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Fed's Rate Decision Has Big Implications for Home Buyers, Sellers

by KRISTIN WONG

The Federal Reserve's expected announcement of a rate increase on Wednesday has big implications for prospective home buyers and sellers, but experts have four words for anyone who's feeling that they need to act immediately: Don't do anything rash!

The Fed is widely expected to raise the federal funds rate by a quarter point, from a zero-0.25 percent range to 0.25-0.50 percent, for the first time in nearly a decade in an effort to keep the economy from overheating. When the Fed's rate goes up, so do interest rates of all kinds of other consumer loans, including mortgages.

Because mortgages are longer term than many other loans, even a small increase in interest rates can mean a buyer will pay many thousands of dollars more over the life of the loan. But moving quickly to try and lock in the lowest rate may not make sense, depending on your overall financial picture, experts say.

"Homeowners should not accelerate or decelerate their purchase decisions based on a market forecast," said Peter Lazaroff, wealth manager and director of investment research at Plancorp. "All markets, including interest rates, are forward looking. That means that debt prices have already built in expectations for slightly tighter monetary policy."

The Fed's rate and mortgage rates

While the Fed's impending rate decision already has sent mortgage interest rates inching higher from historic lows and a rate hike will send them higher, experts note that it won't happen at once and it won't happen quickly.

The federal funds rate is directly tied to short-term market rates — credit cards, for example — but long-term mortgage rates are not directly affected by the Fed. Nonetheless, Lazaroff said it is reasonable to expect higher mortgage rates over time.

Ahead of the Fed's meeting, the average 30-year fixed mortgage inched up to 3.95 percent last week, a slight increase from 3.93 percent and almost two-tenths of a point from its six-month low of 3.76 percent.

But Lazaroff said further increases are likely to be gradual, meaning that prospective buyers and sellers have some time before higher rates really begin to bite.

That doesn't mean that there is no need to start moving if you're serious about buying a home, said Melanie McShane, an independent real estate broker in Southern California.

Even a slight change in interest rate can make a big difference on your home loan, she said. For example, let's say you have a $300,000 loan with a 3.95 percent 30-year fixed mortgage. Your total interest payment would be $212,500. With a rate of 4.25 percent, you'd pay a total of $231,295 in interest. At less than half a percentage point increase, that's nearly a $20,000 difference.

"I've been in the industry for 11 years now and have seen the impact interest rate fluctuations have on homebuyers," she said. "As the interest rates move up, the total loan amount that the buyer qualifies for decreases. Typically a buyer has a fixed amount in mind of how much they are comfortable spending monthly. As the interest rate moves up, that fixed monthly payment buys less and less home."

And with mortgage rates still near historic lows, this remains a good time for potential homeowners to lock in a low, fixed interest rate, she said.

But timing a purchase depends on more than just mortgage rates, said Robert R. Johnson, president and CEO of The American College of Financial Services. As interest rates rise, the market is likely to become more competitive.

"There is often a hidden benefit to higher rates," Johnson said. "All else being equal, if interest rates are higher, home prices are generally lower because of supply and demand effects. If there is lower demand, sellers may be forced to sell homes at lower prices than might exist if rates were lower."

McShane, however, doesn't think the impact of waiting will be that substantial.

"I don't believe that there is going to be a benefit to waiting other than more selection," she said. "I do not believe that home prices will fall enough to be a significant factor in waiting to purchase a home."

Lock in a fixed rate

Most experts agree that new buyers should prefer a fixed mortgage. Because further increases seem likely over at least next year, an adjustable rate mortgage would almost certainly mean paying more interest.

"I believe that new homebuyers should look to lock in fixed rate mortgages sooner rather than later," said Johnson. "Rates have nowhere to go but up and homeowners should access cheaper money now."

The draw of adjustable rate mortgages (ARMs) is the initial rate is usually slightly lower than a fixed rate loan. But if interest rates increase over time, ARM increases will usually cancel out any savings.

For example, let's again say you're borrowing $200,000. If you have a 10/1 ARM at 3.95 percent (meaning it will stay at the initial interest rate for 10-years), with a maximum rate of 8 percent, you would potentially pay $180,000 in interest over the 30-year life of the loan. With a 30-year fixed mortgage at a higher rate of 4.25 percent, you'd only pay about $154,000 in interest over the life of the loan. There are a number of factors that can influence these numbers, such as the length of time you live in a house. (You can use this calculator to crunch the numbers yourself.)

As a potential homebuyer herself, McShane is looking to lock in a fixed rate sooner rather than later.

"Fixed rates right now are very attractive and I would certainly recommend that for anyone who does purchase," she said. "First time home buyers should understand that even with a slight increase in interest rates, now is still a great time to buy. But they should not purchase more than they can comfortably afford. We are not in the market cycle where rates are going to decrease so that they can refinance." 

Analyzing Ford's Return on Equity (ROE)

Finanzas: Noticias.
By Jeremiah Strider | December 10, 2015

Ford ’s (NYSE: F) recent return on equity (ROE) tells investors that the company is creating measurable net income for its stockholders. Although Ford may have been the only auto manufacturer that did not take government bailout dollars during the financial crisis of 2008 and 2009, it nonetheless suffered significantly during those years. In fact, like the other large U.S. automakers, Ford’s equity balance was substantially below zero during those years and the years that followed. Essentially, the company owed more than its assets were worth; therefore, there was no shareholders' equity on the balance sheet. That negative equity, along with several years of net operating losses, made the company's ROE unsuitable to consider for several years. There simply cannot be a return on shareholders' equity when there is no equity. In 2011, Ford's shareholder equity and ROE turned positive, ending at 281.62%, a number that was skewed by the equity balance being extremely low and having the highest annual net income for the past 10 years at $20.3 billion.

Recent Three Years

For the most recent three calendar years of 2012 to 2014, Ford's ROE has been 36.58%, 33.81% and 12.45% respectively. Net income during those same years was $5.6 billion, $7.2 billion and $3.2 billion respectively. The ROE does not correlate to the net income trend because Ford also raised its dividend during each of those years: from 0 in 2011, gradually increasing up to 50 cents per share by the end of 2014. While this is generally viewed as a sign of strength to investors, it may skew the equity calculations and make the yearly ROE difficult to compare. Ford has also bought back a small portion of company shares during recent years, decreasing shares outstanding from 4.1 billion in 2011 to 4 billion in 2014.

Comparison to Competition

Ford Motor Company, ’s largest domestic competitor in the highly consolidated automotive manufacturing industry is General Motors, which also experienced years of negative shareholder equity during the economic downturn but returned to positive figures in 2010. During the same most recent three-year period of 2012 to 2014, GM's ROE has been 18.14%, 11.54% and 7.48% respectively. Net income during those same years was $6.1 billion, $5.3 billion and $3.9 billion respectively. GM returned to paying dividends in 2014 after several years of none, paying an average of $1.20 per share that year. GM's shares outstanding has remained relatively level during recent years with no major share repurchases or new share issuance.

The two companies are relatively close in overall size; GM generates more annual revenue than Ford, but Ford has more overall assets than GM. Ford also has carried more long-term debt than GM in recent years. Both companies' ROEs indicates that they have returned to more stable economic footing and that they are beginning to reward shareholders reliably for their investments through dividends. Both companies' stock prices have also recovered from severe lows during the economic recession.

Other Considerations

The amount of new debt a company takes on is often a factor that an investor should consider in addition to an ROE analysis. Although Ford carries a higher amount of debt compared to its competition, it has not substantially increased that debt in the last three years. This indicates that its capital needs are not being met via debt financing, which often skews an ROE analysis.

Ford’s annual revenues have returned to their highest level since the recession, but they are still substantially lower than annual revenues before the recession. However, it appears as though the company is learning how to manage its assets and shareholders' equity at this new level as demonstrated by the return to positive ROE figures posted in each of the past three calendar years.

How to Reduce Real Estate Investment Taxes

By Zina Kumok | December 14, 2015

With the Federal Reserve likely to raise interest rates soon, many people are pulling the trigger on purchasing a rental property. It can be a great way to earn passive income and diversify your portfolio. But don’t jump in with your eyes closed. Even if you’re a homeowner, owning rental property is a different beast. Real estate tax law is not the same for rental properties as it is for residences. Here are some ways to save yourself from the tax man and get the most from your real estate investment.

Tax Tips

If you’re used to paying taxes on your home, there are some differences in property tax for landlords. Here’s what you need to be aware of when it comes to real estate rental taxes: (For more, see: Tax Deductions for Rental Property Owners.)

• Record your deductions. Like any small business, you can deduct the costs of running your real estate property from your taxes. These might include advertising, maintenance, utilities, insurance premiums, management fees, repairs and more. You can also deduct any mileage related to maintaining the rental property. Keep a small notebook in your car to log your mileage.
• Know the difference between a repair and an improvement. According to the Internal Revenue Service (IRS), there are two types of changes you can make to a rental property. One is a repair, which can be deducted from your taxes. A repair implies a fix to something that is broken, such as a water heater or faulty wiring. An improvement is when you make a change that increases the value of the home, such as finishing the basement or adding energy efficient insulation. Improvements must be depreciated over a period of time. (For more, see: How Rental Property Depreciation Works.)
• You may not be eligible to deduct anything. The IRS limits deductions to married couples filing jointly earning $150,000 or more. Deductions begin phasing out starting at $100,000. If you earn $100,000 you can deduct up to $25,000. However, any losses that exceed that amount can be carried over to future years. If your salary exceeds this amount, make sure to set aside money for your rental taxes.
• Count your time. According to certified financial planner (CFP) Chris Hardy, if you spend more than 750 hours a year working on your real estate business, you can deduct expenses even if you exceed the income threshold. This could be a huge boon for high-earning professionals. Track the time you spend working on your rental property. This way, you’ll have a record in case the IRS comes calling. (For more, see: Tips for the Prospective Landlord.)
• Live there first. Hardy says that another way to save on taxes is to live in your rental property for at least two years before renting it out. Single people can receive $250,000 in capital gains without paying taxes (or $500,000 for married couples filing jointly). When you sell your home, you’ll be able to deduct up to that amount from any profit you earn. This is great for people looking to buy houses and flip them later.
• Vacation homes have special rules. If you own a vacation home that you rent out, you don’t have to pay any taxes if it’s rented for less than two weeks a year. This can be a great way to make some extra money on your property without paying extra taxes on it.

The Bottom Line

Real estate tax law can get hairy, but don’t let that stop you from buying a rental home if you’re in a suitable position to do so. The above tips will help. If you have more questions, consult a tax professional who can guide you. (For more, see: The Pros & Cons of Owning Rental Property.)

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