effects will be strongest in the "coldest, most congested and most expensive states rather than the high-growth states of the South or West." Among the states where Mr. Myers sees downward pressure on prices within the next decade: Connecticut, Pennsylvania, New York and Massachusetts.
Of course, applying demographic trends to house-price forecasts can be hazardous. Economists N. Gregory Mankiw and David Weil predicted in a paper in 1989 that demographic trends would lead to a "substantial" fall in real, or inflation-adjusted, home prices over the next two decades "if the historical relation between housing demand and housing prices continues." They reasoned that baby boomers were coming to the end of their prime house-buying years and that the smaller baby-bust generation would bring lower demand for housing.
That warning proved, at a minimum, premature. Despite the recent drop, the average U.S. home price is up about 35% in real terms since the end of 1989, according to the Ofheo index. Messrs. Mankiw and Weil both declined to comment.
Few people who invest in housing have time to follow these academic debates. For nearly four decades, Rich Sommer and his wife, Carolyn, have been investing in rental properties in and near Stevens Point, Wis. Mr. Sommer describes real estate as a good way "to get rich slowly." He and his wife, both former schoolteachers, gradually have built their net worth from zero to around $2.5 million through their rental properties. They have dealt with countless plumbing emergencies, evicted deadbeats and even once had to clean up after a suicide in one of their properties.
Still, he hasn't been hit very hard by the real-estate crash, in part because the Midwest is much less vulnerable to booms and busts than coastal areas. When asked what he would do if someone handed him $1 million today, Mr. Sommer doesn't hesitate: He would put it into real estate.—Mr. Hagerty is a staff reporter for The Wall Street Journal in Pittsburgh.
Write to James R. Hagerty at bob.hagerty@wsj.com
http://online.wsj.com/article/SB122764977315457619.html
The Future for Home Prices
Americans still see real estate as their best shot at wealth. It may be wishful thinking.
By JAMES R. HAGERTY
Over the past few years, Americans have had a brutal lesson in the risks of real estate. House prices have crashed more than 35% in some parts of the country, millions of people are losing their homes to foreclosure, and banks are failing.
The takeaway?
Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now.
The Journal Report
See the complete Your Money Matters report.
Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years.
Down the Road
And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again -- but, on average, probably not nearly as much as they've averaged over the past decade. That isn't to say that some places won't experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.
Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.
Other experts make similarly modest predictions. William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody's Economy.com, a research firm, expects house prices to increase an average of around 4% a year over the next couple of decades.
Some experts say it's a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.
For all of those forecasts, many Americans are undaunted. Consider three surveys, all from October.
In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.
Real Time Economics
The S&P/Case-Shiller home-price index showed accelerating price declines in September. See a sortable chart of home prices, by metro area.
"I just believe in real estate," says Jason Schram, a lawyer in Chicago who has bought two rental properties this year at what he considers fire-sale prices. "I've seen over and over people I know build wealth through rental real estate, and that's the path I intend taking, even though it's a bit bumpy at the moment."
Location, Location
So, as homeowners and buyers look ahead, what factors will determine whether their homes are really likely to rise in value, rather than just in their dreams? What are some of the bullish signs -- and some of the bearish ones?
In the long term, house prices are driven by fundamentals that are hard to predict:
- immigration,
- birth rates,
- the size and nature of households, and
- incomes.
The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live. (My Comment: Selangor, Malaysia :) )
William Frey, a demographer and senior fellow at the Brookings Institution, a think tank in Washington, says young people and immigrants are likely to flow to Florida, Georgia, the Carolinas, Tennessee, Virginia, Nevada, Arizona and some of the more affordable interior parts of California.
These areas generally have lower housing costs than the Pacific Coast or Northeast and job growth from modern industries and leisure businesses, he says. Areas with little immigration and low growth or falling populations are likely to include Michigan, Ohio, the Dakotas, Iowa, western Pennsylvania and upstate New York, Mr. Frey says.
Hit Parade
Newland Communities LLC, a San Diego-based planner and developer of neighborhoods, employs a full-time researcher to study long-term housing demand and ranks metro areas in terms of their growth prospects. Among those near the top of Newland's hit parade are Washington, D.C., Raleigh and Charlotte, N.C., Atlanta, Dallas, Houston, Phoenix and Las Vegas, says Robert McLeod, the developer's chief executive.
All of them, Newland believes, will keep growing because they have well-diversified regional economies and other attractions, including mild climates. With the exception of Washington, they all have fairly affordable housing costs. Washington has a highly educated work force, high incomes, a stable source of government-related jobs and rapidly expanding technology firms, Newland says.
"The older industrial cities are going to suffer" from shrinking employment and forbidding weather, says Mr. Rosen of the University of California. Some Sun Belt cities, including Atlanta, also could languish if traffic jams and sprawl ruin their charms, he says.
Among metro areas that Mr. Rosen expects to do well in the long run are Albuquerque, N.M.; Boise, Idaho; Salt Lake City; Seattle; Portland, Ore.; Denver and Colorado Springs, Colo. He says those places generally offer "urban vitality" and "easy access to outdoor activities" combined with affordable housing and good job-growth prospects from modern industries, such as biotechnology.
Still, just looking at population trends isn't enough. Prices in the crowded coastal areas tend to be more volatile, rising and then falling much faster during booms and busts than do inland areas, Mr. Case notes. Shortages of land and building restrictions make it hard for builders to respond quickly when demand for housing rises in coveted neighborhoods near the coasts; further inland, it's usually much easier to find vacant homes or land, and so sudden movements in prices are less likely.
For instance, despite rapid growth, home prices in Texas cities have tended to climb only gradually. Those cities typically have plenty of room to sprawl, and Texas regulates land use less strictly than many other states. Supply swells to meet demand.
The Wonder Years
What's more, no one can assess the outlook for housing without considering the effects of 78 million aging baby boomers. For instance, some housing experts believe the boomers will be much less likely than their parents to settle for sun and golf in their retirement; they may prefer urban settings with lots of cultural life or to live nearer friends and families. That could mean higher demand -- and increased prices -- for housing in urban neighborhoods.
Most of this is just guesswork, though. "A lot of people have theories about the baby boomers," says Mr. Frey, the Brookings demographer, but boomers always have tended to confound expectations.
Dowell Myers, a professor of urban planning and demography at the University of Southern California, warns that the retirement of boomers over the next two decades is likely to depress house prices in many areas. As boomers relocate to retirement homes and cemeteries, there will be a lot more sellers than buyers in parts of the country, he says.
"It's going to really mess up the housing market," says Mr. Myers. He predicts that this "generational correction" will be larger and longer-lasting than the current slump.
To get a sense of the effects of aging boomers, Mr. Myers looks at the number of Americans 65 and over per 1,000 working-age people. He sees that number soaring to 318 in the year 2020 and 411 in 2030 from 238 in 2000.
Many people over 65 buy homes, of course, but as they get older they become more likely to sell than buy. People aged 75 to 79 are more than three times as likely to be sellers than buyers, Mr. Myers says.
In some areas, younger people will be happy to buy (and probably renovate) those boomer nests. The problem, Mr. Myers says, will be in places where lots of older people are selling and few young people are settling down. He says the effects will be strongest in the "coldest, most congested and most expensive states rather than the high-growth states of the South or West." Among the states where Mr. Myers sees downward pressure on prices within the next decade: Connecticut, Pennsylvania, New York and Massachusetts.
Of course, applying demographic trends to house-price forecasts can be hazardous. Economists N. Gregory Mankiw and David Weil predicted in a paper in 1989 that demographic trends would lead to a "substantial" fall in real, or inflation-adjusted, home prices over the next two decades "if the historical relation between housing demand and housing prices continues." They reasoned that baby boomers were coming to the end of their prime house-buying years and that the smaller baby-bust generation would bring lower demand for housing.
That warning proved, at a minimum, premature. Despite the recent drop, the average U.S. home price is up about 35% in real terms since the end of 1989, according to the Ofheo index. Messrs. Mankiw and Weil both declined to comment.
Few people who invest in housing have time to follow these academic debates. For nearly four decades, Rich Sommer and his wife, Carolyn, have been investing in rental properties in and near Stevens Point, Wis. Mr. Sommer describes real estate as a good way "to get rich slowly." He and his wife, both former schoolteachers, gradually have built their net worth from zero to around $2.5 million through their rental properties. They have dealt with countless plumbing emergencies, evicted deadbeats and even once had to clean up after a suicide in one of their properties.
Still, he hasn't been hit very hard by the real-estate crash, in part because the Midwest is much less vulnerable to booms and busts than coastal areas. When asked what he would do if someone handed him $1 million today, Mr. Sommer doesn't hesitate: He would put it into real estate.—Mr. Hagerty is a staff reporter for The Wall Street Journal in Pittsburgh.
Write to James R. Hagerty at bob.hagerty@wsj.com
http://online.wsj.com/article/SB122764977315457619.html
Recession Survival Guide
Your 2009 Recession Survival Guide
by Kimberly Palmer, James Pethokoukis, and Luke Mullins
Tuesday, December 2, 2008
So you think it's bad news that a recession has been "officially declared"? (Turns out, it started back in December of last year.) Puh-lease. First of all, it shouldn't be news to anyone that the economy has been in the tank for a while. Unemployment has been climbing (from 4.4 percent in March 2007 to 6.5 percent now), and the stock market has been plummeting (down roughly 40 percent so far this year). Ouch!
Second, the recession announcement by the National Bureau of Economic Research can be a handy catalyst for action. Now that there's not a shadow of a doubt that the economy is terrible, you can look ahead to 2009, make smart plans to weather the downturn, and--if you're savvy--figure out how to take advantage of the tough times we'll be facing all next year:
The Economic Outlook
Oh, it's going to be nasty out there. Not so nasty that your great-grandparents will quit telling those Great Depression stories, but bad nonetheless. For a while, economists thought we might luck out and get away with a downturn no worse than the 1990-91 recession. That one lasted eight months, with back-to-back quarters of negative GDP growth of 2.9 percent and 2 percent. Unemployment rose from 5.2 percent to 7.8 percent. But now it looks as if the 1981-82 downturn is the better comparison. It lasted 16 months, had several quarters where the economy shrank 3 percent more, and saw unemployment rise as high as 10.8 percent. So what about the recession of 2008-2009?
Weakening big picture.
There have been two quarters so far during the recession where the economy has gotten smaller, each time by less than 1 percent. Those days are over. "We are currently forecasting a 4 percent decline in real GDP in the fourth quarter, placing it among the worst quarters for economic growth in the postwar period," says Jason Trennert of Strategas Research. The first three months of next year could be just as bad. And even once the economy begins to grow again, the overhang from the credit crisis will probably crimp significant growth until until 2010.
Worsening unemployment.
It's the sharp jump in job losses that really pushed the NBER to make its recession call. And things only seem to be getting worse. "Current conditions in the economy are terrible," notes IHS Global Insight economist Brian Bethune. "Employment continues to go south, the unemployment rate is ramping up sharply, and households are seeing their net financial worth evaporate before their eyes on a daily basis." Economists say that an 8 percent unemployment rate is likely--and 10 percent is not out of the question. Even worse, more people without jobs will make it that much tougher for the housing market to rebound anytime soon.
Sickly stock market.
The stock market often begins to perk up about three to six months before the end of a recession. But economist Michael Darda of MKM Advisers says the time to buy has yet to arrive. "We don't expect the current recession to end until late 2009, which means equities may not put in a durable bottom until the first half of 2009."
Tight credit.
Since the housing bubble started to unravel, credit card companies have been cutting credit limits and, in some cases, raising interest rates, partly because they fear more consumers will default as financial stress spreads. "We haven't hit bottom yet in terms of credit card companies trying to protect themselves," says Justin McHenry, president of IndexCreditCards.com. Even if the Federal Reserve continues to hold down interest rates, McHenry says credit card companies will probably raise rates and cut credit limits through early 2009. That means people who have credit cards with decent rates should hold onto them, because they might not find a better deal elsewhere.
Food prices may drop.
After spikes in the prices of milk, eggs, and other staples earlier this year, shoppers may be in for some relief in 2009. The price increases were partly caused by the high price of gasoline, which is used to transport much of our food. Now gas prices are dropping, leading some analysts to expect lower supermarket prices. But it won't happen overnight, because the cost of diesel is still high, and farmers need to recover from the high input costs they faced over the summer.
How to Weather the Storm
Even though you can't control the economy, you don't have to just sit there and be buffeted by these big economic forces. You can do stuff!
Live below your means.
Some people are shopping for this year's holiday gifts while still paying off their 2007 purchases, says Gail Cunningham of the National Foundation for Credit Counseling. Now's the time to re-evaluate those habits, she says, before piling on even more debt. You can make sure you pay as little as possible for gifts by using online comparison websites. Another option is taking advantage of layaway programs at retailers that let you pay off purchases before you bring them home. That way, you avoid paying high interest rates to credit card companies.
Bolster that emergency cushion.
Even in flush times, financial advisers say consumers should have about six months' worth of expenses in their bank account to guard against job loss or other emergencies. Now, with the unemployment rate headed toward 7 percent, it's more important than ever.
Toughen up your portfolio.
It doesn't matter how smart your investing strategy is if you won't stick with it. And the roller-coaster stock market is sure making that tough to do. Jittery investors might want to think about stashing somewhere between 30 and 40 percent of their portfolio in less risky investments, such as bond funds, treasury bills, or money market funds. But don't overdo it. Investors who are decades away from retirement should keep the bulk of their portfolios in stocks. If you want to dial down your risk, look to stock funds that have been bucking the bear, such as Apex Mid Cap Growth and Reynolds Blue Chip Growth. Also, exchange-traded funds, which look like mutual funds but trade like stocks, give you more diversified exposure to a particular sector or industry than betting on individual issues.
Save for a down payment.
Unlike in the housing-boom days, borrowers will have to be able to make a sizable down payment to qualify for the lowest mortgage interest rates. So if you're looking to go bargain hunting in real estate, begin setting aside a little bit of cash each paycheck to put toward a down payment. When you begin to feel better about your job security, you'll be ready to take the plunge.
How to Take Advantage of the Bad Times
Time to stop surviving and shift to thriving. It's an ill wind that doesn't blow some good, and you need to make the most of the opportunities that are out there.
Energize your career.
Don't just worry about keeping your job--make it better. Lean times present an opportunity for niche employees to put other skills to work and rebuild their reputations as go-to multitaskers. Employees should actively try to pick up the work of their departed peers. Also, volunteering to take on new responsibilities can pave the way for a negotiation in six to eight months, when an employee can prove that the job has evolved and is now worth more on the market. A new outlook and approach like this will help you hold on to your current job, or pave the way to your new career.
Refinance your home.
Recent Federal Reserve announcements intended to ease the financial crisis have sharply reduced 30-year fixed mortgage rates, to 5.5 percent at the start of the week vs. 6.2 percent just two weeks earlier, according to HSH Associates. "Recession equals lower Treasury rates, which equals lower mortgage rates, which equals a great opportunity to refinance," says Mike Larson, a real estate analyst at Weiss Research.
Buy a home.
Home prices nationally have already fallen more than 20 percent from their 2006 peak, and in certain boom-and-bust states the declines have been even more precipitous. So if you've got a stable job, good credit, a down payment, and a strong stomach, there are certainly buying opportunities out there for you. "I can point to properties here in [Florida] that are off 40 to 50 percent from their peak bubble levels," says Larson, who is based in Florida. "This is creating an opportunity."
More from Yahoo! Finance: • The $64,000 Question: Who Wants to Be a Millionaire?• The Bright Side: Deep Retailer Discounts• 4 Ways to Get the Most Out of Holiday Sales
Visit the Banking & Budgeting Center
Look for the next great stock investments.
Not only can you pretty much count on next year being one of lousy economic growth, you can for sure count on Barack Obama being president. And there are a few stocks out there that could get a boost from an Obama administration, including Chesapeake Energy (natural gas) and AeroVironment (aerial vehicles for Afghanistan). Also, keep an eye out for "growthy" (high earnings growth) small stocks, especially techs, which often are the first ones to rise when a new economic expansion nears. Hey, the recession can't last forever, right?
Forget about keeping up with the Joneses.
Since almost everyone's budgets are strained right now, cutting back is en vogue. Pollster John Zogby has found that a growing segment of the population has become more focused on spiritual fulfillment than on material success. Similarly, futurist Faith Popcorn's research shows that the concept of "frugality" has taken hold among families, with parents increasingly teaching their children to reconsider how much they consume and whether they could do with less. The "new frugality" movement, as she calls it, will usher in a new set of values for the next generation, she says.
Negotiate almost everything.
From credit cards to clothes, companies are open to making deals as they struggle to keep customers. "If you're a good customer, [credit card companies] may be more apt to negotiate your rate because they don't want to lose you," says McHenry of IndexCreditCards.com. At farmers markets and clothing boutiques, simply asking, "Can I get a discount?" can lead to a lower price. Paying with cash increases the chances of making a deal because it allows retailers to avoid credit card transaction fees.
Copyrighted, U.S.News & World Report, L.P. All rights reserved.
http://finance.yahoo.com/banking-budgeting/article/106242/Your-2009-Recession-Survival-Guide
by Kimberly Palmer, James Pethokoukis, and Luke Mullins
Tuesday, December 2, 2008
So you think it's bad news that a recession has been "officially declared"? (Turns out, it started back in December of last year.) Puh-lease. First of all, it shouldn't be news to anyone that the economy has been in the tank for a while. Unemployment has been climbing (from 4.4 percent in March 2007 to 6.5 percent now), and the stock market has been plummeting (down roughly 40 percent so far this year). Ouch!
Second, the recession announcement by the National Bureau of Economic Research can be a handy catalyst for action. Now that there's not a shadow of a doubt that the economy is terrible, you can look ahead to 2009, make smart plans to weather the downturn, and--if you're savvy--figure out how to take advantage of the tough times we'll be facing all next year:
The Economic Outlook
Oh, it's going to be nasty out there. Not so nasty that your great-grandparents will quit telling those Great Depression stories, but bad nonetheless. For a while, economists thought we might luck out and get away with a downturn no worse than the 1990-91 recession. That one lasted eight months, with back-to-back quarters of negative GDP growth of 2.9 percent and 2 percent. Unemployment rose from 5.2 percent to 7.8 percent. But now it looks as if the 1981-82 downturn is the better comparison. It lasted 16 months, had several quarters where the economy shrank 3 percent more, and saw unemployment rise as high as 10.8 percent. So what about the recession of 2008-2009?
Weakening big picture.
There have been two quarters so far during the recession where the economy has gotten smaller, each time by less than 1 percent. Those days are over. "We are currently forecasting a 4 percent decline in real GDP in the fourth quarter, placing it among the worst quarters for economic growth in the postwar period," says Jason Trennert of Strategas Research. The first three months of next year could be just as bad. And even once the economy begins to grow again, the overhang from the credit crisis will probably crimp significant growth until until 2010.
Worsening unemployment.
It's the sharp jump in job losses that really pushed the NBER to make its recession call. And things only seem to be getting worse. "Current conditions in the economy are terrible," notes IHS Global Insight economist Brian Bethune. "Employment continues to go south, the unemployment rate is ramping up sharply, and households are seeing their net financial worth evaporate before their eyes on a daily basis." Economists say that an 8 percent unemployment rate is likely--and 10 percent is not out of the question. Even worse, more people without jobs will make it that much tougher for the housing market to rebound anytime soon.
Sickly stock market.
The stock market often begins to perk up about three to six months before the end of a recession. But economist Michael Darda of MKM Advisers says the time to buy has yet to arrive. "We don't expect the current recession to end until late 2009, which means equities may not put in a durable bottom until the first half of 2009."
Tight credit.
Since the housing bubble started to unravel, credit card companies have been cutting credit limits and, in some cases, raising interest rates, partly because they fear more consumers will default as financial stress spreads. "We haven't hit bottom yet in terms of credit card companies trying to protect themselves," says Justin McHenry, president of IndexCreditCards.com. Even if the Federal Reserve continues to hold down interest rates, McHenry says credit card companies will probably raise rates and cut credit limits through early 2009. That means people who have credit cards with decent rates should hold onto them, because they might not find a better deal elsewhere.
Food prices may drop.
After spikes in the prices of milk, eggs, and other staples earlier this year, shoppers may be in for some relief in 2009. The price increases were partly caused by the high price of gasoline, which is used to transport much of our food. Now gas prices are dropping, leading some analysts to expect lower supermarket prices. But it won't happen overnight, because the cost of diesel is still high, and farmers need to recover from the high input costs they faced over the summer.
How to Weather the Storm
Even though you can't control the economy, you don't have to just sit there and be buffeted by these big economic forces. You can do stuff!
Live below your means.
Some people are shopping for this year's holiday gifts while still paying off their 2007 purchases, says Gail Cunningham of the National Foundation for Credit Counseling. Now's the time to re-evaluate those habits, she says, before piling on even more debt. You can make sure you pay as little as possible for gifts by using online comparison websites. Another option is taking advantage of layaway programs at retailers that let you pay off purchases before you bring them home. That way, you avoid paying high interest rates to credit card companies.
Bolster that emergency cushion.
Even in flush times, financial advisers say consumers should have about six months' worth of expenses in their bank account to guard against job loss or other emergencies. Now, with the unemployment rate headed toward 7 percent, it's more important than ever.
Toughen up your portfolio.
It doesn't matter how smart your investing strategy is if you won't stick with it. And the roller-coaster stock market is sure making that tough to do. Jittery investors might want to think about stashing somewhere between 30 and 40 percent of their portfolio in less risky investments, such as bond funds, treasury bills, or money market funds. But don't overdo it. Investors who are decades away from retirement should keep the bulk of their portfolios in stocks. If you want to dial down your risk, look to stock funds that have been bucking the bear, such as Apex Mid Cap Growth and Reynolds Blue Chip Growth. Also, exchange-traded funds, which look like mutual funds but trade like stocks, give you more diversified exposure to a particular sector or industry than betting on individual issues.
Save for a down payment.
Unlike in the housing-boom days, borrowers will have to be able to make a sizable down payment to qualify for the lowest mortgage interest rates. So if you're looking to go bargain hunting in real estate, begin setting aside a little bit of cash each paycheck to put toward a down payment. When you begin to feel better about your job security, you'll be ready to take the plunge.
How to Take Advantage of the Bad Times
Time to stop surviving and shift to thriving. It's an ill wind that doesn't blow some good, and you need to make the most of the opportunities that are out there.
Energize your career.
Don't just worry about keeping your job--make it better. Lean times present an opportunity for niche employees to put other skills to work and rebuild their reputations as go-to multitaskers. Employees should actively try to pick up the work of their departed peers. Also, volunteering to take on new responsibilities can pave the way for a negotiation in six to eight months, when an employee can prove that the job has evolved and is now worth more on the market. A new outlook and approach like this will help you hold on to your current job, or pave the way to your new career.
Refinance your home.
Recent Federal Reserve announcements intended to ease the financial crisis have sharply reduced 30-year fixed mortgage rates, to 5.5 percent at the start of the week vs. 6.2 percent just two weeks earlier, according to HSH Associates. "Recession equals lower Treasury rates, which equals lower mortgage rates, which equals a great opportunity to refinance," says Mike Larson, a real estate analyst at Weiss Research.
Buy a home.
Home prices nationally have already fallen more than 20 percent from their 2006 peak, and in certain boom-and-bust states the declines have been even more precipitous. So if you've got a stable job, good credit, a down payment, and a strong stomach, there are certainly buying opportunities out there for you. "I can point to properties here in [Florida] that are off 40 to 50 percent from their peak bubble levels," says Larson, who is based in Florida. "This is creating an opportunity."
More from Yahoo! Finance: • The $64,000 Question: Who Wants to Be a Millionaire?• The Bright Side: Deep Retailer Discounts• 4 Ways to Get the Most Out of Holiday Sales
Visit the Banking & Budgeting Center
Look for the next great stock investments.
Not only can you pretty much count on next year being one of lousy economic growth, you can for sure count on Barack Obama being president. And there are a few stocks out there that could get a boost from an Obama administration, including Chesapeake Energy (natural gas) and AeroVironment (aerial vehicles for Afghanistan). Also, keep an eye out for "growthy" (high earnings growth) small stocks, especially techs, which often are the first ones to rise when a new economic expansion nears. Hey, the recession can't last forever, right?
Forget about keeping up with the Joneses.
Since almost everyone's budgets are strained right now, cutting back is en vogue. Pollster John Zogby has found that a growing segment of the population has become more focused on spiritual fulfillment than on material success. Similarly, futurist Faith Popcorn's research shows that the concept of "frugality" has taken hold among families, with parents increasingly teaching their children to reconsider how much they consume and whether they could do with less. The "new frugality" movement, as she calls it, will usher in a new set of values for the next generation, she says.
Negotiate almost everything.
From credit cards to clothes, companies are open to making deals as they struggle to keep customers. "If you're a good customer, [credit card companies] may be more apt to negotiate your rate because they don't want to lose you," says McHenry of IndexCreditCards.com. At farmers markets and clothing boutiques, simply asking, "Can I get a discount?" can lead to a lower price. Paying with cash increases the chances of making a deal because it allows retailers to avoid credit card transaction fees.
Copyrighted, U.S.News & World Report, L.P. All rights reserved.
http://finance.yahoo.com/banking-budgeting/article/106242/Your-2009-Recession-Survival-Guide
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