Archive for November, 2005

A Few Quick Takes

A few quick takes:

Here’s Kathleen Hays on the Fed and why it keeps raising rates.

Here’s Les Christie on housing affordability (or lack thereof), mirroring our post on the same thing last week.  Our analyses are remarkably similar.  So I guess our math is good.

Here’s the Deseret News story on the new development at Traverse Mountain (which is technically part of Lehi).  We’re talking about 1.2 million square feet of retail development, which roughly doubles the entire retail space in Lehi – including the new Costco which just broke ground two weeks ago.  It is going to be an amazing project.  As the Vice-Chair (and, I understand, the Chair-elect, though I don’t remember that part) of the Lehi Area Chamber of Commerce, let me say “this is freakin’ awesome, dudes.”

Here’s a story about me, also from the Deseret News.  It’s an election year.  It’s always an election year.  I can apparently get in trouble for doing almost anything.  Howard Johnson won the election, and it wasn’t particularly close, but we had an hour-long conversation on Monday and apparently there won’t be any reprisals.  This isn’t Chicago, after all, let alone someplace really nasty, like Provo.  We didn’t have anything to do with this site, but we wholeheartedly endorse its sentiments on the subject of my former city of residence.

Reminding everyone about the Twelfth Night Ball on January 6 and urging you to RSVP before we fill up.  This is going to be an event you’ll want to make.

Mortgage Rates Are Rising

Rates are rising.  Period.  We lost another .05 on the bond price today, which means roughly .25 less tomorrow on the rate/price sheet, meaning that we’re likely right on the bubble between 6.25% and 6.375% on the 30-year fixed.  We’ve explained before how rate sheets work, so I’m not going to do it again here.

But rates are rising. What does this mean for the average homebuyer/homeowner?

Homeowner: if you have a fixed rate, it means you ought to keep it if it’s lower than 7%.  If you have an ARM with less than 3 years to go until the rate adjusts, you ought to look at swapping over to a fixed rate.  If you have a fully adjustable rate, and you can’t get off it without a massive prepay penalty, just hang on.  If you can, we definitely ought to talk.

Additionally, in order for a borrower to qualify for a loan, there are debt-to-income ratios that have to be met.  The higher the payment, the harder the qualifying.  As those ratios rise, they exert negative pressure on housing prices.  A $200,000 seller has to reduce his home price by $10,000 to drive the payment at 7% down to where it was at 6.5%.  A $150,000 home has to be discounted to $142,500.  Per $10,000 of home value, a .5% rise in mortgage interest rates strips $500 off the price of the house.  The rise in interest rates from 5.75% in June to 6.25% has cost homeowners $500 for every $10,000 of value in their home.

Interestingly, the Fed is increasing interest rates in order to fight inflation.  Inflation drives up the value of your home.  The Fed moves are therefore negative for homeowners in two ways – it depresses the buying power of your potential purchaser and it restricts the potential increase of your equity.  I know, you’re saying you don’t like inflation because it makes milk more expensive.  It does indeed.  But inflation is expressed as a percentage, right?  The larger the amount in question, the greater the increase in raw dollars as inflation rises.  So I have a question: how much milk would you have to buy before you paid out an additional $10,000 due to inflation?  But that’s what the “inflation-fighting” has cost you on your home.  Do you think you’re ahead on the deal?  Me neither.

Homebuyer: rising rates make things complicated.  Here’s an example: if you’re trying to buy a $200,000 house, and you get the regular rate of 6.25%, the monthly payment is $1231 (all these numbers are principal and interest).  However, if the rate rises to 6.5%, the payment is $1264.  $31/mo doesn’t sound like much, but how about $360/yr?  At 7%, you’re paying $1330.  That’s $1000 more every year.

It may seem like, due to the numbers above about negative pressures on home prices, that you’re getting a good deal by having rates go up.  Well, actually, no.  At best, you’re getting an offset as prices rise to meet the amount you have to pay.  But there’s a better way to offset the increase in interest rate, and that is an increase in wages.

First off, wages generally rise with inflation.  Second, recently, wages in most industries have outstripped inflation, so that’s a good thing.  Calculate it like this: you make $3500/mo.  Interest rates are rising, so that $200,000 house you want is going to cost you $100 more per month to get into.  To break even, your income will need to rise just 2.8%.  Expressed in hours, based on a 40 hour workweek, you’d need to work about 1 more hour a week.  If you got a Christmas bonus of $500, you’d need to work 1 more hour every two weeks.  Even if you were working at McDonald’s, you’d need only 17 hours a month to break even.  It’s much easier to make up the loss of purchasing power with an increase in wages than any other way.

Wage increases depend on business growth, which is retarded by rising interest rates.  So the Fed is out to get you, too.

The good news for both homeowners and homebuyers is that so far, we don’t have a major collapse underway.  Trying to make up the loss from a rise in rates to, say, 9% is much harder.  And though that much increase is not inconceivable, it would be enormously unexpected.

Bottom line advice to the general populace: if you own, hold.  If you don’t own, buy.  And I’d do it as soon as possible.  We can recommend the people to help you, and we guarantee you’ll like them.

Rapid Fire

Okay, well, there’s been some serious stuff happen the last couple days and I have had no time whatever to comment.  So here’s our take in rapid fire:

Scooter Libby’s indictment: uncertainty in government is bad for the economy and good for the bond market, which means good for mortgage rates.  In this case, the indictment is weak and Scooter is nobody, so he uncertainty is muted and will have no real impact on the stuff that matters to us in this forum.  This could change, but I think there’s less than 5% chance that any significant turmoil will result from the trial.

Samuel Alito’s appointment: Alito is aggressively pro-business and pro-law, whatever else he is.  The battle over his appointment will be hot but I believe it will be sound and fury signifying nothing and he will be confirmed without destroying the fabric of the Republic.  Should have very little impact on financial markets, but what impact it has will be good.

Fed movement: the Fed did what everyone on earth expected and raised rates by .25% again.  This will happen at least two more times before the end of January, just bank on it.  That means that Prime moved to 7% this morning and everyone’s HELOC went up another .25%.  If you are on an Option ARM, watch for another rate increase in December.  The move further flattens the yield curve, which is bad for mortgage rates, and it makes a recession more likely without doing anything whatever to keep inflation low.  We’ve been through this before in this forum.  Short-term ARMs also became a worse deal versus the 30-year fixed.

Rate movement: Everyone is reporting that rates are on the rise, and they are.  This means that for A-paper borrowers things are not as rosy as they were in June, or heavens, in Blessed June of ’03.  The 30-year fixed is hovering at about 6.25% and the 15-year at about 5.75%, depending on a huge number of other factors.  The 5-year ARM is about 5.75% as well.  Short-term adjustables have become a far worse deal than before.  Tomorrow we’ll have a dissection of the impact of rising rates on home prices, which you are absolutely not going to want to miss.

BYU’s crushing of Air Force: Gotta love the scrappy Falcons, but BYU is showing power on the offensive line that makes Cougar fans weak in the knees.  Any time you score 62 points and roll up almost 700 yards of offense without a single play of more than 40 yards that has to scare people.  UNLV is next, and it will not be pretty in Vegas.

CSU’s demolition of UNM: the Rams were totally outplayed in the first half, then did not allow the Lobos to cross their own 40 yard line in the second half.  I have no idea what happened.  But CSU/TCU for the Mountain West Championship suddenly looks like a good game to see.  Not that it’s televised.

Twelfth Night: We’re doing our Third Annual Twelfth Night Benefit on January 6 at the Apollo Dance Hall in American Fork (50 East 50 North).  Dancing, partying, food, you name it, and some fellow named Osmond is going to be there.  No kidding.  RSVP required, but if you read this, you are hereby invited.

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