It ain't over til it's over

You’ve probably seen the real estate advertisements recently. A beaming real estate agent handing the keys to a young couple as they begin life’s adventure as homeowners. It's idyllic and the opportunity won't last long. Or will it?

The voice over implores viewers to take advantage of this “never been a better time to buy a house.” I would agree there’s never been a better time to refinance a home with interest rates historically low. Assuming there is reasonable equity in the house, if they go lower still, refinancing should be possible. But the idea that housing costs are about to spin on their heels and head higher is hardly borne out by the evidence.

The fundamental part of the economy that pulled us into the mire is not ready to let go of our economic throats quite yet. In the past couple months lenders have paused in foreclosures at the behest of the President and it has certainly not been a hardship on the lenders since by all accounts they have already bitten off more than they can chew. Recently the banks have begun once more to begin foreclosures but I have to wonder why bother? They already have a huge shadow inventory.

RealtyTrac, which compiles real estate statistics, estimates 600,000 properties have been repossessed by lenders and not yet put on the market. The market simply cannot absorb so much supply without pressing housing prices even more dramatically lower.

A RealtyTrac survey found that only 30% of foreclosures were listed for sale in real estate listings. Much like the understating of unemployment because of workers having hours cut but still on the payroll, additional homes would be on the market if the homeowner thought there were any buyers. Discouraged workers do not show up in statistics, neither do discouraged sellers.

Normally there are about 160,000 homes a year in foreclosure sales. We are now seeing 80,000 a month, or six times normal levels, and rising.

Extend these actual physical homes to the securitized market of mortgage backed securities and the PPIP sounds like a pretty good deal, if you are a lender. In real terms, the PPIP program is meant to sell the taxpayer this real estate in a so called partnership. Is it any wonder the market values mortgage backed securities at about 35 cents on the dollar and the banks are champing at the bit to get them off the books in the PPIP at closer to 80 cents?

The mortgage issues alone make rolling the dice on financial company stocks a bit early I think unless you are a nimble trader ready to take profits and reload. There is still pain to come.

Last year the subprime market was hit with the maximum level of rate resets. Tens of billions of dollars of subprime adjustable rate mortgages came to market with results we have all seen. That pig is slowly moving through the python. As we move further through 2009 resets on prime, agency and Alt-A will surpass those of subprime. By 2010 sub-prime resets will be negligible. But there is trouble ahead in Option Adjustable Rate Mortgages.





If you can buy for less than you rent and be cash flow positive treating the house as effectively a rental property then it may be a go. But if you are hoping to get in before the real estate market takes off and leaves you behind, chill out. Keep saving, there is very likely an even better deal just over the horizon.
This 60 Minute video should help cool fevered real estate pitches.




John Barnyak
President
www.stonehouseasset.com

Holes don't go to China, nor do mortgage rates

This entry goes into the "news you can use," class. Manipulated markets always snap back. The the Tulip bulb market of 1637, silver market of the late 1970's, and now, the mortgage market of 2009.

The U.S. home mortgage system has been a nightmare for some borrowers recently. But setting aside the questionable, if not illegal, actions of banks, investment firms, and mortgage charlatans, the American system of locking in a long term rate while having the option of refinancing if rates fall has made US home mortgages one of the more appealing borrowing structures in the world.

This assumes the borrower could afford to borrow in the first place and is not victim of his own over reaching with some of the teaser hybrid loans that brought the system to its knees. Today, plain vanilla is the best flavor.

Right now, the panic of continually degenerating economic news in housing and its knock on effects on banks has put money on sale if one has steady income, and reasonable credit history.

Rates are changing daily, even hourly, so work with a knowledgeable and trustworthy broker. In the words of one analyst, "shop the broker, not the rate." A sharp broker working for you can lock in a rate on a dip that you would never see over the course of casual rate shopping. We have worked with several in Pennsylvania, so they do exist.

Rates will vary and move based on individual issues such as FICO score and buydown points. Doing homework ahead of time can pay dividends for an opportunistic borrower whether a first mortgage or a refinance.

These rates are extremely attractive. But they are skewed. For example, interest only loans are close to 6.25% while 30 year rates are as much as 2% lower. This spread is unprecedented, as are 30 year rates at 4.25-4.5%.

Rates are low and people should take advantage of them while they can. But it's important to understand why rates are low.

Fannie Mae debt is on a tear. Remember that yield and price move in inverse fashion. Thus a price rally in bonds equates to lower yields. Yesterday the Fannie Mae 30/60 (thirty year term/sixty day delivery) was at 4.46% The massive government buying of mortgage backed securities is driving the prices up and the rates down.

However, these prices are artificial. The government is buying Fannie Mae and Freddie Mac debt to force down yields and stabilize home prices. Could it reach still lower? 3.50%? Perhaps. But if it does it will likely be of extremely short duration as suddenly every mortgage in America will benefit from refinancing. If you haven't done your homework you will likely miss it. So do your homework, be prudent and conservative. If you plan in remaining in your home for more than a few years, this could be a windfall moment when you look back.

John Barnyak
President
www.stonehouseasset.com