Greetings!
Economic Commentary
As 2009 winds down, I think we are all cautiously optimistic that the economy will start to rebound in 2010. Before that happens though, we need a sustained recovery in jobs. With unemployment currently at 10% (and probably much higher when you consider all the non-filers and materially underemployed people), there will be no recovery.
The question of the day is “how do we spur sustainable job growth?” I believe the answer lies in expanding credit to small and medium-sized businesses, who with a fighting chance, many of these will become the success stories of tomorrow. Detractors may argue about where the money will come from. The fact is our government has already printed the money and has been allocating it to the same old, legacy institutions that in large part put us in this mess. I don’t know about you, but I am tired of hearing about the systemic risk argument that these large institutions are the only ones that can understand and fix this mess. Taking the banking industry as an example, I know there were plenty of regional banks that did not get caught up in making absurdly risky loans- why not give these institutions more leverage and thus, power to solve the credit problems. In talking to many small business owners, I hear the refrain over and over about how the government is making it very hard for them to operate with retracting credit, overregulation, and increased fixed costs to do business. I do not think we want to become a socialist nation, where the incentive to work hard and innovate is greatly minimized; after all, this is contrary to the very foundation our country was built upon. Below is an excellent article by one of the most noted credit experts in our country. It is my hope that America will come together and recognize that it is Main Street, not Wall Street, that should be shaping the course of this country.
Mortgage Update
Mortgage rates have continued to stay in the sub-5% area for conforming loans. While rates should stay relatively low throughout 2010 as the economy continues to struggle, expect them to slowly rise throughout the year. One item of great significance is what will happen when the Federal government’s current budget of buying up to $1.25 trillion in mortgages will be used up by March 2010. Where the government is still saying they plan on letting the free markets take over at this point, I believe they will have to continue to subsidize the dour housing market in some respect. With that said, if that subsidy is not continuing outright mortgage purchases, I think rates could easily jump a full 1% (see article below).
For the high balance conforming markets ($417,000-729,750 in LA & OC), rates have really improved over the last month with the spread only being 0.125-0.25% over conforming rates. Many homeowners who are currently on adjustable rate financing and are close to this upper limit are wisely locking in to these historic low 30 and 15 year fixed rate mortgages, thereby eliminating all interest rate risk in the future.
The true jumbo market has started to show signs of life with minimum down payments coming down to 20% and more investors/ products coming into the market. The 5-year fixed is still the most popular jumbo product, as it carries about a 1% discount vs. 30-year rates. Expect for the jumbo segment of the market to continue to open up as investors are sensing opportunities here.
Lastly, as we had expected, the government opted to continue (and expand) the 1st-time homebuyer tax credit until April 2010 (deals must be closed by June 2010; see enclosed article) and continue the high balance conforming programs throughout 2010.
If you haven’t already done it, please call us to take advantage of these historic low rates! Also, if you like the material, I would be honored if you could pass this newsletter on to your colleagues, friends, and families.
Best Regards,
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| The Return of the Free Market Mortgage |
The Federal Reserve’s program to buy $1.25 trillion in mortgage-backed securities appears to have stabilized the housing market. Mortgage rates have been contained. That, in turn, has made homes more affordable — and put the brakes on the housing market’s plunge.
Rates on a conforming 30-year fixed loan dipped below the 5% mark last week, the fifth time they have done so this year, according to HSH Associates, a mortgage-tracking firm. Meanwhile, the S&P; Case-Shiller home price index September reading showed a fifth consecutive month of gains with prices in 20 metropolitan areas rising a modest 0.3%, though prices overall recorded an 8.9% decline from a year ago.
But what will happen to mortgage rates when the Fed stops manipulating the market? The central bank has already extended the purchase program once, so it will now expire in March 2010 rather than the end of 2009. “The question is: Are they really going to stop the program next year?” says Richard Green, director of the Lusk Center for Real Estate at the University of Southern California.
In light of a weak economy, it seems unlikely. Unemployment is projected to remain in the double-digits well into next year, and foreclosures aren’t likely to let up soon. According to the Mortgage Bankers Association, a record 9.6% of all borrowers were delinquent on their mortgage in the third quarter. “The lesson learned in the last couple of years is whenever we get to the ‘end’ of these programs, someone comes up with another way to extend it,” says Michael Larson, a real estate analyst at Weiss Research.
Case in point, the first-time home buyer tax credit was set to expire at the end of November but was extended through the spring and expanded to include existing homeowners. If anything, Larson says, the Fed will err on the side of caution and on the side of an easier policy to nurture the tenuous recovery in housing. What’s more, as long as the Fed continues to dominate the mortgage-backed securities market, “we’re not really going to move the needle on rates,” Larson says.
If and when the Fed program does end, mortgage rates will rise – but not by much. The Fed’s intervention is worth upwards of 75 basis points for a conforming loan, says Keith Gumbinger, a vice president at HSH Associates. Without its purchases, that rate might rise to 5.75% or so.
Borrowers should plan for rates to run in the mid-5% range once the program comes to an end. After that, any shift depends on whether the economy has gained more traction and if the job market is improving. Otherwise, rates don’t have the space to push higher, Gumbinger says.
The outlook for late 2010: “You’ll probably see us moving closer to the 6% range if our forecast works out,” Gumbinger says. “Those are still very favorable interest rates. Anything below 6% is a really extraordinary rate.”
Real Estate by Lisa Scherzer (Author Archive)
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| Tax Credit is Expanded |
Great news for homebuyers courtesy of the government. The President has signed legislation that extends the $8,000 homebuyer tax credit to contracts signed by April 30 and closed by June 30 of next year. The credit, which many say has boosted home sales in recent months, was set to expire after Nov. 30 this year. The bill also creates a $6,500 credit for those who buy a home after living in their current house for at least five years. That measure would also apply to contracts signed by April 30 and closed by June 30. The current credit defines a first-time homebuyer as somone who has not owned a residence within the past three years.
Both credits are available only for the purchase of principal residences priced at $800,000 or less. The bill also raises the adjusted gross income cap to $125,000 for single filers and $225,000 for joint filers. The amount of the previous credit began to phase out for taxpayers whose adjusted gross income was more than $75,000, or $150,000 for joint filers.
“It’s going to put people back to work, both home builders and people in the real estate business,” said Sen. Chris Dodd, D-Conn. “The kind of jobs that can make a difference.” The extension will cost $10.8 billion over 10 years, according to the Joint Committee on Taxation…
Source: CNN/Money |
| The Credit Crunch Continues |
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Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.
Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends.
Taxpayer dollars have supported institutions that are ‘too big to fail.’ Small business has been left out in the cold.
Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.
Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.
Why do small businesses matter so much? In the U.S., small businesses employ 50% of the country’s workforce and contribute 38% of GDP. Without access to credit, small businesses can’t grow, can’t hire, and too often end up going out of business. What’s more, small businesses are often the primary source of this country’s innovation. Apple, Dell, McDonald’s, Starbucks were all started as small businesses.
What’s especially disturbing is how taxpayer dollars have supported “too big to fail” businesses yet left small businesses unassisted and at a significant disadvantage. Small businesses do not have the same access to government guarantees on their debt. After all, most of these small businesses don’t issue public debt.
As is true in most recessions, banks’ commercial lending portfolios shrink as creditworthy customers pay down their debts and the less-worthy borrowers are simply denied loans. Banks, in other words, want to lend only to those that don’t want to borrow. Challenging as that may be, in the last cycle small businesses at least had access to their credit cards.
Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels – the first contraction since 1993. Credit cards are the most common source of liquidity to small businesses, used by 82% as a vital portion of their overall funding. Thus, it is of merit when 79% of small businesses surveyed tell the Small Business Administration that credit card lending standards have tightened drastically and their access to credit lines has decreased materially.
Incentives should be provided to smaller banks to step up small-business loans on a greater scale. Smaller banks could not only bridge gaps created by the shut down in the securitization market but also gaps being created by a massive contraction in credit-card lines. Arguably credit would perform better with these types of loans as they would reintroduce and reinforce the most important rule in banking: “Know Your Customer.”
I believe that we are only in the early stages of the second half of this credit cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010. This includes not only the large lenders reducing exposure but also the shuttering of several major subprime credit-card lenders. Beginning in the fourth quarter of 2007, lenders began reducing available credit by zip code. During the past four quarters, lenders have cut “inactive” accounts (whether or not the customer viewed the account as a liquidity vehicle).
The next phase will likely be credit-line cuts as lenders race to preemptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.
Regulators should be mindful that regulatory change during the midst of a credit crisis often ends with unintended consequences. Those same consumers that regulators are trying to help are actually being hurt by a vast reduction in available credit.
Main Street represents the foundation of this country. Reviving it should take priority over any regulatory reform or systemic overhaul.
By Meredith Whitney, Meredith Whitney Advisory Group, LLC
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We wish you and your family a great holiday season!
Sincerely,
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Chris Brown CB Investments, Inc.
300 Pacific Coast Highway, Suite 301
Huntington Beach, CA 92648
(714) 969-2300
(888) 510-1555
Licensed by CA Department of Real Estate, ID #01295714; CO Division of Real Estate, ID #100009815; FL Office of Financial Regulation, ID #0703894 | |
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