Quick and dirty: Fnma 3.5% bond is currently UP 12 bps on the day after spending much of the week WAY underwater. Rates have risen as much as 3/8 of a percent this week on 30 year fixed money. GOLD is at $1405 an ounce and OIL has been UP for the last few weeks as well...trading at $88.04/barrel right now.
Purchase money went from 3.99%-ish for a 30 year fixed money with me to 4.25%-ish today.
Gasoline average price nationally is on the rise...
If you have no interest in why rates and the price of gas will likely continue to rise and how this may affect the price of housing in the United States, please feel free to delete this email now. The commentary below may be worth checking out though. It may be just what you need to inspire some urgency in your buyers and borrowers.
Cheers!
Chad.
Okay for those still with me:
Does this sound familiar to anyone?
We are in such an interesting place right now. For those interested: when you purchase a treasury note, the feds promise to pay you interest on that "note". When you are ready to cash it in, you receive your initial investment back plus interest. The only thing binding the feds to pay you interest is their promise. The only thing you are purchasing is that promise that you will receive interest. The way the feds pay you actual money is to sell more bonds to get money to pay out. As long as they are selling more bonds than they are cashing out, they are okay.
Does anyone remember Bernie Madoff? When you bought shares with him, you were promised a return. When you came to him to cash in some shares, he would pay you as agreed...but would need to sell more shares to get the money together to pay you your promised return. This is all well and good unless too many people want to turn in their shares for payment. This is because Bernie was spending MILLIONS on himself and family without EVER wisely investing any of the money he was receiving to "earn" the promised returns for his investors. As long as he sold more shares than he cashed in, he was safe.
This type of thing is also called a Ponzi scheme.
About 19 months ago, the feds announced that they were going to increase their purchases of Treasury notes to about 500 billion dollars worth of their own treasury notes. A few months ago in August,, they announced that they were going to re-invest the mortgage backed securities they purchased in 2009 (1.25 trillion) AS THEY PAID OUT. SO: As the mortgage backed securities came due or were refinanced, the feds were paid a return on that investment. They have been re-investing that in T-notes. A few WEEKS ago, it was announced that the feds were going to invest another 500 billion into the "longer term treasury offerings". In addition to the projected returns on the mortgage backed securities that are being re-invested, this puts about 75 billion dollars a week...or 15 billion a day worth of fed dollars into U.S. Treasury notes.
Remember the difference between a Mortgage Backed Security and a Treasury note? Basic difference: one represents ownership in a mortgage note secured with a piece of real property and one represents a sense of "ownership" of a promise of a return. See where this is heading?
Interestingly, many in the media are saying that this purchase program they are calling "Quantitative Easing II" or "QE2" will actually bring down long-term interest rates. I really can not find an explanation on how this may occur. I suspect that there is just a general lack of understanding on the part of the media...or maybe it is me.
The thought I have found that tends to drive the reasoning behind QE2: they are trying to create inflation. Inflation will combat "deflation" and "stagflation". Inflation = weaker dollar. Weaker dollar = it costs more for the same basket of groceries.
How?
Remember the Supply and demand thing? More supply vs. the demand = less VALUE. When the feds simply PRINT such massive amounts of "promises" in the form of T-notes THEN sell those notes to themselves: they are watering down the money supply. It is Creating MONEY from NOTHINGNESS.
The logic I am reading is that it will make our GDP go UP...or the amount of goods we export will go up because OTHER currency will be stronger against the dollar. SO: if you hold a YUAN, you can BUY MORE US GOODS with it as it gathers strength and the dollar is weaker. China's imports actually are up 25% this last quarter so they are spending some money in the world economy. Unfortunately, much of the goods we export rely on the assembly of parts made in China...so our manufacturing becomes more expensive. Also, how in the world can we compete with 70 cents an hour wages that the world's labor providers can pay? The answer: we can't. We would have to completely devastate our dollar to have this logic make any sense at all.
The other half of the inflation equation.
Traditionally an inflationary environment (more money chasing the same goods and services = more expensive goods and services) we are beginning to boom. The "more money" is coming from higher wages, companies making more money etc. Inflation is simply a symptom of this. UNFORTUNATELY...the feds are trying to create the SYMPTOM FIRST hoping that the traditional other side of that symptom will present itself. This simply will not do. It doesn't make sense.
OF COURSE...I am just a SCHMUCK looking for logic when I may not have all the info so I need to qualify myself. HOWEVER: it doesn't seem that complicated. I am seeing smoke screen in the media and a general disregard for what the long-term ramifications could be with this.
So how could this affect us?
In an inflationary environment, money moves AWAY from the fixed rate returns and into items that gain value along with inflation. Remember that even when you purchase stocks in a company who can raise their prices: they are spending more to produce their product so their net profit is no better. If you own a CD or something with a fixed income coming to you monthly: your same monthly money will buy less and less as the dollar loses value. Inflation is actually BAD for stocks and BONDS BOTH.
Example: if you get $100 U.S. in dividends or interest every month...that same $100 U.S. just won't go as far a few months from now in an inflationary environment.
People tend to invest in commodities during inflationary times. Commodities generally go up in value in an inflationary environment. This is why Oil and especially GOLD have been very much on the rise lately. Weaker dollar = more expensive gold and oil...so more money for those who own them. With oil on the rise and the lack of refineries in the U.S. (one hasn't been approved for construction since the '70's) we will have a restricted supply of gasoline along with more expensive raw material to produce gasoline. Inflation + lack of refining capacity = EXPENSIVE gasoline. (Remember how I feel about gold? It is pretty, but only worth something if someone will buy it from you...it has no other value except intrinsic value to support its market value. You can't eat it and when the gold market unwinds, it tends to unwind quickly.)
With inflation, people who DO invest in fixed return investments like the Mortgage Backed Security tend to want a higher return on them (imagine that?). This brings a tendency for those investments to offer higher yields and in effect it deteriorates the pricing on them since you actually "pay" less than they "pay" for the same investment. Here is a different way to look at it: if they can't securitize mortgages that have a 4% note by offering a 3.5% FNMA security...they may have better luck securitizing a 7% mortgage with a 6.5% return offered in the form of a FNMA 6.5% security. SO: mortgage rates go up.
Alright, I know this is getting long but stay with me.
When mortgage rates go up...it is more expensive to pay the mortgage, right? A $200,000 mortgage at 4% is $4.77 for every thousand you borrow putting the Princ & Interest payment at $954 monthly. A $200,000 mortgage at 7% is $6.65 per thousand putting the payment at $1330/month (a 39% increase!). Effectively in this scenario the price of housing increases 39%. This also cuts MANY buyers right out of the market. When buyers are taken from the market, we have less demand for the same supply. Less demand = lower prices.
This is not to say that I see prices diving...only that I think the recovery in the real estate market is fragile and things could prove volatile unless the feds alter their current course.
Whew...I needed to get that off my chest.
The best thing we can do right now is understand what we are holding onto. We have some of the best deals on housing we have seen in years. We have actually seen underwriting guidelines remain in a much less volatile state. Money is CHEAP to borrow and mortgage insurance companies are starting to be competitive again with their rates and product offerings.
There are plenty of "green shoots" to be excited about and when we look around...we have much to be grateful for.
Cheers,
Chad
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Chad Schauers
Montana Mortgage Lender, Bozeman, Montana
