"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works".
- John Stuart Mill
Clients and prospective customers often ask, "Which way are mortgage rates going?", and "Is now a good time to buy a home?", or, "If I need to refinance, should I do it now?". These may appear to be simple, direct questions (and most people like simple, direct answers), but unfortunately the answers are rather complicated. I believe I do you a disservice if I blurt out an easy "up", or "yes, now", or "no, wait". However, from this piece you should be able to infer what I believe to be the answers to those questions, and I am hopeful that I can help you draw your own well-reasoned conclusions. So, the quest here is to answer the question: Is the Worst Behind Us? In order to do so, we must connect the dots.
A better way of referring to those "dots", is to call them data points. I am not going to bury you in charts, graphs, and percentages, but any references I make to the data can, I believe, all be substantiated.
Ladies and Gentlemen, as I write this in mid-Summer 2008, I can say without hesitation that unfortunately, the worst of the Mortgage Meltdown, Credit Crunch, and Housing Crisis is most definitely not behind us. In fact, we are probably in the early innings. Why?
Let's start with the Case-Shiller Home Price Indices. On a year-to-year basis, home price values are dropping, and the drop, accelerating. Mortgage delinquencies and foreclosure rates are up across the spectrum. We are familiar with the "Subprime" issues, and now, at last, the Banks, and the media, and the Treasury Secretary, and the Federal Reserve, are all beginning to address the reality that the problems (which may run much deeper and wider than Subprime) extend to "Alt-A" and "Prime" loans as well. These are the loans made to consumers with "good to excellent" credit scores, but requiring less-than-full documentation of income and/or assets. Also, these loans often were made with little or no money down, and/or interest-only payments, and/or with the potential for "negative amortization". Many of these loans will go bad. Moving on, consumer credit borrowing is up, and I believe that lagging economic indicators will show that this is out of necessity, and not just for kicks. Monthly inventory of homes for sale is up and trending higher, and homes are taking longer to sell. New home construction is down, which I believe is a good thing, because there is plenty of inventory and a shortage is unlikely for quite a long time.
As adjustable rate mortgages (ARMs) that were made over the last several years continue to reset, many people will be unable to refinance, and will be stuck with the higher (often much higher) payments. Consumers may not have enough equity in their home to refinance. Or, they may not be able to qualify for a loan because of the much more stringent lending guidelines that we are experiencing now. Mortgage interest rates, while still low now, may not be as we go forward. There is a tremendous amount of bad mortgage debt still glutting the pipeline. That will obviously add to defaults and foreclosures. The Government, the Fed, Hank Paulson, the media .... they either don't know how bad the problems are going to get, or are unwilling to tell us. They are concerned that there will be panic, so we are told that "there is no real crisis, just a crisis of confidence". I don't know about you, but I find that kind of treatment insulting. For one thing, it's just not true. That in itself is enough reason to be offended, but I am going to refrain from pursuing a tangent that will take me too far off point.
Additional factors are likely to contribute to this difficult environment:
Commodity Inflation. The Government and their Crony Capitalists may not be feeling the effects in their personal lives, but most Americans are. Remember when a newsman asked Bush about the prospect of $4/gallon gasoline? Bush said, "Really. I hadn't heard that.". Well, everybody else had. But it's not just about the gas tank. The price of producing, packaging, and transporting everything is affected. As of this writing, the price of oil has dropped from the highs, but is still up astronomically over the last several years, and this market will remain volatile. Emerging markets, a growing global population, and the fact that oil has peaked as a sustainable source of energy (and all that aside from the environmental and geopolitical risks), will necessitate the development of alternative sources of energy to offset the inevitable surge in oil, gas, and natural gas prices. In the meantime, if "consumers" are forced to drive less, it will hurt our consumption-based economy.
Unemployment. Higher than reported and rising. Methods for calculating unemployment do not include people who have stopped seeking work after a certain amount of time. And many Americans are "under-employed". A continued economic slowdown - heaven forbid we use the "R" word - will make the unemployment (and under-employment) problem worse, as layoffs will mount and new hires will freeze in most industries.
Consumer Defaults on not only mortgage loans, but also installment and revolving debt (such as car loans, student loans, and credit cards).
Bank Failures. And/or bailouts. Either way, tremendously costly to the Consumer.
The Weak Dollar. As the Federal Reserve prints dollars by the hundreds of billions to bail out the very entities that have caused this mess, the value of the dollars we hold is diluted, and everything costs more. The Fed acts as though letting banks fail (and perhaps Fannie Mae and Freddie Mac?) would be tantamount to having a meteor the size of Jupiter hit the Earth. Of course, we cannot verify this one way or another. We can't know the would-be result of the road not taken. But the Fed, like our Government, employs doomsday tactics to shut us up and scare us into submission.
The Global Economy. It is slowing down. If stock prices fall commensurately, it will not help us to speed up the cleansing process and stabilize the housing market.
Ongoing War Profiteering. Gotta give 'em credit, they are good at what they do. And they do it with a straight face! Anyway, who pays for it? Taxpayers, and our grandchildren, and their grandchildren, and ...
So, what inning are we in? I believe that world-class economist Nouriel Roubini recently indicated that we are currently in the second or third inning. Some of the more "glass half-empty" (realistic) economists are now hypothesizing that the amount lost and/or stolen (CNBC, the Fed, the Treasury Secretary, and Big Banks call them Writedowns) could reach $2,000,000,000,000, or more. In case your eyes are playing tricks on you as you try to count all the zeros, that's TWO TRILLION DOLLARS, or about fourteen Euros.
No, I'm just kidding about the Euros thing .... kinda.
In my next installments, I will be addressing the specific questions mortgage borrowers seem to have on a consistent basis ... "Which way are rates going?", "Is now a good time to buy?", and "If I need to refinance, should I do it now?".
The Silver Lining: Where there is crisis (or crisis of confidence), there lies opportunity. See, who says I'm not an Optimist?
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