Tuesday, September 25, 2007

Ramdom Postings

. OH REALLY - Former Fed Chairman Alan Greenspan predicted on Friday 9/14/07 that the Fed will have to raise rates to double-digit levels in the future to fight inflation. The last time the Fed funds rate was at least 10% was November 1984. The current rate is 4.75% after last Tuesday’s rate cut (source: USA Today, Federal Reserve).

WE OWE, THEY COLLECT - Fiscal year 2007 (i.e., 10/01/06 to 9/30/07) has just 1 month still to be reported. Through 11 months of the current fiscal year, the government has collected $2.3 trillion of revenue (i.e., tax receipts), an amount that is greater than the yearly revenue totals from every fiscal year in the history of the country except for 1 year (source: Treasury Department).

A LONG LIFE, BUT NOT THE LONGEST - The life expectancy of a new-born American baby is 77.9 years today, an increase of more than 8 years in the last 50 years. However, the USA ranks only 42nd in terms of life expectancy at birth among all countries (source: Center for Disease Control, AP).

AT THE END - 27% of Medicare expenses are paid during an individual’s final 1-year of life (source: USA Today).


A HELPING HAND - 5 out of every 6 employer-sponsored 401(k) plans has some form of employer match for the elective deferrals invested by participating employees (source: Vanguard).

ALL TALK, NO ACTION - More than 33 years ago, President Richard Nixon announced the following to American citizens in his January 1974 State of the Union address: “At the end of this decade, in the year 1980, the US will not be dependent on any other country for the energy we need to keep our transportation moving” (source: Association for the Study of Peak Oil and Gas – USA).

LESS OF OURS, MORE OF THEIRS - In the last 27 years (i.e., since 1980), the daily amount of oil produced in the USA has fallen 40% while foreign oil imports has climbed +92% (source: Department of Energy).

THE BILL HAS COME DUE - As adjustable rate mortgages are reset from the lower introductory rates paid in the early years of the loans, American borrowers are expected to spend $42 billion in higher mortgage payments in 2008 than they’ll spend in 2007 (source: Fortune).

GROSS AND NET - In the last 5 years, the gross value of real estate owned by Americans has gone up +62%. Over the same period, the outstanding debt from home mortgages has grown +79% (source: Federal Reserve).

FOR SALE - In March 2005, there were 2.3 million existing homes for sale. In July 2007, the number of existing homes for sale had risen to 4.6 million, or twice as many as the total from 28 months earlier (source: NAR).

THEN AND NOW - 52 economists surveyed in early September 2007 believe the chances of the USA falling into a recession within the next 12 months are slightly greater than 1 in 3 (36%). A different group of 56 economists surveyed in late January 2007 believed the chances of a recession occurring in 2007 were only 1 in 25 or just 4% (source: Wall Street Journal, USA Today).

Interest rates

Last week’s announcement by the Federal Reserve to cur interest rates was a good sign for consumer loans and holders of adjustable rate mortgages. It was no help the 30-year fixed rate mortgage. Interest rates on fixed loans actually increased after the Fed announced its interest rate cut. What’s up with that?

Initially, both Stocks and Bonds rallied on the comforting words from the Fed - but as Bond Traders analyzed the potential future impact of the Fed cut over the following days, they started selling off Bonds with both hands, causing fixed home loan rates to rise by .125 to .25%, actually higher than where they stood before the Fed Rate Cut. What happened?

Traders realized that a Fed Funds Rate cut could encourage increased spending by consumers and businesses, as borrowing costs will now be cheaper for Home Equity Lines of Credit, consumer loans like car loans and credit cards, and business loans as well.

Increased spending can translate into increased inflation in the long run - and inflation is bad news for Bonds. Bonds deliver a fixed rate of return, and the value of that return is eroded by inflation. So Bond Traders sold, the price of Bonds moved lower, and home loan rates moved higher as a result. Counterintuitive to many...but its reality, and now you understand what many do not - including much of the mainstream media.

Monday, September 24, 2007

Long-term rates riase on Fed's rate cut

Last week’s announcement by the Federal Reserve to cur interest rates was a good sign for consumer loans and holders of adjustable rate mortgages. It was no help the 30-year fixed rate mortgage. Interest rates on fixed loans actually increased after the Fed announced its interest rate cut. What’s up with that?

Initially, both Stocks and Bonds rallied on the comforting words from the Fed - but as Bond Traders analyzed the potential future impact of the Fed cut over the following days, they started selling off Bonds with both hands, causing fixed home loan rates to rise by .125 to .25%, actually higher than where they stood before the Fed Rate Cut. What happened?

Traders realized that a Fed Funds Rate cut could encourage increased spending by consumers and businesses, as borrowing costs will now be cheaper for Home Equity Lines of Credit, consumer loans like car loans and credit cards, and business loans as well.

Increased spending can translate into increased inflation in the long run - and inflation is bad news for Bonds. Bonds deliver a fixed rate of return, and the value of that return is eroded by inflation. So Bond Traders sold, the price of Bonds moved lower, and home loan rates moved higher as a result. Counterintuitive to many...but its reality, and now you understand what many do not - including much of the mainstream media.

Jobs gains and effects on housing

While it’s true that the state is not adding jobs as quickly as it did during the building/housing boom years, job growth continues. The California Employment Development Department reported last week that 21,000 payroll jobs were added during the month of August. It was an unexpected gain from the job loss that occurred in July.

The construction, real estate and finance sectors are not adding any new jobs but gains are reported in technology, government, medical and service sectors.

Continued job growth is important to grow ourselves out of the current housing recession. During the last housing recession that began in 1992 and lasted until 1996, a million jobs were lost in California. Most of the jobs lost were high paying manufacturing and engineering jobs in the defense industry that began in 1991.

The end of the Cold War, presented an opportunity for a previous administration to cut defense spending thus reducing the number of troops, military installations and defense research. California, which had been the recipient of much defense industry growth, plunged into a jobs recession. The loss of jobs and high unemployment, created a housing bust with a higher rate of foreclosures and short sales than we have today.
This housing recession did not result from the lack of jobs or poor economic performance. California and most of the national economy has been doing quite well. It resulted from a lack of confidence. Buyers decided that housing prices had exceeded their affordability and stopped buying. As consumer confidence returns so will the housing market.