Looking Ahead at Mortgage Rates

The NY Federal Reserve is, and has been, the biggest buyer of Mortgage-Backed Securities for all of 2009. This helps push mortgage rates lower, and that's why they allotted for a 1.25TN budget over a 15 month period. It is set to expire at the end of Q1 2010.

This week, their purchasing volume is down significantly. ~9BN this week. For the past few months, they had been closer to 16BN per week, and a few months earlier they were consistent at 25BN per week.

It makes sense that as they near the end of their budget, they will slow the volume. Otherwise, their departure from the market would create a demand vacuum.

Many speculate that mortgage rates will quickly return to the levels that predated the Fed buying campaign. But I don't think it will be that severe - that environment had a number of different dimensions that do not apply today. That said, it's helpful to note what has happened to rates this week (up) as the Fed's buying changed (down).

Strategic Default and the Fading Stigma of Foreclosure

It's important to pay attention to the sociological dimensions of the financial crisis (aka Great Recession) as it continues to evolve.

I think this article on SocketSite touches on a very interesting point. Social dynamics are at play as well as financial ones on the path to a mortgage loan default and foreclosure. But as the 'bug' spreads, and more and more of us know people who have faced foreclosure, it becomes less of a Scarlet Letter. And that implies that the social reasons to avoid foreclosure get weaker as it becomes more prevalent around us. It's a snowballing effect.

So before we are able to truly bottom, we need to combat this force as well as the purely economic ones.

Note - the study referenced here suggests that 1 in 3 California mortgage defaults in 2008 were strategic, which represents a 16x increase from the rate only 4 years earlier.

Price Discrimination and Landlording

You've got to wonder about the owner who rented out this home. There are a lot of 'accidental landlords' out there, and maybe this is an upside-down, about to be foreclosed upon investment. But no matter what, I hope this homeowner charged a premium for rent based on tenant selection.

Unemployment Over Time - Nice Visual

Here's a great visual representation of the unemployment trend over the past few years, laid out by county for the entire US. Takes about 15 seconds to get the point across.

Are You Getting Tired of Being Outbid?

The Currently Frustrating First Time Buyer Landscape It has been an amazing transformation in the housing market - multiple offers scenarios are back in a major way, primarily on lower-end price ranges. Just a few months ago, it seemed there were 20 listings for every willing home buyer.

Not any more.

Today, first time buyers are FRUSTRATED when they make an offer and lost in the piles of offers, which in some cases are 30, 40 even 70 other offers! And within those offers, many of the would-be buyers are investment groups, buying with cash. It's big money squeezing out the smaller money. Just like that. First time buyers are getting boxed out.

This is frustrating when you think of the psychology of the today's first time buyer. They're overcoming quite a lot of fear and uncertainty after watching the devastation that has hit the housing marketplace in the past few years. Is now the time? Think of the nerves this requires! And on top of that, there's a sense that these buyers deserve a shot, since they weren't a contributing factor in this whole messy episode in the first place. Right or wrong, I can understand that feeling.

Frustrating.

Get Ready For a New Resource

Fannie Mae's "First Look" program is about to come online. Fannie Mae has a large inventory of foreclosure homes, just what the investor groups are after. But that's also what a lot of first time buyers see as good price opportunities. Here's how First Look is going to help:

* reducing deposit requirements to as little as $500
* renegotiate offers after appraisals
* up to 45 days to complete transaction, up from usual 30 days

Fannie Mae's intent is to provide easier access to this inventory for owner occupants. This is not restricted to first time buyers, but it will absolutely affect that sector of the market if the program comes around as intended.

If you have any questions about this, feel free to email me.

Rewind: Retirement Overconfidence, April 2006

In April 2006, I was in Chicago preparing to give a best man toast at a wedding. I jotted down some notes on something I had with me for reading material. And this morning, cleaning out some stuff in my office, I came across the notes, turned them over to see what I had written on.

"Workers have Retirement 'Overconfidence'"

Wow. This was 3.5 years ago, and the study that the above article references indicated that 68% of workers surveyed reported that they were confident about their retirement savings. It also suggested that 53% of them had less than 25k saved for retirement.

That sounds like a horrible mis-match, but to me, that's only ~21% that are delusional for certain (assuming the 32% NOT confident are all in the group that has less than 25k saved so far.)

But 77% had less than 100k saved for retirement. When we retire at ~67, and live to 78 (78 is the US life expectancy as of 2007), that 100k isn't going to provide much of a Winnebago budget if it has to last for 11 years.

• SIDE NOTE- And at least one prominent US doctor believes the first person to live to age 150 is currently a man in his mid-50s. Read that again. Do you still want to plan to retire in your 60s?

So where are they now? I'd love to see what the current survey says. How many are confident about their retirement planning now that we've passed into this era of economic crisis. How much has it affected confidence? (How much has it affected savings?). And how will it shape our expectations, planning, and savings habits going forward?

Tax Credit Expansion and Extension - Best FAQ Resources

Take your pick:

• Straight from the horse's mouth: IRS
  
• User-friendly page from the National Association of Home Builders

The NAHB site was put up in a hurry. They want to sell you homes. Great motivation to put together a clear communication on the subject. Check it out.

Weekly Rate Survey on Mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: Over the next 30 days rates will decline slightly; over the next 90 days rates will remain unchanged.

Comment by John C. Glynn: No signs of inflation anywhere, and wide profit margins from lending institutions; there's fat to be cut even if the inflation specter pops up. I see a lid on rates for a while."

See what others say.

Tax Credit Update - Move-Up and First Time Buyers (APPROVED)

Obama has just signed the tax credit expansion/extension into law. It affects first time buyers, and now some move-up buyers as well.

Last week while this was still making its way through Congress, I asked readers to comment on how such a change might affect them. I received a good number of responses. Here are some highlights:

• 68% of responses were generally positive in response to the credit
• 37% indicated specifically that this credit would have positive implications for our general economic health
• 16% indicated that this specifically urges them along in plans that were loosely taking shape as-is
• 0% of responses contained comments that this would dramatically change their plans
• 26% of the responses had comments suggesting the size of the credit cause the credit to be ineffective
• 11% of the responses had comments suggesting that the credit was reaching too far up the socioeconomic ladder; either the Move-Up Buyer was being wrongfully rewarded, or that the income limits were too high
  
• 16% indicated specifically that this credit would have negative implications for our general economic health

And as a side note:

• 37% of responses had something sarcastic to say
  

Thanks to all who took the time to read, and especially to respond.


Some key points of interest with the new revision:

• Income thresholds are raised
• Move-Up buyers can claim a tax credit of up to $6500
• Dates have been extended into mid-year 2010
  

If you're buying a home next spring, here are some key qualifying dates to remember.

• April 30, 2010 : You must be under contract for your new home
• June 30, 2010 : You must be closed on your new home

And if you are now trying to figure out how this credit might now apply to your specific situation, the IRS has a basic info page, and also a scenario page that has just about every possible angle.

Keep me posted - I'm really interested to see if this has an impact on our markets. If you're interested in reading my view, I explored it right here.

Why A Tax Credit For Move-Up Buyers Is Important

Today I posted a question on Facebook - asking for input from existing homeowners on the appeal of a tax credit that would not be restricted to first-time buyers. There is currently a proposal on the table that:

• Extends the deadline for the first-time $8000 buyer credit
• Increases the income caps on accessibility of the credit
• Adds a $6500 credit for move-up buyers

While I've seen many first-time buyers get excited about the $8000 credit, and especially in recent weeks as the deadline approaches, my gut sense was that the $6500 move-up credit would make far less impact in encouraging people to move than an $8000 credit encourages a renter to ditch their landlord.

Most of the responses I got were pointing at political aspects of this (which I don't care to get into here), but it did elicit a few private messages from people who said they would consider it. None of these people was previously insistent upon staying still, so it's hard to tell if the allure of a $6500 credit would make anybody budge who wasn't already oriented that way...

But then I recalled a very interesting article that I read a few weeks back from the Pragmatic Capitalist. In this post, they take data to the theory of market lock-up, and explore the level of equity most homeowners need to be in a position to sell and buy. They look at how many homeowners are 'trapped' and unable to become a move-up buyer even if they wanted to. It's not an optimistic outlook, so remove all sharp objects from the area before reading.

The move-up buyer credit goes straight at the problem raised by the Pragmatic Capitalist. Maybe $6500 isn't enough to grease every jammed-up gear in the system, but it's got to help some scenarios. I'd argue it could be the last nudge needed to spark a few transactions currently stuck. As with everything economic, it affects the margins.

Add to this conversation the Plankton Theory as it applies to Housing (discussed frequently by Bill Gross and Paul McCulley of PIMCO)- which stresses the importance of first time buyers (the plankton) to continuously bring new money to the market so that the bigger fish (move-up buyers) and whales (McMansions) can have something to feed upon.

If we have low inventory at the first-time buyer level (we do, as evidenced by reports of 20-40 offers per listing), and a move-up buyer creates lower-end inventory, than the enticements need to be hitting this move-up market. The first-time buyer needs inventory, not a tax credit.

So if it works, it encourages market activity in the middle and upper price brackets, essentially adding fluidity to the market. I like it.

Best Real Estate Commercial Ever

There are so many things to love about this ad.

Another Angle on the Housing Crisis

Russ Roberts made an interesting remark in a podcast I recently listened to, in which he was talking with Robert Shiller of Yale University and the well-known Case-Shiller Home-Price Index.

He stated that one of the often overlooked benefits received by the droves of consumers who over-bought houses and helped carry the economy into crisis, was the fact that they got to (and in many cases still do) enjoy being able to live in a bigger, nicer home than they otherwise would have.

It's worth thinking about. In the end, it may not work out so well for everyone. But what about all the time spent enjoying the lifestyle?

Where'd That Buyer's Market Go?

Didn't it just seem like there was a massive swing from a seller's market to a buyer's market? Leading up through about 2005 or 2006, it seemed buyers were constantly facing multiple-offer situations, and frequently watching homes sell above the asking price. Not all markets, but it was common in the Bay Area. Sometimes the seller priced deliberately low to try and incite a bidding frenzy.

Then, the bubble burst. Foreclosures and short sales hit the scene. And we had 20 listings for every buyer. Low-ball bids, high inventory were commonplace. It was a complete inversion of the seller's market, as the buyer now had all the levers.

And in recent months, we've heard some pretty wild stories about some segments of the market. What is interesting to me is the lower end homes, first-time buyer price range. This market is back to full on mania! Much of the inventory is controlled by banks, the prices are low/affordable. And investors with cash have come out of the woodwork to pick up these places. First time home buyers are racing to buy before the $8000 tax credit expires.

We are hearing of cases with 20 offers. 30 offers. 40 offers... listings stating that "all non-cash offers will be dismissed". Buyers are taking a shotgun approach, putting offers out on several homes, hoping one 'sticks'. Crazy stories about Realtors stealing keys so other agents cannot show listed homes, and the other agents breaking in to the home to show to their clients... !!! Madness.

It's amazing to me that we would see the market go from one extreme to the other so quickly. No time spent in the middle, no 'equilibrium'. But we'll straighten this out eventually. And it will last for a while before the next tilt happens.

35 Billion in Housing Aid - Coming to State Housing Finance Agencies

There's some interesting news about an expected 35 Billion lifeline about to be extended to the various state run Housing Finance Agencies, including CalHFA. These agencies offer below-market financing for housing to first-time buyer families and individuals, with some restrictions on income and property value.

I have a substantial amount of experience with the CalHFA program, and when this program is healthy, it is effective.

Late in 2008, CalHFA suspended it's lending programs due to a lack of funds. This 35 Billion infusion - which is ~2 times as much as the expected total expenditure for the 8k first time buyer tax credit - will likely help open that program back to a level where it can be effective. It's worth keeping an eye on.

Are Home Sales Up? Depends On Your Price Point

Real estate is all about micro markets. In the San Francisco Bay Area, homeowners might be celebrating the recent trend to higher sales volume in recent months. But that data comes from national sources. How much of the Bay Area falls into the brackets below, where we are seeing increases in volume? Thanks to Steve Harney for the info:

Below $100000 - sales up 38.8%

100k-250k - sales up 8.7%
250k - 500k - sales down 6.2%
500k - 750k - sales down 8.9%
750k - 1MM - sales down 10.6%
1MM - 2MM - sales down 23.3%
2MM+ - sales down 32.4

Not to be a wet blanket though... This data does not show the volume of sales in these brackets, and the bulk of housing likely falls into those lower price brackets. Activity at the lower end means future liquidity at the higher end. It's the "plankton theory" of housing: If a homeowner want's to buy a higher priced home, they need to sell their lower priced home to somebody. There's a food chain. First-time buyers, aka the "plankton" have to get into the market to support the ripple up the chain for move-up buyers. So I would expect that this activity will work its way up through higher price brackets in coming months.

Ayn Rand - Liberty vs Socialism

This is worth a spin...

Slideshow of 100 Abandoned Homes in Detroit

This is a view of disaster through an artistic lens. There are some downright gorgeous shots in here, every one of them representing a story of tragedy, loss, failure, and hurt. A sign of the times, Detroit has had as many headlines as any other city as a representation of the worst economic conditions in our nation in 'The Great Recession'.

Remember the mood only 6 months ago? While I think the recovery rally cries are a bit premature, it certainly does not feel as likely as it once did that we could see a full wide-scale meltdown or economic collapse.

We'll come back, and the beginning of that long process is underway. I'd love to see these same 100 photos updated in a few years.

Weekly Mortgage Interest Rate Survey on Mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

Comment by John C. Glynn: A second-guessing of the 'recovery' will put pressure downward on rates, but be careful about the implications of an unwinding Federal Reserve with their asset purchase programs designed to lower rates - they are coming to an end.

Find out what others are saying by clicking here. (hint, looks like I am running with the pack this week...).

Unemployed to US Economy: "Go on without me..."

I am concerned about the recent optimism in the financial markets. Sorry. Not cool to be a pessimist. But I am not - just trying to be a realistic optimist here.

We lost 245k jobs in the month of July. This made markets happy because it was less than expected (325k), and fewer than the prior month. Around January of this year, we were losing ~750k per month. So yeah, improving, but not exactly good.

Is this cause for optimism? How can we distinguish between optimism and an evaporation of pessimism? Are they the same thing?

(Source: Bureau of Labor Statistics)

What bothers me are the following details, below the headlines of the news release:

• the only growth in new jobs is among the 55 and up crowd - baby boomers who, under other circumstances, would no longer be in the job market.
• nearly 5MM people have been out of work for more than HALF OF A YEAR

The second point leads me to wonder, when does fatigue set in? The unemployment rate went down this period (9.4%) but this is expected to be anomalous in retrospect; unemployment is expected to break 10% within the year. Since the survey methodology only considers "unemployed" people to be those A) without work and B) actively looking for work, how many people have given up? How many are tired of sending resumes out multiple times a week, getting no replies, and simply focusing on other things until there are signs that jobs are available?

I love this analogy from Planet Money: The foot is on the pedal, and it's floored (Federal Funds rate @ 0% and other stimulus). The car (our economy) is rolling backward. But the speed at which we are rolling is slowing. And that's enough to get us where we're going? hmm...

I am not yet convinced. What say you?

Stevie Ray Vaughan Called; He Wants His Social Security Back

According to The Tax Foundation for 2007 (most recent data):

• the top 1% of tax filers paid 40.4% of all Federal taxes (up from 39.9%)
  
• the top 1% of tax filers made 22.8% of total reported adjusted gross income
• $410,100 income required to be considered top 1%
• top 5% paid 60.6% of all Federal taxes on 37.4% of adjusted gross income
• $160,000 income required to be considered top 5%
• top 10% paid 71.2% on 48% of all income
• $113,000 to be in the top 10%
• bottom 50% of all filers paid 2.9% of the total income tax bill

July Jobs Report to Mortgage Rates: "You can call me Susan if it makes you happy"

Today we saw release of the anxiously awaited July employment report, which turned out to have a few surprises, and a general portrayal of an economy that is continuing to struggle, but at a slower pace than before. The number of jobs (net nonfarm payrolls) lost over the month eased to 247,000, as against June’s loss of 443,000. Obviously, this is an improvement, and it is generally being read as indicative of a gradually healing jobs market.

It is important to recall, though, that this recession has seen the loss of 6.7 million jobs—and “less-worse” won’t make that number decline. And while the unemployment rate fell to 9.4% from 9.5%, there is a lot of indication that a primary reason reason was that people took themselves out of the jobs market, as they stopped actively look for a job. This is no improvement, and the unemployment rate is still expected to break 10%. When we see a greater number of people entering and re-entering the jobs market, it will signal an improvement to confidence in people’s ability to find a job. Improvements in the jobs market tend to follow improvements in other areas of the economy. It will be some time before we can say we’re in a recovery, not just moving toward one.

So how did mortgage rates respond to this news? Not so good. If you are on the fence about refinancing, or waiting for a better deal, it might feel like somebody's got a grip on your necktie right now, no clear sign of them letting go at the moment...

...For approved audiences, this clip is "Rated R". The butt-kicking in the bond market today reminded me of this...

Mortgage Meltdown: More Blame Game and Depressing Politician Behavior

In case you still want to watch the debate over 'who caused this Great Recession', check this clip out. You can't stick a bullseye on Barney Frank's back, let alone get a straight (or honest) answer out of him. But can you blame the guy? He's a vote-getter first and foremost! Ok, I'm in a particularly cynical mood today, politicians depress me rather than inspire me 9 times out of 10. Now you know.

Last we heard, it was the Clinton administration pushing Fannie Mae and Freddie Mac to lower lending standards to accommodate more low-income buyers. Who even cares at this point? I wish they'd stop the finger pointing and learn how to regulate before the crisis hits, not squeeze the life out of the market with righteous after-the-fact belt-tightening that is more about showboating to their constituencies (self-service) than about creating a healthy economic environment with stable legal guidance (public service).

For some more bad light on politicians, see this story about Senators Chris Dodd and Kent Conrad and their 'sweetheart' deals from Countrywide on their own personal mortgages, via a program called "Friends of Angelo" (Mizillo). How feasible is it that the Chairman of the Senate Banking Committee (Dodd) and the Chairman of the Senate Budget Committee remain unclouded in their judgment when receiving preferential treatment from a bank? In other words, "the last two people that should have dirty loans were at the front of the line".

Well apparently they now admit that they were aware of the preferential treatment, though they denied it a year ago when the story first broke. I can't find a credible link though that supports this supposed acknowledgement.

Weekly Mortgage Rate Survey on Mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: (V) (V) Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

"Comment by John C. Glynn: Discord among analysts - and thus volatility - continues. There's enough reason to expect rates to remain low, but the sensitivity seems to be to the upside for rates, so bad timing can potentially hurt."

Find out what others are saying by clicking here. (hint, all over the map - still - which reinforces my belief about uncertainty above...).

090706 Less Worse Syndrome and other Brain Dumps

Are we in the midst of recovery? Has the Great Recession hit bottom? The market chatter has definitely shifted. Key changes include:

• "green shoots" instead of "next shoe to drop"
• "inflation" instead of "deflation"
• "recovery" instead of "bottoming"

So.....?

During the last Fed meeting, there were actually conversations that included speculation that the Fed would either raise rates, or begin looking in that direction. They said nothing of the sort. And even though the oddsmakers had the chances of rates changing at that meeting at less than 4%, there was still anticipation along these lines. Since that meeting, SF Fed President (evidently in the running to be the next Fed Chairperson) reiterated her belief that the Federal Funds rate would be at or near the current level of 0.000-0.250% into 2010 or longer. huh.

Paul McCulley says, discussing the eventual hiking of Fed Funds rate:

"And when is all this going to happen? Last week, the markets started to romance the notion of before the end of 2009. To me, this is simply silly. In the matter of cutting off, and then kikking, the fat tail risk of deflationary Armageddon, boldness in execution is no vice, while patience in declaring victory is indeed a virtue. The Fed has been bold and is committed to patience. Bravo! And the first Fed rate hike? Call it no sooner than 2011." -6/15/09

It's going to be tough to pull out of this with rising unemployment. At 70% of GDP, Consumer Spending is a critical factor in new environment. Consider this from Bridgewater, which I recevied from John Mauldin:

"... as long as credit remains frozen, spending will require income, and income comes from jobs. And debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions."

Less Worse syndrome is dominating the markets right now. For example, in May, the total number of jobs lost came in around 345k, but since April had losses of ~509k, the markets saw this as a positive sign. Job losses are not positive. The month to month changes may indicate a change in the trend, but not just on one report. The June losses were at 465k. So that's 509, then 345, then 465. During the mnth of June, before the June data was released, the markets were optimistic based on an appearance of "less worse". They appear to be reconsidering...

...

The California new home purchase tax credit - 10,000 to anybody buying new construction residential real estate in CA has expired. The program hit it's limit at 100,000 applicants.

There is a 1 page bill in congress to put the hated HVCC (Home Valuation Code of Conduct) policy on hiatus for 18 months. If you are engaged in a financing transaction, you've either encountered this acronym, or are about to. It is causing all kinds of problems, and creating quite a stir. Should be interesting to see where this goes. I'm not too encouraged by the 1-pager, but there's been overwhelming support from the industry...

Did She Just Say "Pundint"?

eh? I know Suze Orman is already a target for laughs, portrayed on Saturday Night Live by Kristin Wiig. So I'll try not to get petty here.

There are a few well known "pundits", or even actual financial services practicioners, who have taken opposition to some of Suze's advice. Particularly her hardcore blanketed advice to pay down all debt as a top priority. Critics say, sometimes it's just not that black and white.

In this video, Suze makes a key shift in favor of liquidity for safety purposes as a priority over eliminating credit card debt. It's interesting to note however, that this advice comes too late in the game for many to react. I think it really highlights the key issue some have with her advice - we need to be financially prepared for the unknowns in life before they hit us. It doesn't really help to start preparing for disaster after it strikes.

Her former advice to pay down credit card debt is basically a math lesson gift wrapped as financial planning advice. Too many of the variables in her equation are held constant, when true financial planning takes a subjective, individualized look at all variables in a particular scenario. Same goes for the new advice - that may be the right idea for some, but don't mistake what is going on here. Her extreme point of view, and universal conviction are what make her interesting enough to put on TV. That's not what makes individual advice pertinent or valuable.

For kicks, here's the SNL version.

Fed Watch: What Did Today's Policy Statement Really Say?

"Strikes and gutters, ups and downs..."

I have not seen this much anticipation ahead of a Federal Open Market Committee meeting in I don't know how long. This component of the Federal Reserve meets for a 2 day session every 6 weeks, and makes a formal policy statement at around 11:15 (pacific) on the 2nd day. Generally, there are a lot of eyes on the markets in this moment, as the Fed's statement will contain an update to or reassertion of the Federal Funds rate, a key short term rate with implications for the economy and longer term rate outlook. But there are also a few carefully constructed sentences released to justify their rate-setting decision, and the markets try to read between the lines for hints at what the Fed might be thinking.

When investors buy bonds, the values increase, and rates get lower.

We entered this week's meeting in a state of uncertainty. During the spring months, the bond market had been flat for several months, rates for mortgages remaining relatively calm. Then, a few weeks ago, after a few economic reports indicated a potential recovery beginning to take place in the economy. This caused bond investors to pull some money out of the market in favor of other vehicles - like the stock market. The momentum gained traction until the levee broke, and a lot of the 'safe haven' money that goes into bonds during bad economic times started to flood its way out, causing rates on mortgages to rise - and rise quickly.

Just as quickly, the 'confidence rally' came to a halt, and the markets seemed to be reconsidering the idea that we were about to come out of the woods of The Great Recession. And that's where we were today - caught in the middle, unsure of whether we are going to head into recovery, and bump right into hyper-inflation, or another wave of economic pessimism, causing bonds to regain their appeal.

All eyes were on Ben Bernanke and the Fed's policy statement. The markets wanted to be reassured that inflation was not an imminent threat. They wanted confirmation that the Fed has an 'exit strategy' in place to unwind some if the excess reserves that have been pumped into the economy to fight deflation. Funds which if left unchecked, should lead to inflation again at some point. But there are as many critics of the inflation treat theory as there are proponents. And this causes the market to be uncertain. They wanted something to chew on today...

Here is a link to the policy statement. It was all old news. Nothing new. Just a subtle reference to the idea that they expect inflation to remain low, and that they are committed to their campaign to keep participating in market stabilization efforts.

The bond market made an initial sell-off, but knee-jerk reactions are typical. By the end of the session, the market for Mortgage Bonds (underlying instrument affecting mortgage rates) were dead flat on the day. I'll give credit to Bernanke for playing it cool, and effectively managing the expectations of the market. By not responding directly to the wishes of the market, he reasserts the impression that he is in control. It may not be what the market was asking for, but the market abides.

Weekly Mortgage Rate Survey on mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline significantly; over the next 90 days rates will decline slightly.

"Recent bond market deterioration represents a shift in sentiment, and the high volatility is representative of a lack of conviction. No markets like uncertainty. The shift toward optimism that we are coming out of the Great Recession may be premature."

Find out what others are saying by clicking here. (hint, all over the map, which reinforces my believe about uncertainty above...).

Affordability Index Update - Remember Real Estate is all about Micro Markets

Holy smokes!

Check out this article from the LA Times, talking about the real estate market in Lancaster, CA. House prices are down to levels not seen since the late 1980's! If we could get an affordability index for this town alone, I imagine it would look quite exaggerated compared to the one above. And if you're a homebuyer in Lancaster, that's a good thing!

Bummer for everyone who bought over the last 20 years, especially if they are looking to sell, but if you're out looking for a home, or an investment property, this is what we call a 'no brainer'.

Long Exhale... Brain Dump 06/09/2009

I've been plugging away some long hours over the last few months, but I'm back to shake some dust of the blog here. No cohesion promised here, just a spewing of some of the more evocative and interesting ideas, quotes, etc that I've seen since the last post:

- Jon La Grou introduces an awesome home construction enhancement, cheap, smart, simple. Updating 150 year old technology, bravo. 5 min video

- John Mauldin on the current crisis: "..This again illustrates the problem of using past performance to protect future results. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a deleveraging recession in the US for 80 years. Using the past data in today's world is useful, and may be harmful to your portfolio." >> Word.

- Pimco's Paul McCulley on the current crisis: "There's nothing like a bull market to make geniuses out of levered dunces."

- There's a battle Royale taking place right now in the debate on the future of interest rates. We saw the low trend break down over the last two weeks, and what followed was one of the biggest downlegs in the bond market I've ever seen. Cheerleaders of the recovery think that long term interest rates need to be higher to attract investment capital. The Federal Reserve can't continue to make the market with mortgages at 4.5% if all of the 'safe haven' dollars are now getting cozy with alternative vehicles to the US Treasury markets. But are we even out of the woods yet? With credit contracting, and unemployment rising (10% here we come!) how are we supposed to spend our way back to positive GDP growth? It doesn't add up... I said it before, and I'll say it again, we've got a lot of bites left in this sandwich...

- US Housing affordability index (which began tracking data in 1971) was at an ALL TIME HIGH before rates popped. This has been bringing in bargain hunters to gobble up the excess housing inventory. But the momentum was just getting going. With rates up, it knocks the index back a ways. But financing a home today is still cheap by historical standards. 30 year average of the 30 year fixed mortgage rate is closer to 7.500%

- In much of the recent economic press, there is discourse along the lines of "the worst is behind us". The stock market has had one or two down weeks over the last three months. In other circles, we hear "commercial real estate is the next shoe to drop". Given that it would be less likely that the government would bailout strip mall developers, will the markets be able to shake off an era of see-through buildings and continue dancing like there's nothing to worry about?

The Case for Not Waiting

One of the more frustrating aspects of today's marketplace is all the wasted energy. Consumers are stuck on the fence, waiting for lower rates to refinance, waiting for lower prices to become a buyer in this buyer's market. Sometimes waiting pays off, and it certainly has if you hesitated to buy a home in 2006, and are now reconsidering. But you could be heating your house with the windows open...

Trying to squeeze blood from a turnip, waiting for 4.500% when you can get 4.625% today can lead to disappointing results. Rates are at or within spitting distance of all time historical low levels. With all the moving pieces of the puzzle, waiting often means a lot of false starts and missed opportunities.

Example 1 (purchase). Defining the cost of waiting. Maybe you've got a pretty good read on the supply/demand dynamics of your market, you know about the seller's circumstances, competition, etc. Visibility is ok, and you know this house is overpriced. So you try and pull down the price tag, but the seller isn't going for it. Do you have a good read on the global markets? Well, do ya? Some sort of inside track? What if that house you want does eventually come down 25k, but at that exact point in time, the markets are digesting a panic over inflation expectations, and rates have shot from 4.750% to 5.250%? What's a better deal? The answer is: Lower rate, higher price. I'll show my math if you don't believe me, shoot me an email to request it.

Example 2-4 (refinance). Job loss, Equity loss, Rate spike. If you owe $400k 6.250%, waiting for 4.500% when you could have 4.625% today, how much do you lose paying at 6.250% for 3, 6, 12 months of waiting? Again, it's helpful to do the math. 12 months at 6.250% costs $6500 more in interest than 4.625% over one year. The extra .125% in rate, if you can get to 4.500%, is worth $500 over a year.

Sure, over 30 years, that's a significant savings. But it is not worth the cost of missing the boat altogether, as we hear about consumers doing every day.

Unemployment is rising (currently 8.5%). Equity is falling (price declines of 30-50% off peak in some markets). And there is a debate going on in the markets about inflation coming from excess stimulus cash in the financial system, and whether it will cause rates to spike without warning.

Would you rather have a $6500 sure thing, or a shot at $7000 with a potential risk of zero? These are forces beyond your control, so eliminate them or avoid them if you can. Otherwise, if you're sitting on that fence, and you fall asleep, you might end up with a nasty burn...

This American Life & Planet Money Bring You: BAD BANK

NPR's This American Life has done a few great features on the Subprime Crisis, the Banking Crisis, and the Economic Crisis (they evolve with the news!). Recently, along with the Planet Money team (which I believe became a spinoff team of This American Life after the 1st in the series), they released "Bad Bank". It's another great overview of the challenges before us, some details about how we got here, some good soundbites from congress, etc. They are among the best I have seen at breaking down this complex situation into digestable news. Give it a spin.

Earlier releases:
Giant Pool of Money
Another Frightening Show About the Economy

Stewart vs. Cramer: File under: UNCOMFORTABLE

This is great to watch, and hurts at the same time.

ARRA 2009 - Important Details, Effective Date

ARRA Brings New Opportunity To Refinance or Modify

There has been an overwhelming amount of noise and confusion since the American Recovery and Reinvestment Act of 2009 (ARRA) was announced a few weeks ago. As a follow up to my message from 2/24, below is an summary of the recently released details, some resources to help you figure out if this will benefit you, and some instructions on what steps you should take next. If you think this information is useful, please pass it along. Feel free to forward this email to anyone you know that may be impacted.



The Making Home Affordable government program is divided into two parts:

· Modification Program

· Refinance Program


Despite all the fanfare surrounding this program, it remains 100% VOLUNTARY, and mortgage servicers (the companies that actually collect borrowers’ mortgage payments) are not obligated by law to follow these rules and guidelines...yet. Oddly enough, even if a financial institution has already received assistance with government funding, they are NOT obligated to participate. However, if a financial institution receives new or more government funding in the future, they WILL be obligated to participate.



In other words, the rules are still a bit unclear and nobody really knows who will participate and how it will all work from a practical perspective. Most of what you read and hear about in the media will most likely be speculation at this point. In a nutshell, the program has three elements:

· The government is offering financial incentives to mortgage servicers who modify loans for borrowers.

· The government is offering financial reimbursement to investors if they allow servicers to modify loans and then take a hit on the borrower’s re-default if the property declines in value after the loan modification

· The government is offering financial incentives to borrowers who modify their loans and make their new payments on time



Vacation homes and investment properties don’t qualify for the program. Only borrowers who have experienced some type of financial hardship can qualify. Click on this link if you want to see if you qualify for at least the minimum requirements.




Remember, even if you do qualify under these minimum requirements, your servicer (the company where you send your payments) might not be participating in the program just yet.




Part 2 - Refinance Program


Here’s how it works:

· You need to be current on your mortgage payments (no late payments in the last 12 months)

· Your mortgage balance cannot exceed 105% of the current value of your home

· Your mortgage needs to be owned or guaranteed by Fannie Mae or Freddie Mac

o This may include Alt-A or even sub-prime mortgages



Based on current market conditions, this might make sense for you if:

· You have an adjustable rate, interest only, or balloon mortgage that you want to convert into a fixed rate; or,

· You have a fixed rate mortgage where the interest rate is greater than 5.500%.



Important Dates

· This program becomes effective on APRIL 4. Prior to that date, you can, and should begin the process of gathering required documentation. Please contact me to get this process started.

To find out if your mortgage is owned/guaranteed by Fannie Mae, click here.

To find out if your mortgage is owned/guaranteed by Freddie Mac, click here.


Other Recent Developments


There have been many other recent developments in the markets, as well as new government legislation. Here are just a few recent items that may impact you or someone you know:

· Home improvement tax credit

· First-time home buyer tax credit (Federal)

· New construction home purchase tax credit ( California primary residences)

· Reverse mortgages for home purchase transactions (age 62 or older)

· Suspension of required minimum distributions for certain retirement accounts (age 70 ½ or older)



Let me know if you’d like to discuss any of these items in further detail by sending a quick email.

The Simpsons on 'The Meltdown'

What are you, some kind of talking dog? Put down your gins, and confess your sins! watch now.

Is The Stimulus Coming to a Town Near You?

Stimulus Watch.

This is a pretty cool resource. It gives an overview of the projects, budgets, and number of jobs created by various stimulus plan initiatives.

I clicked around for a few local towns, places I've traveled recently, and places I've lived.

Oakland CA
San Ramon CA
Pasadena CA
San Francisco CA
Jackson MS
Nashville (zip!) TN & Memphis (zilch!) TN
Maui HI
Grants Pass (nada!) OR
Tucson AZ

Frontline on The Mortgage Meltdown

There was certainly some sensationalism, but I liked the way they presented this. In fact, I like the dramatic production effects, such as sirens in the background as if somebody had called 911 as the market chaos reached one apex after another. Kind of amusing, but makes a dry topic easier to watch... Beneath the surface, and particularly interesting is the look at the political and competitive elements of Henry Paulson's actions at the height of the marketplace drama. You can watch it here.

California's $10,000 Tax Credit for New Home Buyers

No income limitations? Not limited to first time buyers?

A quiet little news item that for some reason isn't grabbing as much headline attention as I would expect... has me a little curious about the validity. A quick search points to several mentions, but all trace back to blogs on new home builder sites, and PR releases from builders like THIS ONE. I guess that makes sense, but I'd expect to see more attention drawn to this, or something pointing to an official CA.GOV page.

If this is legitimate, it is in some ways BETTER than the federal tax credit of $8000 to first time buyers with qualified income. And if you are a first time buyer in California, you could be eligible for both!

2009 Homeowner Affordability and Stability - early details

New Initiatives To Help Homeowners

President Obama recently unveiled his plan to help stabilize the housing market and keep millions of borrowers in their homes.

The Homeowner Affordability and Stability Plan includes two initiatives to help struggling homeowners. One is a refinancing program for homeowners with less than 20% equity in their homes, or who owe more than their home is worth. The second program attempts to lower monthly payments for homeowners at risk of losing their home. In adition, the plan includes a third initiative to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

More details are to be released March 4.

What We Know Right Now:

Refinancing Initiative
Under current rules, those families who own less than 20% equity in their homes have a difficult time refinancing and taking advantage of the historically low interest rates. This initiative is open to homeowners who have conforming loans which are guaranteed by Fannie Mae and Freddie Mac, and who owe up to 5% more than their home is worth.

Stability Initiative
This initiative is designed to provide help to families as well as entire neighborhoods by helping reduce foreclosures and stabilize home prices. It is intended to help homeowners who are struggling to afford their mortgage payments, but cannot sell their homes because prices have fallen significantly.

The goal of this initiative is simple: "reduce the amount homeowners pay per month to sustainable levels." To accomplish this, lenders are encouraged to lower homeowners' payments to 31 percent of their income by lowering their interest rate to as low as 2% or by extending the terms of the loan. In addition, lenders can also lower the principal owed by the borrower, with Treasury sharing the costs.

More Info

A question and answer document is available HERE courtesy of the National Institute of Financial Education. I'll provide updates as I receive them, and if you want to learn more after March 4th, please send me a note.

Join the Savings Craze! The Paradox of the Paradox of Thrift

Experiencing a recession is great way to force a reassessment of your financial behavior. The Great Depression is famous for shaping a generation of frugal citizens/consumers. Do you feel like you have not been saving enough money? America Saves Week dot Org has a 12 step program for you. Join the craze!

But wait, popular economic theory of the day warns of 'the Paradox of Thrift'. What may be good for the individual is not good for the collective. Waxing economical takes place here, here, and here. Is there a moral dilemma here? Is this why we've been trained to act as consumers, rather than citizens?

Paul Kasriel has another angle. Debunking the Paradox with some tough love for WSJ contributer Daniel Henninger.

Why I Love Rick Santelli

This is a pretty powerful moment, representing the sentiment behind the counter-argument for Economic Stimulus. This is being called Santelli's 'Chicago Tea Party'. You can see Santelli expand the viewpoint here on the Today Show.

Today's View of Capitalism is a Joke

In traditional capitalism, you have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

In American capitalism you have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

In French capitalism you have two cows. You go on strike because you want three cows.

In Italian capitalism you have two cows, but you don’t know where they are. You break for lunch.

In Real capitalism you don’t have any cows. The bank will not lend you money to buy cows, because you don’t have any cows to put up as collateral.

In Enron Capitalism you have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. Sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public buys your bull.

In Californian Capitalism you have two cows. They are happy.

In Arkansas capitalism you have two cows. That one on the left is kinda cute.

UPDATE: Proposed Changes to Tax Credit, Conforming Limits

Republican amendments to the current stimulus package up for vote later today include:

-Restoring the $729,750 loan limits in some areas

-Temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year - no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

-Other details:

1. buyers must occupy the home for two years as their principle residence
2. includes a two year recapture provision (if they leave the home in two years they lost the credit)
3. purchases of homes by investors are ineligible
   

The bill is still working its way through Congress, and the House of Representatives must still negotiate with the Senate since the House bill does not contain the credit.

Proposed Changes to Homebuyer Tax Credit, Conforming Limits

Rumors are going around about the following ideas, supposedly on the table for legislative discussion:

First Time Buyer Tax Credit Change:
Currently, the credit is up to $7500 for qualified first time buyers, and the funds are expected to be repaid at the rate of $500 per year for the ensuing 15 years.

Proposed changes are for increasing the credit to $14,000, and also to make it forgivable. In other words, no requirement to be repaid. Ever.

That is a significant change, and would represent a MAJOR incentive to enter the market.


Conforming Loan Limits:
Currently, the limit is 417k nationally, and in some high cost areas, it can be as high as 625,500. All 9 Bay Area counties are currently at 625,500. During 2008, the ceiling was higher – 729,750, but the “temporary” classification caused the lenders, who still operate in a free market world, to have almost zero interest. It didn’t really work. The 625,500 level was more conservative, but permanent. It has helped, but not quite as well as intended.

Proposed changes would reinstate the ceiling at 729,750 for qualified California property, or, according to one source, raise the ceiling to ~$932,000 for qualified California property.

Also potentially significant change, unlocking many borrowers with high outstanding loan balances on expensive property. No way of knowing if lenders will have an appetite for these deals or not, but it’s something to keep an eye on…

What If You Could Set Your Own Tax Assessment Value?

Here in California, Prop 13 puts limits on periodic tax assessments, but in many other states the values change up and down with the county assessor's opinion of the value of the property. There is an inherent conflict here where the county wants maximum tax revenue, and homeowners don't want to have to deal with a bureaucratic protest every year when their tax bill feels like an insult.

Paul Kasriel recalls a concept for a solution to this conflict, as discussed by a former Fed official, and how it might relate to current challenges we are facing with "fixing" the economy. Specifically, he is looking at the "bad bank" concept currently being mulled over, and how current banks and the bad bank would theoretically agree on a value for the "bad assets".

But backing up a step, I found the basis for the analogy more interesting. The self-assessment theory works as follows:

• Let the owner of the real estate place the value on his property.
• The taxing authority has the right to purchase the property at the owner-decided value.

Owners are deterred from placing too low a value on their properties, and no incentive to place too high a value on their properties. An efficient system for maximizing and fairly taxing the property in the county. The alternative, which is related to the cringing sounds you hear from economists watching government regulation, intervention, and inter-mediation in this broken-down marketplace, is one where there are more rules, regulations, loopholes and inconsistencies.

It's a very thought-provoking piece. 2 pages of your time...

Yeah, rates are lower, but...

It's just not that easy to get your hands on the banks' money these days... Great visual representation, and I can tell you, it fairly depicts the view from the front lines here...

We can still get the deals done, but nothing is as simple as it once was!

Barney Frank on High Balance Conforming Loans

I caught a video piece of Barney Frank fielding questions the other day, in which it was painfully obvious to this mortgage planner that the legislation cannot force free markets to do as legislators intend or wish. I wish I had a link to the video, but I don't, nor do I have the time to search for it. I am sure it is out there.

In 2008, the elected representatives on Capitol Hill decided to allow for Fannie Mae and Freddie Mac to purchase loans at a temporarily increased ceiling - ranging by county according to the median home values in these counties. The non-conforming loan breakpoint was 417k, we've talked about it here. Anything above 417 could not be touched by Fannie/Freddie.

The 2008 temporary limits were put into effect, and some areas were able to treat loans all the way up to 729,750 as conforming, per law. But the banks did not like the temporary nature, investors didn't look at it the same way either, and rates and terms for anything between 417 and 729k left much to be desired, and many to be refinanced at some other time, or never.

For 2009, lawmakers made the "temporary" permanent, but revised the limits, bringing the max ceiling down to 625,500 in the highest cost areas. Investors and banks were a little better to adopt these. And in many ways, borrowers with 417-625k see many of the same underwriting rules. But some of the differences are significant.

Pricing these loans is not the same, bringing much disappointment to the borrowing and lending community. Lawmakers stipulated that banks could only package a small percentage (10%) of "high balance" loans with the traditional, sub-417k loans into their bond issues for the secondary market.

There was so much pent up demand from borrowers with high balance loans to refinance, that the banks all got inundated with demand for money under these terms. It put them way off balance, and they dont have 9x the traditional conforming investments to match every dollar worth of high balance loans. So what do they do? Raise rates. So now when you have a high balance loan, your rate is SIGNIFICANTLY higher than the traditional balance conforming loans.

This will ebb and flow as the banks process and liquidate their inventory. But watching Barney Frank scratch his head, saying something to the tune of "I don't understand why anybody would be treated any differently if they were borrowing the higher balance, we changed the rules to make it the same" - which is not a quote, but is precisely what he was saying - you can see why so many of the governments attempts to help the market have not worked, or only partially helped, or helped one area and introduced a new problem...

One more complication in today's market. Next to impossible to predict a given bank's pipeline composition, and therefore next to impossible to know when they will spike their rates overnight, as we are seeing them do erratically.

There's no inflation in our economy - unless you wholesale money

What happened to inflation? 5$ gas, 6$ milk, 7$ Pabst Blue Ribbon!!! ???

Today's PPI (Producer Price Index) came in at a negative for the 5th straight month. It measures commodity prices, and other materials that producers of goods and services need to buy in order to produce their good or service. Tomorrow's CPI (Consumer Price Index - which measures the cost of goods that consumers buy) is expected to indicate the same signal - no inflation to speak of.

Meanwhile, much is being said about the efforts by the government to push down mortgage rates. But the underlying fundamentals that determine interest rates are not correlating with the rates being offered to consumers,. Or they are correlating less than is usual, presenting challenges to consumers and brokers trying to execute on their behalf.

Yes, rates are quite a bit lower. But the challenges of our "new landscape" are also new in nature, and no matter where you turn, it just gets more and more interesting. After 6 quarters of downsizing, banks were slammed in recent weeks with record applications for new loans. There was an immediate logjam. Demand is exceeding capacity. Banks do not need to lower costs to attract business. Margins are fat, 'because they can'.

Icing on the cake: Banks offer lower rates to deals on shorter term locks. But it takes twice as long for them to underwrite files today, so what's the point? You have to lock long-term, which means higher rates. Or, you float. And if you float, you get jumped in line at underwriting by all the locked-in deals. These same banks offer 7 day locks at their absolutely lowest rates... but you can never get within 7 days of closing UNLESS YOU LOCK!

If you do lock, and the period does not wind up being adequate, for ANY reason whatsoever, you can pay to extend it. But banks are doubling and tripling their extension fees as their queue grows longer and longer. Oh, and they are charging some brokers additional fees for not delivering on a loan once it is locked - even if they are too busy to underwrite it!

So lets review:
-banks have been taking it on the chin for ~6 quarters, so...

-rates are down, but not as much as they should be given the government intervention, and economic datapoints
-extension fees are skyrocketing
-processing times are skyrocketing
-lock periods are skyrocketing
-penalty for cancelling is skyrocketing

As far as I know, mortgage rate lock extension fees are not included in the PPI or CPI. Yet another area of the economy overlooked by the economic reporting data. Outrageous! Somebody call David Horowitz!

Great perspective to a timely question

Ric Edelman fields a question from one of his radio show listeners:

Q: Do you and your wife make extra principal payments to your
interest-only loan? Or do you not want to own your home someday?

Many in the investment business suggest investing it in the stock market
- you don't keep up with inflation by putting the money into your home
or keeping the money in cash. Well, over the past decade or so, with all
of the ups and downs of the stock market, I bet the folks who kept their
money in cash or paid down their mortgages fared better than those in
the stock market. I know, I know, the market goes up and down, and over
the "long term" the stock market is supposed to outperform the other
things, but I question this advice sometimes and just wonder if you are
going to own your home someday? If not, why?

Ric: No, we don't make extra payments. We personally handle our money
the same way we advise our clients and consumers.

Why would we want to add extra money to our payment? If you believe that
real estate values rise over long periods, the home's equity will grow
all by itself, and it will do so at such a rate that any extra payments
we'd make would be pointless.

Here's an example: Say you own a $500,000 house with a $400,000
mortgage. You thus have only $100,000 in equity. If you send in an extra
$100 per month for five years, you'll have an extra $6,000 in equity.
But if the house grows just 1% per year, it will produce $25,505 in new
equity, or four times more than your effort from making extra payments!
And if the house grows 2% per year, your new equity will be more than
$50,000!

This is one reason - there are nine others in my DVD on the topic - why
making extra payments is a waste of time and effort.

Of course, I began by asking if you believe that real estate values will
rise over long periods. If you don't believe that, then you shouldn't be
a real estate owner in the first place. You should rent instead.

Also, I note that you referred to those who recommend placing into the
stock market all the money that you'd otherwise use to make extra
payments. I do not agree with that advice. Instead, you should invest
the money in a highly diversified manner. That's because, as you've
noted, it's possible to see stock prices falter for extended periods. By
owning a wide variety of assets, and not just stocks, you reduce the
risk of such underperformance.

But even if you invest solely in stocks, you're highly likely to do
fine. Remember that we're comparing the interest rate on your mortgage
to the performance of the stock market. Since your mortgage will last
for 30 years, we need to evaluate stock prices over that same period.
And in every 30-year period since 1926, according to Ibbotson
Associates, stocks have handily outperformed mortgage rates.

I realize that you're questioning the strategy because of the stock
market's recent performance, but it's precisely at such times that we
need to remind ourselves of the long-term nature of the markets.
Otherwise, you'll be tempted to do the wrong thing at the wrong time for
the wrong reason.

Find out more about Home Ownership here:
http://www.ricedelman.com/cs/education/home_ownership