Mayor McKae’s Blog
April 16, 2010
Goldman Sachs Indicted for Fraud
Just when you thought things were getting back to normal. This pops up, or was it the comment a spouse makes to another, “honey maybe we should put another $100,000 in the market”? GOD FORBID!
The next 8-10 years you will see an enactment of the 1974 to 1983 years. 1974 was then the worst recession since the Great Depression. More money was lost out in the stock and bond markets than in the Great Depression. Well it happened again.
I have written this before, but it is highly improbable you will see back-to-back 40% returns on the stock market and a similar bull market in Bonds. From a probability and statistical standpoint the chance of a 40% standard deviation in the stock market is less than 10%, it happened last year. Two years in a row very slim.
Sooner or later investors will find the returns on Money Market funds to low and the stock and bond market too risky. Private investment in Hedge Funds, are you kidding me Mr. Madoff?
Where will they go? I look at the past and I say it is real estate. The real estate market is coming to life; REIT’s are being bought by other REIT’s, median home prices are going up. Foreclosures and short sales are becoming a smaller piece of the home sale market as higher end homes are pushing up median prices. Silicon Valley is hiring and confidence is being restored in Silicon Valley.
Timing was auspicious for the SEC to announce the indictment of Goldman Sachs. The Senate is deadlocked on a finance regulation bill, Obama’s Boys are upset, banks are not lending and pay is outrageously high for Wall Street. Look at the fellow who has lost his job and has stopped looking. He reads that the average pay on Wall Street is at record highs. Are you not surprised the Tea Party is growing across the country?
Let me tell you why I think interest rates will move up. It is called the “Carry Market” among traders. Let’s take a bank-trading department. The bank management must review risk and capital against loan applications. On one hand the bank has their capital invested in Treasury Bonds and Treasury Bills. Let us say this bank has their excess capital in 10-year Treasury Bonds. 10-year Treasury Bonds most mimic mortgages. The Bank has the bonds at par, for example $1,000,000. The coupon is 3.83%, example only as this is the last quoted yield. The Bank does not put up $1,000,000. The Bank is allowed to use leverage. They put up $100,000, actually much less. But I will use this as an example. The banks borrow money from the Federal Reserve System at ¾%.
$100,000 invested
$38,300 annual interest
$6,750 interest expense ($900,000 times .75%)
$31,550 net returns per year
31.6% annual return on invested capital
Alternative is Home Buyer with 20% down 700 credit rating and 4 to 1 ratio of income to mortgage payment including property taxes. The interest rate on a jumbo 30-year mortgage is 5.9% with 1 point.
Do you think there is an incentive for the bank to lend money to the homebuyer when they replace a 31.6% return on capital? Why should they?
Prior to March 31, 2010 the bank had a field day, the FED was buying, 90% of the mortgages ended up in US Government hands. The banks acted as intermediaries and servicing agents and they received double-digit returns on their capital. Why should there be a surprise when banks announce record earnings and trader’s earn record earnings. The traders made it, not the old-line bankers.
Do you understand why the examinations on Capitol Hill are over the bank using the trading desk for their own benefit rather than providing loans to businesses and home buyers. The banks are using taxpayer money to line their pocket with leveraged trades. All they are today are Hedge Funds insured by the US Government. That is why the Finance Index has out performed all other indexes and averages. That I why the Tea Party is getting stronger as they see tax payers are lining the pockets of bank traders at the expense of tax payers.
Now, I am not a Tea Party member, but I do know history. If you go back again in time and read Teddy Roosevelt life story, you will see a similarity of the Robber Baron of the late 19th Century and TR work as a Progressive to change and stop the abuses that were going on at the time.
What stops this? The FED raises short-term rates, the Discount Rate; a rate that does not affect the Average American. It only affects banks and brokers. When this happens bond prices drop as yields move up and the bank losses money on the bonds and their cost of money increases. If the FED raises rates by ¼ of a point or .25% to 1%, what is the effect?
$100,000 invested
$38,300 interest income
$9,000 cost of money
$61,274.51 loss on value of 3.83% bonds in a market where bond yield is now 3.83% - .25% or 4.08%
-$31,974.51 loss on investment.
When that happens the game is over and the banks are now back to where they should be lending money to qualified borrowers and helping the economy grow and employing the fellow who stopped looking for a job.
From Yahoo Finance this is the rate market as it was at 4PM Friday April 16, 2010:
30 Year Fixed
Today: 5.19% Last Week: 5.23%
15 Year Fixed
Today: 4.38% Last Week: 4.48%
1 Year ARM
Today: 3.37% Last Week: 3.89%
30 Year Fixed Jumbo
Today: 5.90% Last Week: 5.95%
5/1 ARM
Today: 3.94% Last Week: 3.97%
3/1 ARM
Today: 4.33% Last Week:4.40%
Study the history books and see why I am saying interest move up and why median home prices will move up.
Gary McKae
Tuesday, April 20, 2010
Thursday, April 8, 2010
MAYOR McKAE’S BLOG
APRIL 6, 2010
My initial intention was to write you about my experiences as Mayor and Town Council Person of Woodside and how you can interact with Planning Departments when you decide to buy, remodel or build anew. What changed my mind was a visit from a Well-Known Big Bank Mortgage Representative who covers our office. He asked me to give him direction of interest rates. WOW! I thought, a Big Bank is unable to give him direction; I must get my BLOG out!
Then after I wrote the Blog, this came out and I went back to the Blog to add and update.
END OF CHEAP MORTGAGES MAY BE NEAR AS RATES LEAP, Front Page, San Jose Mercury News, Thursday, April 8, 2010
On March 31st the US Government by way of the FED, Federal Reserve System, stopped buying mortgages in the after market. The total is somewhere’s around $1.25 trillion to my recollection. That is 80% of the mortgage market. The FED has kept short-term rates at or near Zero and has no intention of moving rates up at this moment. The major complaint of the Obama Administration has been banks have not been lending to the degree the administration desired. On Good Friday we had two bombshells explode, first was the employment/unemployment numbers and the other was the direction of bond trading on the shortened day. Most other markets except bonds and futures were closed, and they were only open for a partial trading session.
As I have said or written in the past, I expected rates to move up. I expect home prices to increase and right now I think you could see a substantial pop in home prices, as inventories are low. What will cause this all to happen?
With the FED buying bonds rates were kept artificially low and the spread between US Government Debt and Mortgage Debt had a lower or narrower than normal relationship. In addition to the spread difference banks were unwilling to lend until they knew the direction of rates and the removal of the artificial peg created by US Government buying. While there were buyers of real estate, many of them were frustrated over the terms and conditions and underwriting necessary to complete a loan. The major road block had been the terms the US Government had put on buying bonds in the after market and the terms FANNIE MAE and FREDDIE MAC put on buying the bonds. With the banks belief rates were artificially low they failed to issue loans for their portfolios to other than strong clients with long term relationships, in my opinion
The POP or Bombshells we had on Good Friday was better than expected employment numbers added to continuing good numbers on the economic recovery. A recovery that appears to be without inflation to make things even better! The US Dollar rallied and interest rates went up. When trading began on Monday morning 30-year treasuries touched 5%, and 10-year US Treasuries hit 4%!
The Dollar continued its rally as Greece remained a question and the Euro remained under selling pressure.
I asked him where are conventional 30-years mortgages, and Jumbo’s at? 5.25% and 5.75% he said. Gone are the days of 4.75% where I advised all of you to load up on! But, he said, I don’t know how long they will last, that’s why I am here. Where do you think the rates will go? I said, 6.5% on jumbo’s and the floodgates of loan availability will open. His next comment was what about housing prices? My next comment was a move back to my Bull Whip Economics, A big POP in prices I said.
Why 6.5%, how did I come up with that number? That is simple, the mortgage rates at the time prior to the FED Mortgage Buying Program was 6%! It is reasonable to assume mortgage rates will move up to that level. I gave another ½% for the printing presses and U.S. government spending. Frankly, I expect we will see 7% within a year and a half.
What else makes me believe that mortgage rates will move to 6.5%? It has to do with the spread relationship between 30-year US Treasuries and Mortgages. If you look at conventional and jumbo loans at 5.25% and 5.75% and the 30-year trading at a 5% yield the spread is too narrow. There should be at least a 100 basis point (1%) spread.
On the floodgates opening, it is my opinion that the spread between cost of funds, short term interest rates and long term mortgages will open up to give bankers the spread that guarantees them a profit and their ability to manage their portfolio of loans by maturity.
My next call was to check with a well-known architect who works with builders over his outlook for the market and his workload. I have many clients looking to build but they are waiting, he said. Waiting for what, I said, a signal. I guess so, he said, but based upon the inventory out there, I expect a POP in prices as they all scramble for homes to buy, blow down and build new. What about those that are in the planning stage, how are they doing. Looking for financing, he said.
To me, that all ads up to the Bull Whip hitting the backside of home prices. Why the Bull Whip? It is all about money and availability of credit. Liquidity moves prices. When you have a lack of liquidity prices goes down. The availability of liquidity prices go up. Banks create liquidity. The FED creates liquidity to the Banks. Value is all in the eyes of the beholder. If cash is available to buy value is there. If cash is not available value goes down to the level of available liquidity. Do you remember the Law of Supply and Demand from Economics 101?
Again I tell you get out and buy today! If you have great credit and can get loan commitments you are in the drivers seat. You can call your prices. Don’t wait until the bell rings; the door of opportunity is not going to expand to you and all the others who decide to buy. It always happens, one day 3 people call for the same house and a bidding war ensues. It doesn’t matter how long it has been on the market. I recently spoke to a manager of another office who told me about that situation of there agents in his office putting offers in on a property in Portola Valley which was on the market for 6 months and then POP, the Bull Whip hit and it became a bidding war.
The final comment I need to add is a comment from CNBC. Just as I finished my commentary, the “bing” rang on my IPhone and CNBC announced that, “Most Americans Say Now Is the Time to Buy a House: Poll”. The article goes on to say that nearly two-thirds of Americans think the time is right to buy a house, with a majority believing prices will be the same of higher over the next year. The poll comes from a survey released by Fannie Mae today, Tuesday, April 6, 2010. I will be emailing the link to you later today.
See the attachment for more on Where Rates Are Heading.
Good Buy! Gary McKae
APRIL 6, 2010
My initial intention was to write you about my experiences as Mayor and Town Council Person of Woodside and how you can interact with Planning Departments when you decide to buy, remodel or build anew. What changed my mind was a visit from a Well-Known Big Bank Mortgage Representative who covers our office. He asked me to give him direction of interest rates. WOW! I thought, a Big Bank is unable to give him direction; I must get my BLOG out!
Then after I wrote the Blog, this came out and I went back to the Blog to add and update.
END OF CHEAP MORTGAGES MAY BE NEAR AS RATES LEAP, Front Page, San Jose Mercury News, Thursday, April 8, 2010
On March 31st the US Government by way of the FED, Federal Reserve System, stopped buying mortgages in the after market. The total is somewhere’s around $1.25 trillion to my recollection. That is 80% of the mortgage market. The FED has kept short-term rates at or near Zero and has no intention of moving rates up at this moment. The major complaint of the Obama Administration has been banks have not been lending to the degree the administration desired. On Good Friday we had two bombshells explode, first was the employment/unemployment numbers and the other was the direction of bond trading on the shortened day. Most other markets except bonds and futures were closed, and they were only open for a partial trading session.
As I have said or written in the past, I expected rates to move up. I expect home prices to increase and right now I think you could see a substantial pop in home prices, as inventories are low. What will cause this all to happen?
With the FED buying bonds rates were kept artificially low and the spread between US Government Debt and Mortgage Debt had a lower or narrower than normal relationship. In addition to the spread difference banks were unwilling to lend until they knew the direction of rates and the removal of the artificial peg created by US Government buying. While there were buyers of real estate, many of them were frustrated over the terms and conditions and underwriting necessary to complete a loan. The major road block had been the terms the US Government had put on buying bonds in the after market and the terms FANNIE MAE and FREDDIE MAC put on buying the bonds. With the banks belief rates were artificially low they failed to issue loans for their portfolios to other than strong clients with long term relationships, in my opinion
The POP or Bombshells we had on Good Friday was better than expected employment numbers added to continuing good numbers on the economic recovery. A recovery that appears to be without inflation to make things even better! The US Dollar rallied and interest rates went up. When trading began on Monday morning 30-year treasuries touched 5%, and 10-year US Treasuries hit 4%!
The Dollar continued its rally as Greece remained a question and the Euro remained under selling pressure.
I asked him where are conventional 30-years mortgages, and Jumbo’s at? 5.25% and 5.75% he said. Gone are the days of 4.75% where I advised all of you to load up on! But, he said, I don’t know how long they will last, that’s why I am here. Where do you think the rates will go? I said, 6.5% on jumbo’s and the floodgates of loan availability will open. His next comment was what about housing prices? My next comment was a move back to my Bull Whip Economics, A big POP in prices I said.
Why 6.5%, how did I come up with that number? That is simple, the mortgage rates at the time prior to the FED Mortgage Buying Program was 6%! It is reasonable to assume mortgage rates will move up to that level. I gave another ½% for the printing presses and U.S. government spending. Frankly, I expect we will see 7% within a year and a half.
What else makes me believe that mortgage rates will move to 6.5%? It has to do with the spread relationship between 30-year US Treasuries and Mortgages. If you look at conventional and jumbo loans at 5.25% and 5.75% and the 30-year trading at a 5% yield the spread is too narrow. There should be at least a 100 basis point (1%) spread.
On the floodgates opening, it is my opinion that the spread between cost of funds, short term interest rates and long term mortgages will open up to give bankers the spread that guarantees them a profit and their ability to manage their portfolio of loans by maturity.
My next call was to check with a well-known architect who works with builders over his outlook for the market and his workload. I have many clients looking to build but they are waiting, he said. Waiting for what, I said, a signal. I guess so, he said, but based upon the inventory out there, I expect a POP in prices as they all scramble for homes to buy, blow down and build new. What about those that are in the planning stage, how are they doing. Looking for financing, he said.
To me, that all ads up to the Bull Whip hitting the backside of home prices. Why the Bull Whip? It is all about money and availability of credit. Liquidity moves prices. When you have a lack of liquidity prices goes down. The availability of liquidity prices go up. Banks create liquidity. The FED creates liquidity to the Banks. Value is all in the eyes of the beholder. If cash is available to buy value is there. If cash is not available value goes down to the level of available liquidity. Do you remember the Law of Supply and Demand from Economics 101?
Again I tell you get out and buy today! If you have great credit and can get loan commitments you are in the drivers seat. You can call your prices. Don’t wait until the bell rings; the door of opportunity is not going to expand to you and all the others who decide to buy. It always happens, one day 3 people call for the same house and a bidding war ensues. It doesn’t matter how long it has been on the market. I recently spoke to a manager of another office who told me about that situation of there agents in his office putting offers in on a property in Portola Valley which was on the market for 6 months and then POP, the Bull Whip hit and it became a bidding war.
The final comment I need to add is a comment from CNBC. Just as I finished my commentary, the “bing” rang on my IPhone and CNBC announced that, “Most Americans Say Now Is the Time to Buy a House: Poll”. The article goes on to say that nearly two-thirds of Americans think the time is right to buy a house, with a majority believing prices will be the same of higher over the next year. The poll comes from a survey released by Fannie Mae today, Tuesday, April 6, 2010. I will be emailing the link to you later today.
See the attachment for more on Where Rates Are Heading.
Good Buy! Gary McKae
Market Matters Beyond the Headlines
Mayor McKae’s Blog March 19, 2010
Subject: Market Matters Beyond the Headlines: Nabbing bargain basement about to end?
I have attached an article from the Wall Street Journal specially formatted for consumers. You are welcome to print it, share it via email or post it on your social websites.
At the end of this month the Federal Reserve will stop buying mortgages in the after market. Many analysts predict a rise in interest rates by year end.
MAKING SENSE OF THE STORY FOR CONSUMERS
Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers. With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.
The federal tax credit for home buyers also is scheduled to end April 30. The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers. In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to California Association of Realtors otherwise to be known as C Association of Realtors 2009 Survey of California Home Buyers.
Rising interest rates will have an effect on home buyers. For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment. If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.
By JAMES R. HAGERTY
Is it time to rush out and buy a house before mortgage rates go up?
As the Federal Reserve winds down its intervention in the mortgage market, rates on home loans are generally expected to rise at least modestly during the rest of this year from today's unusually low levels. Some analysts believe mortgage rates will jump to around 6% by year end from 5% in recent weeks, while others see only a slight increase.
Meanwhile, federal tax credits available for some home buyers are due to expire at the end of April, adding to the sense of urgency many shoppers feel.
"I'd hate to miss out on really low [mortgage] rates" or the tax credit, says Jennifer Hale, a veterinarian who is looking for a new home near Minneapolis with her fiancé, Lawrence Nystrom.
If rates do go up sharply, that will have a big effect on home buyers. Richard Redmond, a mortgage adviser at All California Mortgage in Larkspur, Calif., offers the example of a couple with combined pretax income of $100,000 a year and debt obligations (excluding mortgage) of $500 a month. At a 5% mortgage rate, he figures, the couple could qualify for a loan big enough to buy a $590,000 house, assuming a 20% down payment. At 6%, that would fall to $540,000.
Since late 2008, 30-year fixed-rate mortgages have been available for people with strong credit records at around 5%, near the lowest levels since the 1950s, thanks to the Federal Reserve's heavy purchases of mortgage securities. At the end of March, the Fed is due to stop buying the securities. Most mortgage analysts think the immediate effect of the Fed's withdrawal will be modest.
More Weekend Investor
Where to Find the Money
Intelligent Investor: Why You Should Get a Bigger Slice of Earnings
Tax Report: File Away, but Pick the Right Status
Coupon Clipping: Playing a Calmer Corporate-Bond Market
Getting Going: The Home-Credit Derby Has Its Price
Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York, estimates that the Fed move will add a maximum of about 0.25 percentage point to mortgage rates. "There is a lot of private money on the sidelines," waiting to buy mortgage securities once the Fed stops gobbling most of them up, Ms. Goodman says. She points to banks, money managers and foreign investors.
What happens to interest rates over the rest of this year depends on many factors that are hard to predict, including the strength of the economy, Fed policies and foreign investors' willingness to buy U.S. debt.
Projections vary widely. At the lower end of the scale, analysts at Credit Suisse and FTN Financial Capital Markets forecast that mortgage rates will be in a range of roughly 5% to 5.25% at the end of 2010. Moody's Economy.com projects about 5.7%, and Barclays Capital 6%. Barclays cites a general rise in interest rates propelled by heavy government borrowing and a strengthening economy as the main factors.
John W. Anderson, a broker at Twin Oaks Realty of Crystal, Minn., who is helping Ms. Hale and Mr. Nystrom search for a house, says the tax credit and fear of higher interest rates are motivating buyers "to move a little faster." But he cautions against moving too fast because of the risk of overpaying or ending up with a home you don't really like. "Getting the right home is the No. 1 thing," he says.
Subject: Market Matters Beyond the Headlines: Nabbing bargain basement about to end?
I have attached an article from the Wall Street Journal specially formatted for consumers. You are welcome to print it, share it via email or post it on your social websites.
At the end of this month the Federal Reserve will stop buying mortgages in the after market. Many analysts predict a rise in interest rates by year end.
MAKING SENSE OF THE STORY FOR CONSUMERS
Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers. With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.
The federal tax credit for home buyers also is scheduled to end April 30. The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers. In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to California Association of Realtors otherwise to be known as C Association of Realtors 2009 Survey of California Home Buyers.
Rising interest rates will have an effect on home buyers. For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment. If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.
By JAMES R. HAGERTY
Is it time to rush out and buy a house before mortgage rates go up?
As the Federal Reserve winds down its intervention in the mortgage market, rates on home loans are generally expected to rise at least modestly during the rest of this year from today's unusually low levels. Some analysts believe mortgage rates will jump to around 6% by year end from 5% in recent weeks, while others see only a slight increase.
Meanwhile, federal tax credits available for some home buyers are due to expire at the end of April, adding to the sense of urgency many shoppers feel.
"I'd hate to miss out on really low [mortgage] rates" or the tax credit, says Jennifer Hale, a veterinarian who is looking for a new home near Minneapolis with her fiancé, Lawrence Nystrom.
If rates do go up sharply, that will have a big effect on home buyers. Richard Redmond, a mortgage adviser at All California Mortgage in Larkspur, Calif., offers the example of a couple with combined pretax income of $100,000 a year and debt obligations (excluding mortgage) of $500 a month. At a 5% mortgage rate, he figures, the couple could qualify for a loan big enough to buy a $590,000 house, assuming a 20% down payment. At 6%, that would fall to $540,000.
Since late 2008, 30-year fixed-rate mortgages have been available for people with strong credit records at around 5%, near the lowest levels since the 1950s, thanks to the Federal Reserve's heavy purchases of mortgage securities. At the end of March, the Fed is due to stop buying the securities. Most mortgage analysts think the immediate effect of the Fed's withdrawal will be modest.
More Weekend Investor
Where to Find the Money
Intelligent Investor: Why You Should Get a Bigger Slice of Earnings
Tax Report: File Away, but Pick the Right Status
Coupon Clipping: Playing a Calmer Corporate-Bond Market
Getting Going: The Home-Credit Derby Has Its Price
Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York, estimates that the Fed move will add a maximum of about 0.25 percentage point to mortgage rates. "There is a lot of private money on the sidelines," waiting to buy mortgage securities once the Fed stops gobbling most of them up, Ms. Goodman says. She points to banks, money managers and foreign investors.
What happens to interest rates over the rest of this year depends on many factors that are hard to predict, including the strength of the economy, Fed policies and foreign investors' willingness to buy U.S. debt.
Projections vary widely. At the lower end of the scale, analysts at Credit Suisse and FTN Financial Capital Markets forecast that mortgage rates will be in a range of roughly 5% to 5.25% at the end of 2010. Moody's Economy.com projects about 5.7%, and Barclays Capital 6%. Barclays cites a general rise in interest rates propelled by heavy government borrowing and a strengthening economy as the main factors.
John W. Anderson, a broker at Twin Oaks Realty of Crystal, Minn., who is helping Ms. Hale and Mr. Nystrom search for a house, says the tax credit and fear of higher interest rates are motivating buyers "to move a little faster." But he cautions against moving too fast because of the risk of overpaying or ending up with a home you don't really like. "Getting the right home is the No. 1 thing," he says.
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