Tag: Economics

The Case for Not Waiting

One of the more frustrating aspects of today’s marketplace is all the wasted energy. Consumers are stuck on the fence, waiting for lower rates to refinance, waiting for lower prices to become a buyer in this buyer’s market. Sometimes waiting pays off, and it certainly has if you hesitated to buy a home in 2006, and are now reconsidering. But you could be heating your house with the windows open…

Trying to squeeze blood from a turnip, waiting for 4.500% when you can get 4.625% today can lead to disappointing results. Rates are at or within spitting distance of all time historical low levels. With all the moving pieces of the puzzle, waiting often means a lot of false starts and missed opportunities.

Example 1 (purchase). Defining the cost of waiting. Maybe you’ve got a pretty good read on the supply/demand dynamics of your market, you know about the seller’s circumstances, competition, etc. Visibility is ok, and you know this house is overpriced. So you try and pull down the price tag, but the seller isn’t going for it. Do you have a good read on the global markets? Well, do ya? Some sort of inside track? What if that house you want does eventually come down 25k, but at that exact point in time, the markets are digesting a panic over inflation expectations, and rates have shot from 4.750% to 5.250%? What’s a better deal? The answer is: Lower rate, higher price. I’ll show my math if you don’t believe me, shoot me an email to request it.

Example 2-4 (refinance). Job loss, Equity loss, Rate spike. If you owe $400k 6.250%, waiting for 4.500% when you could have 4.625% today, how much do you lose paying at 6.250% for 3, 6, 12 months of waiting? Again, it’s helpful to do the math. 12 months at 6.250% costs $6500 more in interest than 4.625% over one year. The extra .125% in rate, if you can get to 4.500%, is worth $500 over a year.

Sure, over 30 years, that’s a significant savings. But it is not worth the cost of missing the boat altogether, as we hear about consumers doing every day.

Unemployment is rising (currently 8.5%). Equity is falling (price declines of 30-50% off peak in some markets). And there is a debate going on in the markets about inflation coming from excess stimulus cash in the financial system, and whether it will cause rates to spike without warning.

Would you rather have a $6500 sure thing, or a shot at $7000 with a potential risk of zero? These are forces beyond your control, so eliminate them or avoid them if you can. Otherwise, if you’re sitting on that fence, and you fall asleep, you might end up with a nasty burn…

This American Life & Planet Money Bring You: BAD BANK

NPR’s This American Life has done a few great features on the Subprime Crisis, the Banking Crisis, and the Economic Crisis (they evolve with the news!). Recently, along with the Planet Money team (which I believe became a spinoff team of This American Life after the 1st in the series), they released “Bad Bank“. It’s another great overview of the challenges before us, some details about how we got here, some good soundbites from congress, etc. They are among the best I have seen at breaking down this complex situation into digestable news. Give it a spin.

Earlier releases:
Giant Pool of Money
Another Frightening Show About the Economy

Join the Savings Craze! The Paradox of the Paradox of Thrift

Experiencing a recession is great way to force a reassessment of your financial behavior. The Great Depression is famous for shaping a generation of frugal citizens/consumers. Do you feel like you have not been saving enough money? America Saves Week dot Org has a 12 step program for you. Join the craze!

But wait, popular economic theory of the day warns of ‘the Paradox of Thrift‘. What may be good for the individual is not good for the collective. Waxing economical takes place here, here, and here. Is there a moral dilemma here? Is this why we’ve been trained to act as consumers, rather than citizens?

Paul Kasriel has another angle. Debunking the Paradox with some tough love for WSJ contributer Daniel Henninger.

Today’s View of Capitalism is a Joke

In traditional capitalism, you have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

In American capitalism you have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

In French capitalism you have two cows. You go on strike because you want three cows.

In Italian capitalism you have two cows, but you don’t know where they are. You break for lunch.

In Real capitalism you don’t have any cows. The bank will not lend you money to buy cows, because you don’t have any cows to put up as collateral.

In Enron Capitalism you have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. Sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public buys your bull.

In Californian Capitalism you have two cows. They are happy.

In Arkansas capitalism you have two cows. That one on the left is kinda cute.

UPDATE: Proposed Changes to Tax Credit, Conforming Limits

Republican amendments to the current stimulus package up for vote later today include:

-Restoring the $729,750 loan limits in some areas

-Temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year – no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

-Other details:

  1. buyers must occupy the home for two years as their principle residence
  2. includes a two year recapture provision (if they leave the home in two years they lost the credit)
  3. purchases of homes by investors are ineligible

The bill is still working its way through Congress, and the House of Representatives must still negotiate with the Senate since the House bill does not contain the credit.

Proposed Changes to Homebuyer Tax Credit, Conforming Limits

Rumors are going around about the following ideas, supposedly on the table for legislative discussion:

First Time Buyer Tax Credit Change:
Currently, the credit is up to $7500 for qualified first time buyers, and the funds are expected to be repaid at the rate of $500 per year for the ensuing 15 years.

Proposed changes are for increasing the credit to $14,000, and also to make it forgivable. In other words, no requirement to be repaid. Ever.

That is a significant change, and would represent a MAJOR incentive to enter the market.

Conforming Loan Limits:
Currently, the limit is 417k nationally, and in some high cost areas, it can be as high as 625,500. All 9 Bay Area counties are currently at 625,500. During 2008, the ceiling was higher – 729,750, but the “temporary” classification caused the lenders, who still operate in a free market world, to have almost zero interest. It didn’t really work. The 625,500 level was more conservative, but permanent. It has helped, but not quite as well as intended.

Proposed changes would reinstate the ceiling at 729,750 for qualified California property, or, according to one source, raise the ceiling to ~$932,000 for qualified California property.

Also potentially significant change, unlocking many borrowers with high outstanding loan balances on expensive property. No way of knowing if lenders will have an appetite for these deals or not, but it’s something to keep an eye on…

What If You Could Set Your Own Tax Assessment Value?

Here in California, Prop 13 puts limits on periodic tax assessments, but in many other states the values change up and down with the county assessor’s opinion of the value of the property. There is an inherent conflict here where the county wants maximum tax revenue, and homeowners don’t want to have to deal with a bureaucratic protest every year when their tax bill feels like an insult.

Paul Kasriel recalls a concept for a solution to this conflict, as discussed by a former Fed official, and how it might relate to current challenges we are facing with “fixing” the economy. Specifically, he is looking at the “bad bank” concept currently being mulled over, and how current banks and the bad bank would theoretically agree on a value for the “bad assets”.

But backing up a step, I found the basis for the analogy more interesting. The self-assessment theory works as follows:

  • Let the owner of the real estate place the value on his property.
  • The taxing authority has the right to purchase the property at the owner-decided value.

Owners are deterred from placing too low a value on their properties, and no incentive to place too high a value on their properties. An efficient system for maximizing and fairly taxing the property in the county. The alternative, which is related to the cringing sounds you hear from economists watching government regulation, intervention, and inter-mediation in this broken-down marketplace, is one where there are more rules, regulations, loopholes and inconsistencies.

It’s a very thought-provoking piece. 2 pages of your time…

Barney Frank on High Balance Conforming Loans

I caught a video piece of Barney Frank fielding questions the other day, in which it was painfully obvious to this mortgage planner that the legislation cannot force free markets to do as legislators intend or wish. I wish I had a link to the video, but I don’t, nor do I have the time to search for it. I am sure it is out there.

In 2008, the elected representatives on Capitol Hill decided to allow for Fannie Mae and Freddie Mac to purchase loans at a temporarily increased ceiling – ranging by county according to the median home values in these counties. The non-conforming loan breakpoint was 417k, we’ve talked about it here. Anything above 417 could not be touched by Fannie/Freddie.

The 2008 temporary limits were put into effect, and some areas were able to treat loans all the way up to 729,750 as conforming, per law. But the banks did not like the temporary nature, investors didn’t look at it the same way either, and rates and terms for anything between 417 and 729k left much to be desired, and many to be refinanced at some other time, or never.

For 2009, lawmakers made the “temporary” permanent, but revised the limits, bringing the max ceiling down to 625,500 in the highest cost areas. Investors and banks were a little better to adopt these. And in many ways, borrowers with 417-625k see many of the same underwriting rules. But some of the differences are significant.

Pricing these loans is not the same, bringing much disappointment to the borrowing and lending community. Lawmakers stipulated that banks could only package a small percentage (10%) of “high balance” loans with the traditional, sub-417k loans into their bond issues for the secondary market.

There was so much pent up demand from borrowers with high balance loans to refinance, that the banks all got inundated with demand for money under these terms. It put them way off balance, and they dont have 9x the traditional conforming investments to match every dollar worth of high balance loans. So what do they do? Raise rates. So now when you have a high balance loan, your rate is SIGNIFICANTLY higher than the traditional balance conforming loans.

This will ebb and flow as the banks process and liquidate their inventory. But watching Barney Frank scratch his head, saying something to the tune of “I don’t understand why anybody would be treated any differently if they were borrowing the higher balance, we changed the rules to make it the same” – which is not a quote, but is precisely what he was saying – you can see why so many of the governments attempts to help the market have not worked, or only partially helped, or helped one area and introduced a new problem…

One more complication in today’s market. Next to impossible to predict a given bank’s pipeline composition, and therefore next to impossible to know when they will spike their rates overnight, as we are seeing them do erratically.