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Your Interest Rate Update

October 16, 2009

Wow. It's amazing what the expiration - or perceived expiration - of a government hand-out (errr...tax incentive) will do to boost sales.

Cash For Clunkers created a spike in car sales in August - which promptly receded upon the program's expiration.

I think the Homebuyer Tax Credits will do the same thing. Looking at home sales for the four-county Sacramento Metro area, we've seen a huge spike in pending sales during September, in both month over month and year over year comparisons. I imagine this trend will continue through October, since the program is currently set to expire for closings after November 30, 2009.

As I write this letter, pending sales and closed sales for October are only about 1/3 of September's levels, across the board, although we're half-way through the month. But, that's not unusual, since most closings are scheduled for the last week of the month. We'll see how it pans out. I expect similar final #'s to September's.

In September, for pending sales in the price range of $150k-$200k we saw a 67% m/m spike and a 58% y/y increase. In the $201k-$300k range pending sales rose 68% m/m and 48% y/y. From $301k-$400k pending sales increased by 53% m/m and 38% y/y. The $401k-$600k range saw increases of 63% m/m, but only 5% y/y. And, even the higher end of $601k-$1mill saw pending sales - which to this point had been mostly down both m/m and y/y - increase by 115% m/m and 21% y/y.

That's pretty interesting to me, particularly since in most cases for our market, although we're seeing some month to month increases in sales, the year over year comparisons are basically flat, or down, across the board since the spring, when interest rates first hit their historic low of 4.625%.

And, ordinarily I'd expect that with low interest rates (a good 1% lower on average than 2008), lower home prices (down roughly 10% from 2008) AND the buyer tax incentives, sponsored by our tax dollars (well, really our borrowed tax dollars) that sales would be UP year over year from 2008. But, that's not been the case. It appears that it takes the expiration of a tax credit to move folks to buy homes.

So, that begs a few questions:

Why were people not buying homes in droves up to this point, given that rates are lower, prices are lower, and Uncle Sam was doling out cash?
Is this spike in sales simply pulling sales forward w/ folks looking to capitalize on the tax credit, who would have bought a home anyway?
Is this tax incentive creating any new demand from home buyers who would otherwise not be buying?
Will the home buyer tax incentive actually expire or will it be extended?
And, what will happen to home sales when that tax credit is finally closed, whether Nov. 30th of 2009, or some future date?

If you listened to the main stream media, you might think that the reason people aren't buying is because guidelines are too strict, and it's hard to get financing.

Although guidelines are definitely tighter, they're basically back to where they were 10 years ago. You have to have a job, be able to verify your income, have some savings and have decent credit to get a loan. But, if those things all line up, financing has never been cheaper.

Rather, I think that in California, and most of the country, people aren't buying in droves because... they're not working too much. In California, unemployment is in the 12% range. If we look at the under-employed, and those who've quit looking for work (which is around 16% on the national level) I'd think we'd see true unemployment pushing 20% here in California. And, the Sacramento area is particularly loaded with government employees, many of whom are furloughed. It's tough to go buy stuff, particularly a home, when you're not working or making less than you're used to making.

As for the impact of the tax incentive, I see that as icing on the cake for buyers. I don't believe it drove a significant amount of fresh demand from buyers who would otherwise not have bought. I think many of them have been diligently shopping for homes, hoping to find one that fits their needs so they can use the tax incentive. I wonder how many of them compromised on the home they wanted, just to get in contract and close within the current deadline? To me, a few grand is nothing, compared to being happy in your home for 10+ years. But, maybe some don't see it that way.

I expect home sales, for the most part, are being pulled forward, that would have occurred anyway. I have no way of knowing hard data on buyer's intent and timing, but I don't think the incentive pushed people who were otherwise planning to keep renting to go buy a home.

I do think the tax credit will be extended, and possibly even expanded. It's not in the news much, but there is a bill currently moving through Congress with growing support that will extend, and possibly expand, the homebuyer tax credit. There's certainly a lot of lobbying force pushing Congress down that path.

So, what will happen when the free money is cut off? Will we see a similar decline in home sales that we saw in car sales upon the expiration of the Cash For Clunkers program? I think it's likely that the pattern will repeat. What will the talking heads say to that, as they point to the recent sales spike as further evidence of a turnaround in real estate?

There are just so many homes (like three million) that still need to move through the system that I don't see a clear, sustainable upswing in sales just yet. You can't make people buy things they can't afford. If I recall, that's part of how we got here in the first place.

But, in the same breath, I do think we're finding a bottom to the home pricing correction. Data points to slight month over month price increases - whether those are sustainable or not, or driven by the spike in sales, is another question. But, things do appear to be firming, however slowly.

Meanwhile, we're seeing pretty much every other asset class rising, too. The Dow Jones Industrial Average just closed above 10,000 the other day for the first time in a year (and the 26th time in history) and the media is celebrating, despite the fact that it first did so 10 years ago. Bonds and Mortgage Backed Securities have also been rallying, pushing down yields and rates. Commodities continue to advance. And, that brings me to another question: When in history do we see all these things moving higher at the same time? Not too often, and typically, Mr. Bond Market tends to be making the correct call vs. Mr. Stock Market about the overall direction of our economy. Whether it is this time, or if we are entering some new paradigm where jobs are lost, people spend less, but corporate profits rise, our economy still grows, and inflation picks up, only time will tell. I'm certainly not betting on that new paradigm coming to pass.

Although I think the worst shocks are behind us - we still have a lot of debt out there to either pay down, or....just write off. That won't be a pretty process, and it will take years, not months. The commercial losses are just now really hitting the fan in full force. Those will dwarf the residential loan losses. It's going to be interesting to watch it all unfold. Retailers have closed 8300+ stores so far in 2009, two thousand more than closed during all of 2008. I could go on. The era of excess is unwinding in the US, as it should. Then, we have to rein in our government spending. As you may have seen, the projected deficits continue to increase from already staggering amounts.

We will return to growth. We will return to full employment (roughly 5% unemployment rate) and, home prices will rise over time, but...again, that will all take years, not months to turn the corner.

In the mean time, we know that home prices are back to where they were in about 2002-2003. Interest rates are at historic lows and...it's a great time to buy, for those who are well positioned to do so. And, there are some very viable ideas out there that are free to us taxpayers that could do a lot to firm up our housing market. Hopefully, they will gain traction in Congress. More on those ideas in another letter.

As always, if you, your family, or friends have any questions about financing residential or commercial real estate, please call or email me. Here are today's rates. If you're in the market for a Jumbo ARM, the rates are screaming!! Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	4.000%	1	4.190%	$300,000.00	$ 1,432
5/1 ARM	4.000%	1	4.210%	$300,000.00	$ 1,432
5/1 ARM Int Only	4.125%	1	4.385%	$300,000.00	$ 1,031
Jumbo (ask me about the new limit, per your zip code)
30 yr fixed mortgage	6.625%	1	6.751%	$550,000.00	$ 3,522
15 yr fixed mortgage	5.250%	1	5.505%	$550,000.00	$ 4,421
3/1 ARM	3.875%	1	4.055%	$550,000.00	$ 2,586
5/1 ARM	4.875%	1	5.095%	$550,000.00	$ 2,911
5/1 ARM Int Only	5.000%	1	5.250%	$550,000.00	$ 2,292
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.