Flushing Savers From Their Foxholes

"Certificates of Confiscation" Once Again?

Certificate of Confiscation: 1970's term for bonds, certificates of deposit (CD's), etc. yielding less than (rising) inflation.

How do you get people (and corporations and banks) to stop hoarding cash, and put it to work, stimulating the economy?

Reduce interest rates to zero.

But what if that still doesn't do the trick?

Make holding cash not only unremunerative, but costly.

The best way to do that is to devalue the currency and/or create inflation, so that the value of cash steadily erodes, precipitating an inexorable stampede into . . . anything else.

Fleeing Cash

Which is basically what has been happening since late August, when The Federal Reserve signalled its intent to further stimulate the economy by printing more money (called "quantitative easing").

Since then, stocks have rallied about 10%, and commodities -- especially gold and oil -- are up anywhere from 15% to 40%.

Meanwhile, the dollar is down 8% against a basket of major currencies.

(Un)Intended Consequences

The problem with driving savers out of their negative-yielding foxholes is, what comes next?

The Fed hopes that all that liquidity will find its way into the stock market, driving up prices and creating a "wealth effect" that will spur spending and the broader economy.

But it's just as plausible that erstwhile savers will switch their affinity to something -- anything -- that promises immunity from central bank debasement.

That list includes: gold, silver, oil, wheat futures, Swiss francs, Australian dollars -- you name it.

As those things appreciate, they create inflation, which punishes consumers, which hurts the economy.

Can you say, "full circle?"

Alternative Financing: Back to the Future?

Contracts for Deed & Assignable Mortgages

Last Fall, Edina Realty's excellent legal department identified FHA loans and short sales as the two, big looming issues for Realtors to prepare for in 2009.

Good call.

So, what is Edina legal predicting will be big in 2010?

Alternative financing.

As in, contracts for deed and mortgage assumptions.

Expected: Higher Interest Rates

Both are likely to be more common in the housing market in the coming year(s), for four reasons:

One. Higher interest rates. The Fed's ginormous, $1.25 trillion(!) buy-down of mortgage rates (yes, it's been happening all year) is slated to be phased out early in 2010.

Without that subsidy, rates are expected to float higher. In fact, they already are.

Contracts for deed are are a time-tested alternative to more expensive, less available bank financing.

Two. A continued weak economy.

Consumers who've lost a home to foreclosure typically can't qualify for a mortgage for at least three years.

But if they have steady income, there's no reason why they can't make payments on a contract for deed.

Three. Continued, volatile investing climate.

As investors know all too well, the interest rate on short-term savings is now effectively zero (and has been for over a year). Just because banks are expected to charge more for mortgages doesn't mean that savers can expect to earn more on their balances.

Meanwhile, many investors' appetite for stocks is, shall we say, diminished.

Contracts for deed provide an attractive alternative to home sellers with considerable equity.

And guess what?

Something like two-thirds of homeowners over 60 years old own their homes free and clear!

Four. Buyer and Sellers will assume and assign, respectively, below-market rate mortgages . . . because they can.

Fully 50% of the mortgages made in 2009 have been comprised of FHA and VA loans -- both of which are assumable.

If rates hit 7%-8% in the future, as many expect, being able to step into your seller's 4.75% interest rate is a no-brainer.

P.S.: one more way U.S. taxpayers are going to get shellacked if/when interest rates rise: all those assumable FHA and VA loans will have to be written down by the tens of billions.

Low Interest Rates for Savers

1.5% in Really Big Type is Still . . . 1.5%

Just a heads up to whoever writes the marketing copy for banks advertising "fat" interest rates on their saving deposits, CD's, etc.:

1.5% in really big type is still just 1.5%.

And it doesn't matter how pleased the actors in the ads look.