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Your Interest Rate Update

November 25, 2008

And now, for something completely different...

Good news!

Of course, I've been accused of seeing life through rose-colored glasses but...there really is some pretty good news out there. We're by no means out of the woods. For each bit of "Good News" I'll highlight there are certainly counter points. I'll try to address those issues in another letter.

In the mean time, here are some big bright spots. Just in time for Thanksgiving!

Today the Fed announced they're injecting another $800 billion to buy securitized debt ($200 billion for credit cards, auto and student loans, and $600 billion for Mortgage Backed Securities/MBS). As you know, most debt these days is bundled and sold off as Asset Backed Securities. The Fed, as a new buyer for those securities - because there really haven't been any other buyers lately - caused mortgage rates to dip significantly. Here's what happened to rates: (because the media is reporting a 1% drop, which isn't really accurate. There was a 1%+ change to the price of the underlying Mortgage Backed Securities, not to mortgage rates).

Yesterday, 11/24 at close of business: 5.625% 30yr fixed with 1% origination

This morning, 11/25 at 7am Pacific: 5.25% 30yr fixed with 1% origination

This evening, 11/25 at 3pm Pacific of business: 5.375% 30yr fixed with 1% origination - there was some profit taking/selling of MBS, pushing rates back up a little.

That's still great news! Interest rates for 30yr fixed loans have gotten that low 3 times this year. Prior to that first dip in February/March, it had been 3 years since we'd seen these low levels. And, each of the previous windows of low rates we saw this year were relatively short-lived, lasting as little as a few hours.

The hope now is that the Fed's most recent action will soak up Fannie and Freddie's MBS, and free up money for them to make more loans, allowing rates to stay low for a little while. They're definitely doing what they can to work on the supply side in terms of both stemming foreclosures, and freeing up the credit markets to facilitate lending. The hope is that lower interest rates will spur people into buying.

The Fed and Treasury are being fluid, analyzing what's working and what's not, and they're willing to adapt as this crisis unfolds; not rushing right in to dole out the next batch of bail out funds, while also continuing to pursue whatever means necessary to normalize the markets, and increase liquidity.

But....they still need to work on the demand side of the equation. Just because a borrower can get cheap money doesn't mean they will, if they think that whatever they're buying will be cheaper next week, next month, or next year.

That brings me to the next piece of good news. Prices are dropping. That's great news. Gas prices are now below $2/gallon again. That alone is projected to save US Consumers over $1billion next year. And, as consumers cut back spending, companies will continue lowering prices to entice us back to spend our money. That will do wonders to help struggling consumers who are seeing their earnings and savings erode.

But...lower prices could lead us into another "too much of a good thing" situation. Deflation, if left unchecked, can be as dangerous and insidious to economic stability as inflation. That too, however, is a subject for another time.

Another good side of deflation is that home prices in the Sacramento area are hitting a level not seen since 2002. The median home price is now $194,500. That's back to an affordable level for the average household income of Sacramento residents.

The National Association of Realtors survey shows sales of existing homes are up 37.5% in the West from Oct. of 2007 (seasonally adjusted). Although they're still down from Sept. 2008 by 1.6%, the monthly drop seems to be showing signs of stabilizing; the supply of unsold homes is still hovering around 10 months. It seems people are indeed seeing that there are some good opportunities out there. Hopefully that trend will continue.

Additionally, on the demand side of the equation, there is growing discussion about tax credits for homebuyers, beyond the recently established credit for first-time buyers. Giving buyers an incentive to get back into the market will help us stabilize the housing market and begin the healing process for our economy.

Investors can actually finance more than 4 residential properties. Although Fannie and Freddie (and thus most of the lenders out there) won't allow for more than 4 properties to be financed, I've found several lenders who do not sell their loans, but rather keep them on their books. Rates are high, but...Investors can finance more than 4 properties. And, if it cash flows at an artificially high rate, then...you're in great shape when the market does normalize. Meanwhile, you can use a little leverage and ride the long-term appreciation train. And, for most investors looking to own more than 4 properties, cash flow may not be their primary concern. In fact, a slight loss might even create a tax benefit.

President Elect Obama and his economic team seem to be focused on the right tactics too. They seem to understand that the tax hikes he proposed on those earning more than $250,000 can not be implemented while our economy is under this stress. They realize that as the US Consumer retrenches, the government is the only real force to spur significant demand, which will drive spending and create jobs.

Although this will undoubtedly push our budget deficit over the $1 Trillion mark, they realize they also need to focus on cutting wasteful spending and work to ensure that any new initiatives aren't just "throwing good money after bad" but rather creating the opportunity for both near-term stimulus, and long-term sustainability. Clearly, that's easier said than done, but...they seem to be saying the right things at this point. Hopefully that too will continue.

The last bit of good news is that the longest recession the US has experienced was 18 months long. So, depending on how we count, we're somewhere between 1/4^th to 1/3^rd of the way through it. Yes, it's likely to get worse before it gets better, but...there's still plenty of opportunity, and lots to be thankful for.

On that note, I hope you have a great Thanksgiving!

As always, call or email if you or anyone you know has questions about financing residential or commercial real estate. Here are your rates for the week. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
40 yr fixed mortgage	7.750%	1	7.990%	$300,000.00	$ 2,030
30 yr fixed mortgage	5.375%	1	5.615%	$300,000.00	$ 1,680
15 yr fixed mortgage	5.250%	1	5.450%	$300,000.00	$ 2,412
3/1 ARM	5.625%	1	5.815%	$300,000.00	$ 1,727
5/1 ARM	5.750%	1	5.960%	$300,000.00	$ 1,751
5/1 ARM Int Only	5.875%	1	6.135%	$300,000.00	$ 1,469
Jumbo (ask me about the new limit, per your zip code)
40yr fixed mortgage	n/a	1	#VALUE!	$550,000.00	#VALUE!
30 yr fixed mortgage	8.750%	1	9.010%	$550,000.00	$ 4,327
15 yr fixed mortgage	8.500%	1	8.755%	$550,000.00	$ 5,416
3/1 ARM	5.750%	1	5.930%	$550,000.00	$ 3,210
5/1 ARM	6.250%	1	6.470%	$550,000.00	$ 3,386
5/1 ARM Int Only	6.500%	1	6.750%	$550,000.00	$ 2,979
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.