"Bubbling Up"

Mortgage Rates, Gas Prices on the Move

One of the signs that's something afoot in the financial markets -- as it is now -- is that interest rates re-set several times in one day.

(More typically, they re-set every few days.)

Although the increments have all been small, that's been happening all week in the credit markets.

Think of the re-sets -- all up, by the way -- as a series of 2.0 and 3.0 seismic (financial) tremors.

Meanwhile, local gas prices, which had been unchanged seemingly for weeks locally at around $2.89 a gallon, suddenly rose twice in the last two days to $3 (or more).

Housing Market Hindsight

Low Interest Rates -- Then & Now

Three (four?) years into the housing market downturn, what conclusion is it possible to draw?

In retrospect, it seems obvious (at least to me) that it was a liquidity-driven phenomenon.

Add a tsunami of cash, subtract any vestige of underwriting standards, and real estate will go up.

Subtract liquidity, and tighten lending standards . . . and it goes down.

No Pop from Low Rates

Astute market watchers will point out that, if cheap money drives real estate upwards, it should be positively flying now, because mortgage rates are at record lows.

What that analysis ignores is: 1) the cheap money is itself a symptom of the downturn, as the Fed is using cheap money (free to the banks) as its weapon of choice to support housing (the so-called "hair of the dog" cure); and 2) to qualify for a cheap mortgage, you must have good credit and a job.

If you're a move-up Buyer, you also need some equity for a downpayment.

Flight to Safety = Rate Drop

Market Melt-Down Creates Refinancing Opportunity

No, it's not good when already volatile markets lurch downward like they've done the last couple days.

However, astute financial observers know that such turbulence is also accompanied by a "flight to safety" -- in this case, U.S. debt.

Doesn't the U.S. have a $13 trillion (and counting) deficit, and many more trillions in unfunded obligations?

Doesn't really matter, at least for the moment; in the land of the financial blind -- that would be the Eurozone at the moment -- the one-eyed man is King.

What does that mean for the the housing market?

A weaker economy -- if that's indeed what's ahead -- isn't great news.

However, the silver lining is that anyone who's on the cusp of refinancing can do so at rates that are temporarily "on sale."

"Crying Wolf" on Interest Rates?

Still Low (For Now)

For months (years?), Realtors have been warning prospective home Buyers that today's low rates (still around 5% for those with excellent credit) won't last much longer.

That's based on a number of potent economic factors:

--Trillions in economic stimulus pumped into the economy by the Fed and its potentially inflationary impact;

--The dire status of Fannie Mae and Freddie Mac -- the sources of liquidity to the housing market at the moment;

--The withdrawal of both direct (tax incentives) and indirect government support to the housing market (like the Fed's purchase of $1.25 trillion in mortgage-backed securities, which stopped in March).

And yet, mortgage rates have stayed low -- and now, jumbo rates are coming down, too.

You'd certainly guess that by now, many (most?) consumers take perpetually low interest rates for granted.

I'm not forecasting an imminent spike.

But we all know what happens in other markets (like stocks) when investors get complacent . . .

Counting Down to "The Deadline"

Mortgage Rates: Moving Up

Everyone in the housing business seems to be counting down to the approaching deadline with baited breath.

No, not April 30, when the home buyer tax credits expire.

March 31, when the Federal Reserve stops buying mortgages and mortgage-backed securities -- reportedly, anywhere from $10 to $25 billion, per week, since at least last Fall.

Those purchases act like a huge subsidy, keeping rates down and the mortgage securities market liquid.

The Fed Exits

How big a subsidy?

We're about to find out.

No doubt anticipating the Fed's exit, interest rates have been rising this week; just this Wednesday, according to Edina Mortgage's Lala Brosz, rates on jumbo mortgage re-set four times, from around 5.25% at the beginning of the day, to 5.5% at the end.

The potential updraft in mortgage rates makes it more imperative that prospective Buyers lock in good rates while they're still low (vs. float, in the hopes that they'll drift down).

It may also be a good time to inquire about whether your lender offers a re-lock option, which can be cheap insurance in an environment of rising rates.

Wholesale Price of Money Goes Up (A Little)

Fed Rate Bump

Today's leading financial stories are: a) the Federal Reserve's apparently surprise decision to raise interest rates on short-term bank borrowing; and b) the market's reaction to same (playing out now).

My take?

The action itself is relatively trivial: hiking rates on some arcane, overnight interest rate from .5% to .75% (yes, that's less than 1%) does not suddenly make money expensive (the same rates have been as high as 6%(!) in recent years, before "the deluge").

Clearly, then, the concern is that there are more increases to follow.

Given the hair-trigger nature of today's markets ("Explanation for Jumpy Markets"), you'd expect traders to overreact to the news -- like they now do to all news -- then settle down rather quickly.

As far as mortgage rates go, what the Federal Reserve and Treasury are doing (or not) with respect to funding Freddie Mac, Fannie Mae, FHA are much more significant than a trivial bump in banks' overnight borrowing costs.

Rate Pop Today

30-Yr. Rates Back to 5%

Busy day -- I'll catch up to the "news cycle" tonight.

However, in the mean time, just a hunch :) that there's a link between unemployment numbers coming in better than expected, and 30-year rates going over 5% for the first time in several weeks.

Haven't seen any commentary dissecting whether the numbers are actually good, or mask negatives (as is often the case).

I'll have to see what the "usual [blogosphere] suspects" say before I weigh in . . ..

Low Interest Rates for Savers

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

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

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

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

Good News, Bad News on Interest Rates

Back to 5%?

The good news on mortgage interest rates?

After a steep climb the last two months or so, to around 5.5% on 30-year mortgages, they've now fallen back closer to 5%.

The bad news?

The reason is that the latest batch of economic news -- unemployment, economic activity, the housing market -- shows continued weakness.

Bold Mortgage Prediction!

Mortgage Prediction: More Red Tape

Clients know that I demur when asked where I think interest rates are headed.

If Ben Bernanke, Chairman of the Federal Reserve, doesn't know with a high degree of confidence -- what chance does anyone else have?

That said, here's one major development that's easy to predict: there will be more red tape.

That's so because government, by default, is going to be more and more involved in the lending process.

In fact, it's likely to be the loan originator, the underwriter, the appraiser, the insurer, the servicer, and the securitizer (did I forget anything?).

Since the full nationalization of Fannie Mae and Freddie Mac almost a year ago, it's already playing many -- if not all -- of those roles.

If the old focus was making money (through any and all means), the new focus is not losing it.

That mindset -- plus government "process" -- is not likely to breed expediency or economy.

"Greenspan Did It"

Adjustable Rate Mortgages the Missing Link

What about Greenspan's argument that he only controlled short-term rates? And that short rates became decoupled from long-term rates in 2002? Nonsense, says [Stanford Professor John] Taylor. Surely the existence of adjustable-rate mortgages (accounting for about one-third of mortgages starting in 2003) linked the mortgage market and short-term rates.

--Susan Lee, "It Really Is All Greenspan's Fault"; Forbes (4/3/09)

One of the more interesting debates within economics circles is exactly how culpable former Fed Reserve Chairman Alan Greenspan is for the housing bubble. Put me in the camp that says, "very."

Greenspan has protested -- and continues to protest -- that as Fed Chairman he was only responsible for setting short-term interest rates.

True enough.

But thanks to the explosion of adjustable rate mortgages -- encouraged by none other than Greenspan himself -- dirt-cheap, short-term interest rates quickly spilled over into the housing market.

As a result, Greenspan's drive to lower rates in the wake of the tech stock bust and the post-9/11 recession directly led to vast, new sums of capital being made available to home buyers.

The rest, as they say, is history.

Big Fed Move

Mortgage Rates Tumble

In a surprise, [The Federal Reserve] dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

Indeed, the immediate effect on the bond markets was striking, with prices rising and yields dropping sharply on the news. The yield on the 30-year Treasury bond, about 3.75 percent before the announcement, fell quickly to 3.4 percent and remained volatile. At the same time, the dollar plunged about 3 percent against other major currencies.

Edmund Andrews, "Fed to Buy $1 Trillion in Securities to Aid Economy"; The New York Times (3/18/09)

Today's big financial news was the Fed's decision to buy up to $1 trillion in bonds and mortgages. Mortgage rates reacted immediately; the sites I monitor showed a .25% drop, to 4 5/8%.

Guesstimates are that rates could fall another .25%, which would take them under 4.5%.

Predatory Practices Persist

"Yeah, That Will Work" Department

I've been on a (very) brief family vacation -- Duluth water park and puppy scouting -- and returned to lots of mail, mostly business-related and bills. Including one from a large bank where I have had a credit card account -- and several other accounts -- for almost a decade.

Beginning later this month, the letter notified me, the interest rate on any unpaid credit card balance will be *28.99%! In fact, nowhere in the letter was the name of the bank even identified; rather, the correspondence, from "Cardmember Service" in ND, simply referenced the last 4 digits of my credit card (I had to check my wallet to realize which credit card account was affected)

Bad credit?

Hardly.

My wife and I have 800 credit scores, and just refinanced at 4 5/8% (we're part of the lucky minority that had enough equity and qualifying credit histories). And it's hardly like we are a new or unknown customer to the bank in question: our credit card account goes back years, and has never even incurred a late payment fee. We also have a mortgage with them -- also never late -- and multiple savings accounts.

Fortunately, it's not like it really affects us: we use credit relatively sparingly, and pay off the balance in full every month. (I also have several other credit cards that I can -- and quickly will -- switch my business to.)

But still.

What if we couldn't pay off the balance? The new rate would literally eat us alive in no time.

Predatory Practices Persist

At 29% compounded annual interest, $1 in debt balloons to $6(!) in seven years!

Clearly, anyone who fell into this pit would never be able to climb out. Is this how the banks propose to dig out of the crater they've dug for themselves -- and us, too?

Do the big banks really need to give people another reason to hate them right now??

*There are supposed to be usery laws on the books of most states. I can only guess that the card is issued from someplace like North or South Dakota, with a very "liberal" interpretation. In what has been called "a race to the bottom," some states compete for corporate business by gutting their consumer protection laws.

Cause(s) of Interest Rate Volatility

Interest Rate Level as Regulator Valve

Anyone in the market for a new mortgage -- or trying to refinance an existing one -- can attest to how volatile interest rates are today.

Certainly, one key ingredient is the unprecedented uncertainty in the credit markets. However, another, more recent factor is understaffed lenders.

According to local mortgage broker Alex Stenback, lenders have cut back staff to the point that they simply can't process high volumes of mortgage applications (at least not quickly).

When they're overwhelmed, they turn off the application spigot by raising rates; when they're caught up or want to attract more business, they open the spigot back up by lowering rates.

That's just one more reason for consumers to watch rates more closely than ever. Practically, that means choosing a with-it lender or mortgage broker who'll do that for you . . .

$3,000 ATM Fee?

Cheap Money Elusive for Many

While rates are falling, borrowers face higher costs every step of the way, from rising fees for mortgage insurance to added costs that drive up the mortgage rate. At the same time, lenders have become more cautious about who they will lend to, as more people lose their jobs, watch their incomes decline and fall behind on their bills.

--"Costs and Tighter Rules Thwart Refinancings"; The New York Times (1/24/09)

The big drop in interest rates -- from over 6% to under 5% -- isn't stimulating the housing market as much as hoped because many would-be borrowers and refinancers don't qualify. Depending on the individual housing market, as many as two-thirds of applicants are denied (in the Twin Cities, the number I've heard is 50%).

Many of the remainder still may not get the best, advertised rates, due to something called "risk-based pricing." Just as some people pay 7% on their credit cards and others pay 22%, mortgage rates now vary considerably depending on your risk profile.

To add insult to injury, lenders are now imposing additional fees on weaker credit risks to compensate for their projected higher risk of default. (Such an approach may make sense now, but it smacks of "gotcha" to millions of borrowers who faced no such hurdles when they signed up for their original loans. On the contrary, lenders pitched low initial "teaser" rates, "option-ARM's" and other sugar-coated loan features.)

The net result is a huge winnowing-out factor for those trying to lower their payments and/or switch out of risky mortgages.

Oh, and forget about "cash-out refinancing" -- using your house literally as an ATM. Even if you have enough equity to do it, the cost is likely to be prohibitive: anywhere from $500 to $3,000 to access $100,000 of your equity.

Record "Housing Affordability"

Has Housing Hit Bottom?
Key Metric Says "Maybe"

Falling prices plus low interest rates equals improved housing affordability, right? Maybe. Even if it does, however, Buyers may be too gun-shy at the moment for that to matter.

According to the four local realtor associations, the Twin Cities' Housing Affordability Index ("HAI") is now at 192, the highest number since the statistic was first tracked in 1990.

What that means is the median family income in the Twin Cities is 192% of the income needed to qualify for the median priced home, using a 20% down payment and 30-year fixed mortgage.

By contrast, that number fell to as low as 120% in mid-2006. Not coincidentally, mid-2006 was very close to the peak of the housing bubble.

Watch the Numerator

So is a record-high HAI now signaling that the housing market is close to a bottom?

It depends on the wild card in the equation: Buyers' income.

In a recession, unemployment rises, and wages typically stagnate or fall. I don't compile the HAI statistics, but you'd guess that the income component of the HAI is a lagging number, and is now likely weakening along with the overall housing market.

So some consumer skepticism may be warranted.

Of course, prospective home buyers are not just backward looking, but forward-looking, too.

For now, people who are watching home prices fall and who are worried about losing their jobs clearly are listening to what their gut tells them, not their brain (and certainly not their realtor!).

2009 "Dear Client" Letter - Part 2

Rational Moves in an Irrational Market

Cont. from Part One:

--Two. If you're a Buyer, take advantage of a soft market to upgrade. That's what stock market investors do during a bear market. Specifically, they buy blue chip stocks that are temporarily "on sale."

Similarly, today's real estate downturn has lowered the entry point for many desirable Twin Cities neighborhoods by $20k, $50k, or more. Dropping home prices, plus cheap mortgages, spells opportunity for millions of younger Buyers. Meanwhile, if you're a move-up Buyer, you're likely to be pleasantly surprised by how much house you can afford, in neighborhoods you wouldn't have dreamed of looking at before.

If you're a Seller, consider taking your lumps. Casting aside all the forecasts -- a good idea, I might add -- no one really knows whether housing prices are headed up, down, or sideways the next 12-18 months.

That depends on interest rates, the national and local economy, unemployment levels, etc. -- complex, inter-related variables that even the pro's get wrong (forget about predicting the future; most economists can't even get the present right: witness the one-year lag diagnosing the current recession).

So if your life circumstances dictate making a move this year, you may just want to . . . move. If you're buying something else, whatever you lose as a Seller may very well come back to you as a Buyer.

In that vein, if you're a prospective downsizer contemplating becoming a renter . . . you may want to consider buying something smaller instead.

Psychologically, it's a lot easier to pull up stakes where you've lived for decades if you're excited about where you're headed. Given today's historically low rates and record-high inventory, the odds of finding a great townhome or condo are a lot better than finding something equivalent in today's increasingly crowded, picked-over rental market.

If you're a longtime homeowner, keep in mind that, while you may be getting less than you might have 2-3 years ago, you're still getting more than you would have 5 years ago -- let alone 20 or 30. Thanks to residential real estate's favorable tax treatment, all of that gain is likely tax-free for most Sellers (no capital gains tax is due on the first $250k of gains for qualifying singles, and $500k for couples).

Three. Read my blog, City Lakes Real Estate (http://www.citylakes.blogspot.com/). Ok, that may not qualify as a "tried-and-true" strategy, but it's still a good one.

Since I started the City Lakes blog more than a year ago, I've posted almost 200 pieces discussing emerging real estate trends, both local and national; market tips for Buyers and Sellers; and how to think about and make sense of broader economic issues.

It's been both gratifying and thrilling to see the City Lakes blog cited by a variety of influential news sources and opinion leaders, both online and off, including The New York Times, RealClearMarkets.com, The Star Tribune, and even Edina Realty senior management (it's spelled K-A-P-L-A-N, guys).

I'm confident that you'll profit from reading my blog. However, just to make sure, if you subscribe by January 31, I'll mail you a $5 Target gift certificate (Dunn Bros., if you prefer). Don't worry, the subscription's free.

While no one knows what the future holds, it's also true that no one needs to simply wait for it, passively. One of my favorite cartoons shows two vultures sitting on a tree limb, with the caption, "To hell with all this waiting -- let's go kill something."

Wishing you good hunting, and a happy, healthy 2009!

Ross

Money's Fungible . . Borrowers Aren't

One Size, er, Rate Doesn't Fit All

One of the more noteworthy features of today's mortgage market, besides greater volatility and generally declining rates, is the wide range in quoted interest rates.

For sterling credit risks -- credit scores in the high seven hundred's or above, plenty of existing home equity (or a fat down payment, if buying new), stable jobs, etc. -- the gates of "(re)financing heaven" are very much open. If that's you, you can walk through and borrow at 30 year rates well below 5%.

However, if you don't meet those criteria -- and anywhere from half to two-thirds of all prospective borrowers/re-financers now don't -- Fuhgettaboutit.

It's also the case that people applying for jumbo loans are being quoted substantially higher rates than for so-called conforming loans (generally, under $417,000), because the latter can still be re-sold on the secondary market, while the former can't.

What that means for consumers is that there isn't one prevailing interest rate anymore -- they're dozens, depending on your profile and borrowing needs.

Amongst other things, that makes using the Internet and shopping for rates a little more daunting now. It also makes good lending relationships more valuable.

That's because, while money may be a commodity ("fungible") . . . prospective borrowers are unique.

Refinancing Motives

Refinance to Lower Payments --
or Avoid Higher Ones

With long-term mortgage rates flirting with 5% again, many homeowners should revisit whether it makes sense to refinance.

Refinancing (assuming you can) is appropriate in two situations: 1) you're able to substantially lower your monthly payments; or 2) if you don't refinance, you face the prospect of substantially higher monthly payments. It's also relevant whether you're planning on staying put or not: there's no point in paying to upgrade a mortgage that you're not going to keep.

Ultimately, the decision to refinance is just a cost-benefit analysis.

The cost is the 2.5%-3% or so you can expect to pay for the new loan (unfortunately, about the same cost as the original, purchase money mortgage).

The benefit is the reduced monthly payment.

To use concrete numbers, if you currently owe $250k on a 30 year, 6.25% mortgage, you could reduce your monthly payments about $200 by refinancing at 5%. If the cost to refinance was $6,500, you'd recoup the fees in a little less than 3 years. Over the life of the loan, your savings would total an impressive $72k! (You'd have to partially offset that by what you'd have if you'd instead invested $6,500 for 30 years).

My mastery of hurdle rates, internal rates of return, etc. was never that good -- and is nonexistent now -- but intuitively that seems like an attractive proposition.

Even if you can't improve your situation, you may want to refinance to prevent it from getting worse. That's the case if your current mortgage is set to adjust to a substantially higher rate soon, is non-amortizing (interest only), or negatively amortizing (the amount you owe actually increases).

In any case, to qualify for refinancing at all, your credit scores must be decent (mid-600's or better), and you must have sufficient equity to serve as collateral. Unfortunately, that disqualifies many homeowners who bought in the last couple years with little or nothing down, and have seen their homes drop in value.

If you're a bona fide refinancing candidate, here are three tips: 1) be sure to ask for the federally-mandated disclosures (the Truth-in-Lending, or "TIL," and the Good Faith Estimate; 2) inquire about a re-lock option, which lets you capture a lower rate if they drop while your application is pending; and 3) shop around.

Money is fungible, and quoted fees vary. Think of it this way: before you spent $6,500 on a used car, new roof, etc., you'd expect to do some due diligence, wouldn't you?

Saved by Zero?

Ben Bernanke's Theme Song

Maybe, someday
Saved by zero
I’ll be more together
Stretched by fewer

Thoughts that leave me
Chasing after
My dreams disown me
Loaded with danger

Maybe I’ll win
Saved by Zero

Holding onto
Words that teach me
I will conquer
Space around me

Maybe I’ll win
Saved by zero
Maybe I’ll win
Saved by zero

--Lyrics, "Saved by Zero"; The Fixx

Who knew? Personally, I had (Federal Reserve Chairman Ben) Bernanke pegged more as a crossover, Country & Western type.

If and when the Fed's monetary medicine starts to work, it'll be time for another song by The Fixx: "One Thing Leads to Another."*

*Thanks to Bob Riesman for all relevant musical input.