IMPLICATIONS OF RISING MORTGAGE RATES

Are they threatening the recovery?

Or is their effect overstated?

Between early May and mid-July, the average interest rate on the 30-year fixed-rate mortgage rose about 1%. Rates on 30-year FRMs have basically held steady since hitting a peak of 4.51% in Freddie Mac's July 11 Primary Mortgage Market Survey - in the August 15 edition, they averaged 4.40% - but they could rise dramatically again.1,2

When mortgages become a bit costlier, things can get a bit tougher for home buyers, home sellers, home builders, real estate brokers, the construction industry, the labor market, the service industry and the broad economy. As housing's comeback is a key factor in this current economic recovery, how worried should we be that home loans are growing more expensive?

Analysts are divided about the impact. A July Wall Street Journal poll of economists drew rather mixed opinions: 40.0% of respondents felt that more expensive mortgages "won't have a noticeable effect" on the housing recovery, 35.6% thought that they "will slow sales" and 24.4% believed that they "will slow home-price gains."1

So far, the lure of increasing home values appears to outweigh disappointment over pricier home loans. In the latest S&P/Case-Shiller Home Price Index (released at the end of July and covering the month of May), both the 10-city and 20-city composites showed the biggest year-over-year gain since 2006. Rising home prices (and rising stock prices) contribute greatly to the "wealth effect" felt by consumers. So there is a chance that a 100-basis-point rise in the 10-year Treasury yield (it hit 2.82% on August 15) and conventional mortgage rates may not do as much damage as feared. After all, both consumer confidence and consumer spending have improved even with a 2% hike in payroll taxes and this spring's federal budget cuts.3,4,5

Maybe we haven't seen it yet. The fundamental housing market indicators in our economy are lagging indicators, presenting statistics a month or more old. The Case-Shiller composite home price figures are based on three-month averages ending in the latest month of the index - in other words, the May survey reflected data from March, April and May, and May is when mortgage rates began their ascent.3

New home sales figures compiled by the Census Bureau must also be taken with a grain of salt. The pace of new home sales reached a five-year peak in May, but here is the asterisk: the Census Bureau actually measures new home sales in terms of signed sales contracts rather than closings. So a sizable percentage of those homes were not yet constructed, and the actual closing could have been months away. As it turns out, 36% of the signed sales contracts in May were for homes yet to be built - meaning they were in all probability three to nine months from completion, with most of the involved buyers unable to lock in mortgage rates in early May as they would have preferred.6

Which of two outcomes will occur? Summer home sales statistics may reflect more impact from higher mortgage rates. Perhaps they will communicate that the housing market is no longer red-hot, but reasonably healthy. The real estate industry, Wall Street and Main Street can all live with that.

The bigger question is whether consumer spending and GDP will keep improving as mortgage rates presumably keep rising. If the economy gathers or at least maintains momentum and the "wealth effect" continues to boost consumer morale, then the housing market should see sustained demand - a desirable outcome. If mortgage rates rise due to inflation (or some other factor unrelated to growth), then consumers may decide that costlier mortgages are simply too much of a stumbling block to home buying, gains in home values nonwithstanding.3

Two things can't be denied. One, consumers have grown more optimistic recently (and wealthier, at least on paper). Two, home loans are still really cheap these days, at least by historical standards. Those two factors may maintain demand in the real estate market in the face of rising interest rates.

Citations.
1 - blogs.wsj.com/economics/2013/07/19/will-rising-mortgage-rates-halt-the-housing-rebound/ [7/19/13]
2 - freddiemac.com/pmms [8/15/13]
3 - forbes.com/sites/moneybuilder/2013/08/14/with-mortgage-rates-in-a-holding-pattern-what-will-housing-prices-do/ [8/14/13]
4 - nasdaq.com/article/how-we-know-the-federal-reserve-is-in-control-cm265615 [8/7/13]
5 - usatoday.com/story/money/markets/2013/08/15/stocks-thursday/2658439/ [8/15/13]
6 - realestate.aol.com/blog/2013/06/27/rising-mortgage-rates-impact-homebuilders/ [6/27/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

WHAT IF FANNIE & FREDDIE WENT AWAY?

How might things change for mortgage lenders & borrowers?

Is a new home financing system ahead? In the text of a speech delivered August 6, President Obama said: "I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market."This statement came as part of call for winding down Fannie Mae and Freddie Mac and revamping home financing in America.1,3


How might the playing field change? Right now, Fannie and Freddie backstop almost 90% of U.S. home loans. They are also $187.5 billion in debt to taxpayers, a result of the 2008 bailout that rescued them from the edge of insolvency. Two measures are already underway in Congress to replace both government-sponsored enterprises within the next few years.2,3

If a bipartisan bill introduced this spring by Sen. Bob Corker (R-TN) and Mark Warner (D-VA) becomes law, it would transfer lending risk over to private capital. The proposed legislation would require private lenders to assume the first 10% of losses on individual home loans, and stay sufficiently capitalized to counter major losses. A new federal agency - the Federal Mortgage Insurance Corporation, or FMIC - would regulate the mortgage industry and act to insure banks in a crisis. Just how would it be funded? A fee would be assessed on each mortgage issued. In the vision of the bill, the FMIC would pay for itself thanks to those fees and have enough left over to fund the construction of affordable multifamily properties and provide assistance to low-income homebuyers.2,3,4

Another bill written by House Financial Services Committee chairman Rep. Jeb Hensarling (R-TX) would terminate Fannie Mae and Freddie Mac without a replacement - the FHA would be the last remaining U.S. mortgage backstop. As Bloomberg notes, no House Democrats have emerged to support that bill - and as the Baltimore Sun notes, the bill drafted by Sens. Corker and Warner stands little chance of getting past the House. So it seems the playing field might be reshaped only after considerable compromise, and not in the short term.2,3

Aren't Freddie & Fannie turning a profit now? Yes, but none of it is paying for their bailout. The GSEs have now returned more than $131 billion in dividends to the Treasury, but that money represents ROI for Uncle Sam. It doesn't whittle away the $187.5 billion owed to taxpayers.3,5

What would happen to mortgage rates without Fannie & Freddie? They would almost certainly rise. Private lenders have little motivation to finance home loans the way the rules are now, and it would take significant incentives to bring them back into the market. As Moody's Analytics chief economist Mark Zandi told CNBC, "[That] will mean higher mortgage rates. The question is how much higher." In particular, first-time or lower-income homebuyers might find it tougher to qualify for a loan. (In one key respect, it has grown tougher: the average credit score for a Fannie and Freddie loan in 2012 was 756, compared to 720 in 2006.)4,6

Would the 30-year FRM become an endangered species? That is another concern. Without Fannie and Freddie around to guarantee home loans against defaults, the worry is that the standard American mortgage would become scarce. In many other nations, 30-year home loans are unconventional. The fear is that banks would address the default risks of 30-year mortgages by asking for larger down payments and demanding higher interest rates.2,4

True change will likely take a few years. It is hard to imagine Fannie and Freddie liquidating their portfolios and going out of business soon. Reform will probably proceed gradually - very gradually. President Obama's call to unwind both GSEs and the recent proposals to replace them certainly amount to interesting food for thought.2

Citations.
1 - cbsnews.com/8301-250_162-57597284/wind-down-fannie-mae-freddie-mac-obama-says/ [8/6/13]
2 - baltimoresun.com/news/opinion/editorial/bs-ed-obama-housing-reform-20130808,0,5392371.story [8/8/13]
3 - sfgate.com/business/bloomberg/article/Obama-Says-Housing-Market-Still-Needs-Limited-4710318.php [8/6/13]
4 - csmonitor.com/Business/new-economy/2013/0808/If-Obama-eliminates-Fannie-Mae-Freddie-Mac-will-mortgage-rates-go-up [8/8/13]
5 - reuters.com/article/2013/08/08/us-usa-fanniemae-results-idUSBRE9770JL20130808 [8/8/13]
6 - tinyurl.com/mg2xxs4 [8/7/13]

DELICIOUS AND HEALTHY BREAKFAST RECIPE

This recipe is from the AARP Diet book and serves 2 people.

Black Bean Omelet

•2 whole eggs plus the egg white from a 3rd egg, whisk them up
•½ cup diced onions or shallots, a little extra is OK.
•1 medium clove of garlic, diced or pressed. I am starting to think diced might be better so it doesn't cook to fast.
•1 can of black beans, rinsed and drained. Put them in a microwavable cup or bowl and heat them up for 60 to 80 seconds so they are pretty warm. Otherwise they will make your omelet cold.
•¼ cup cheese, (it is supposed to be low fat cheese). We use Swiss, which is pretty low fat on its own. I also like it to have a little more cheese than the ¼ cup.
•1 whole tomato, diced
•1 Tbsp of diced cilantro
•1 Tbsp of olive oil
•Salt and pepper to taste

Sauté the onions for about a minute or two, until they start to turn golden or start to brown then add the garlic and go for about 30 seconds to 1 minute more. I like to pull those two ingredients out of the pan so they don't get too done.

Pour in the eggs, let them start to set and the spread the tomatoes, onions and garlic, beans and cheese, on one side of the omelet. Salt and pepper the ingredients then fold the omelet over and let it heat through for about 30 seconds. Divide in half and serve with the cilantro sprinkled on top.

To spice it up, top it with some good salsa or hot sauce.

ENJOY!

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

EUROPE'S SLOW RECOVERY

A Long-Awaited European Recovery?

You may be enjoying this long respite from reading about the European debt problems, which just a year ago still scared many observers into thinking that the world was on the edge of a deep economic malaise. The last time Europe made headlines, Greece was going bankrupt, France had its pristine AAA credit rating downgraded, Spain was wrestling with unemployment north of 20%, Italy was insolvent and everybody south of Germany was mired deep in economic recession.

So where are we now? The Financial Times of London recently took a hard look at the current situation in Europe, and found that the reports of Europe's demise may have been exaggerated. In fact, it says that when the Eurozone's gross domestic product data are released in the coming week, we will see positive figures after 18 months of gloomy negative growth rates.

Among the hopeful signs: manufacturers in the 17 countries that use the euro currency have reported their biggest increase in output since 2011, and Greece, the epicenter of the original crisis, has qualified for its next batch of rescue loans totaling 5.8 billion euros as it sells off (or privatizes) government-owned corporations to pay its debtors. Spain's unemployment rate has recently fallen for the first time in two years and even troubled Portugal, where political opposition to austerity threatened its ability to receive a global bailout, now seems to be back on the tracks of economic reform. Perhaps the best news is that France's finance minister recently announced the end of recession in the Eurozone's second-largest economy, with second quarter 2013 growth of 0.2%.

Of course, there are still problems that could derail this still-fragile recovery. Perhaps the biggest is the continent's banking industry, where banks are still avoiding having to fess up to their losses on sovereign debt, still cleaning up their balance sheets and are slow to make much-needed loans to regional businesses. Greece and Spain are still burdened with 27% jobless rates, and Italy is still mired in recession after a 2.4% GDP decline in 2012.

Those of us who have read more about the Greek economy can finally dare hope that the break from scary headlines continues. Interestingly, most of the reports that talk about rays of hope in Europe also mention, in passing, that the U.S. economy has been the sole engine of growth in an otherwise troubled global economy. That, in itself, is something to cheer about.

　

Sources:

http://www.ft.com/cms/s/0/80504532-00e6-11e3-a90a-00144feab7de.html#axzz2bbpzTv8i

  
 

 

http://www.theguardian.com/business/2013/jul/25/spain-unemployment-falls

 

 

 

 

http://www.skynews.com.au/businessnews/article.aspx?id=893707

http://www.euronews.com/2013/07/22/portuguese-political-crisis-cooled-but-not-cured/

http://www.cnbc.com/id/100893323

http://www.cnbc.com/id/100951335

MARKET HIGH YAWN

New Market Highs (Yawn...)

The headlines have been telling us over and over again that the U.S. stock market is achieving record highs, and the not-so-subtle implication is that they have nowhere to go but down. In fact, the "lost decade" of 2000 to 2010 has obscured the fact that, historically, it is pretty common for stocks to achieve record highs.

If you look closely at the accompanying chart, you'll see that since 1950, the overall trend, until 2000, was a smooth if somewhat boring upward climb from 21.40 in January of 1950 to 55.34 in January of 1960 (more than a 150% gain), to 89.63 in January of 1970, to 102.09 in January 1980, to 339.94 in January of 1990. Record highs were recorded on a routine basis, and the trend accelerated from 1990 to 2000. That's roughly 50 years where the news media would have found nothing remarkable about stocks traveling into uncharted territory.

The pullback associated with the "tech wreck" decline in 2000 and the 2008 market meltdown have turned a relatively smooth ride into the kind of rollercoaster that carries warnings for people with back problems and heart conditions. Never mind that the markets are up 9,706.42% since 1950; the headlines today tell us that we're back above the market tops of 2000 and 2007.

History suggests that the steady, moderate growth of the 50 years ending in early 2000 is more normal than what we experienced during the first decade of the 21st century, when we endured two major collapses, the first brought on by rampant speculation in dotcom ventures (and Wall Street's phony and ultimately punished "research"), the other by Wall Street's reckless speculation on packaged mortgages. The ride may never become as smooth as it was in the past century, and it's certainly possible that the returns won't be quite as generous. We don't know. But it's possible that four or five years from now--or 50 or 60--all the incremental market tops will elicit barely a yawn from investors, and won't command headlines in our newspapers. Maybe we should prepare by ignoring them today.