Well, here we are and it’s time for another Mortgage Market Week in Review. This week, we’re going to talk about consumer spending, consumer confidence, the new normal, where’s the bottom? and why interest rates have had a 1 percent up and half percent down swing since last week Wednesday.
Consumer Spending – Retail Sales came out and surprise! They were down by 1.2%. With all of the gloom and doom that is being preached in the mainstream media, is it any wonder that people are pulling back? Nope. But something that I think is missing from the discussions is a simple question. Are (or were) people spending more than they were making? I believe that a pretty convincing case can be made that our society was living on credit and spending more than they made for too long. It appears that it’s starting to catch up with us.
Consumer Confidence – The same goes here. The mainstream media is preaching gloom and doom and consumer confidence is down, way down. Are there cases where the mainstream media are overdoing things? Absolutely. However, I was telling my wife the other night that I think being a mortgage guy watching the news about the economy is sort of like being a nurse (she is) watching her parent be a patient (she did this week – Mom is fine). She said she can readily believe that. The media is overdoing things, but frankly there are a lot of really ugly things going on. I’m not going to go into them, but if you want to read up on them (and keep yourself up at night), let me know and I’ll point you to some good sites on the web to read up on them.
The new fundamentals in mortgage rates. What in the world happened to mortgage rates? Last Wednesday, they were at 5.875%, they climbed to a high of 6.875% and then dropped back to 6.375% by today. A couple of thoughts:
1. As the government, not only ours but virtually all governments in the world, has gone on a huge borrowing spree, that has shifted the dynamics and made mortgage backed securities not nearly as attractive as they used to be. That pushes the price down and the rates up.
2. Sell, Sell, Sell. This is going to be a little confusing. It is estimated that between September and October of 2008, $103 Billion (that’s with 9 zeroes if you are counting) have been redeemed out of hedge funds. So what does that mean? That means that literally tons of stocks and bonds had to be sold to attempt to maintain the proper capital conditions. So what? So that means that that it was frankly a fire sale of virtually everything. Stocks, bonds and everything were on sale. When everyone is selling and very few are buying, that pushes the price down and what happens when the price of bonds go down (all together now – the rate goes up!) So we’ve seen, and I think we’re going to continue to see a disconnect between mortgage rates and the economic fundamentals. Things like jobs and retail sales and such won’t have nearly as much of an impact on mortgage rates as they have, instead we’re going to see rates be impacted more by the dynamics in the stock and credit markets. I have to tell you, I think that paranoid schizophrenic is a kind term for the markets lately. So, hang on to your hats!
3. The cost of government borrowings. I think long term (2 weeks to 12 months) we’re going to see rates edge up more than down because of the cost of government borrowings. As they say in Congress, $250 Billion here, $750 Billion there, before long it adds up to real money. And before long, the government floats so much debt (bonds) out there that supply outpaces demand and the when supply outpaces demand, rates go up.
Check out right HERE if you want a copy of today’s rates off my blog.
So what does that mean? Frankly, if you find a rate that works for you and a program that you can get approved on, don’t get greedy and try for too much. Also, keep in very close touch with your lender if you do float an interest rate. Did you know that you can sign up to get e-mailed rates on a daily basis? Check out Straight Talk. Call me if you want to talk about your particular situation.
The new normal – I read an article the other day (read it here) that talks about getting the credit markets back to normal functioning. I hear lots of people talking about how we need to “support the housing market” so that house prices return to normal. I don’t hear anyone talking about what “normal” should we have. Does anyone even ask the question that I think needs to be asked?
“Are we merely in a cyclical recession where things will bounce back to the way they were, or are we in a structural recession?”
Let me lay out three reasons why I believe that this is a structural recession and the country is going to look different when it’s all done:
1. The financial system was built on too much of a system of leverage and that has blown up in a big way. The new banking system will still lend, but for the foreseeable future it will be significantly less leveraged and significantly more conservative.
2. The days of easy money for consumers are over. I was talking to someone the other day who asked me if the mortgage market was dead. He was surprised when I told him that we had plenty of money available but you had to meet four criteria:
a. You needed to have a downpayment or equity in your house (with approximately 15 million households owing more on their house than what they could sell it for, that limits the market).
b. You need good credit. Not necessarily great credit but if you don’t have credit scores in the 700’s, expect for it to be more expensive.
c. You need verifiable income. No more stated income, no more 3 months self employed, none of that.
d. Then you can get a reasonable mortgage in relation to your income.
3. The “Poverty Effect” – Much had been made of the “wealth effect.” That was where people felt more inclined to spend extra if they had more equity in their house and a larger balance in their 401K plan. Well, right now, they are upside down on their house and they have seen the value of their 401K drop by 40%. That makes them feel poorer so they spend less.
Where’s the bottom? We got a couple of reports on housing that frankly showed that we aren’t close to the bottom yet. New Home starts, new home permits, foreclosure levels, builder expectation levels all came in at levels that indicate we aren’t close to the bottom yet.
So where does that leave us? A couple of thoughts:
1. There is still mortgage money available but it is available for fewer people than it was even 2 to 4 months ago.
2. Mortgage rates are very volatile and it is important that if you are going to be in the market for a mortgage that you watch the market closely and “grab it” when it makes sense.
3. Ask yourself a question: Which would you rather do:
a. Pay $350,000 for a house now and get a mortgage rate of 6.375% for 30 years.
b. Wait until next year, spend $325,000 for the house but get a mortgage rate of 7.375% for 30 years?
Because you might very well spend less on a house next year, but you might also have to pay a higher rate.
And I’m going to leave you on that note. If you have questions, let me know.