Isn't This How We Got Here?

Here's a fun one (from Mortgage Ledger Newsletter):

The CEO of K. Hovnanian Homes, Ara Hovnanian, recommended to Bloomberg TV that interest rates should be lowered to three percent for the 30-year fixed rate mortgages in 2009 provisionally.

In 2010, the rate would then increase to four percent with the future direction unknown.

Now, I can't believe that Hovnanian is ignorant of how this stuff works, so I want to ask him - who, exactly, should lower the rates? The government? The government, when last I checked, didn't set mortgage rates. The lenders? They can set the rates wherever they like already. Brokers? Brokers take the rates from the lenders.

I suppose, in theory, the government could buy so many mortgage-backed securities that mortgage rates would drop into the 3% range, but I can't see any way to make them stay there, no matter how much money the government spent. And believe me, $700 billion doesn't go anywhere near where you'd have to go to cut rates more than in half, which is what he's talking about.

He went on to say that the major problem in the housing market is affordability. Well, Mr. Hovnanian, you can cure the affordability problem much faster by chopping the prices of your ridiculously overbuilt stock than by spending a few trillion - of other people's money - to game the mortgage market.

Fortunately, the market ignored him. We're trading in a very tight range for the past week. Rates are holding almost steady, but did get fractionally better today.

Incidentally, if you live local to Lehi, you can start looking for my articles in the Lehi Free Press, as I've been asked to write a weekly financial column for them. It's called "Singin' in the Rain". Ideas would be greatly appreciated. I'm gonna get stuck for stuff to say, I just know I am.

Cj
801-310-3407

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How Much Does My Interest Rate Really Matter?

Inflation is the big problem this week, and it's pushed mortgage interest rates to their highest level in 2 months. Today's market news - bad earnings from nearly everyone and higher-that-expected jobless claims - should push bonds higher, but right now the market traders have decided that stocks are good and bonds are bad, and nothing is going to change their minds, apparently. So let's spend a moment talking about interest rates, and why they are NOT the end-all and be-all of mortgages.

First, interest rates aren't very high, on a historical basis. 6.25% sounds like a lot, but most people can remember 7.5% fairly recently, and some can remember 12%. Business still got done.

Second, let's look at the real difference between 6.25% and 6% mortgage interest rates. On a 30-year mortgage, beginning balance of $250,000, the payment difference is $41/mo ($1498 vs $1539). That's less than $500/yr, or .1% of the gross annual income of a typical homeowner for a home with that kind of loan. Suppose your company comes to you and says "in order to cut costs and keep the company alive, we're going to have to cut everyone's salaries. The cut will be .1%. Please don't kill us." Anyone going ape over that? Over what amounts to one family trip to Wendy's every month? Yet there are borrowers that have attempted suicide when their rate rose by an unexpected .25%.

Third, keep in mind that on fixed-rate loans, you pay with the house's money, to use a gambling term. Every year inflation rises, and that means that every year the effective payment on your mortgage DROPS. Know how we talk about "real dollars" as a way to price things? That, say, gasoline, despite its huge runup recently, is still cheap in 1975 dollars (costs less now than it did then, actually)? Well, in 2015, you're going to be paying your mortgage with 2015 dollars, and if things go the next 7 years the way they have the last 7, that will be the equivalent of paying only $1249, a $250/mo cut in real dollars, more than 6x as much as the difference between 6% and 6.25%.

Bottom line? Don't panic when rates rise. If you're refinancing, just hold your cards, tell us what rate you want, and we'll tell you when it gets there (hey, a stockbroker for mortgages - for FREE!). If you're buying, just buy. The cost of a new heater will be 25x as much as any difference in your interest rate, so don't waste energy on irrelevant things.

30-year rates at 6.25% this morning, although there are bonuses for credit over 720 and for larger loan sizes and for lower loan-to-value ratios, so you need to check with a pro to know where you are for sure. Bryan - still 6.125%. Hang in there.

Cj

P.S. Although we do this for free, we get up at 5:30am to do it and we'd be grateful if you'd do us the favor of passing along some names of other people that would like this service. We think Rate Watch is valuable, and if you do, let us know.

Get a Job, Da da da da, da-da-da-da-da

No, not me.

The federal jobs report came out this morning, and it was baaaaaad. That's gooooood. Sort of.

I posted on this before, about how the employment picture has a great deal to do with bonds, because high employment is supposed to mean high inflation (how people can still be sold on this idea when we've had record low unemployment for years now and inflation has never crested 5%, I don't know, and you would have thought that the Carter years of 10% unemployment and 18% inflation would have killed that off, too, but whatever), and high inflation is bad for bonds, and what is bad for bonds is bad for interest rates, so bad employment numbers is good for bonds and therefore good for interest rates, not that we really want people to be out of work, but we're thinking primarily about ourselves here.

That was all one sentence.

I expect, given the huge move in bonds this morning, that we'll be back to 6 - 6.125% on the 30-year fixed by Monday. Maybe not; lenders have a habit of not being willing to move down nearly as fast as they move up, but the market move certainly isn't going to hurt anything. It is now virtually certain that the Fed will cut rates at its next meeting, and that is good for the economy as a whole, I believe.

Good news has been a long time coming in this part of the market, and it's all the more welcome now that it has.