Housing Improvement

Residential real estate is very important to the health of our economy.  It is one of the largest assets on a family’s balance sheet and it comprises about 2.2% of our nation’s annual gross domestic product (GDP).  Stabilizing prices and increasing new housing construction are critical to economic recovery.  Another critical component is keeping people in their homes.  As can be seen from the numbers below, we are gradually seeing improvement in the percentage of homeowners who are past due on their payments or in foreclosure.  This bodes well for our future.    

 

Time Period	One Payment Past Due	In Foreclosure
Dec. 31, 2009	10%	5%
Dec. 31, 2010	9%	5%
Sept. 30, 2011	8%	4%

 Sources:  Mortgage Bankers Association and JP Morgan Asset Management

Just a Game

The U.S. budget super committee is still struggling to agree on a plan for budget cuts.  While the super committee has been debating this issue, American Public Media has been creating an online “game” so that the American public can attempt to balance the national budget based on what they believe to be most important in terms of spending and taxes.  The game is called “Budget Hero” and it is even being used by university classrooms to help teach students about how the government really operates financially.  http://budgethero.publicradio.org/widget/widget.php

October 2011 Market and Planning Update

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies”- Groucho Marx (October 2, 1890 – August 19, 1977) American comedian and filmed star famed as a master of wit

We selected the quote above for this month’s commentary because much of the recent market volatility can be attributed to world political leaders creating an environment of confusion and uncertainty.  The financial markets don’t like uncertainty, especially when it relates to budget deficits, debt levels, credit ratings and future tax policy.

PLANNING COMMENTARY

Amongst all of the recent excitement surrounding Europe, it has nearly been forgotten that the U.S. budget super committee, designated by the President and Congress, will face their deadline this month for issuing certain budget cuts.   By law, the committee has until November 23^rd to recommend $1.5 trillion in deficit reduction that can be spread over the next 10 years (unless they pass a resolution to extend their deadline).  How to do this, not whether to do it, will likely continue to be the center of contention.  The options to create the reductions are simple – raise taxes, cut spending or use a combination of the two.  However, finding agreement about those options won’t be easy.   

What will the European Central Bank Do?

Investors are quickly losing faith in one of the world’s largest sovereign-bond markets, driving the yield on the benchmark 10 year Italian bond up to 7.45%.  Rates are at their highest level since the inception of the euro.  Italian Prime Minister Silvio Berlusconi pledged Tuesday to step down after Parliament approves austerity measures intended to reassure investors and ensure that Italy remains able to borrow.

The new President of the European Central Bank (ECB), Mario Draghi may have to aggressively print Euros to buy Italian government debt.  The primary objective of the ECB is to maintain price stability within the Eurozone, which is the same as keeping inflation low. The ECB Governing Council defines price stability as inflation of around 2%.  Mr. Draghi cut short-term interest rates in his first meeting.  Certainly he doesn't want to aggressively expand the Euro, but given the recent interest rate spike, it appears he will have no choice but to buy Italian bonds to support their prices (and bring their interest rate down).  It is somewhat notable that Mr. Draghi is Italian, so he is likely feeling extra pressure. 

Growth Rate Cuts

Today, the Federal Reserve cut its growth forecast and raised estimates it publishes for future expected unemployment rates.  Partly because of these revisions the Fed has decided to hold steady its key borrowing interest rate, the Federal Funds rate, at the existing range of 0% to 0.25%.  While inflation has continued to increase (most recent estimates were 3.9% annually) the Fed has been reluctant to tighten because of persistently high unemployment rates and sluggish growth.