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Your Interest Rate Update

January 4, 2009

Happy New Year! I hope the Holidays treated you well and I wish you a happy, healthy and prosperous 2009.

First off, I want to thank you for helping me have a great 2008. My business thrives on your thinking of me when you think of real estate financing.

I truly appreciate all the questions, calls, emails and referrals you bring my way. I know I can't always help directly, particularly with today's tighter guidelines and lower home equity levels, but I'll always lend my thoughts, insight and perspective to a scenario in an effort to arm you with information so you, your friends and family can make educated decisions based on your specific situation, with the facts we have at the time.

It's also important - while I'm fortunate and thankful to be doing well - to recognize that there is real pain out there now. I have several clients and friends at or near retirement age who've suffered significant losses in their retirement portfolios. Some of whom are now considering delaying retirement as a result. I talk weekly with those who've lost, or risk losing their jobs and homes. That's nothing to gloss over. But, it also doesn't do any good to dwell on it. We do what we can, and we have to move forward.

2008 was loaded with challenges to overcome. 2009 is likely to be laced with plenty of them too. But, we'll get through these tough economic times. We always do. Hopefully, we'll learn a bunch on the way. And, for some, there are definitely opportunities to capitalize on, which is where I hope to focus this year. It's much more positive and constructive, in the long run. Just like Mom used to say, you can't cry over spilt milk. You just have to try to not spill the glass again.

So, what's in the glass for 2009? Nobody knows, really. But, here are some of my thoughts.

1) Mortgage Interest Rates: I think mortgage rates will hover around the 5% range for 30yr fixed conforming loans (those under $417,000) for most of the year. Yes, this is a change from my thoughts prior to Thanksgiving, before the Fed formally announced they'd purchase Mortgage Backed Securities (MBS) and other securitized debt. Prior to that move, banks/investors were holding mortgage rates around 6%, and I thought they'd rise, even though their borrowing costs were significantly lower. The Fed basically recreated a market where there was none, by saying they'd buy MBS. They'll actually start that purchasing process this month. We could see another dip down to the 4.5% level, as a result. Super Conforming rates (up to 115% of the median home price per zip code as defined by HUD, with a new limit of $625,500) will hover around .375% to .5% higher than Conforming rates. I think it's likely that towards the end of the year, Jumbo interest rates (anything over $625,500) will start to come back from astronomical levels too. Right now, they're trading in the mid 6% range for ARMs and much higher for 30yr fixed loans. Overall, mortgage rates have become a priority of the Fed (and others in the government) in order to help spur demand, and get buyers to start soaking up some of the excess housing inventory. We'll worry about paying for it down the road.

2) The Housing Market: I've felt like a bottom is forming in California for much of 2008. I still feel that way. I'm going to call a bottom some time in late 2009 (and that might slip into early 2010). In the mean time, it's not unreasonable to expect another 5% to 10% dip from current price levels. If we don't see that dip, I'd call it a bonus. But, as I always say, we'll know the bottom 6 months after it's gone. And, if you have a long-term (10+yr) horizon on owning that home, a slight dip in price in the short term should equalize over the long haul. Here in Sacramento, we're already approaching a 6-month supply, which is where the market can start to stabilize. So, although my knowledge and experience is in California, I think it's likely that the rest of the country - where home values didn't rise as high and shouldn't fall as low - will also plateau towards the end of 2009. It seems like California, Florida, Nevada and Arizona - where most of the ridiculous increases were loaded - have mostly fallen back down to affordable levels. Although I do expect a plateau in prices towards the end of this year, I don't see them rising appreciably for another two or three years after that.

3) Word of the Year: I actually have two. Yep, there's a theme, I tend to slip in a couple predictions under one heading...Stagdeflation and Quantitative Easing - I sort of borrowed Stagdeflation from Nouriel Roubini. If you like reading about economic stuff, look him up. Or, visit www.rgemonitor.com. He's an economics professor at NYU and a very smart guy. He's one of a handful of people who a few years ago predicted the mess we're in now. Essentially, Stagdeflation is the opposite of Stagflation. It's defined by a period of slow or declining economic growth and falling prices. Although we can look at lower prices/cost of goods as a good thing, deflation can be as insidious and destructive to our economy as inflation. And, it can spiral out of control. I won't go into the mechanics of the potential spiral here, but...if I'm right, we'll be hearing a lot about it in the coming months through the mainstream media, as prices continue to fall. Quantitative Easing basically means printing money. Since the Fed has reduced the Fed Funds Rate to a range of 0 to .25%, they really can't get lower. Ok, they can target 0. That's it. Beyond that, the interest rate powder is spent. So, what can the Fed do to fight deflation and spur economic growth? In short, print money. We can inflate - or try to inflate - our way out of the economic and deflationary mess we're in. Again, if I'm right, you'll hear a lot more detail about Quantitative Easing in the coming months. That's the only set of tools Bernanke and Co. have left. That brings me to my next prediction.

4) Knock, Knock. Who's there? A trillion dollar government stimulus package. Come on in, old friend. Unfortunately, it's not a joke. But, you can already see every state, county, and city government working on getting their "shovel ready" list together. I hope it's a story with a happy ending. But...although the intentions - and history - can be in the right place, it's going to take exceptional planning, and even better execution for the government stimulus plan that the Obama administration is promoting to have a positive economic impact, rather than just building a ton of "bridges to nowhere" that dig our nation into a greater hole of debt. To be sure, our infrastructure can use investment. Look at the Minnesota bridge collapse, or Sacramento's levee system, or the areas still recovering from devastating hurricanes as glaring examples. We can use a spearhead for "green technology" particularly when many other conventional financing channels have run dry. We can rebuild aging roads, schools and hospitals that otherwise might not receive immediate investment. All those things can create jobs. But, unfortunately, our Congress doesn't have the best track record of keeping their hands out of the pork barrel. Just remember, we voted them in. We can vote them out. So, my prediction - to summarize, since I really just glossed the pitfalls - is that the government stimulus package will be a huge bone of contention all year long. Being the optimist that I am, I think history will look back and call it a good thing, but...as with so many things, only time will tell. If planned and executed well, it can have tremendous short and long-term economic benefit.

5) Debt forgiveness: Yes, debt forgiveness. I think we're going to see wholesale debt forgiveness for some homeowners who are upside down. We're already seeing that 50% of those whose loans have been modified are behind again. There are a variety of reasons, but, one of them is certainly that people aren't really motivated to pay for something that they put little to no cash into that will take them 10 years of making payments for them to get back to where they started. Especially when they can go rent something that's similar, or maybe nicer, for less than they're currently paying to own. Loan modifications are continually evolving. From a lender's perspective at some point, it might make sense to just forgive the debt and receive steady payments, rather than foreclosing - incurring the time and expense - and getting the same net result of reduced income. And, if we don't see outright debt forgiveness, I believe debt deferment will become popular, allowing homeowners with negative equity to pay only what they can afford, for a period of 10 years or so, before they face a balloon on the remaining principal balance, plus interest. A plan like that "should" give enough time for the market to stabilize and head back up at a normal and sustainable 5% per year, or so. At the very least, it slows the bleeding.

6) My freebie: Commercial Real Estate collapse. Typically, commercial real estate lags residential real estate by a couple years. That makes sense, because first the new home communities are built, then the stores, malls and office spaces are built to service those new residents. Well, we know what's happened on the residential side. There's still a ton of commercial square footage being built that was in the pipeline years ago. Just look around on your drive to work. On top of that we now have companies closing and vacating office space en masse. Retailers are closing right and left. Restaurants are going out of business. So, not only do we have surplus inventory of commercial space, but we have slack demand. That doesn't bode well for those making those payments, and thus those expecting to collect on those payments. The Commercial Mortgage Backed Securities (CMBS) market dwarfed the residential market. Fortunately, for all intent and purposes, they stopped packaging those deals over a year ago, but...the volume of cash that was outstanding up to that point is still a huge shoe to drop. And, like MBS, CMBS were leveraged ten times over, and insured by those who don't have the capital to repay in the event of default, just like MBS. In the words, sort of, of Ross Perot, "what yer gonna hear, my friend, is a big suckin' sound."

So, it's definitely going to be an interesting year. The good news is, if you're looking to buy or refinance real estate, it could be a great year of opportunity. Money is cheap, and prices are back to pretty reasonable levels. Either way, it's definitely not going to be boring. And, I truly hope you can make the most of it.

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 this 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	4.750%	1	4.990%	$300,000.00	$ 1,565
15 yr fixed mortgage	4.500%	1	4.700%	$300,000.00	$ 2,295
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	5.875%	1	6.055%	$550,000.00	$ 3,253
5/1 ARM	6.375%	1	6.595%	$550,000.00	$ 3,431
5/1 ARM Int Only	6.625%	1	6.875%	$550,000.00	$ 3,036
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.