Mortgage Market Week in Review

I want to apologize for the delay in getting this out until Saturday.   Due to some technical difficulties and some new things I’m going to be implementing, Friday was spent working on computer issues.   Yeah, I know, a fun way to spend a Friday…..

So, here we are at the end of the week and what’s happened?  Well, a couple of things did manage to happen.  We’ll talk about the Fed, what they did, why it matters and why it doesn’t.   We’ll talk about earnings (or the lack of them), consumer spending (or the lack of it), inflation (or the lack of it), bailout backlash, and falling oil prices as well.   So, here goes:

The Fed, as  you know by now, lowered the Fed Funds rate by .5% to 1.0%.   A couple of statistics about that number:

1. As you  know, that isn’t directly linked to mortgage rates, so mortgage rates are not going to drop by .5% because of that move.

2. That is equal to the lowest rate the Fed has had rates this century (from June of 2003 to June of 2004).   If you’ve read anything about what’s happening in the financial world, you’ll know that the former Fed Chairman Greenspan has taken a lot of heat for keeping interest rates too low for too long.    Hmmm, and now we’re back to that same level.

3.  The rate they lowered to is 1.0%.   That means they have very little “ammo” left in their pouch if things deteriorate further.

4. Japan, in the 1990’s, had an interest rate of 0%.   That’s right, banks etc. could borrow money from the Central Bank of Japan (their Federal Reserve) for nothing.  How well did that work for Japan?   Short answer, not very well.

Why does what the Fed did matter?

1. Because in their statement, they essentially removed all mention of inflation being a risk.   For more details on what the Fed said, check out “The Fed Translated.”

2. Because it showed that they are very concerned about the economic conditions not only in our country but elsewhere.

3. Because it raises the question of whether we’re going to see a nasty rebound in inflation once we get to the other side of the current economic mess.   Why?   Because the problem we have right now is not that money is too expensive, the problem we have is that too many people, companies, banks, countries, borrowed too much money and now have to adjust their spending and borrowing to significantly lower levels.   Making money cheaper messes with the deleveraging and also has long term effects on the value of the dollar making inflation a risk, and if you’ve been reading my writings for any length of time, you’ll know that inflation raises rates.

Why what the Fed did doesn’t matter….

Because they are approaching a liquidity (lack of funds because credit availability is shrinking) and a solvency (in over their heads with debt already) issue with a tool that really only works for normal economic cycles.   If you want to increase growth, make things cheaper by lowering rates.   But, if people can’t borrow money because they are either marginal borrowers or too leveraged, the cost of funds doesn’t matter.

Earnings reports (or a lack of them). I’m not going to get into the specifics of all of the earnings reports but let’s just say that with the exception of a couple of companies, the reports all showed a significant slow down in consumer spending, a significant fall off in consumer confidence, and a significant reduction in corporate earnings.   There were some companies that showed otherwise, but the majority of the trend showed that we’re in a quite dramatic slowing of the economy.    The GDP reports for the 3rd quarter showed that the economy contracted for the quarter.

Consumer spending (or the lack of it). A couple of different reports came out this week that showed that the consumer (that’s you and me), who count for 70% of all economic growth in the country, have pulled back quite substantially.   A couple of thoughts on that:  There have been many studies done over the years about the wealth effect of both 401K’s and home values.   When you have $500,000 in your 401K and $150,000 in equity in your home, you feel more inclined to go out and buy the new hot tub, take a nice vacation etc.   But if your 401K is now down to $250,000 and your home equity is down to $1, you suddenly don’t feel so wealthy.   When you don’t feel so wealthy, you aren’t as inclined to spend.   It’s a vicious cycle.

Inflation (or the lack of it) – since we talked about what the Fed said about inflation, this is actually going to be more about what the Treasury is doing in terms of borrowing all of this money to bail out Fannie, Freddie, AIG……..    There is starting to be more and more concern about how are we as a country going to pay this money back and that is putting upward pressure on the borrowing costs for the government.   Since the government is also Fannie and Freddie, that’s pushing mortgage rates higher.   I think that the overarching concern about how much the government is borrowing is the main reason that even though the economic fundamentals would normally push rates downward, they have remained elevated.

The Bailout Backlash – there are a couple of things happening along this line:  There are starting to be more and more people in the government and elsewhere who are questioning whether the bailout is working.   We’re “giving” all of this money to the banks and they aren’t lending it out, what’s up with that?   A couple of quick thoughts, not in defense of the banks, but in explanation:  1) if I’m concerned about my financial well being, and I’ve got the ability to get a major cash infusion that will help me make it through, am I going to turn around and loan that out in what could be a very risky lending environment?   Nope.   2) if I take that cash and buy another bank with it, does that make me “too big to fail” so that if things get really bad, I know Uncle Sam is going to save me?  Maybe.   I’ve talked before about the nature of “unintended consequences” and I think this is one of them.

Another bailout issue that we’re seeing is the rising call for bailing out some homeowners who need help on their mortgages.   There are a lot of people who are quite angry about the idea because they bought a house that was within their means and why should someone who was “reckless” get bailed out and they don’t.   I’d like to propose a different concept instead:  Let’s call it the Vanderwell Bailout Plan:

1. Every home owner who has paid their income taxes on time for the last 2 years gets $10,000.

2. If you are in good financial shape, what are you going to do with it?

a. Spend it – it helps the economy.

b. Invest it – it helps the markets

c. Put it in the bank – it recapitalizes the banks.

3. If you are struggling financially, that could help you get through a bad stretch so that you can make things work.

No question of who is worthy and who isn’t, every homeowner gets it.

What about those who rent? If you rent and buy a home before the end of 2010 (this isn’t going to end soon anyway), you can get a $10,000 Federal Tax credit which means you won’t have to pay Federal taxes for quite some time.   Not an interest free loan like they have going right now, but a true credit that you can spread out over as many years as it takes to take advantage of the whole thing.

Would it solve everything?  Nope, but it would be a much more equitable way to give the economy a boost than bailing out Joe but not Fred.

Oil prices – have you seen the prices at the pump lately?   My wife filled up for $2.43 a gallon yesterday!   That’s an awesome thing with the exception of the reason why.   The reason that prices have dropped is due to demand destruction.   The economies all over the world are shrinking and therefore we aren’t using as much oil.

Now a couple of technical changes that I’m making:

1. Starting next week Friday, I’m switching the way that I distribute my Mortgage Market Week in Review. Currently, it’s e-mailed to over 1400 people and it’s also put up on Straight Talk, Bloodhound Blog, and Mortgages Unzipped.   Starting next week, I’m still going to be writing on the blogs, but the Mortgage Market Week in Review will be available only by free subscription to the e-mail newsletter.    To subscribe to it, go to Straight Talk and in the sidebar on the left, there’s a spot where you can subscribe.  When you subscribe, you’ll get a “opt in” confirmation e-mail from Aweber on behalf of tvanderwell@straighttalkaboutmortgages.com to confirm that you wanted to subscribe.

2. That’s the second change I’m making, due to the recent growth in the number of subscribers to my weekly e-mail, I’m switching the format and rather than getting an e-mail from me at thomas.vanderwell@53.com, you’re going to get it from aweber’s mailing service on behalf of tvanderwell@straighttalkaboutmortgages.com.   Same content, same occasionally brilliant insights into the market, just some technological changes that will make it easier for me to get it out to you.

Oh, one other thing, as part of the upgrade of the technological features, I’ve changed the layout and design of Straight Talk About Mortgages.   Let me know if there are things you like or don’t like about the changes.   I wanted to keep it easy to read and I wanted to have a site where more than just the most recent post can be read without having to click on page after page.

Oh, and rates are currently posted here.

Tom Vanderwell

Cell (616) 292-7559

tvanderwell@straighttalkaboutmortgages.com