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I Feel The 30 Year 5% Mortgage Argument is a Red Herring!

29 May 2009 1,683 views 4 Comments

I keep hearing on the argument of how inflation will come and haunt us. And how interest rates are going sky-high. And how we are doing things wrong and the economy is so bad. And if mortgage rates go above 5% then everything will break apart and people will stop getting mortgages. At leas that is what the pundits say.

My first question is why is there is such a drive toward negativity? American’s tend to be optimistic, and when you look at the consumer confidence numbers you see that average American’s are. Yet when you listen to the financial experts you hear on how bad things are.

So what gives? Are things that bad? What if there are other reasons? What if the reason why we have these negative comments is because the financial experts need it? Let’s say that you are running a fund, and you were down last year, you had an excuse. But what if you are down this year, what do you say? What can you say? After all you are the financial expert and hence you should be able to make money!

But what if you as the financial expert were the deer in the headlight last year and now don’t have the heart to cross the road? What if you have to tell your fund holders that you are lagging the benchmark? Well then you have a major problem. And that I am tempted to believe is the reason why some many are negative. They themselves are facing the pressures of not performing.

So what do I have to support this argument? Why not look at the historical 30 year mortgage rates. Summarizing the average mortgage rate is around 9%! This means that the average American held mortgages at much higher levels. The 5% level is a record low level and using that as an upper bar is a red herring argument.

I even think that Americans will buy houses at higher levels of interest, so long as the price is right. And that’s why prices just keep going down, down and down. People are buying at the right price, at what they can afford. The calculation will be mixture between interest rate and price of house. Just like it used to be in the 70’s, 80’s. In fact I am thinking that this is bullish since a higher yield in the long term will make the American debt more interesting.

Of course the American economy cannot sustain 18% interest rates, but it could sustain 7%, maybe 8% and that would make foreigners stand up and look at America.

So the question is why is there no pullback? Jim Cramer had an interesting insight in that there were pullbacks, but people were so busy focusing on the indicies that they did not realize the individual sectors pulled back. This is called correlation, where overall your position treads water even though overall you built up a position.

Will there be a pullback? Maybe, maybe not! I really don’t care since I am up on the year and have recovered all of my losses last year plus then some. And since I play long only I think that is pretty good.

Just as a final thought…

Bank of America has had pressure from the government to have certain board members resign. The pundits reaction is, “OMG the government is dictating terms”. Yet as Karen Finnerman said, “you know as much as the government pressured this, this board really did not do its job, the bigger question is who replaces them.”

Exactly Karen! Sticks to the facts and not automatically look at the bad side. After all if this were any other corporation where there was no government intervention the shareprice would be skyrocketing. In fact if the government did use its clout to force change at the bank I say, “go for it!”

As a good friend of mine (not gay) once said regarding gay marriages, “if people think gay people are going to give marriages a bad reputation I say let gay people marry after all hetero’s did not do an impressive job. Gays can only make it better.”

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4 Comments »

  • Michael said:

    I am curious how folks will be able to afford these houses with no jobs? Especially as banks are not lending but hoarding cash, folks are not spending as they do not see the economy getting better any time soon (sentiment indicator is BS look at the retail numbers..), unemployment is still skyrocketing….soon to increase more with GM and Chrysler’s job losses. Gas prices also mean folks have less to spend and now interest rates are going up due to treasury yields popping….why would you buy a house now when you can just wait for the rate to go back down? Remember the 16% drop in mortgage apps directly attributable to the interest rate pop? Our economy is based on the consumer (70%) and if they are not buying and cant due to costs going up because of commodity prices skyrocketing…how pray tell is this economy going to improve? The only reason the market went is up is speculators went after commodities and the market rose with them and coupled with the devaluation of our dollar caused the market to skyrocket on nothing but hot air and rhetoric. NO FUNDAMENTALS at all! You have companies that did better because they cut costs (fired people and closed doors) and had sales still go down but that is considered good? Folks are tightening their wallets not loosening them which is the only way this economy will recover…and that wont happen until all of the other bubbles pop. Commercial Real Estate, Credit Cards, and still residential real estate is beginning to accelerate down again as well with all of the alt a’s and ARMs for prime lenders about to reset at an even higher interest rate. I do hope you have stop losses because when this market reverses soon….I expect it to drop far south of March’s 667…..I do wish you luck!

    -Michael

    # 6 June 2009 at 2:21 pm
  • Christian Gross said:

    You know you are making my point? There is this huge drive towards negativity.

    So let’s walk through each argument.

    Q How will people buy houses if they have no jobs?

    A Not everybody is going to be unemployed

    Q Banks are hoarding cash

    A Maybe, maybe not. It depends on your credit rating no?

    Q Sentiment Indicator is BS

    A Really? So when it was pointing down were you saying, BS BS? Or are you saying that it is BS because it does not jib with your view of the world?

    Q Gas prices mean folks have less to spend

    A Yes sure if you have an SUV. I don’t happen to have one, and I am sure many American’s don’t either. Those folks are laughing themselves silly.

    Q Consumer is not buying

    A Maybe, but guess what it will not matter. With oil at 70 it is the emerging countries that will drive growth.

    Q The only reason the market went up…

    A Blah blah blah, and what did you say when the market went down? Same story or is it blah blah? Remember are you being biased?

    My final comment, is please stop being so provincial! America is am important economy, but in the future it will not revolve around the American consumer!

    # 9 June 2009 at 5:33 pm
  • Michael said:

    Christian,

    Thank you for responding. It appears that you and I disagree but I will work to provide a response to your counter-arguments.
    1) You are indeed correct that not everyone will be unemployed. However, I would put forth that the supply of houses on the market far out strips demand. Thus you will continue to have a massive drop in housing values. Moreover, the U6 unemployment percentage of underemployed/unemployed is around 16%. Couple this with an apparent complete reversal of many folks from a consumption focus to a savers mentality…this will prevent a lot of folks from buying homes. Moreover, with projected house values expected to drop, why would you buy a house? The value is probably going to drop anyways…why not wait? My statement that banks are hoarding cash is because of the deteriorating real estate (derivatives, commercial, residential) assets (legacy) banks still have on the books. Add to that banks cutting credit lines, making loans harder to get, and folks not wanting to apply for loans means banks are cash heavy but are reluctant to loan. I believe the sentiment indicator is BS because it is being misread. Folks do believe the economy will get better as do I. However, if you read the report, people do not feel comfortable with their situation now. That bodes ill will for the eceonomy as until the everyday consumer (70% of the economic power) starts spending again, the economy is toast. When 1 in 6 people are unemployed OR underemployed…folks will heard cash until they KNOW the worst is over and we haven’t seen anything yet. Unemplyment in my estimation will hit 11% by years end and possibly hit 12 or 13% by end of 2010. Stress tests were never done to this level. Folks keep blathering on about Inflation. I say the reverse is true. Higher commodity prices will only exacerbate the economic hardship for the average person. Add to this the Treasury yields skyrocketing…do you believe that the housing market will survive 6.5% or higher interest rates for folks with AAA credit and others having to pay 7.5% or more by close of this week possibly? I would argue that with 1) Higher Interest Rates due to 10YR treasury yields skyrocketing, 2) Higher Commodity Prices due to laughably premature speculation the US much less the world economy is doing better will do nothing but destroy whatever green shoots were starting to sprout up. Christian, I would argue we are in the eye of a huge economic storm. We still have a lot of assaults on the US economy 1) Commercial Real Estate, 2) Residential Prime Mortgage Defaults and 3) Credit Card Defaults that are to cause a lot more woe to the financial system. My overall argument about the sentiment indicator is that it is more qualitative and easily misread. Thank you for responding….!

    -Michael

    # 9 June 2009 at 6:30 pm
  • Christian Gross said:

    I completely agree with you that housing values will go down. It will go down until people can afford them. Is it massive? I don’t know since it will depend entirely on the local market. In some places those massive drops have already occurred.

    Regarding the “REAL” unemployment statistics… Ok whatever… The problem with the statistics is that there is no real way of knowing one way or another. When I see those situations around me what I do is take an average, look at the skew and cross my fingers.

    Saver mentality? YEAH RIGHT! I live in Switzerland (though grew up in Canada and the States) and here are savers! And do the Swiss splurge? Absolutely! Though they don’t do frivolous splurges.

    If American’s are truly becoming savers then they will spend on high ticket items because they will want quality. Because whereever I have see “savers” that is exactly what they do. Savers are people who weigh the benefits and costs of buying something and when they do buy they will pay more to get better quality.

    I actually think that while Wallmart and dollar stores are doing well that is not where the growth will be. It will be with companies that provide value. In Germany that company is Aldi. A discounter that has time and time again scored highly in the quality of products category. Aldi is not Wallmart, I would argue Aldi is better than Wallmart.

    Or are American becoming cheap skates? That means saving and not spending? Answer not likely because it goes against the grain of Americans. I just don’t see Americans as cheap skates. Though I could believe right now that they are trying to build up a cushion.

    Regarding the economy being toast, I say who cares because it will not matter in the bigger scheme of things. You know by reading my blog entries that the rise in commodity prices is what is going to get the global economy going again. And ALREADY I see my brother in Russia and sister in Ecuador doing better. They are living life as normal and things are becoming normal. THAT means they will be consuming, and it is their consumption that will drive the world economy.

    Does this mean the American consumer is getting a free break? NOT AT ALL… In fact if you look at the McDonald’s numbers it is the rest of the world that is providing the growth for McDonalds. And this is my entire point.

    Higher oil prices does not bother me because 4 years ago I switched my car from a higher consumption to lower consumption because I knew this oil thing would happen. When oil spiked to 147 it did not hurt our pocket book at all because we were consuming less. With our car I tank every two weeks.

    What will change in America is that they will not be wasteful anymore. Here are some examples of how I think Americans will cope:

    1) Air conditioning will be rationed and the house will heat up more.
    2) SUV’s of today will become a thing of the past.
    3) Pickup’s will become a thing of the past.
    4) Station wagons will become more popular.
    5) Houses will hold heat better due to better insulation.
    6) Household appliances will become more efficient.
    7) …

    I think you get the idea right? Obama’s move to make all of the government buildings more efficient is the smart thing to do, and I do think American’s will follow.

    And with these changes the pocket books of American’s will open and they will get richer again.

    If there is one change Americans are going to do is that they will calculate the bottom line. They will spend wisely. In the past they just spent, spent, spent…

    # 10 June 2009 at 3:12 am