Q:
What impact will
the presidential election have on interest rates?
A: The recent increase in the federal funds rates has reversed the fed policy of the last three years, and it is about time that they did that. Sopping up the extra liquidity that was created through easy money policy during the last three years to cushion the impact of recession and general slowdown is the current priority now that the economy has started to recover. Expect further modest increases until the federal funds rate reaches a "neutral" level that allows economic growth but also keeps inflation at a low level. The Presidential election may delay the next fed increase but it is unlikely to change the trend of rising interest rates.
Q: Is there a historic trend in real estate prices in Orange County?
A: Yes. They go up and down. More usefully, over time there is an upward trend in real prices. The practical implication is that when prices are high, buying real estate means being able and willing to wait for prices to recover if they head into a periodic downturn. These downturns are inevitable. So are the upturns, absent a truly catastrophic economic event of a magnitude we have not experienced before.
Q: Housing prices are setting records and seem to have no ceiling. Is this still a good time to buy?
A: When you consider buying a home, remember that this is primarily a consumer decision, not a pure investment. Because homes do not appreciate over longer periods of time (and sometimes shorter ones, as with recent trends), people tend to mix these two decisions together. Looking at the long term, and considering maintenance, upgrades, insurance, etc., the rate of return on home-ownership is not as high as many believe. So, at any time you want to avoid buying at the top of the market, because that means you have to own the home longer to recover your investment. (The good news is that housing prices do recover from market slumps.) Apart from that, the decision should be base on your housing needs and family situation - how long do you want to stay in one place, what amenities are important to you - rather than on the expectation of selling a year from now at a profit.
Q: There is so much conflicting information about whether the new federal tax cuts are good or bad for the economy. Which is it?
A: Both. (Sorry. Now you see why President Truman once called for a "one handed economist.") In the short term the cuts will stimulate the economy. If households spend the increase in their disposable incomes and businesses expand, the economy gains jobs. This is likely to happen, so the cuts will generate higher short-term growth. The trouble begins later on, as the federal deficit grows, pressures on Social Security and Medicare increase with the baby-boom retirement wave, and interest on the debt balloons. In essence, this is a very large bet that short-term growth from the stimulus will lead to longer-term growth and prevent the deficit from rising as much as is expected by most economists. Frankly, it is a bet I would not make.
Jane Hall, Ph.D., Professor of Economics at California State University,
Fullerton and Co-Director of the Institute for Economic and Environmental
Studies. Do you have questions for Jane? Please email her at jane@wiseinvestors.org.
