September 19

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6% Mortgage Rates

FAMILY UPDATE

Now that my daughter got her driver's license we never see her. She leaves at 6:30 AM for school and comes back around 9:00 at night. She is busy with sports and friends and all those fun things you do at sixteen.

It’s amazing how dogs can pick up on emotions. I was having a tough day this week and Desmond followed me around wherever I went. Whenever I sat down, he lay on my feet. It's like he can sense distress. Have any of you had this experience?

The Federal Reserve has been increasing interest rates in order to cool off the economy. What does that mean exactly, and how does is affect you?

The Fed determines what kind of interest banks charge for loans. It also determines what interest you receive from your savings account. Increasing rates is terrible for people who want to buy something on credit. For savers, it can be a good thing, as interest rates on savings accounts will increase.

Mortgage rates have doubled in the past couple of months. What does this mean in real money?

As recently as two months ago you could get a mortgage at around 3%. This means that if you purchased a $500,000 home your mortgage payment would have been around $2100. Now that rates are closer to 6%, a $500,000 mortgage would increase (incredibly) to $2900. As you can see this is basically screeching home sales to a halt. This is what the Fed is trying to accomplish. They want to slow down spending.

The same goes for cars. If you buy a new car and want to finance the purchase, you will be paying 6-7% interest. It would increase your payment by over $100. The days of 0% financing are long gone.

Along those lines, since everyone’s house in our area has basically doubled in value over the past few years I've been seeing some advertisements about refinancing your home so that you can get the equity into your hands.

"You can renovate your house, pay off high-interest debt, or just use the money on a dream vacation!" they say.

Don’t listen to them. While it may be tempting to get a bunch of equity from your house, the new mortgage will be based on current interest rates. I can’t believe that some people even consider this, but getting a big cash payment sometimes is too hard to resist.

The housing situation in this area is a very serious problem. There is no affordable housing for those people working in the service industry. I’m not sure if anyone has any answers.

Anyway, the Federal Reserve says it is going to continue to raise rates. As you can see, they wield a ton of power. Their policies are working to slow larger purchases, but it is harder to reign in the prices of consumer goods or anything that you don’t need to buy on credit.

In other news, this week, Bob Baloney sat down with me and had some questions:

"Dave, things seem so crazy right now. We are experiencing things the world has never seen before," Bob said.

"I understand," I replied. "We are experiencing some historically rare variables in the investing world right now. It can be very disconcerting."

"I still have that 401k at work that I’ve been contributing to. I’m thinking about stopping. As soon as I put the money in my account goes down and the money disappears," Bob said.

I replied, "This isn’t exactly what happened. You are buying low. You are buying shares. The share price may be temporarily down, but you are buying more shares at a lower price. If anything you should increase your 401k contributions."

"You say that we can safely spend 5% of our portfolio each year. How does that work exactly? How can you take money from an account that is going down?" Bob asked.

"Remember over the past three years when stock portfolios were returned an average of 15% or more? I know it is easy to forget. Did you get extra money because the portfolio was performing so well? No. We are sending you an average. Short-term volatility like this has no bearing on your long-term plans," I replied.

"My friend read that the stock market could go down as much as 80%. I would have to go back to work. I don’t know what I would do," Bob said.

"I’m not sure where he is getting that information. The market didn’t go down that much during the Great Depression. If the market goes down that much, banks are going to fail, and it won’t matter where you had your money. Do you really think that Apple, Facebook, Microsoft, Visa, Walmart, and Proctor and Gamble are all going out of business? We need to think logically. Markets temporarily go down and permanently go up," I replied.

I interjected, "Bob, I do have a good piece of news about inflation. Social Security has a cost-of-living-adjustment. Since inflation is raging your Social Security benefit is going to increase by around 9% next year. That increase happens whether you are taking your benefits or not."

"High inflation," I continued, "does not equal losses in the stock market. The news keeps talking about how we haven’t had this kind of inflation in forty years and they are right. Let’s look at what happened."

"1979, 1980, and 1981 is when inflation peaked. That data is what everyone is referencing. What did the stock market do? +18.5%, +35% and -4.7%. You have to remember that the stock market is not logical." High inflation does not guarantee the markets are going to crash.

"Wow! That’s great news," Bob exclaimed.

Bob asked, "Since everything is on ‘sale’ now. Would this actually be a good time to invest some of my extra cash?"

I replied, "It totally depends on your situation and risk tolerance. Personally, I am investing my own money into the stock market. The Dow Jones is hovering around 31,000. At its peak, it was at 38,000. I figure that any money I invest could always go down more, but the markets are certainly not at their all-time high."

"Thanks for the help, Dave," Bob Baloney said. "I’m going to go grab a baloney sandwich and walk on the beach."

Be Blessed,

Dave

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