Posted: May 20th, 2010 | Author: Joe | Filed under: Economy, Real Estate | Tags: bailout, home buyer credit, Mortgage Rates, Mortgages, news, Stimulus | 1 Comment »
Remember when the government subsidies for buying new cars ended and car sales tanked? Looks like we’re seeing the same thing in the housing market. It shouldn’t be surprising that Mortgage Purchase Applications Plummet As Tax Cuts Expire because when you subsidize an activity, you get more of it. When you take that subsidy away, you get less of that activity.
This is a pretty good indicator because the number of refinances rose 14.5%, while applications for new home purchase dropped 20% over the previous month. Rates are still very low, so it’s a logical conclusion that people are no longer as motivated to buy a house since the new home buyer tax credit expired in April.
In fact that is the conclusion of the Mortgage Bankers Association:
” The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009,”
This is exactly why government subsidies and stimulus don’t work. They only provide artificial economic activity over the short term, but they cannot correct for imbalances in the market. They cannot prevent a recession or a pullback in economic activity, they can only postpone it.
Things have been looking good lately – on the surface. But how much of that economic “recovery” has been an illusion created by stimulus spending that only masks the underlying problems?
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Posted: April 21st, 2010 | Author: Joe | Filed under: Debt, Economy | Tags: commodities, Debt, Economy, Inflation, Mortgage Rates, Saving, Stocks | No Comments »
We often hear that the record spending of the U.S. federal government is going to lead to an increase in inflation – either a moderate increase of 3-4% or hyperinflation on par with Weimar Germany of the 1920′s, depending on who you listen to. I’m not going to get into the hyperinflation debate, but I will say that a little bit of inflation is a good thing (that’s what leads to your “standard of living increase” in your paycheck) and it is in fact the goal of the U.S. government – regardless of the party in control.
In very simplistic terms, you have a spectrum that runs from deflation (a shrinking of the money supply – think Great Depression) all the way to hyperinflation (rapid and uncontrolled growth of the money supply – Weimar Germany in the 20′s, or Zimbabwe in the early 2000′s). The ideal situation is someplace near the middle, but leaning slightly toward the inflation side of things.
As with many things in life, there are winners and there are losers. Here’s the break down of who falls into which category if inflation spikes.
Winners in an inflationary environment.
- Investors in commodities.
Anyone with a loan that is backed by an asset, be it a car or home, is a winner because the value of the asset rises while the amount owed remains constant and is paid back in devalued currency (assuming the loan is fixed rate). The fixed rate is also a benefit because one of the first things to rise with inflation is interest rates.
On the investing side of things, stock holders receive some protection from inflation because the underlying companies can raise their prices to keep up with inflation, thus preserving their value. Commodities investors do well because the supply of the underlying commodity cannot be manipulated as easily as fiat currency (i.e. you can print more paper money, but it’s much harder to mine new gold).
Losers in an inflationary environment.
- Investors in long-term bonds.
- Variable rate mortgage holders.
The economy loses because inflation erodes the value of the currency and the purchasing power of consumers. Consumers lose their standard of living and can no longer afford the latest and newest “thing”, let alone groceries, gas and other essentials. Savers lose in an environment where inflation rises faster than the interest they earn on their savings, and their purchasing power erodes more quickly than their savings grow. In essence, they can’t save enough to afford the things they want or need to buy because the prices rises too quickly.
Anyone with variable interest rate loans is going to end up paying more as the rates rise, and credit card holders will be hardest hit. First time home buyers will have a difficult time saving for a home, when the value of the home grows faster than their savings. For existing home owners, the value of their home will help negate the rising value of other homes.
How to be a winner.
The takeaway here is that you can position yourself to be a winner, or at least lose less, by taking the following steps:
- Live on less than you earn (live frugally).
- Only buy appreciating assets, where you can.
- If you borrow money, make sure it’s a fixed rate loan.
- Own a home and don’t rent (where appropriate).
- If you invest, favor short term bonds, stocks and commodities.
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Posted: February 5th, 2010 | Author: Joe | Filed under: Economy | Tags: Economy, Housing, Mortgage Rates, Mortgages, news, Recession | No Comments »
It looks like there’s a “mini-wave” of mortgage refinancing that’s been pushing the rate of applications up to a six week high. But the home buyer tax credit doesn’t expire until the end of April, and that doesn’t apply to refinancing anyway, so why the rush?
The rush may be due to the anticipated end to the Federal Reserve MBS purchase program at the end of Q1, 2010. The MBS program is the mechanism by which the Fed has been buying mortgage-backed securities from banks, helping to keep mortgage rates near historic lows.
For example, the average 30-year mortgage rate has been near 5% for almost a year.
According to the Mortgage Bankers Association, their mortgage index jumped 21% last week, as a result of a 26.3% increase in demand for refinancing while purchase loan requests were up 10.3%.
It’s not all rosy news though, the report also states that the borrowing cost was up 0.40% from the record low set last March. Analysts expect both mortgage rates and mortgage costs to be headed higher throughout the year.
Source
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Posted: January 17th, 2010 | Author: Joe | Filed under: Debt, Economy, Real Estate | Tags: Adjustable Rate Mortgages, ARMs, Economy, Mortgage Rates, Mortgages, news, Real Estate | 1 Comment »
It seems like only yesterday that we were hearing about Option ARM Mortgage rates resetting, and that holders of those loans were unable to refinance because their house was worth less than the mortgage…. Oh, wait… it was yesterday. 
Well, even so, things appear to be confusing in the housing market and mortgage industry still.
According to a recent Reuters article, the rise in mortgage applications the 1st week of this year is a reflection on the demand for refinancing loans. Demand for mortgages for new purchases only rose marginally.
According to the Mortgage Bankers Association, the index of mortgage applications (both purchase and refinance mortgages) was up 14.3%, though the index was less than half of what it was a year ago. And the 4-week moving average of mortgage applications was down 6.4%.
The article quotes Bob Walters, chief economist at Quicken Loans as stating:
“What makes the (applications) increase interesting is that nothing exceptional occurred to prompt people to return to the market,”
But I’m wondering if it isn’t the threat of those option and interest only ARMs resetting staring people in the face. But, I’m only a blogger, what do I know?
Another factor that ties in with the ARM reset is the anticipated rise in mortgage rates when the Federal Reserve stops buying mortgage-related securities at the end of March. Part of the purpose of this program was to bring rates down and keep them down to allow the market to at least stabilize, if not start to see some growth.
Things look to stay rough for the time being though. The Mortgage Bankers Association forecasts that mortgage originations will drop a further 40% in 2010, to the lowest level in a decade. And the Yale University economist Robert Shiller has said that he expects housing prices in the U.S. to continue falling in the next few months.
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