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