Beware the Media!

Long-time friends and colleagues know me well enough to know that I take in my news with a fair amount of skepticism. No matter who you are listening to (in and out of media) its wise to keep mindful of their bias and objectives. Its a pretty simple rule. This is why the nightly news advertises stories about which of your dinner ingredients might kill you tonight!... but the story runs at 11pm... they just want some attention so they can sell commercial time to their advertisers.

Look at the difference between two different stories on the topic of baby-boomers and the implications for housing. From the perspective of Real Estate and Mortgage companies, Realty Times reports of the generation "They've got all the money ... They've got all the real estate, too". The article makes the case for the next wave of Real Estate activity with baby-boomers leading the charge by buying 2nd homes and vacation property. This is no new speculation by the way; stories about this appear weekly.

But look at this article. It basically reports that baby-boomers are far more likely to remodel their homes than move to the beach, or the desert, or to buy a 2nd home on the shore of some lake. And who is behind the so-called study? Home Depot!

The only way you can get a sense of anything out there, especially in the real estate market, is to get as many angles and opinions as possible. Do your best to triangulate reality among all of the self-serving junk in the news.

Blowing Bubbles...

Are we headed for a soft landing? The media has been beating the 'real estate bubble' drum for several years, and in doing so scaring countless would-be homeowners out of buying what would have been a nice investment, not to mention a nice place to call home. But now we are seeing a counter-weight of similar magnitude, in real estate professionals and industry insiders who clamor for the so-called "soft landing" in the housing market.

Stepping back a bit and looking at housing from an economic perspective we might be able to take some of the hot air out of the equation and see what is really happening. Housing is an investment, and an asset in a class of its own based on the function it serves relative to other types of investments. But real estate is still subject to market conditions, cycles, and other typical financial rhythms.

There is no question that housing has seen tremendous gains in recent years, exhibiting characteristics of 'irrational exuberance' that have paved the way to inflated asset prices and preceded significant corrections in value. The most recent memorable example was the NASDAQ and dotcom stock rally that came to an end in 2000. From the peak of the rally to the trough of the correction, the index lost a staggering 71%

Commentary on the asset bubble phenomenon most commonly references a mania in the market for Dutch tulip bulbs during the 1630's, where at the height of the market, people were swapping homes for flower bulbs.

In Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay wrote "that whole communities suddenly fix their minds upon one object, and go mad in its pursuit." Is this what we have seen in the US housing market in recent years?

The characteristics of a cycle turning over are present in the housing market. First we saw a parabolic curve in home values. The Federal Reserve stepped in to raise rates (while the general goal was to curb inflation, it is very likely that the specific goal was to temper home values), and eventually inventory increased. Now prices are starting to come down.

Paul Kasriel of Northern Trust recently published that in the current housing rally, the dollar volume of all sales was at a record high when represented as a percentage of GDP. The implication is that this is an extreme market, and that we should be facing a similarly extreme correction.

Given that the housing market continued to rally in the face of the Fed rate hikes, demand was defined as 'inelastic'. In other words, people did not care that it was becoming more expensive to buy; they just used more liberal loan products, taking on increased risk, and kept on spending. It took 17 hikes of 0.25% each before the market showed a change in mood.

Several economists think that the Fed tightened rates well beyond the neutral point, and expect them to start lowering as soon as January 2007. Cool the jets with higher rates, then slowly ease back into the comfort zone. Its like getting into a car that has been parked in the sun: put the AC on full blast for 10 minutes, and you'll eventually need to back off and find the middle ground.

Paul McCully at PIMCO recently made the case that all of this suggests that a 'soft landing' in housing is nothing but a pipe dream. Demand for housing, he says, is inelastic on the way down, just as it is on the way up. Once the investors change sentiment, rate cuts are not going to bring them back in droves. We saw this with the NASDAQ, and stock market in general. It took an over-correction and under-valued securities to bring the interest back to Wall Street.

So is housing due for an over-correction? Is the 'soft landing' attainable? Kasriel and McCully make for an interesting case. Next we will look at the Kubler-Ross model laid down over the US housing market, and see if we can find any similarities.

Rock the Vote! TIC Coalition in SF

In San Francisco, affording the home of your dreams takes a lot of money, and a tough stomach!

One of the many areas of political battleground on the streets here in San Francisco is that of affordable housing. There are some interesting social intersections here where the typically egalitarian political mood of San Francisco meets with the stratified financial footing of its residents. I won't go off on a political rant here; I am more interested in distributing some useful info on the coming elections...

In San Francisco, the cost per square foot of house is on the upper end of the spectrum nation wide. In an effort to cut some costs, people have taken to buying multi-unit buildings by joining with other buyers - often times strangers - to pool resources and buy the entire building. They take title as Tenants in Common, which essentially gives each party ownership in the building as defined by percentages rather than by area or a specific unit within the building. In many cases, the next step is to legaly convert the building to condominiums, thereby granting each party exclusive ownership of their respective unit, and the freedom to finance or sell separately from other building owners.

Tenancy in Common housing and condo-conversions have really become a political hot-button in recent years. Because a condo has fewer strings attached from the perspective of the owner, it is usually considered more valuable as an asset, thus the tendancey to want to convert. But proponents of affordable housing issues argue that if the city converts too much inventory into condos, they will eliminate relatively affordable living space for the thousands of people in need.

As is with any political battle, the laws swing back and forth between the two competing interests, and currently represent San Franciscos predominantly liberal politics. There are extremists on each side. There is probably an acceptable range of middle ground for a solid utilitarian community. But at times there needs to be resistance to hold the balance in this middle ground. For example, under current law, some owners will wait 5 years before being allowed to convert, and the process itself takes 2 years (if you are lucky!) just to wade through the bureaucratic process that the city requires. In recent years, legislation has pushed this timeline out to be as long as a decade in some cases.

To many, the idea of owning real estate but being legally prohibited from controlling what you do with that real estate is a seagull poop on the statue of the American Dream. To this concern, the San Francisco TIC Coalition has united as a force to represent the interests of home owners. In a recent advisory, they recommended voting "NO" on Prop H, and cited this page for more info. One thing I will rant about politically is the uneducated voter - so do your homework! But consider them a good resource for the home owner in San Francisco - especially if you are involved in a TIC.

* Several interesting reports on Affordable Housing can be found here.
* More info about the SF TIC Coalition can be found here.

Growing Momentum for Change in Realtor Broker Compensation Models

Dating all the way back to the 1970s, there has been debate about the traditional compensation model for Real Estate agents, and the politics and laws surrounding the debate.

In the last few years, the expectation that technology would cause dramatic change to this long-standing model has been at the forefront of the debate. And in the last few weeks alone, there has been a lot of chatter and news about the debate as it stands currently, and some signs that changes are happening...

An extensive report is provided by the AEI-Brookings Joint Center for Regulatory Studies, and goes into much detail about some of the complaints voiced about the current model, as well as the challenges faced by those making an effort to change. Some are political, some economical, and some are logistical. It is not without flaws in my opinion, but does not claim to have all the answers either. Very much worth the read.

And then look at this special report from the Real Estate Journal about 'Careers in Real Estate'. 3 of the 6 articles in this report relate to flat fee sales, competition to the MLS, and a la carte models of paying for various Real Estate Transfer services. These are all concepts raised by the Joint Center study as well.

Last year there was a fantastic book written by Stephen Dubner and Steven Levitt called Freakonomics. The authors use economic principles to evaluate some interesting social dynamics, and devote one section to relating Real Estate Agents to the Ku Klux Klan. Needless to say, this is not a favorable write-up. More evidence of their distaste of Realtors exists on their blog.

There are some valid and well-composed arguments in all of these pieces. I also feel that each of them go too far at times. If the issue is of interest to you, give these a read. There are some new ideas out there. And if you are not so interested in this topic, you still should read Freakonomics. As a student of both Economics and Sociology, I have a particular fascination with it. But it is wildly entertaining; brilliantly thoughtful and explorative, and humorous as well.

Income Taxes of the Rich and Famous

According to a recent analysis done by our friends at the IRS, based on 2004 tax revenue:

• The top 1% of income tax filers paid 36.9% of all tax dollars, yet they received only 19% of total adjusted gross income (AGI).
  
• The top 5% of income tax filers paid 57% of all tax dollars, and made 33% of AGI.
• The bottom 50% of all filers paid 3.3% of total income tax
• The lowest income earners paid negative tax rates, based on credits, etc.

Wow! Are you incorporating tax avoidance strategy in your finances? Proper mortgage financing is one of the best ways to limit your exposure. Make sure you talk to a professional mortgage planner as a part of your financial picture.

Some more interesting numbers:

• Top 1% of AGI = $328,000 and up
• Top 5% of AGI = $137,000 and up
  
• Top 10% of AGI = $99,100 and up

Don't get caught trying to keep up with neighbor Jones, but it's helpful to know where you land. Good financial planning might help you cross into a new zone next year. Let me know if you need help finding a Financial Planner, CPA, etc.

In Defense of The Option ARM

Business Week recently published a scathing article about Adjustable-Rate Pay-Option Mortgages (aka The Option ARM) that has sent a pretty good ripple through the lending community. Well, big surprise, this one-sided eye-grabbing piece is typical of the flesh-eating virus style of media-induced panic.

Before I defend this loan product outright, I want to be clear on something: there is no doubt in my mind that this is an often-abused and often-misunderstood product. But I do feel the need to point out a few problems with the article, and and present another side to these loans. Read the article here.

The key benefit for Option ARMs is the payment flexibility, where a borrower is allowed to make minimal monthly payments on their home loan. It is a strictly cash-flow driven financial tool, and generally is not the cheapest type of loan available. As is with any other time value of money concept, you are paying a premium for this flexibility. This may be in the form of higher interest cost, higher risk of increasing interest, or in the current rate environment, both.

Business Week makes a fair claim that many mortgage brokers are pushing this product for inappropriate borrower scenarios, and this is a real problem that I agree with. The simplified sequence looks a little like this:

Home owners are attracted by the low minimum payments - commonly featured in mortgage broker's radio and print advertisements - and do not ultimately understand how the loan works before they sign up. They make minimum payments for a while, and then get caught by surprise when they realize that (A) their loan is growing in size and (B) their payments minimums are adjusting to keep pace with this increasing balance. Add to the mix a realization of a slowing appreciation rate for US real estate, and the stage is set a full-blown panic. All the media needs to do to sell a few magazines is run headlines like "Nightmare Mortgages".

Throughout this article, BW gives examples of some people who are feeling the pinch of rising rates and payments on their Option-ARM. She presents that they have been screwed by their mortgage broker, and that the mortgage broker has been led along like a puppy by banks to sell these products by offering high margin revenues for the product. Its the man stickin' it to the people yet again, and the result is a shaky American financial infastructure, ready to buckle beneath its own weight when Mr. & Mrs. Average Homeowner come up short on their upwardly adjusting mortgage payments.

Let's not forget how the media makes a living. Do I have to make the case that they have a history of blowing things out of proportion? Is it obvious already that they sell more magazines, more commercial time, more web impressions when they have really dramatic news to talk about? A recent James Bond movie made fun of a corrupt media mogul who was creating global conflict to sell newspapers. Its a parody, but it comes from the every day media machine.

And they are blowing things out of proportion here...

First, no responsibility is put on the borrower, the consumer, the buyer to educate themselves. The American consumer is presented as a feather in the wind, succeptable to any mortgage broker's lousy self-serving advice. I don't buy it. The consumer controls the mortgage process more today than ever, educated (albeit in a commonly misleading way) to a dangerous degree. They think they know it all, but they dont know enough. They surf the web for info, and think they can walk into the transaction telling the mortgage broker what is best for them in the mortgage universe, and how much it should cost. What choice does a mortgage broker have but to tell them what they want to hear, that the lowest payment out there is based on a 1% Option ARM start rate?

Well, that is your common mortgage broker for you. So who can blame the consumer for making every attempt to arm themselves with the latest info, and come in to the transaction with their defenses in place? The consumer fears the mortgage broker, and the mortgage broker fears the consumer. This is a recipe for a bad deal. From my perspective, this is the 'Nightmare Mortgage'. All this drama about Option ARMs is just a symptom of that problem.

In most of the case studies, there is no mention of the situation prior to the Option ARM. Most of these people are in over their heads already. Harold can't afford any mortgage product on the income quoted. The Shaw's dont have enough income to qualify for their mortgage, etc. Did the Option ARM really get them in trouble, or are were they already headed there? Maybe they mismanaged their finances, or just had some tough turns in life. It happens.

But lets not let these folks get away with blaming everything on the bank or the broker. While I do agree with some abuse from inside the business, is the consumer not required to take responsibility of their own situation? Not reading the terms? Not taking the care to find a reputable broker? I mean, I can go into WalMart and buy a shotgun, but if I shoot somebody with it, I am not allowed to blame it to the blue-vested clerk who rang the register...

These loans are promoted with 1%-2% pay rates as the hook. Does it not seem too good to be true? It is! Theres more to this story - a lot more! I hear radio ads for these, and I get the flyers in the mail. Most of the advertisements seem criminal to me. And I do think that a large segment of this industry is participating in a misleading game, and delivering a back-handed slap to people in a time-sensitive, major financial transaction - often leaving them with little choice or time to react once they realize the bigger picture.

To date I have talked more people out of the Option-ARM than I have put into the Option-ARM. But we still put them together for the right situations.

In todays marketplace for real estate finance, there are countless options. There are so many products that can be tweaked to fit a loan scenario, where you can emphasize one goal over another - financial, personal, etc (related to taxes, investments, inherritance, divorce, retirement, education, timing... the list can go on and on...). The Option ARM represents one of the most sophisticated tools available, but you need to know when and why it is right for you. A Certified Mortgage Planner isn't likely to lead you astray; make sure you are working with somebody who can educate you, and plan with you to weave the mortgage product with your greater financial goals.

Work with an expert. Get a referral from somebody you trust. And then let them work with you to provide a mortgage plan. Only you know your financial habits and objectives. And I guarantee you that a good mortgage planner knows a lot more about their business landscape than you do. If you can't put trust in them to help you navigate real estate finance decisions, then its not the right person to work with.

Recession 2007! ... ?

How many economists does it take to hit a moving target?

The financial and economic communities are abuzz with tension right now, as the Federal Reserve is undoubtedly fine-tuning the structure of their remarks in tomorrow's policy meeting. A few weeks ago the markets were betting heavily on this meeting to be the first where the Fed did not raise rates since they began the current tightening policy in June of 2004. As I have mentioned before, the CPI numbers have been supporting the notion that inflation in the US economy is uncomfortably high. And for the last several weeks, the Fed Governors have been popping up all over the place, like a giant game of Whack-a-Mole, peppering the news with one common sentiment: Inflation persists, and is of current concern to the US Federal Reserve.

Its a different picture than a few weeks ago. This whip-saw reading on the economy is unkind to the markets, which have seen a consistent down-turn accross asset classes in the past month. Whether this is a modest correction or a trend reversal is yet to be determined. So is the economy slowing down? Is inflation still too high? The worst case would be "yes" to both.

We sit today with the markets 100% convinced that rates will be hiked tomorrow, 0.25%, to a Fed Funds rate of 5.25%. Some believe we could see a more definitive move to 5.50%. More think we will see 5.50% in August. And some think the 'terminal rate' will be as high as 6.00%.

What does this imply for our economy in the near future? As usual, there is a rainbow of opinion out there right now, ranging from healthy to worrisome. But its not the same old boom-time we have seen in recent years; current forecasts mention words like Recession, Stagflation, Asset Bubbles, etc:

• Along with the Fed, other central banks in the world are tightening, taking liquidity out of the system. The Bank of Japan has had a huge impact recently, to the tune of some $200 billion over the last few months according to George Soros. This is in the process of throwing a cold shower at the global economy.
• Commercial banking guidelines remain very liberal, but the tightening of liquidity on this level will be the likely next step, according to John Mauldin. Goodbye easy institutional money, and goodbye easy consumer money. How can we continue to spend and propel the economy at this pace?
• The folks at Northern Trust provide some discourse on the inverted yield curve, and second-guess the popular notion that 'this time it's different' with respect to the yield curve / recession correlation. Hints of the Fed going too far and causing economic damage here.
• Stephen Roach suggests that the central bankers view the recent market slowness as a correction, and are still interested in slowing the economy to a more moderate pace. Everything looks healthy; we needed this.

So lets add these ideas up a bit. Rising rates & shrinking liquidity, slowing housing markets, tightening lender guidelines... all of this has to cool off the housing market. It has to. It does not guarantee a decline, or correction in housing, but it certainly makes the idea of investing in real estate one where the risk/reward balance has shifted more in the direction of risk. The growth rate cannot be sustained, and we are seeing some hints of this in recent housing data.

It is often argued that real estate is a unique investment, in that a home both an asset, and a place to live. I support this concept, and believe that especially in the long-term view, you cannot go wrong. The media has been talking "Real Estate Bubble" since 2000. If you got scared off then, you missed one heck of a run...

Just some things to consider in the face of an increasingly gloomy economic outlook. Its a moving target. The next few months CPI, GDP, Employment and Housing data will all be interesting to watch, and should provide for further speculation, and hopefully some increased clarity on what comes next.

Bubble, Inflation, Fed, Recession

To get a handle on where the economy is headed exactly is nearly impossible. I am always amazed at the volume of data available and the number of analysts who all look at the same data and come up with wildly different projections.

Today's Consumer Price Index (CPI) came in showing inflation growth a little higher than the market expected, and the bond market is having a fit over it. This all but guarantees another Fed rate hike for the end of June, and the bond market is adjusting to this ahead of time.

Many economists seem to feel that the Fed historically goes too far when tightening rates, and many believe that we could wind up in a mild recession by the end of the year or early 2007 if they push it any further. Financial markets were clinging to the idea that the Fed would go on 'pause' as of the last rate hike, but today's news is changing the outlook. Ben Bernanke has to be aware that inflation is a lagging indicator, and today's news reflects 6-24 months ago's economy, but as the new chairman, he also faces political pressure to appear vigilant in fighting inflation, hence the expectation of another adjustment.

What this means is, if you are going to do something soon, you might consider locking in pricing before it gets any worse. However, I would be hesitant to pay too much up-front for the transaction, since a sputtering economy means that rates should come down again in the next few quarters. If today's refinance objective is to consolidate debt and lower payments, then don't wait. But if the Fed goes too far, the odds increase that you may find an opportunity to obtain better rates & terms in the coming months.

If you have questions about how to navigate this market, and make mortgage decisions right now, or about what this chart above means exactly, please email me.

* Graphic courtesy of Mortgage Market Guide

The Shoe Shine Boy has a Tip on a Fabulous 3BR/2BA

I don't know if it was Joseph Kennedy, John D. Rockefeller, some anonymous millionaire or just an urban legend, but the lesson lives today, and I am afraid that some warning signs are not being fully appreciated. The story goes something like this:

(Insert preferred Robber Baron here) was getting his shoes shined on a sidewalk near Wall Street, circa 1929. The shine boy was bursting at the seams with unsolicited stock tips. The savvy investor took this as a sign that the market was over-extended with a false confidence. Speculators had pitched valuations to unstable highs, setting the stage for a precipitous crash, and the investor cleared out before the stock tips 'hit the fan'...

Herbert Hoover also blamed the great stock market crash on speculators, suggesting that even "lowly bellboys" were attempting to mimic the legendary returns made by people like Jay Gould and Cornelius Vanderbilt.

This same environmental dynamic also held up under a microscope to the dotcom bust and associated NASDAQ tumble. Volume, valuation, and volatility were all riding high as a deluge of new investors gained easy access to the trading floor, and ignored some of the basics of investing. By and large, they were under-educated in the field of investing, and just like 1929, the fall-out rippled well beyond the speculative investor's financial world.

So what about housing in today's market? Clearly there is a bubble watch going on, as values have hit parabolic growth patterns, and sustainability concerns have set in. But housing data continues to be pretty strong, despite the media's repeated warnings. We have seen statistics suggesting that as much as 40% of the purchase volume in 2005 for houses was for investments or 2nd homes - indicative of speculative buying.

Anybody who has stayed up late once in a while has seen the infomercials catering to get-rich-quick in real estate programs. They usually involve a lot of interview snippets with average people sitting by a pool at some resort in Orlando, quoting their monthly income. They suggest that you should be able to easily buy houses with no investment of your own cash, and tease you to call for more info. And as the frequency of media comments about profits made by investors flipping property, and the huge profits being made in real estate in general, more and more people are sucked into this frenzy for real estate investments. I just worry that the investors are really not taking adequate care to educate themselves about real estate investing, and I sense an instability in this sector of the market.

As I said, the housing industry continues to turn in strong data. Employment growth and income growth are supporting a lot of the gains we have seen in housing costs. The Federal Reserve seems to have a good grip on inflation, and the economy seems healthy, and ready to ease off the throttle a bit. I don’t expect a crash in the values of people's homes. But to the extent that the market could be bolstered by a false sense of confidence - these investors who don't know what they're doing - I would advise exercising some caution when buying anything. History has a tendency to repeat. Be careful following the advice of infomercials.

Flat or Inverted Yield Curve, and Recession Watch

New York Fed President Timothy Geithner made a comment recently that provides interesting testimony on the extent foreign investment in our bond market has subsidized our long-term interest rates and mortgages:

"China's policy of buying dollar assets to keep its currency tied to the dollar masks US financial-market conditions and heightens the risk of inflation in the US . China's purchases of US dollar assets could spur inflation by putting downward pressure on US interest rates and producing more expansionary financial conditions than fundamentals warrant.”

With the Federal Reserve ratcheting our short term money to higher rates over the past 2 years, the expectation was that we would see the yield curve shift upward, with a generally higher interest rate at all maturities - for the most part. Instead, we have seen downward pressure on the long end of the curve, largely due to the Chinese government, who have bought as much as 28% of our recent treasury auctions (high demand means higher prices, and lower yields or interest rates).

Looking at the yield curve, the left side has risen much faster than the right, now to a point where we are seeing either flat curves or inverted curves from day to day. Some pundits argue that a flat or inverted yield curve signals a recession to follow, as the expectation is that rates will drop, making longer term maturities more valuable, so investors bid the prices up making the yields lower. This dated wisdom discounts the impact of the modern global economy, where as much as 60% of our treasury auctions have involved foreign money.

With the Fed expected to raise rates 2 or 3 more times, you can count on this curve seeing a steeper inversion, unless the long-term rates start to really lift. We are already seeing foreign interest peel away, as the European Central Bank and the Bank of Japan have initiated tightening cycles in their markets, drawing attention from foreign investors and competition for our money.

This may lift some of that downward pressure on the long side of the curve. On the short side, the Fed will probably have to lower rates again after the full effect of this tightening cycle has been felt. Its kind of like when you get into a hot car and turn on the air conditioner at full strength; after a few minutes you are cold again, and have to adjust the air back to a balanced and comfortable level. The Fed will do this as soon as they find that counter-inflationary sweet spot. And from there, the yield curve will likely shake its way out to a more natural slope.

Our National Builder Division Hits the Ground Running in San Ramon

We have been busy in San Ramon for the last month helping the first phase of 496 new home owners get their financing together. At the 'Reflections' property, one bedroom condos are selling for as little as 249,900, and 2 bedroom models are getting up around 439,900. The first release took place this last Saturday, and it was a feeding frenzy. Anybody concerned about real estate bubble conditions in the East Bay might want to keep an eye on this project, because they had more than 200 qualified buyers waiting in line for housing.

When it comes to housing prices, its all about supply and demand, folks. Good old fashioned economics. You will not see prices trail off until demand subsides. For now, strong job growth, and a general lack of supply for housing at this price in this community are going to keep demand pretty strong.

We have met some interesting people, and had quite a bit of fun out there so far. But I think this is the calm before the storm. 496 units makes for some serious paperwork, and some serious weekend hours. Have you ever bought real estate directly from a new home builder, or through a condo conversion? I'd like to hear about your experiences with this process, especially how the financing was handled. Drop me a note and tell me about it if you get the chance...

What is the best Mortgage?

Question: Is your mortgage a big liability, something that you feel an eager need to 'pay-off', and live debt free? Or is it a handy financial tool that can help steer your handling of your overall financial goals? Maybe a little of both?

What is the best type of Mortgage?

-Lowest rate
-Lowest payment
-Most flexible payment
-No mortgage at all!
-other

I would love to hear from you on this. Please email me with a response, and a brief explanation for your answer. I will follow up on this topic based on your answers.

Prime Time!

The Greenspan era came to an end today in the Federal Reserve, and Alan had his red tie on! That means another raising of the Federal Funds rate and the Prime Rate, both having implications for the market for mortgage debt, interest rates, and the economy in general.

The Federal Reserve lowered these rates a few years ago when our economy began to head into a recession. Lowering the cost of borrowing money helps consumers and business borrow and spend money, which generates activity in our economy, and ultimately helps swing the pendulum back into recovery. Now with the economy growing steadily, the Fed has to keep balance. Greenspan has kept a sharp focus on signs of inflation, and used these 'measured' rate hikes to slowly cool the jets in this time of heavy borrowing.

Interest rates are in a rising trend, but the global economy and foreign participation in US Treasury auctions is helping to keep a lid on our long term rates. With a higher cost for access to money, spending should slow a bit, and the demand for goods and services in our economy will lessen. This has been Greenspan's way of keeping inflation at bay. The raising of these short-term rates is putting pressure on the interest rate environment from the short end of the yield curve, which now sits basically flat. Some economists believe that this indicates another recession is around the corner, which would suggest that the Fed was too aggressive, and the general consensus believes that we will get one to three more .25% hikes in the next few Fed meetings.

With this raise of 25 basis points, the Fed Funds rate has been jacked-up on 14 consecutive Fed meetings, for a total change of 3.50%. Prime now sits at 7.50% (up from a low of 4.00%), and is the basis for all of your Home Equity Lines of Credit (HELOC). You might have seen your zero margin HELOCs go from 4.00 to 7.50 since June of '04, and it seems likely that we will see another rise at the end of March when the Federal Reserve meets again under the chairmanship of Ben Bernanke before this cycle ends. Again, some believe we will see an additional one or two raises after this.

Don't panic yet. Your HELOC loan balance probably represents a relatively small portion of your mortgage debt, and therefore the change to your monthly payment shouldn't be too bad. The new rate will go into effect for your February bill. But if you want to compare your new payment to your payment back when Prime was at its lowest, then you might notice a bigger difference. Still, I don't think this is a cause for panic.

So what do you do about it? These adjustments represent the reality of adjustable rate debts. And for the past several years, these rates have been so low, that had you borrowed money any other way, it would have cost you a lot more. So congratulate yourself for utilizing a smart strategy thus far, and consider this a good time for revisiting this strategy going forward.

HELOCs have highly attractive features that 'convenience premium' in their cost. They will continue to be attractive even as the Prime rate rises a little more. They make for a great safety net if you do not keep an emergency fund of cash. You can pay down your balance at any time, avoid the accumulation of interest expense when funds aren't being used, and then re-borrow when needed. This flexible feature makes the HELOC a great option for many circumstances. Interest costs are generally tax-deductible (please consult your tax advisor, or contact me if you need to be put in contact with one), and obtaining these lines of credit is often very inexpensive (if not free). I have one on my house.

Consider a new HELOC if:

• you have a first mortgage only, and need a financial safety net and access to your home's equity
• you have higher cost debt, such as credit card, car loans or personal bank loans
  
• your current HELOC or 2nd mortgage was taken out at a time where your home's value or your income situation was different than it is today

Consider keeping your HELOC if:

• -you have a low margin

Consider converting your HELOC to a fixed rate 2nd mortgage if:

• your current HELOC is maxed out
• your current HELOC represents a large portion of the over-all debt outstanding on your home
  
• a refinance of both mortgages might yield a lower monthly payment

These loans have definitely become more costly as the economy has recovered from its brief recession. Their utility is not lost in these rising rates, however. Let's keep an eye on the moves of the Fed and Bernanke, and the economy in general to see if things change. You should reevaluate your strategy every so often for managing your mortgage debt, and these market changes represent some of the reasons why.