Well they don’t have to.  We cannot know the future.  New and unknowable information creates the future for us, and even though we are told that certain things are going to happen, we don’t know for sure that they will until they do.

Let me give you an example.  Most people are sure that rates will rise this year.  But if you asked them to bet their $1,000,000 retirement account double or nothing on it, they wouldn’t do it.  So are they really sure?  They must not be or they would make that bet and double their money.

Yet we can make prudent decisions based on what we do know.

We know that the price of Mortgage Backed Securities determine interest rates.

We know that when the prices on MBS rise, rates go down.

We know that there have traditionally been two main buyers of Mortgage Backed Securities – Wall Street Investors and other countries (China mostly).

We know that in the past, when the Stock Market is struggling, market timers on Wall Street have an appetite for Bonds and MBS.

We know that in December last year the US Government, through the Federal Reserve, began buying them too as way to drive the prices up and bring the rates down.  They became a third buyer of MBS.

We know that this worked – over the last year, rates have been very low.

We know that the US now owns more than 1 trillion dollars in these debt instruments, and we know what they have been saying about that.

They’ve said that they will continue to buy but slow down that effort.

They’ve also said that over time they will want to get rid of them.  That means that they will flip from being a buyer to being a seller.

So right now, the MBS market has three buyers that all have a hefty appetite.  The prices are very high and rates are low reflecting this reality.

Soon, we will likely lose one buyer altogether as the Fed stops buying.

And when the Stock Market heats up, the emotional public will make investments there again rather than in the MBS side of things.  Who knows when that will happen?

China threatens, but so far has not made any substantive changes in their buying patterns.

The US will likely become a “seller” rather than a buyer.

So the long story short – the current demand for these MBS could turn into an over-supply and falling prices, causing the rates to rise.

That said, I think as consumers, we ought to make decisions based on what we know now.  Rates are very low today.  5.25% is available with no points and no origination fees if your home’s value is higher than what you owe and not much worse than that if the value is less than what you owe.

Mortgage processing is bearable again too.  If this works for you, then you should take action now rather than waiting.

Any day now, high demand could flip to extra supply, and rates would rise if that happened.

Oh, and pay off your credit cards and car notes too.  You will want to have extra cash around if that happens. And those who do will have very good investment opportunities available to them.

January 29, 2010
Home Equity Won’t Be Coming Back for a Very Long Time
By Lew Sichelman

Google him for the entire article, but a synopsis of it is here:

“There’s no magic online calculator that can accurately tell when the
value of homes will once again equate to what was paid for them, or to
what they were worth before housing prices fell off the cliff.

“It’s going to be a long time coming,” says HSH vice president Keith
Gumbinger of the prospects of rebuilding “lost” equity.

Of course, it’s impossible to accurately predict anything about the
current state of housing.

Going forward is pretty much a toss-up, but HSH is proscribing a flat
real estate market with no increase in value through June. Then, from
July through August 2011, a period of 14 months, prices are projected to
increase at a rate of about 2.5% a year. And from then on out, the
company is figuring on a yearly gain of 3%.

With these percentages in mind, let’s look at what happens to the value
of a $200,000 house purchased at the top of the market in July 2006:

By the time the market hits bottom – at least the bottom, according to
Case-Shiller – that property was worth a paltry $134,800, a decline of
32.6%. Using HSH’s assumptions, the value of our imaginary house won’t
get back to the $200,000 the fictitious buyer originally forked over for
it until July 2022.

That’s right. It will be 12.5 more years until this house is once again
worth what was originally paid for it.”

How’s that for depressing!

I have done calculations like this one with my excel spreadsheet 100s of times. Having the information can be helpful, but writing an article with this as the only conclusion is misleading. There are at least three reasons why this article should not have hit the web the way that it did.

First, this analysis is riddled with predictions about the future. He even says three or four times that there is no way to know what will happen, but then begins to make huge assumptions – this is speculation at best.

Second, he is using a national index and drawing conclusions that people in Grand Ledge, MI will apply to themselves. There is no normal, no one is actually average.

Third, his analysis is myopic. It only looks at the “problem” and sees nothing else.

For example: If this whole housing collapse did not happen, then neither would have the following (non-exhaustive) list of opportunities:

1. Mortgage rates on a 15 year fixed rate loan in the low 4s – allowing this same homeowner who follows sound advice to make a payment similar to what they were previously paying and eliminate their loan 10 or so years sooner. So even though that particular home may not reach the price the homeowner paid for it for more than a decade – it WILL likely have the same amount of equity in it. Your balance sheet can improve even with declining assets when you deleverage.

2. A stock market that is currently offering equities at a price that gives the same number of shares of the same great companies but for 1998 prices. Even $100 per month invested in the average 401k of the average American is a huge gain over the same 12.5 years that would not have otherwise been present.

3. Bank owned homes are being offered for sale at prices 50% of their previously offered price and sometimes even better than this. Two or three families getting together to make an investment can purchase a nice investment property, fix it up, and rent it out to a less fortunate family for about $45,000 ‘all in’ in many communities around the country. Later, they may sell this home to the tenants securing a fair profit for themselves and a warm home for a family in need. Families on both sides of the transaction benefited from the low price.

4. Inflation right now is almost flat. The price of most living expenses is not rising. We are not losing buying power on our current cash. In fact the bond market has factored in an inflation rate of only 2.7% for the next 10 years.

These are just a few of many opportunities or positives that did not exist three years ago and would not have existed if it weren’t for the “crash” of the housing bubble.

A few cliche’s

~Today, a dollar saved is truly a dollar earned.
~Money is relative.
~When God closes a door, He opens a window.

In other words:

When something really negative happens, look around you for opportunity; its likely everywhere. If you include in that motto – helping others (like in #3 above) – you will do well by doing good.

This has always been true but never like it is at times like this.

Someone ought to tell the guy who wrote that article to hang out with Polyanna for a while and go look on the bright side!

Article excerpt:

Senator Isakson believes lawmakers will eventually move to extend the credit in one form or another. “I don’t believe either this administration or the current leadership would look November 30 in the eye and let this thing die,” he says. White House spokesman Robert Gibbs said this week that the administration is evaluating the credit’s impact and will make a recommendation to the president, the Associated Press reported. The outlook for an extension appears to have brightened. Scott Talbott, a top lobbyist at the Financial Services Roundtable, put the odds of its extension at 50-50 earlier this week, but he said that the chances improved to 75-25 after Reid endorsed the six-month extension.

-Read the entire article here-

My two cents:

I am among what I hope is a growing number of people involved in the Real Estate Industry who are NOT in favor of the credit and “free money for some.”  The reality is that $8000 given to a relative few will cost all of us much more than the estimated $100 billion it will end up having cost the US Government when this is all said and done.

Thinking logically:

1.  The free market sets prices of homes.

2.  The government gives $8000 to some people who buy some homes.

3.  This has increased sales demand.

4.  Any increase in demand, while it exists, will always increase prices (or slow price declines).

5.  Next, the goverment does one of two things:

a)  Ends the credit at some point.  This will cause all housing values to drop by around $8000 more than they already are (even for those who just paid $8000 more for their home to get the credit). Or,

b)  Continues to give credits to some people who buy homes – forever.  This would be the only way to make sure that prices don’t adjust back to their former price; but then it would soon become “normal” and would no longer stimulate future home sales.

I think that (a.) will be their choice (at some point).

When the article says that they will be “evaluating the credit’s impact” they must be ignoring the greater impact of the total cost of the credit in their evaluation.  The cost is greater than just paying back the money.  The higher cost is the cost of entitling people.

Entitlement is something we’ve all felt already with respect to the credit already. After all, we think to ourselves:  “they can’t take that away now?!”.

The cost of entitlement is devastating and should be avoided at every turn.  Lets get it out of our thinking, out of our politicking, and out of our conversations with each other.  It will kill our ability to think clearly.

The Facts are these:

1.  Mid-Michigan is a great place to live and work.

2.  Home prices around here are making it very easy and attractive to own a home.

3.  There is a lot of expansion in the business, insurance, technology and education sectors that says we will be a growing region.

Whether or not the credit is extended, buying a home in Lansing right now is a very good idea for most people who are thinking about doing it.

One of the financial magazines I read weekly is Business Week. It can be a little bit politically charged, but depending on who’s writing the economics ‘short’, it can be very good.

This week’s is written by Peter Coy. Google his name and you’ll find him to be a bit pessimistic on the economic recovery and not quick to get on band wagons that others are riding. His is a level-headed report of the facts, and he doesn’t generally over play his theories. Just the kind of guy you want to hear good news from.

The article I’m referring to – linked here – will not disappoint you. It explains simply and clearly why Bernanke is so committed to a VERY low rate standard.

His reason in a nutshell:  The economy at large has a ton of excess capacity right now, which will take a long time work through. What do we mean by capacity? You see it practically as high unemployment and high inventory of homes on the market. Both examples are resources that are more plentiful, more in “supply” than we need. It will take a lot of economic growth just to work through what is already here and to use up this excess.

Another reason for extra capacity is the recent rise in productivity. The productivity numbers rose again this month, though they were expected to remain flat. So, not only do we have an excess in resources, we;re also getting more efficient at producing them. This will create slow growth in the economy, in Big Ben’s opinion, and support for his theory is growing.

Take five minutes and read the article. You might also consider who you know who might appreciate this information.

Some concluding thoughts:

WHAT IF BERNANKE IS RIGHT?
Then we’ll have slow economic growth and keep interest rates low for some years to come. We can live with this. Let’s be honest – putting our Lansing hat back on – we’ve been living with it for some years already. But here is where we might see light on the horizon – a bright spot. It may just be Mid-Michigan’s turn for moderate jobs growth. If this happens while the rest of the country (world) is lagging, then we could have both rising home values AND low rates. Let’s not be too much the ‘realists’ to think this couldn’t happen.

WHAT IF BERNANKE IS WRONG?
Then the economy at large heats up, rates rise sooner – not a lot, most likely, but sooner. AND our 401k’s rebound again. We can handle this too! Even if he’s wrong, 1982 inflation and rates are not a likely event based on the slow growth expectations.  At least not for a while.  Most of us who need a fixed rate will get one while they’re low and few will remain by the time anything wild happens.

WHY IS THIS IMPORTANT TO ME?
If you are buying a home or refinancing a mortgage right now, then you should still consider a fixed rate.  Mostly because they’re very low right now (see my blog 24/7 for daily averages).  If you are currently in an Adjustible Rate Mortgage, you should get some advice as to what to do.  Your rate will likely be very low for the next few years.  Let’s not allow fear or greed to dictate these decisions.  A good level-headed decision based on the facts of your situation and the realities of your goals is what is needed.

LAST THOUGHTS
Let’s also be very honest with ourselves. As “smart” as Mr. Bernanke is, he does not know or hold the future.  Only time will tell if his contributions were beneficial. He’s helping us navigate right now, and I am thankful for that, as am I thankful for all like him who are in positions of great weight and difficulty. I would urge us to remember the phrase written ON our money when we think ABOUT our money:  “IN GOD WE TRUST”.  After all, low rates, housing credits, and three shifts running at General Motors will all pass away in time.

Here’s just a sample of the latest:

• Single-housing starts for August are up 7% and it looks like they’ll post the first double-digit annualized gain after 13 straight double-digit declines, that’s quite a swing.

• Market home prices are up nationwide, somewhere between 2.7% and 7.3%, depending on whose numbers you trust (Freddie on the low side, Clear Capital on the high).

• The nearly record low rates last week boosted mortgage apps up by 17%.

• We’re enjoying 6 straight months of pending sales increases.  In Lansing, we’ve already closed as many transactions as we did all of last year.

• Consumer confidence ratings are up—and in all categories: current conditions and short-term outlook in both the economy and labor markets.

So the indicators that we’ve been watching so intently, so nervously over the past two years seem to be settling in to a healthy rhythm. And that’s good.

And though we may never be as complacent as we were a few years ago, that’s probably good too. In fact, maybe those were the dark days—when we thought nothing could go wrong…maybe. Either way, I’m ready for some sunshine.

I thought about these things when I got an email this week describing a sales technique banks are using with potential mortgage clients. In a nutshell, they’re arguing that if you originate your loan with a broker, there’s a very good chance you’ll have your closing delayed due to the re-disclosure provisions of Reg Z; whereas a bank, unhindered by such nuisances, can get you to closing quicker. Therefore—by this logic—banks are the better bet.

hmmm…This is clearly folly. So do I answer it? Or do I let it go?

At the risk of “being like him myself” and just adding to the noise, I’m going to answer it because there’s more to this than an argument between banker and broker. There’s also the client whom these rules are meant to protect.

As I pondered how to respond, my first thought was—naturally—defensive. After all, I’m a broker, and them are fightin words. But then I thought, hang on. Rather than turn this into a mud fight, this might actually be an open door for re-emphasizing how a good broker is still your client’s best option.

Let’s start with Reg Z. The re-disclosure piece to TIL (truth in lending) was intended to prevent the bait and switch. You know how it works. A client is informed early in the process about the rate and certain fees (the bait), but when she sits down at the closing table, lo and behold, they’ve changed, gotten bigger, multiplied even (the switch). Most people don’t walk away from the table at this point, and that’s why the practice has been so lucrative.

A couple of observations…

1.  The law was meant to protect consumers from a dishonest practice. So why originate a loan with someone exempt from it? The incentive to be as truthful as possible as early as possible on disclosure of all the costs involved lies not with the bank LO who’s exempt from this part of Reg Z, but on the broker whose livelihood depends on compliance with it. Your client has a stronger basis for trust with the one who has the stronger incentive for full disclosure.

2.  Brokers who used such practices were also those likely to push b-grade paper, and those guys are gone. If your broker has survived the shake-out of the industry, then you’re most likely dealing with someone who’s been doing things right and above-board. Banks haven’t experienced the same “refining” effect of the housing crisis that mortgage brokers have. And if such brokers have survived, there’s a good chance that they’re doing it as bank LOs.

A couple of strong arguments aside from Reg Z considerations…

1.  Speaking of survival, you might not realize just what keeping the doors open has entailed for me—and brokers like me—over the past few years. Those still standing went through something like this:

• 3 hour state-administered test on everything from calculating APR to TIL to past laws pertaining to the mortgage-lending industry
• An audit of accounting books, procedures, financial position, and a random audit of ALL files (closed and withdrawn) from the past 36 months
• A net worth requirement at all times of $70,000 liquid cash in a bank

…and no bank LO can say any of that. Don’t hear me wrong. There are good, conscientious loan officers working out of banks, but they simply haven’t proven their professional commitment to the industry in the same concrete, measurable ways.

2.  And this may get to the heart of the matter better than anything else–By definition a broker provides flexibility that a bank LO just can’t. When my client is declined a loan from Lender A, I find out why, look for a remedy, help my client make adjustments, and then move on to Lender B. And I can do the same for Lenders C,D,E,F,G,H…you get the idea. But a NO from the bank is a NO to that client. No loan, no mortgage, no house, not from us anyway.

I hope that you can hear in this, and in all of my letters and blog posts and emails, that this is not just a “job” for me. It has been and continues to be a crucial part of my life’s purpose. Bringing excellent advice, service and rates to the mortgage industry—as low as it has stooped in the past—is what I do. And I’m not going anywhere.

I’m no Solomon, but I do know the mortgage lending business. And while banks are promoting their Reg Z exemption as an advantage and calling it wisdom, a closer look shows such thinking for the folly that it really is.

Does that mean you should dump your home and rent? Not at all. In fact, if you’re renting now, this may be just the right time to cross over into home ownership.

Some things to consider:

1. Affordability. Prices are very low, but there’s good evidence out there that we’ve seen the bottom and are now starting back up. We may spend some time at this level, we may not, but it’s not likely that we’ll go any lower.

1. Rates have hit an all-time low in the past week. Again, we may be here (or very near it) for months. We may not. But no one’s expecting rates to go much lower.

1. Tax credits. Included in Obama’s stimulus plan is an $8,000 tax credit for first-time homebuyers. This is a credit, not a deduction like mortgage interest, so it represents real tax savings. The program is scheduled to end Dec. 1 of this year, and while it’s likely to be extended, there’s no guarantee of it.

1. Reality. You’re less likely to believe that buying home is an air-tight investment, and more likely to see it for what it is—a chance to own the house you live in, make it your own, grow deep roots, and then look forward (15 years? 30 years?) down the road to no more payments.

So while conventional wisdom may be going through a revision, there’s still plenty of good wisdom out there today that says home ownership is a good thing.

Let’s look over these latest stats and just breathe deep for a minute…

• Single-family starts and permits up. The most depressed segment of the real-estate industry over the past two years, homebuilders, are pulling permits again. Single-family starts are up almost 2% and at the highest levels since last October. Permits for single-family construction are up 6%. That’s 6 of 7 monthly increases for 2009 (March showed a slight downturn).

• Mortgage apps jumped 4% for a 3^rd straight week of increases. The recent drop in rates should see this statistic holding.

• Pending home sales index shows an increase for the fifth consecutive month, the first such streak in six years. A still-glutted inventory will feed this trend for a while.

• NAR’s Housing Affordability Index has the Midwest at a whopping 188, down from an incredible 206 for last month. (The HAI is set against a value of 100, which means that a median-income family can exactly qualify for a mortgage on a median-priced, single-family home. A value of 200 means the same family could “afford” twice as much home.) We need to be careful with this one: affordability is being driven—the larger part of it, at least—by the record number of short sales and foreclosures. So it’s great for buyers, but not a great sign of overall economic health. Look for this one to slip back as the next indicator, home prices, improves…

• Home prices nationwide are on the rise. This is one economic indicator that everyone wants to see rebound as it’s our best sign that the market as a whole is on the mend. Great housing affordability is fine, but no business thrives by holding an indefinite fire sale.

So the encouraging news is beginning to show some consistency to it. And though we’re still being warned that we may bounce along at these levels for some time, still, there’s a sense that we can, at last, stop holding our breath.


home mortgage Lansing