As San Diegans hear negative news about the economy almost daily, investors large and small are wondering how they should best spend and save the money that still is coming into their pockets. SDSU Backpack Journalist Brandon Stone spoke with local economic experts to get some answers.
Questions abound for San Diego consumers worried about their financial future. Is it time to buy a home? Invest in the stock market? Take money out of the bank? Experts urge caution, especially for those who can’t afford to lose more.
Storing money in the bank
Is it time to start keeping money in the mattresses and cupboards because the banks can’t handle the cash for you? For some people, that idea may have gone from extreme to reasonable when companies such as Merrill Lynch, Washington Mutual and Lehman Brothers went bankrupt. Account owners were concerned that if times got tough, they couldn’t get the money out and would be stuck empty-handed.
Not so fast, according to San Diego State macroeconomics professor Raford Boddy.
Boddy: I'd personally still leave it in, especially if you are banking at one of the banks that have been buying other banks with the blessing of the government.
The Federal Deposit Insurance Corporation insures accounts that are less than $250,000, so for those small investors who believe in the government’s ability to back the consumers, there’s a bailout plan set up for the account owners.
Plus, banks build up interest while money in the cabinet just accumulates cobwebs. SDSU economics professor Phacharaphot Nuntramas says the benefits of keeping it in the bank outweigh any perceived risks.
Nuntramas: The cost of keeping it out is the forgone interest income and the hassle of figuring out where to put (the) money.”
Keeping stock of the stock
Wall Street’s big dip has hurt the finances of many Americans, whether through the credit market, retirement funds and the 401(k), or in the trading cycle. Does that mean it's time to cut and run, or is there still enough life to let the money build back up again?
UCSD economics professor James Hamilton advises against shuffling your portfolio around.
Hamilton : “It’s easy to get too absorbed in this news … anyone holding stocks has to be a little bit nervous.”
Nuntramas says investors should not make a move without consulting a financial advisor, especially when it comes to money in a 401(k) or other retirement accounts that penalize early withdrawals.
The Dow Jones has fallen by as much as 25 percent since the collapse of the banking industry in early October, but has shown signs of rebounding. But on many trading days, stocks are soaring and falling multiple times before the closing bell. For those waiting to see a stable trend over time … there may be a lot more waiting.
Boddy: “Based on historical performance the numbers will rebound, but who really knows when?
Is now the time to get in?
The stock market may be unstable, but it is providing an opportunity for someone to make their mark?
Hamilton : “If you look at prices relative to longer-term earnings and compare that ratio to what we’ve seen historically over the last 50 years, this is a good time.”
Even the auto industry, which is taking a hard hit now, might have a smoother road ahead. General Motors is trading at just more than six dollars a share, the lowest stock price in 53 years. At the same time, a new lineup of flex fuel cars, including the Chevy Equinox, Chevy Volt and Saturn Vue might spur market activity. Some ballot measures on the November election could make it easier for people to buy these types of cars. For Californians, Proposition 10 would provide more than $3 billion in assistance for buying alternative fuel cars.
But the experts urge caution before gobbling up low-priced stocks.
Nuntramas: It is too difficult to ‘time’ the market. [It may be] better to incrementally buy into the market. It seems that the right companies in this credit crisis are those that do not rely on short-term borrowings.
Hamilton also advises caution in the marketplace, but isn't discouraging people to invest in the present for a bountiful future.
Hamilton : “The best time to buy stocks is three to six months before the end of the recession. I don’t know if we’re going to see improvement in (that time)… but a lot of these companies are going to be here in three to five years, they’ll be paying more dividends.
Buying a home
When it comes to house prices in this economy, the experts agree that low cost doesn't always mean low risk.
Hamilton : “House prices shot way up in places like San Diego, and they still haven’t come down as much as stock prices.”
The median price for a home in San Diego is $350,000, the lowest level since 2003 according to MDA DataQuick. Strategists debate when the bottom might actually hit; some say it's already happening while others say houses will continue to fall until the second quarter of next year.
Boddy: Housing prices may drop another 12 to 15 percent. So if you came in now and even could get a mortgage, if they drop … you are going to lose quite a bit of the equity in that home.
Meanwhile, rents continue to increase so some owners may be able to make back what they've lost in property values by renting out their houses. In 2007, the average rent for all units, representing studios and multi-bedrooms is more than $1,200, according to the San Diego County Apartment Association, an increase of more than 5 percent from last year.
Even though rents are rising as home prices fall, the demand remains high for rentals.
Numantras: People who were forced to leave their home are renting, plus people who wait for prices to drop further are renting, plus people who are waiting for banks to lend again are renting.”
Hamilton warns that in these unpredictable economic times, no route is perfectly safe. He advises consumers to look at their entire economic situation before buying a home.
Hamilton : “Base your decision on that rather than on the assumption that prices have to go up again.
