A great question for buyers as well! If this house is a 5 year hold, can you stay in this house if rates are 10% in five years, of if you are not an A borrower? It looks to me as if the banks are setting the table for all consumers to be B borrowers in the future. Every time a credit limit is cut back to the consumer’s limit he is using more credit as a percentage of availability thus lowering FICO scores. This is not an accident.
Well, first of all, I should just be watching football or something, but I watched your video, and something you said made me start typing away.
You said, “money can’t stay this cheap for ever…” (I’m paraphrasing).
So, the 60’s wild child, peace loving, goof in me asks the following: Why not?
Seems to me (remember I sell real estate, and depend on the great minds that move the financial markets to get my clients the resources when they need them) that lending with smaller margins, to qualified buyers, would sustain the banking industy….if they were so inclined. Money can’t be cheap if margins must be high.
So…..put me out of my misery. Is this Pollyanna, or just common sense?
I’m not going to call you Pollyanna because that just wouldn’t be a nice thing to do. But at the same time, money can’t be this cheap for ever for a couple of reasons:
1. Inflation – in any “normal” economic cycle, money that is cheaper than the normal rate of inflation (and by normal I mean historical) will eventually cause inflation. Now obviously we aren’t in a “normal” cycle, but if rates stayed like they are, eventually (2012? 2015?) inflation will become an issue. The only way to combat inflation is by raising interest rates.
2. The Fed is giving money away. Fannie and Freddie (oh, and FHA) are losing their and our shirts. We can’t continue that forever. If a gas station continually sold every single one of their products at a loss, they’d go out of business. So, they have to raise prices. How do they raise prices? By raising rates.
3. The risk – as the true amount of the government borrowings becomes known, the “risk free” stature that US Government debt has is going to start slipping. The less “risk free” it’s seen, the higher the rates that will be charged.
Your concept of lending to qualified buyers at smaller margins and remaining profitable is a valid one, but I think the issues we’re dealing with are different.
Indeed. In my utopia, rates could stay low, since in that place in my mind the government is small, very small, without power, and without the authority to spend beyond our means. And in my utopia, rates might stay low since I am by nature a cheap SOB, and I’m not giving money away to anyone so they can wear the shirt that used to be on my back. And in my utopia, rates would stay low because our word would mean something, like a good handshake and a nod used to mean something.
Hey, Tom, it’s me. I guess I nodded off. I was having some sort of dream about….well, it’s too far fetched to talk about in public.
Hope your Thanksgiving brought much happiness to you and your loved ones.
Why would that stop someone from refinancing? If anything I think it would make the decision to lock in today’s current low rates all that much easier. It makes the 30 yr fixed rate look awful good, knowing you are locking a low rate for 30 years. In three to five years turn it into a rental, at least then you have a rental property with a great rate. Regardless if you are refinancing or buying how could you not take advantage of today’s rates?
The situations where I’ve had someone stop from refinancing is when they are positive that no matter what they are going to sell in that time frame. Examples? A couple with 2 kids in a 3 bedroom house and plans for more. Someone who is finishing their masters degree and will be able to get a job with a significantly higher earning potential. A couple who are going to be empty nesters by then. All of them are looking at a high probablity of making a change whether rates are at 5, 10 or somewhere in between. If you are at 5.5% and are in that high probability range, then you would think twice about switching rates. Does that make sense?
Excellent question. I think you’re right on the rates. It will make a big difference if the rates are higher and I don’t think many people think about that.
Thomas Johnson says:
A great question for buyers as well! If this house is a 5 year hold, can you stay in this house if rates are 10% in five years, of if you are not an A borrower? It looks to me as if the banks are setting the table for all consumers to be B borrowers in the future. Every time a credit limit is cut back to the consumer’s limit he is using more credit as a percentage of availability thus lowering FICO scores. This is not an accident.
November 28, 2009 — 8:08 am
Don Reedy says:
Tom,
Well, first of all, I should just be watching football or something, but I watched your video, and something you said made me start typing away.
You said, “money can’t stay this cheap for ever…” (I’m paraphrasing).
So, the 60’s wild child, peace loving, goof in me asks the following: Why not?
Seems to me (remember I sell real estate, and depend on the great minds that move the financial markets to get my clients the resources when they need them) that lending with smaller margins, to qualified buyers, would sustain the banking industy….if they were so inclined. Money can’t be cheap if margins must be high.
So…..put me out of my misery. Is this Pollyanna, or just common sense?
November 28, 2009 — 6:09 pm
Tom Vanderwell says:
Don,
I’m not going to call you Pollyanna because that just wouldn’t be a nice thing to do. But at the same time, money can’t be this cheap for ever for a couple of reasons:
1. Inflation – in any “normal” economic cycle, money that is cheaper than the normal rate of inflation (and by normal I mean historical) will eventually cause inflation. Now obviously we aren’t in a “normal” cycle, but if rates stayed like they are, eventually (2012? 2015?) inflation will become an issue. The only way to combat inflation is by raising interest rates.
2. The Fed is giving money away. Fannie and Freddie (oh, and FHA) are losing their and our shirts. We can’t continue that forever. If a gas station continually sold every single one of their products at a loss, they’d go out of business. So, they have to raise prices. How do they raise prices? By raising rates.
3. The risk – as the true amount of the government borrowings becomes known, the “risk free” stature that US Government debt has is going to start slipping. The less “risk free” it’s seen, the higher the rates that will be charged.
Your concept of lending to qualified buyers at smaller margins and remaining profitable is a valid one, but I think the issues we’re dealing with are different.
Does that make sense?
Tom
November 28, 2009 — 9:10 pm
Don Reedy says:
Tom,
Indeed. In my utopia, rates could stay low, since in that place in my mind the government is small, very small, without power, and without the authority to spend beyond our means. And in my utopia, rates might stay low since I am by nature a cheap SOB, and I’m not giving money away to anyone so they can wear the shirt that used to be on my back. And in my utopia, rates would stay low because our word would mean something, like a good handshake and a nod used to mean something.
Hey, Tom, it’s me. I guess I nodded off. I was having some sort of dream about….well, it’s too far fetched to talk about in public.
Hope your Thanksgiving brought much happiness to you and your loved ones.
Don
November 28, 2009 — 9:46 pm
Ashlee says:
Great video! Nice points and lots of good information.
November 29, 2009 — 5:45 pm
Andrew Hahn says:
Why would that stop someone from refinancing? If anything I think it would make the decision to lock in today’s current low rates all that much easier. It makes the 30 yr fixed rate look awful good, knowing you are locking a low rate for 30 years. In three to five years turn it into a rental, at least then you have a rental property with a great rate. Regardless if you are refinancing or buying how could you not take advantage of today’s rates?
November 29, 2009 — 10:18 pm
Tom Vanderwell says:
Andrew,
The situations where I’ve had someone stop from refinancing is when they are positive that no matter what they are going to sell in that time frame. Examples? A couple with 2 kids in a 3 bedroom house and plans for more. Someone who is finishing their masters degree and will be able to get a job with a significantly higher earning potential. A couple who are going to be empty nesters by then. All of them are looking at a high probablity of making a change whether rates are at 5, 10 or somewhere in between. If you are at 5.5% and are in that high probability range, then you would think twice about switching rates. Does that make sense?
Tom
November 30, 2009 — 5:34 am
Brandon Marchand says:
Excellent question. I think you’re right on the rates. It will make a big difference if the rates are higher and I don’t think many people think about that.
November 30, 2009 — 10:06 pm