How Smart Investors Avoid the Contrast Principle Trap

As part of my work at Kennon Green Enterprises overseeing our various investments, I read a lot of research reports and talk to the staff about how we can implement them to the benefit of our shareholders.

It may not be obvious at first, so to give you an example of how this reading can pay dividends for our investments, consider the “contrast principle” in psychology. Dave Thomas perfected this at Wendy’s. Mr. Thomas placed a triple cheeseburger on the menu, knowing full well that it was far too much food for most people to consume and the price was higher than people would be willing to pay. The intended result of this move, however, was successfully realized when sales of double cheese burgers skyrocketed because people would “compromise”, as he put it, between the two extremes, ordering more actual food and spending more money than they would have had the triple not been on the menu to provide a reference point. Wendy’s shareholders experienced great growth under his leadership because of shrewd moves such as this.

Unfortunately, the contrast principle has a downside for investors. According to one research paper I read recently by a highly respected university, happiness results not from being rich, but from being richer than your neighbors, friends, and family. In other words, on a subconscious level, most people don’t care if they have $1 million or $100 million, so long as their bank balance, cars, houses, clothes, and education are better than those in their social and professional network. The same steel mill executive who was thrilled to make $120,000 per year and live in Pittsburg would suddenly find himself miserable were he to move to Greenwich and be surrounded by hedge fund managers making $50,000,000 per year, despite the fact that his absolute situation has not changed one penny. That means that earning your place in the capitalist class alone won't make you content.

This finding has powerful implications for your investments and financial life. It helps explain why someone can go from earning $30,000 a year at the beginning of their career to $150,000 as they get promoted and still be living paycheck-to-paycheck. As their social status rises, they attempt to acquire the same badges of success that their older, and wealthier, colleagues enjoy, such as a new Mercedes or Brioni suits. Those who avoid this psychological temptation, in part by living in areas of the country where conspicuous displays of wealth are frowned upon, end up being wealthier and far happier. This is precisely what Dr. Thomas Stanley found in his Millionaire Next Door studies. It is easier for an engineer driving a Toyota to build wealth despite a lower salary than a rapidly rising associate in a gilt-edged law firm who finds it necessary to keep up appearances with high earning clients and partners.

The contrast principle is also responsible for large financial waste when purchasing big ticket items. Take a car. A few days ago, a friend of mine had a quote prepared for a beautiful new black Mercedes-Benz. One of the options was “keyless start”, which would allow him to keep the key to the car in his pocket and simply press a button to get going without having to fumble in the dark or struggle with the door when his hands were full. The price for this rather convenient option was $1,200. Compared to the overall cost of the car, it was small. However, ask yourself if you would take your existing car into a dealership and write a check for $1,200 to have that feature added. That allows you to see the price in absolute dollars, not relative to the large price of the car.

The moral: Whether you are buying a house, car, or expanding a small business you own, the contrast principle can cause you great harm. It is absolutely vital to measure dollars in absolute, not relative terms if you want to be a successful investor.

By Joshua Kennon

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Investors Should Think More Like Business Owners

It isn't unheard of for a business owner to borrow large sums of money to expand a factory or spend tens of thousands of dollars installing energy efficient lights to lower costs and increase profits. That is because the mindset of a business owner is on putting money out today in order to earn a return over time.

Many investors don't think this way. Warren Buffett, arguably the most famous investor in the world with a net worth that was once as high as $60 billion before he began making large gifts to charity, said that he is a better investor because he is a business owner and a better business owner because he is an investor. It is valuable to think from both perspectives.

Investors Should Think Long-Term Like Business Owners

You rarely hear an investor say, "I want to become an owner of Coca-Cola. I'm investing $38,000 of my cash, taking physical possession of the stock certificates, and having them locked in a safe deposit box at the bank downtown. The cash dividends will be automatically deposited in my checking account each quarter. I have no plans to sell. I'll judge the success by the annual report that is mailed to me from management and the Board of Directors each year. As long as my profit, and the dividends I receive, continue to increase, that's my only concern." This is especially perplexing when you realize that blue chip companies such offer special plans such as the Coca-Cola direct stock purchase and dividend reinvestment plan.

Instead, the investor might buy $38,000 worth of Coca-Cola stock in a brokerage account, put a trailing stop order in to automatically sell if the position fell by 10%, obsessively watch the account, and not be able to tell you a damn thing about Coke's case volume shipments, profit margins, returns on capital, debt levels, or geographic sales figures. A business owner wouldn't be so negligent in his own business - why should an investor be so negligent in his stock ownership?

Investors Should Focus on Reducing Unnecessary Costs Like Business Owners

You rarely hear an investor mention, "I did the calculations and if I can cut the management fee my retirement plan charges me by rolling over my holdings to a low-cost company, I can save a few percentage points a year." How many mutual fund investors get obsessed with cutting the expense ratio? A business owner, on the other hand, is always looking for ways to cut his costs by saving a little money here or moving things around there.

Investors Should Only Buy What They Understand, Just Like a Business Owner

Can you imagine a restaurant owner adding something to his menu that he never tried or can't explain? Can you picture a laundromat operator selling on-site detergent that is untested from a company with which he has no experience? Business owners don't invest their hard earned money into something unless they understand it and believe the odds are favorable they will earn a profit. Investors, unfortunately, rarely show the same wisdom. School teachers who spend years studying their subjects will buy stock in a solar company without understanding the firm or industry. A retiree will try to trade software stocks without knowing how to turn on a computer. It makes no sense. Don't be that way.

You should be able to explain to a reasonably intelligent third grader 1.) what your company does, 2.) how it generates sales, 3.) what its biggest costs are, and 4.) how much money you expect it to earn under reasonable conditions. You should be able to do this in under 30 seconds or on the front side of an regular index card. If you can't you are not investing like a business owner, you are gambling like a fool.

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Fed’s latest stimulus may have little impact on mortgage borrowers

The Federal Reserve took aim at the nation’s wobbly housing market last week with its biggest stimulus action in two years, but that firepower is doing little to lower mortgage rates or make home loans more available for Americans.

Instead, banks are set to see a windfall since the Fed’s actions will immediately lower the cost of issuing loans. It may take months or longer for benefits to trickle down to consumers, analysts say.

The emerging scenario highlights the limitations of the Fed’s ability to jump-start the housing market on demand: Rather than intervene directly with consumers, the Fed must rely on banks, brokers and other industry actors to offer borrowers better terms.

Banks say they are keeping rates high right now because lowering them any further would overwhelm them with customers. They say that over time, as volume thins out, rates could come down to attract new borrowers.

“Bank of America, Wells, Chase, whomever, have fixed capacity. You can’t take in more loans than you can handle,” said Matt Vernon, a senior mortgage executive at Bank of America.

Critics argue that banks are simply maximizing profits at the expense of consumers. Mortgage bankers are recording higher gains from home loans as the gap widens between the interest rate they charge consumers and the rate they must pay investors who finance the loans by buying mortgage securities.

Another challenge for the Fed is that many people eager to buy a home or refinance an existing mortgage simply can’t qualify because of poor credit histories. That may not change even if rates fall.

People “are seeing a dangling low fruit, but they just cannot reach it,” said Lawrence Yun, chief economist for the National Association of Realtors.

At a news conference last Thursday following the announcement that the Fed would begin buying $40 billion worth of mortgage bonds per month, Fed Chairman Ben S. Bernanke faced several questions about the significance of the central bank’s actions to the housing market.

Bernanke said that the initiative should “provide further support for the housing sector by encouraging home purchases and refinancing.” The chairman said “housing is usually a big part of the recovery process” but has been “one of the missing pistons in the engine.”

Yun said he believes the Fed was right to focus its latest round of stimulus at the long-suffering housing market, but it remains far from certain that the action will have meaningful impact.

Rates are already at generational lows, he said. Pushing them lower might spur some additional refinancing, but Yun said it is unlikely to create a new wave of home buyers.

Mortgage Bankers Association chief executive David Stevens expects even the refinancing boom to “burn out” since everyone who could qualify for a lower mortgage will have refinanced already.

To move that process along, banks are ramping up. Bank of America has added more than 800 people to its mortgage lending team to keep pace with refinancing applications. Vernon, the mortgage executive, said that as banks continue to work through backlogs of loans more quickly, they should begin offering consumers lower rates.

Once the refinancing activity dies out, demand for new homes will climb as borrowers gain confidence in the market, analysts say. The Mortgage Bankers Association is forecasting that loans used to purchase homes could increase by 20 to 25 percent.

Some regions of the country, which experienced only moderate price declines, are seeing a dearth of desirable homes for sale. Lower interest rates, therefore, may have little effect on boosting sales.

In Washington, the number of active listings in June reached a historic low, down 33 percent from a year ago. The result has been a wave of eager but frustrated buyers and a return of bidding wars, escalation clauses and offers to forgo requests for any repairs by sellers.

Wells Fargo senior economist Mark Vitner said he expects the Fed’s actions will give home builders confidence to build new properties in anticipation of demand.

“When Bernanke talked about giving a boost to the housing market, he was really talking about home building,” Vitner said. “Inventories are so low today and sales are growing that I think these actions are really meant to improve buying.”

Indeed, Bernanke said increasing home sales would provide the much-needed boost to the overall economy. “House prices are beginning to rise in some markets, which will encourage people to look at homes, will encourage lenders to make more mortgage loans,” Bernanke said. “So I’m hopeful that we’ll see continued progress in the housing market.”

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Home prices in Georgia's capital rose 4.4 percent in June from May, the most recent month for which data are available. But home prices are down 12.1 percent from the same period last year.

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The Political Damage Caused by Foreclosures

The negative impact of the foreclosure epidemic in the United States has struck communities in many aspects. Local economies have been devastated and families have been forced to make deep adjustments in the wake of losing their homes, and it was only a matter of time before foreclosures affected the American political machine. According to a recent report by NPR, the voter databases used in the run-up to the 2008 election have been radically changed by the massive loss of homes.

The 2008 election year also marked the beginning of the foreclosure avalanche and the global financial crisis. The states where homeowners have been the most affected by foreclosures also happen to be key battleground states for presidential candidates. In fact, Florida, Nevada and Ohio currently boast the highest rates of foreclosure.

Canvassing Made Difficult in Florida

The Sunshine State is home to 29 electoral votes. It is no surprise that the Republican Convention recently took place in Tampa, as Florida is home to a considerable GOP voter base, but President Obama has a strong African-American and Latino constituency in the state.

The rate of judicial eviction orders caused by foreclosures in Central Florida counties is so high that voter outreach groups are waiting until later to go door-to-door. Voter registration campaigns are actually may actually take place in the parking lots of supermarkets and discount stores in this region.

Finding Voters in Ohio

Canvassers are also having a hard time in large cities like Cleveland and Columbus, where almost 11,000 homes have been lost to foreclosure in 2012. Voter outreach groups estimate that 26 percent of voters who registered in Cleveland for the 2008 election will not be found very easily. That’s nearly 99,000 voters in a region that was instrumental in giving Obama a victory in the polls.

Virtual Ghost Towns in Nevada

Foreclosures have deeply changed the suburban landscape of the Silver State since 2007. The problem in Nevada is that many former homeowners decided to leave the state altogether in search of greener pastures. Door-to-door canvassers are finding entire blocks desolated.

Nevada presents a greater challenge than Florida and Ohio. Political campaign experts believe that the key to winning Nevada is to register newcomers who have arrived looking for rock-bottom real estate deals. These home shoppers are likely to vote with housing in mind, and in this regard President Obama may have an edge thanks to the various federal foreclosure prevention programs available to troubled borrowers, although Mitt Romney doubts their effectiveness.

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US property prices up 2% over the last quarter, data shows

Residential property prices in the US increased by 2% in the last quarter despite the country’s overall economic outlook still being stunted, the latest analysis from Clear Capital shows.

One third of the top metros posted double digit yearly gains, while the bottom 15 metros generally saw prices stabilise, it says in its July Home Data Index.

‘July home price trends continued to show promise at a time when the strength of the broader economy is in question on many fronts,’ said Alex Villacorta, director of research and analytics at Clear Capital.

‘The national housing market defied the drag of a softening economy with increasing gains of 2% over the last rolling quarter. Housing gains in the West continued to lead the nation, and more importantly, for the second month in a row, the price rebound has broken out of the low price tier segments into higher priced homes. As the pool of buyers expands, the West continues to position for the next phase of recovery,’ he explained.

‘While significant risks remain at large, housing now has the potential to enter a positive feedback loop. Price increases could lead to increased confidence. This could motivate buyers, propelling the recovery in spite of the potential economic slowdown outside the housing market. Of course it’s still possible that housing could experience a pull back if contagion from other economic sectors bleeds through, but right now there appears to be a healthy level of resilience,’ he added.

The 2% price increase comes on top of a 1.7% gain in the previous quarter. The West and Midwest saw 4.4% and 2.1% quarterly growth, respectively. Meanwhile, the South held its ground with quarterly gains of 1.5%, and the Northeast saw price growth of 0.4%, a slight step back from last month’s 0.8% quarterly gains.

Villacorta said that quarterly growth across regions hasn’t been this robust since October 2011 when prices experienced a short burst in gains. He also pointed out that two out of four regions have now seen rolling quarterly growth over the last two months, and three out of four regions have experienced quarterly gains over the last five months, fuelling yearly gains.

Yearly growth for the broader national market expanded to 2.2% in July, 0.5% higher than June. Boosting growth at the national level, the West saw home prices roll up an impressive 6.2% over the previous year. The South and the Northeast also contributed to national price growth, with 1.8% and 1.6% yearly gains, respectively. While the Midwest has yet to post long term growth, the slight decline of 0.1% improved over last month’s yearly losses of 0.6%.

July marked the third consecutive month of national yearly gains, with longer term price trends at the national level last seen this strong in September 2010, when the First Time Homebuyer Tax Credit temporarily drove prices higher.

‘Confidence in housing will be key to future progress, giving buyers a reason to get off the sidelines, resulting in higher demand that could feed additional gains, and creating a positive feedback loop. Certainly the alternative is still possible, where a hiccup in consumers' outlook could stall progress, further diminishing the willingness of a homebuyer to make a purchase,’ the report concludes.

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Wealthy Unmoved by U.K. Tax Hike as Luxury-Home Sales Surge

The British government’s plan to raise a tax on luxury-home purchases sparked a last-minute dash by real-estate brokers to wrap up deals before the deadline hit in March. They needn’t have bothered.

Brokers including Savills and Knight Frank define prime real estate as homes in the most expensive central London neighborhoods such as Belgravia, Kensington and Knightsbridge.

Sales of homes valued at 2 million pounds ($3.2 million) more than doubled in May from a year earlier, according to the most recent data available from the Land Registry. After a 40 percent decline in April, sales rebounded as investors from mainland Europe and the Middle East took advantage of the U.K.’s status as a haven from economic and political turmoil.

“Money is leaving the euro zone and being spent on a safe asset,” Matthew Pointon, an economist at researcher Capital Economics, said. “Safe-haven flows outweigh the increase in the stamp duty.”

Luxury homes have held their value better than cheaper residential properties in the U.K. because of a scarcity of prime real estate for sale, particularly in London. That has led to record prices paid for homes in the city’s Mayfair, Kensington and Knightsbridge districts.

Chancellor of the Exchequer George Osborne’s annual budget targeted luxury-home purchases to help narrow Britain’s record deficit. He raised a transaction tax known as stamp duty on homes sold for more than 2 million pounds to 7 percent from 5 percent. The use of corporations set up in offshore tax havens such as the Cayman Islands to avoid the tax spawned a 15 percent levy on purchases of homes by companies.

European Investors

In May, 113 houses and apartments in the U.K. sold for more than 2 million pounds, up from 45 a year earlier, according to the Land Registry. In London, sales jumped to 97 from 40 led by overseas buyers.

Homes valued at 10 million pounds or more gained 2.9 percent in price in the three months after Prime Minister David Cameron’s Conservative-led coalition increased the stamp duty, London-based Knight Frank LLP estimates. Home prices in London’s most expensive areas have gained 49 percent since a March 2009 low point and are now 14 percent higher than the previous peak in 2008, the property broker said in a Sept. 3 report.

“London has been extremely hot,” Yolande Barnes, head of residential research at broker Savills Plc (SVS), said in a phone interview. “This was a record quarter, but it’s been pretty strong even before that.”

Negligible Impact

Small tax increases for the ultra-wealthy individuals aren’t likely to deter them from buying luxury residences in central London, according to Charles Leigh, a director at broker CB Richard Ellis Group Inc. (CBG)

“A percent here or there isn’t a major threat,” Leigh said in an interview.

There are 10,760 ultra-high net worth individuals living in Britain, according to Wealth-X, which works with luxury brands and banks to build a database of people who collectively hold $10.7 trillion of wealth. They’re defined as U.K. residents with net worth of at least $30 million, and together they have combined assets of $1.3 trillion.

The U.K. capital is home to 5,955 “ultra-wealthy” people, more than twice as many as Paris, which has 2,820, according to Wealth-X. Zurich ranks third among European cities with 1,775.

Aldine Honey, proprietor of her own luxury real estate brokerage, handled the sale of a 28.1 million-pound home in London’s Mayfair neighborhood in May, the last month for which U.K. Land Registry was published.

‘Extraordinarily Positive’

“It’s extraordinarily positive considering the 7 percent stamp duty,” Honey said in an interview. “Wealthy people still consider London a safe haven.”

Britain’s government is weighing an extension of a capital- gains tax on homes valued at more than 2 million pounds held by unnaturalized non-residents. Some brokers, such as W. A. Ellis, aren’t sure that overseas investors can withstand further taxes on the U.K.’s luxury homes. Some property owners may want to get out while they can, said Richard Barber, a partner at the firm.

“You’re not going to want to get stumped for capital gains,” Barber said.

Doubts about whether luxury-home prices can maintain upward momentum have arisen amid a predicted wave of new building. Builders plan to complete more than 15,000 houses and apartments in London over the next decade to keep up with demand for properties in the city’s traditional prime neighborhoods, according to consulting firm EC Harris LLP.

‘Downside Risk’

Prime Minister David Cameron is loosening requirements on homebuilders to allow them build projects that are presently unprofitable as he seeks to pull Britain out of a double-dip recession. The U.K.’s economic growth slowed in the three months through August and “significant downside risks” remain, the National Institute of Economic and Social Research said today.

The 10-year development pipeline increased 70 percent from a year earlier and companies now expect to construct homes with a sales value of 38 billion pounds, EC Harris said Sept. 3. About 3,800 units are expected to be completed in 2016, more than seven times this year’s total of 500.

“There may be a question mark about the sustainability of some of the price growth we’ve seen in the last year or two in certain areas of super-prime London, which has been phenomenal,” said Mark Farmer, head of residential at EC Harris, in an interview.

Brokers such as Savills are making contrary forecasts. The market will regulate the supply of prime central London homes to a greater extent than has been predicted, according to Savills’ Barnes.

No Overhang

“There will be no vast overhang of stock by 2015 because developers will provide a variety of product in different locations and at different price points, tapping into different market segments,” Barnes said in a statement. Not all projects with planning permission will be built immediately, she added.

About 830 hectares (2,050 acres) of land were released for residential development by planning authorities in London over the four years through 2009, a drop of 10 percent from the same period through 2004, broker Jones Lang LaSalle Inc. (JLL) said in February. That’s prompted developers to renovate older office buildings as homes as buyers hold on to prime London residences for longer and help drive up prices.

Brokers including Savills and Knight Frank define prime real estate as homes in the most expensive central London neighborhoods such as Belgravia, Kensington and Knightsbridge.

An apartment at One Hyde Park, the U.K.’s most expensive residential complex, was put up for sale Sept. 3 with an asking price of 65 million pounds. The 9,000 square-foot (836 square- meter) property in Knightsbridge has four bedrooms and takes up an entire floor of the building, according to a statement by Aylesford International, the broker managing the sale.

“The main feature of any of these deals and the prices they’re achieving is that there’s such little stock” of luxury homes available, Honey said.

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Weak jobs growth beyond government's control

No matter who ends up occupying the White House in January, many of the forces that have kept unemployment high and jobs growth slow will be beyond his control.

With employment growth stuck at a slower pace than in any recovery in the past half-century, the presidential campaign now turns on which candidate -- President Barack Obama or former Gov. Mitt Romney -- has the better plan to boost employment. The latest jobs data will do little to change the debate.

The economy added just 96,000 new jobs in August, well below the roughly 130,000 economists had been expecting. Gains in the prior two months were revised down by a combined 41,000. Manufacturers cut 15,000 jobs last month, while another 7,000 government jobs were lost. Temporary employment fell by almost 5,000 workers.

Other recent reports had painted a somewhat brighter picture. Fewer people applied for unemployment benefits last week, and a private survey by payroll processor ADP found that companies created some 200,000 new jobs in August. Another private report showed that service sector companies, such as hotels, retailers, and financial services firms, expanded at a faster rate last month.

For many voters, the health of the job market is summed up in the unemployment rate tracked by a separate government survey. That number, which dropped to 8.1 percent in August from 8.3 percent in July, could help bolster Obama's claim of slow, steady progress in getting Americans back to work.

But a closer look at the data undercuts that argument. The jobless rate fell last month largely because so many people gave up looking for work, went back to school, retired or otherwise left the workforce. Their departure shrank the labor participation rate to its lowest level in more than 30 years.

“Under those circumstances, it is hard to characterize the drop in the unemployment rate as any sort of good news,” said Paul Ashworth, chief U.S. economist at Capital Economics.

With the pace of job growth stalled, the Obama campaign this week tried to shift voters’ attention to the future. In his speech Thursday night, the president argued that the economy is still suffering the lingering damage from a once-in-a-lifetime financial crisis created by Wall Street excess. While he acknowledged only halting progress in repairing economy and appealed for patience, he stressed his administration’s commitment to help households still suffering from the impact of the Great Recession.

Republicans, including Romney, argue that government spending on the kind of programs Obama highlighted are precisely what is holding back economic growth. They also argue that the White House has stunted the recovery with too much regulation and taxation.

Romney was quick to seize on Friday’s job data to try to dampen Obama’s Thursday night appeal.

"If last night was the party, this morning is the hangover," Romney said in a statement after the jobs report was issued.

The government will issue two more rounds of monthly jobs data before voters go to the polls in November. While the monthly payroll growth has become a proxy for the health of the job market, the data are notoriously fluid and subject to revisions that could swing the payrolls number up or down by as much as 100,000 in either direction. The two upcoming reports are unlikely to reshape the campaign.

The Labor Department’s latest numbers, though a bit weaker than expected, confirm what economists have known for some time. The current recovery, far weaker than past economic cycles, is not creating paychecks fast enough to return millions of workers sidelined by the 2007-09 recession back to work. High unemployment, in turn, has sapped consumer spending, which accounts for roughly 70 percent of the U.S. economy.

While both sides disagree on the causes, there’s no disputing that this is the worst economic recovery in 50 years. This far into the previous five recoveries, the economy was expanding at an average pace of 4.4 percent, twice the current average.

Though new hiring has been crawling along at a snail’s pace, companies are still managing to squeeze more work out of their existing staffs. Corporate profits are rising in part because that weak job market has all but halted wage growth since the recession ended three years ago. Average hourly earnings, along with the number of hours worked, were flat in August, according to Friday’s data.

Many employers say their reluctance to hire stems from uncertainty over policies that will be implemented by the next occupants of the Capitol and the White House. The most immediate concern is a disastrous combination of automatic year-end tax increases and spending cuts known as the “fiscal cliff.” Unless defused, the fiscal hit will almost certainly plunge the economy back into a nasty recession.

But no matter who wins the election, it’s far from clear that either party will be able to resolve the budget impasse.

“The lame-duck Congress will punt the "fiscal cliff" problem down the road, postponing the tax hikes and spending cuts for a few months,” said IHS Global Insight chief U.S. economist Nigel Gault. “That means that extreme uncertainty over fiscal policy is likely to remain a fact of life — and a deterrent to risk-taking — well into 2013.”

That uncertainty – and reluctance to hire – will be stoked by a series of other forces holding back the four-year-old recovery:

• While subpar economic growth feels like a recession to many Americans, Europeans are coping with the real thing. The economic contraction that began in troubled economies of Greece and Spain is now spreading to Germany, the flywheel of Europe’s economy, the largest in the world. China, along with the developing economies that feed its massive manufacturing machine, is in an economic slowdown that Beijing has so far been unable to reverse.
• The budget impasse in the U.S. is due largely to huge, and rising, cost of providing health care and retirement income to an aging population. The dearth of private retirement savings will bring a slowdown in consumer spending as baby boomers continue to tighten their belts. Those trends are irreversible.
• With wage growth stagnant, growth in spending remains weak for consumers in every age group. The boom in borrowing during the 2000s helped offset sluggish wage growth. The resulting housing bust destroyed trillions of dollars in household wealth. Though the housing market is beginning to recover, it will take at least a decade for prices to recover to the 2006 peak.
• As private employers have slowed the pace of new hires, state and local governments are still shedding workers. The Obama administration’s massive federal stimulus program – now criticized by Republicans for failing to produce the number of jobs originally projected – helped blunt those layoffs. As those funds have dried up, local governments have been hit with lower sales and property tax receipts, cuts in state aid and, in some cases, mandated tax caps.

Even the Federal Reserve – the economic fire brigade of last resort – seems to have run out of tools to fight the fire. Friday's weak jobs report give the central bank more reason for another big money drop known as quantitative easing or QE. But after two rounds of more than $1 trillion in pump-priming, and short-term interest rates already at zero, most economists see diminishing returns from another effort to stimulate growth by pumping more money into the system.

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Home prices signal recovery may be here

A sharp boost in home prices during the spring could signal a recovery in the long-suffering U.S. housing market, according to an industry report issued Tuesday.

Home prices rose 6.9% in the second quarter, a signal that a housing rebound may be underway, according to S&P/Case-Shiller

The S&P/Case-Shiller national home price index, which covers more than 80% of the housing market in the United States, climbed 6.9% in the three months ended June 30 compared to the first three months of 2012.

"We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change," said David Blitzer, a spokesman for S&P, in a statement. "The market may have finally turned around."

Two other key indexes covered in the S&P/Case-Shiller report also showed gains. The 20-city index was up 6% for the quarter and the 10-city index rose 5.8%.

National prices were up 1.2% compared with a year earlier, and the 20-city and 10-city indexes also gained year over year. It was the first time all three measures showed positive annual growth rates since the summer of 2010, when generous tax credits for homebuyers were in place.

There have been several positive industry reports over the past several weeks. In July, new home sales were 25% better than a year earlier; existing home sales gained 10% year over year; and developers applied for 30% more residential building permits.

The steep increase in home prices "feels really good after six years of straight down," said Mark Zandi, chief economist of Moody's Analytics.

He cautioned that the results may overstate the case for the housing recovery a bit. The mix of homes being sold has changed lately, with fewer repossessed homes on the market. Those sell at big discounts to conventionally sold homes and had been propelling prices downward.

The home price improvement is expected to have a positive impact on foreclosure rates, according to Michael Fratantoni, vice president for research and economics for the Mortgage Bankers Association.

Foreclosures have already been falling and could drop some more if the upswing in home prices continues.

As home values increase, home equity rises, and fewer mortgage borrowers will be underwater, owing more than their homes are worth. That will give them an asset to tap should they run into a tight financial patch.

An improving housing market will also give homeowners more confidence in the investments they've made in their homes.

"There has also been a lot of concern about strategic defaults," said Fratantoni. "That should ease now. When home prices go up, people have a financial incentive to hold onto their homes and they're less likely to walk away."

Rising prices are likely to push potential homebuyers off the fence, where many have been waiting out the price decline, according to Doug Duncan, chief economist for Fannie Mae.

"Their perception that we hit the bottom takes out the risk of buying into a falling market," he said. "That should increase demand, particularly if they also believe that mortgage rates have reached a bottom as well."

Each of the 20 cities covered in the report recorded a gain in June, compared with a month earlier. Detroit prices jumped 6% for the month, the most of any city. Minneapolis prices climbed 4.8% and Chicago prices rose 4.6%.

In Phoenix. home prices were 13.9% higher in June than 12 months earlier, the highest gain of any of the 20 cities covered.

Several cities were still in negative territory year over year, including Atlanta, where they were off 12.1%. New York prices were down 2.1% on an annual basis, and Las Vegas prices were 1.8% lower.

For Zandi, all the positive news on housing carries over to the rest of the economy.

"Housing is beginning to act as a tailwind for the recovery," he said.

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China Deterioration Raises Risk Of Wen Missing Target: Economy

Manufacturing unexpectedly contracted for the first time
in nine months in August as orders shrank,
a government survey showed Sept. 1.

China’s economy is showing mounting signs of deterioration from manufacturers to banks, raising the risk that outgoing Premier Wen Jiabao will miss his growth target for the first time since taking office in 2003.

Manufacturing slowed further in August, surveys of purchasing managers showed Sept. 1 and today, with one gauge at the lowest level since March 2009. The readings added to evidence of weakness after a surfeit of unsold goods left near- record rubber stocks at China’s main hub for the commodity and financial strains saw a 27 percent jump in overdue loans at the five biggest banks in the first half.

China hasn’t failed to exceed the Communist Party’s annual growth target since the throes of the Asian financial crisis in 1998, and a miss of this year’s 7.5 percent goal may complicate a once-a-decade leadership handover. The outgoing generation of policy makers has held back on stimulus this year as it seeks to rein in a property-market boom and avoid a jump in bad debt.

“If there is no further policy response, it’s very likely that GDP growth will fall below the target and this administration will likely hand over a hard-landing economy to the next one,” said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The central bank should “revert to cutting banks’ reserve requirements more aggressively to revitalize the economy. If we have a cut soon we could have good fourth-quarter growth.”

Financial Strains

The risk of below-7-percent expansion could potentially trigger financial distress or even a crisis if local governments run out of money, said Liu, who has worked for the World Bank and Hong Kong Monetary Authority. Underscoring a buildup in strains, Construction Bank Corp. reported its overdue loans in the eastern manufacturing and export hub of the Yangtze River Delta doubled to 16.8 billion yuan ($2.6 billion).

Liu cut his estimate for full-year expansion to 7.8 percent from 8.2 percent after the release of the official manufacturing purchasing managers index. The gauge fell to 49.2 from 50.1 in July, below the estimates of 24 of the 25 analysts in a Bloomberg News survey. The dividing line between expansion and contraction is 50.

A separate manufacturing PMI released today by HSBC Holdings Plc and Markit Economics was at 47.6, indicating the fastest contraction in more than three years, with an employment index at a 41-month low. A government services PMI showed a faster expansion in August.

The Shanghai Composite Index (SHCOMP), China’s benchmark stock gauge, rose 0.6 percent today. It fell 2 percent last week to the lowest level since February 2009, and is heading for its first three straight years of annual declines since the Shanghai Stock Exchange opened in December 1990.

Yuan Drop

The yuan, which has weakened 0.9 percent this year, is on pace for its second annual decline since the country overhauled the exchange-rate system in 2005 and removed a peg to the U.S. dollar.

ANZ is the latest bank to lower its growth forecast. Mizuho Securities Asia Ltd. on Aug. 31 cut its projection to 7.6 percent from 8.1 percent while Bank of America Corp. reduced its estimate last month to 7.7 percent from 8 percent.

Asia’s next two largest economies are also showing signs of slowing. Japan’s industrial production unexpectedly slumped in July, data showed Aug. 31. India reported the same day that its gross domestic product increased 5.5 percent last quarter from a year ago, down from an 8 percent pace in the same period in 2011.

India today said exports in July dropped 14.8 percent from a year earlier, while imports declined 7.6 percent. Australian retail sales unexpectedly declined in July by the most in almost two years, data today showed.

Inflation Pressures

The slowdown in growth has dissipated inflation pressures, with South Korea today reporting consumer prices rose 1.2 percent in August from a year before, down from the 1.5 percent increase the previous month. Thailand’s inflation rate slowed to 2.69 percent in August from 2.73 percent in July. Indonesia’s core inflation rate fell to 4.16 percent from 4.28 percent, while total inflation held below 4.6 percent.

A gauge of euro-area manufacturing may confirm a contraction for a 13th straight month in August. The U.S. observes its Labor Day holiday today. Three days ago, Federal Reserve Chairman Ben S. Bernanke signaled he’s prepared to deploy additional asset purchases amid an American unemployment rate that’s “far above” the Fed’s mandate.

Economic growth has slowed for six quarters to 7.6 percent in the three months through June from 9.8 percent in the fourth quarter of 2010 as Europe’s debt crisis crimped exports and a prolonged crackdown on property speculation damped domestic demand.

Further Measures

The slowing will continue this quarter to 7.4 percent, according to Lu Ting, at Bank of America in Hong Kong, the No. 1 forecaster on China in Bloomberg Markets’ annual ranking of global economists for the two years through September 2011. He said there’s a risk the full-year rate will be below 7.5 percent, and growth may miss his forecast if the government “fails to roll out further policy measures in the next few months.”

Growth averaged 10.9 percent from 2005 to 2011 when the target was 8 percent and was as high as 14.2 percent in 2007. The government set a goal of an average 7 percent expansion for the five-year plan that runs through 2015.

Industrial companies’ earnings fell in July by the most this year, according to government data. The nation’s steelmakers posted a 96 percent drop in first-half profit as demand weakened and prices fell, the China Iron and Steel Association said July 31.

Plant Shutdown

Hitachi Construction Machinery Co., the world’s third- biggest maker of building equipment, is shutting its Chinese plant for two weeks a month until October due to a sales slump, President Yuichi Tsujimoto said in an Aug. 29 interview.

Inventories of rubber at Qingdao port, the country’s main hub for the car-tire material, were forecast to match a January record last month on a weaker auto market, Li Xiangou, chairman of the city’s rubber exchange, said in an Aug. 17 interview.

Retailers are also suffering. Parkson Retail Group Ltd., which operates more than 50 department stores in China, said first-half same-store sales rose at less than a quarter the pace of a year earlier and sportswear seller Li Ning Co. (2331) shut 1,200 shops in the six months ending June 30.

China’s government has refrained from a stimulus on the scale of the 4 trillion yuan package unveiled during the global financial crisis that helped keep growth above 9 percent in 2008 and 2009 while the rest of the world slumped.

Wen said in October the government would “fine tune” economic policies. Since then, banks’ reserve requirement ratios have been cut three times, approvals for investment projects have been accelerated and social security and health spending have risen. The central bank lowered interest rates in June for the first time in three years and cut them again in July.

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SNB’s Jordan Repeats Franc Pledge, Sees Property Threat

Swiss Central Bank President Thomas Jordan

Swiss central bank President Thomas Jordan reiterated his commitment to defend the franc ceiling and warned of signs of overheating in the residential property market.

“In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy, and would carry with it the risk of deflationary developments,” Jordan said at a conference in Zurich today. “With this in mind, we will continue to enforce the minimum exchange rate with the utmost determination.”

The Swiss National Bank has purchased billions of euros to defend the franc ceiling, which was introduced a year ago to protect the economy from the impact of an appreciating currency. With borrowing costs at zero, Jordan called today on banks to use “prudent credit standards,” saying there is a risk of a “further buildup of imbalances followed by a significant price correction” in the real-estate market.

Jordan is turning his focus to potential threats from the property market after the SNB said in its Financial Stability Report in June that there is a need for “corrective measures.” Home loans have increased by almost 300 billion francs ($314 billion) in a decade and gained 5.2 percent last year to 797.8 billion francs. That’s about 140 percent of Swiss gross domestic product.

Lending Rules

The government toughened lending rules earlier this year, forcing borrowers to provide at least 10 percent of the value of the property from their own funds without using pension assets. Under the measures, mortgages will have to be paid down to two- thirds of the lending value within 20 years.

In addition, the Swiss government can force lenders to hold additional capital of as much as 2.5 percent of their domestic risk-weighted assets to counter threats to financial stability following a request from the SNB for activation.

The Zurich-based SNB said on Aug. 27 that given “indications of a possible slowdown” in the second quarter of the “exceptionally strong” momentum in the domestic residential mortgage and real-estate markets, the so-called countercyclical capital buffer won’t be be activated this year. Still, the central bank is “observing closely” all developments to see whether the buffer is necessary, Jordan told Swiss television in an interview on the same day.

“This is far from an all-clear for the real estate market,” Jordan said. The measure “serves two purposes -- strengthening the resilience of the banking system by increasing its loss-absorbing capacity and helping to lean against the buildup of excesses. It is a very flexible instrument and may be activated for specific sectors of the credit market only.”

There are signs that residential properties are already “overvalued” in the regions of Zurich, Geneva and Zug as well as other parts of the country, Jordan said. Residential mortgages account for about 70 percent of assets of domestically oriented Swiss banks, according to the SNB.

The SNB will hold its next monetary assessment on Sept. 13.

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Lloyds Said Planning To Sell $2.5 Billion Of Mainly Irish Loans

Lloyds Banking Group Plc (LLOY) plans to sell about 2 billion euros ($2.5 billion) of mainly Irish real- estate loans, the latest phase in extricating itself from Western Europe’s biggest property crash, according to a person with knowledge of the transaction.

The U.K.’s second-biggest government-aided bank will probably have to take discounts on the sale, said the person, who declined to be identified because details of the sale are private. Ian Kitts, a Lloyds spokesman, declined to comment.

Lloyds, based in London, moved in 2010 to close and run down the Irish unit it acquired two years earlier as part of its takeover of HBOS Plc. The bank has taken 11.8 billion pounds of impairment charges on Irish loans since the nation’s real-estate market collapsed four years ago, according to data compiled by Bloomberg News. That equates to 40 percent of its end-2008 Irish loan book.

Two years ago, the bank largely handed management of its Irish portfolio to Certus, a company set up by members of its former Irish management team. Lloyds said in July its exposure to Ireland is “being closely managed, with a dedicated U.K.- based business support team in place to manage the winding down of the book.”

Some 86 percent of Lloyds’ 16.1 billion-pound Irish wholesale portfolio, mainly commercial real-estate loans, was impaired, or unlikely to be repaid in full, at the end of June, the group said on July 26.

Loans Sold

Kennedy-Wilson Holdings Inc. and Deutsche Bank AG agreed to acquire 360 million euros of non-performing commercial property loans from Lloyds at an average 83 percent discount to par value, CoStar Group Inc., the commercial real-estate information company, reported in June. Lloyds said in July it sold 300 million pounds of gross Irish wholesale assets during the first six months without giving further details.

Irish commercial real-estate prices have plunged by two- thirds from its 2007 peak, according to Investment Property Databank Ltd., while residential property has halved in value, the Central Statistics Office said Aug. 30.

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Real Estate Outlook: New Home Sales Rise

The sales rate of newly built, single-family homes was on the rise during the month of July: this is welcome news to builders all across the nation.

According to the latest figures from HUD and the U.S. Census Bureau, sales of newly built homes rose by 3.6 percent for the month to a seasonally adjusted annual rate of 372,000 units.

"Sales of new homes in July returned to the same solid pace they set in May, which was the fastest sales rate we'd seen in more than two years," said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. "This is further evidence that consumers are becoming more confident in local housing markets as they look to take advantage of today's very favorable prices and interest rates."

Noting that the three-month moving average of new-home sales has been edging up consistently since last September, NAHB Chief Economist David Crowe said, "Today's good report is the latest indicator of a gradual, upward trend that we expect to continue through the remainder of this year." However, he added that "The fact that the inventory of new homes for sale reached an all-time low in July is a worrisome signal that ongoing, unnecessarily tight credit conditions are keeping builders from being able to replenish supplies as consumer demand improves."

Will this trend continue into our current month? The Mortgage Bankers Association (MBAA) reports that this week mortgage applications declined by 7.4 percent. Refinance activity also decreased by 9 percent. This is the lowest level since July.

Mortgage Refinancing now makes up 80.0 percent of total applications, down just slightly -- one percentage point -- from the week prior.

Affordability remains a hot topic in today's market. While affordability rates remain near record lows, will they remain so? And what about the low-income portion of the population?

A new report from HUD indicates that since its inception, the nation's low-income housing Tax Credit Program has helped produce more than 2.2 million affordable apartments. Now that the initial 15-year required "affordability period" has passed, the vast majority of theses LIHTC properties remain affordable for working families.

The HUD-commissioned report cautions, however, that this could all change as state and local use restrictions expire. Over a million units could become market-rate properties out of the reach of low-income households.

"This report is a wakeup call to all of us interested in preserving our nation's affordable housing," said HUD Secretary Shaun Donovan. "As LIHTC properties age, especially in high-cost areas with escalating market demand, State Housing Finance Agencies must do everything they can to protect the opportunities for working families to live in neighborhoods they might otherwise not be able to afford."

The study's authors suggest that Housing Finance Agencies should place the highest priority on the developments that are most likely to be repositioned in the market -- as higher-rent housing or conversion to homeownership or another use.

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Which Is Better - Real Estate or Stocks?

Let’s begin by looking at each type of investment:

• Real Estate: When you invest in real estate, you are buying physical land or property. Some real estate costs you money every month you hold it - think of a vacant parcel of land that you hope to sell to a developer someday but have to come up with cash out-of-pocket for taxes and maintenance. Some real estate is cash generating – think of an apartment building, rental houses, or strip mall where the tenants are sending you checks each month, you pay the expenses, and keep the difference as the profit.
• Stocks: When you buy shares of stock, you are buying a piece of a company. Whether that company makes ice cream cones, sells furniture, manufacturers motorcycles, creates video games, or provides tax services, you are entitled to a cut of the profit, if any, for every share you own. If a company has 1,000,000 shares outstanding and you own 10,000 shares, you own 1% of the company. Wall Street makes it seem far more complicated than it is.

The Pros and Cons of Real Estate vs. Stocks

Now, let’s look at the pros and cons of each type of investments to better understand them.

Pros of Investing in Real Estate

• Real estate is often a more comfortable investment for the lower and middle classes because they grew up exposed to it (just as the upper classes often learned about stocks, bonds, and other securities during their childhood and teenage years). It’s likely most people heard their parents talking about the importance of “owning a home”. The result is that they are more open to buying land than many other investments.
• When you invest in real estate, you invest in something tangible. You can look at it, feel it, drive by with your friends, point out the window, and say, “I own that”. For some people, that’s important psychologically.
• It’s more difficult to be defrauded in real estate compared to stocks if you do your homework because you can physically show up, inspect your property, run a background check on the tenants, make sure that the building is actually there before you buy it, do repairs yourself ... with stocks, you have to trust the management and the auditors.
• Using leverage (debt) in real estate can be structured far more safely than using debt to buy stocks by trading on margin.
• Real estate investments have traditionally been a terrific inflation hedge to protect against a loss in purchasing power of the dollar.

Cons of Investing in Real Estate:

• Compared to stocks, real estate takes a lot of hands-on work. You have to deal with the midnight phone calls about exploding sewage in a bathroom, gas leaks, the possibility of getting sued for a bad plank on the porch, and a whole host of things that you probably never even considered. Even if you hire a property manager to take care of your real estate investments, it’s still going to require occasional meetings and oversight.
• Real estate can cost you money every month if the property is unoccupied. You still have to pay taxes, maintenance, utilities, insurance, and more, meaning that if you find yourself with a higher-than-usual vacancy rate due to factors beyond your control, you could actually have to come up with money each month!
• As you learned in The Great Real Estate Myth, the actual value of real estate hardly ever increases in inflation-adjusted terms (there are exceptions, of course). This is made up for by the power of leverage. That is, imagine you buy a $300,000 property by putting in $60,000 of your own money, and borrowing the other $240,000. If inflation goes up 3% because the government printed more money and now each dollar is worth less, then the house would go up to $309,000 in value. Your actual “value” of the house hasn’t changed, just the number of dollars it takes to buy it. Because you only invested $60,000, however, that represents a return of $9,000 on $60,000. That’s a 15% return. Backing out the 3% inflation, that’s 12% in real gains before factoring in the costs of owning the property. That is what makes real estate so attractive.

Pros of Investing in Stocks

• More than 100 years of research have proven that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth creator in the history of the world. Nothing, in terms of other asset classes, beats business ownership (remember – when you buy a stock, you are just buying a piece of a business).
• Unlike a small business you start and manage on your own, your ownership of partial businesses through shares of stock doesn’t require any work on your part (other than researching each company to determine if it is right for you). There are professional managers at headquarters that run the company. You get to benefit from the company’s results but don’t have to show up to work every day.
• High quality stocks not only increase their profits year after year, but they increase their cash dividends, as well. This means that every year that goes by, you will receive bigger checks in the mail as the company’s earnings grow. As Fortune magazine pointed out, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends! That’s money that would just keep rolling into your life without doing anything!
• It’s much easier to diversify when you invest in stocks than when you invest in real estate. With some mutual funds, you can invest as little as $100 per month. With companies such as sharebuilder, a division of ING, you can buy dozens of stocks for a flat monthly fee of as little as a few dollars. Real estate requires substantially more money.
• Stocks are far more liquid than real estate investments. During regular market hours, you can sell your entire position, many times, in a matter of seconds. You may have to list real estate for days, weeks, months, or in extreme cases, years before finding a buyer.
• Borrowing against your stocks is much easier than real estate. If your broker has approved you for margin borrowing (usually, it just requires you fill out a form), it’s as easy as writing a check against your account. If the money isn’t in there, a debt is created against your stocks and you pay interest on it, which is typically fairly low.

Cons of Investing in Stocks

• Despite the fact that stocks have been proven conclusively to generate more wealth over the long run, most investors are too emotional, undisciplined, and fickle to benefit. They end up losing money because of psychological factors. Case in point: During the most recent collapse, the Credit Crisis of 2007-2009, well-known financial advisors were telling people to sell their stocks after the market had tanked 50%, at the very moment they should have been buying.
• The price of stocks can experience extreme fluctuations in the short-term. Your $40 stock may go to $10 or to $80. If you know why you own shares of a particular company, this shouldn’t bother you in the slightest. You can use the opportunity to buy more shares if you think they are too cheap or sell shares if you think they are too expensive. As Benjamin Graham said, to get emotional about stock prices that you believe are wrong is to get upset by other peoples’ mistakes in judgment.
• On paper, stocks may not look like they’ve gone anywhere for ten years or more during sideways markets. This, however, is often an illusion because charts don’t factor in the single most important long-term driver of value for investors: reinvested dividends. If you use the cash a company sends you for owning its stock to buy more shares, over time, you should own far more shares, which entitles you to even more cash dividends over time. For more information, read the work of Ivy League professor Jeremy Siegel.

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Where Is the Best Place to Invest My Down Payment Money?

If you are saving money for a down payment on a home or other real estate, you may wonder what the best investment is for you to earn a return on your cash until you need it. The answer is simple: None. Instead, you should put your money in one of a handful of “cash equivalents” that are protected by deposit insurance or the United States Government.

Surprising? It shouldn’t be. In the words of the legendary investor Benjamin Graham, more money has been lost reaching for a little extra return than any other financial sin. When you’re talking about money that you really can’t do without – whether it be to fund the roof over your head, medical expenses, or an emergency savings fund in case you lose your job, you need to remember what you’re trying to accomplish. These “reserve” funds need to be accessible to you in as little as a few days, at the most. It represents money that is not meant to generate a return because it has a singular purpose and you don’t want to take on risk. Your capital is responsible for growing your wealth. (In simple terms, “capital” is the money you have set aside for the purpose of making the money work for you, whether buying shares of stock in a business, starting your own company at home, or investing in bonds for income. Money you save at work through a 401(k) or 403(b) plan, for instance, would be considered retirement capital.)

Many financial tragedies result as a seemingly innocent decision to accept more risk than you can afford. Many times, it begins by justifying the decision to yourself along the lines, “I know it’s a stretch, but it will probably work out alright.” They may be true nine times out of ten but when things go south, the consequences can be devastating, both financially and emotionally.

Where, Then, Do I Invest My Down Payment Money?

That still leaves the question: What should you do with the money you are saving for a down payment? There are only a handful of appropriate places to safely store that money until it comes time to purchase your property. They include:

FDIC Guaranteed Bank Accounts: These include checking accounts and savings accounts at FDIC member banks. Not only can you access your money during regular banking hours without any penalty, if your bank fails, the government will reimburse you up to $100,000 (this has been temporarily increased to $250,000 per depositor until December 31, 2013). For those who stay under the limits, this makes demand accounts, as they are known in the industry, virtually risk free.

FDIC Insured Certificates of Deposit (CD’s): Offered by FDIC member financial institutions such as many community banks, a certificate of deposit is basically a special type of contract where you lend money to the bank for a specific amount of time, say three months or two years, in exchange for a guaranteed rate of return. Typically, the longer you agree to tie up your money at the bank, the more interest they will pay you. If you won’t needs your funds for quite some time that can be okay. If you do need to access your money sooner than the maturity on the CD, then the bank may charge you as much as six months’ worth of interest as a penalty. For emergency accounts that you may need in the short-run, this makes them a poor choice. If you know you won’t buy a home for, say, at least six months, you might get more favorable terms by buying a CD.

U.S. Treasury Bills: These are obligations of the United States Government that mature in one year or less. They are considered one of, if not the, safest of all places to park your cash. That’s because each Treasury Bill is backed by the full taxing power of the government so, in theory, default is impossible. You buy Treasury bills at a discount and when they mature, you receive the full “face value”. These only make sense if you have a good amount of money already saved for a down payment on your house. You’d need at least $10,000 or $20,000 to make it practical.

Money Market Accounts - But Not Money Market Funds: A money market account at your local bank can be a great way to protect your money, while earning much higher interest rates based on how much you have to deposit. These accounts are often FDIC insured, protecting you from the potential problems arising if your bank were to fail. A money market fund on the other hand, is a more complex mutual fund type investment that buys all kinds of cash equivalent assets. These are typically not FDIC insured. Always, always, always - did I mention always - ask your banker whether or not your money market account is FDIC insured. If it is, it should be a safe place to park your down payment savings. If it's not, don't even think about it.

U.S. Savings Bonds: US savings bonds come in two primary types: The Series I savings bond and the Series EE savings bond. Both have unique benefits. If you are more than a year away from needing your down payment money, they provide tremendous benefits because investors are guaranteed to never lose money. That level of protection is vital when dealing with money that you need, such as down payment cash for real estate.

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