Wednesday, August 10, 2011

Strike While The Iron Is Hot!

The Bond Market is Hot, Hot, Hot!!!!!! What does this Mean? It means that Interest Rates are becoming Lower, Lower, Lower!!!! The Fed made a Statement on Tuesday, August 9th, that they will keep interest rates low to mid- 2013. Three Members of FOMC dissented from the change of the statement from “extended period” to specifying mid-2013. This may have been the first time that the Fed has actually specified a timeframe!

Last Friday, August 5th, the S&P downgraded the U.S. Credit Rating from AAA rating to AA+. First time in history, the U.S. dropped below a AAA rating. As we found out on the following Monday, the Bond Market shrugged it off, and the Bond Market rallied about 40 points, while the Equity Markets tanked (over 600 points on the DOW).

Take a look at the Bond (based on the Fannie Mae 4.0% Coupon) on Wednesday’s (8/10/11) and you’ll notice the Rollercoaster ride:

What is reason for all of the sudden changes? Well, think of water being heated to a boil, then creating a combustion, if you will. The European Debt Crisis started last year (around May of 2010) when Greece needed a Bail out, then Ireland. Afterwards, more countries became targets for a Bailout, like Spain and Portugal. This year, Greece needed a second Bailout, and they settled with a “strategic default”. Also, Spain (again) and Italy started to become targets of a Bailout (this is still ongoing, as this is being written). After the U.S.’ Credit Downgrade, now there’s speculation that France will be following those same measures. Also, you have people looting and rioting in London because of their unhappiness with the economic pressures.

On the other side, you have China, whose economy has been flourishing over the past few years, and has been trying to rein in their growing inflationary problem by tightening their lending by raising interest rates at an alarming rate. Just this past Monday, Consumer prices jumped up 6.5%, which will (most likely) lead to more tightening by the Chinese Central Bank. There have been some reports lately, that some of the current global issues, may be about to affect China. They are just noticing a decline in home values (which many believe may create toxic loans in their system) and thoughts about an increase in Bankruptcies, as a result of the credit tightening. On a more local level, I speak with a lot of Longshoremen whom work at the docks in the Los Angeles Harbor. This is the time which China is sending shipments to the U.S. to meet the Holiday shopping, so they (the Longshoremen) typically are very busy unloading the extra cargo. Not this year! Most Longshoremen are concerned about having work and keeping their hours; so we are seeing a drop in the economy firsthand here!

As the Fed mentioned (in their statement), they are seeing the economy slow down more than they previously thought. This is on top of an economy that has not fully recovered from the last recession. Couple that with the uncertainty in the Euro Zone, then you have investors stashing their money into the U.S.’ Treasuries and MBS (Mortgage Backed Securities; also, considered Bonds). There is a lot of concern with Europe right now, that there is talk (don’t know if it will happen) that the EU may need to revert back to their own respective currencies. This is because the less performing countries are pulling the better performing countries much more than they can handle. The reason for the influx of money going into the U.S.’ debt, even though their Credit Rating dipped, is due to the U.S. is still (by far, about 3x larger than China) the largest economy in the world; so you cannot really (or fairly) compare the U.S. to the rest of the other AAA rated countries. The investors view the act by S&P to be more of a “political” motive vs. a “financial” motive. As a result, we’re currently experiencing a dramatic improvement in our interest rates (as you noticed by the graph above, which green means an increase in Bond prices and translates to lower interest rates).

Now, take a look at the graph below. You will see the height (Oct/Nov 2010) of the Bond Market (again, based on the Fannie Mae 4% Coupon) and we’ve exceed it. Interest rates are at an alarming new level.

Now, notice what happened in November (2010) when the Fed announced the Bond Purchase Program (otherwise known as Quantitative Easing 2, or QE2). The Equity Market artificially went up, while the Bond Market declined (interest rates rose). There were some assumptions made in the FOMC Statement that more will be done (most likely, QE3).

The Fed did state it will keep interest rates low until mid- 2013, which they are referencing to the Feds Fund Rate (money charged to Banks) to remain at the 0-.25%. We’ve been at this rate since end of 2008. Mortgage Interest rates have fluctuated during this time from the low- 4% range to the mid-5% range on average. This is a fairly wide spread.

“Strike while the Iron’s Hot!” We are currently at a very low interest rate level and many people are sitting on the fence, whether they are buying a home or looking to refinance. There may be many reasons to refinance:

1. To lower your interest rate
2. Remove yourself from monthly Mortgage Insurance on an FHA loan to a Conventional Loan (possibly at a lower interest rate)
3. Improve Cashflow for Real Estate Investors
4. Pull out some of your money from your Investment Properties, which you paid fully in cash to Purchase more Investment Properties (No Seasoning required, as of 6/28/11)

Those are just to name a few. The consequences may be another possible QE3, which will raise interest rates because money will flow from the Bond Market to the Equities Market; or possibly inflation starts to peak it’s ugly head sooner than people expect. In case you didn’t know, inflation is the Bonds’ worst enemy, as it erodes the value of the
Bond over time. This may be a possibility, as we rely on China for many of our goods, which their costs are increasing; and of course, that can be more costly to the U.S. Consumer. Why do you think Gold is still going up? It’s used by investors as a hedge against inflation, so many economists believe we’ll experience an inflationary problem in the near future.

For those whom are in the High Cost Counties, there will be a change coming in the maximum loan limits for Conventional and FHA loan programs effective October 1st, 2011. Let’s take Los Angeles County for an example. Currently, Los Angeles has a maximum limit of $729,750. Effective October 1st, it will drop to $625,500 (about $100,000 drop). This means that you have to have your loan closed by September 30th to qualify for this maximum loan amount; otherwise, you will become classified as a Jumbo loan (far more difficult to attain, especially, if you don’t have at least 20% equity or down payment). Mortgage Applications are on the rise, so that means Lenders are going to become busier and will need more time to close a loan (than the typical 30 day close). Currently, we’re about 45 days left to this deadline, so timing is critical, if you want/need to be in this range of borrowing money on a home.

For those of you whom are considering to buy a home, this is critical for many of the similar reasons as a refinance, as this will greatly increase the Affordability factor for many borrowers. As more borrowers qualify to buy, then it creates more competition on the available homes on the Market and the Affordability will shrink (possibly pricing you out of the Market). Now, if you’re concerned about your job (which many are justifiably are), then it’s definitely a valid reason to sit still, as you don’t want to jeopardize your financial well being.

Take a look at this short video/scenario, if you’re a Renter on why it may make sense for you to buy vs. renting (click here)

Here’s a short video/scenario, if you’re a current homeowner considering to sell and buy a larger home (click here)

The point to this post is to let you know that you may have an opportunity here to really improve your lives and to make the most out of it while it’s available. A lot of variables can change at any given moment, so don’t miss out on YOUR OPPORTUNITY here! Interest rates are relative, which the Lenders are all competitively priced. My best suggestion to you is to make sure you’re able to get your loan done, the Lender won’t treat you like a number and the Loan Officer will communicate with you throughout the process. The Market is very volatile, as you saw on the first graph, so it is imperative to make it less stressful on yourself to work with somebody, whom can accomplish those objectives.

Mike Bjork is a Sr. Mortgage Planner with First Cal Mortgage and assists Home Buyers with purchasing their homes, provide financing to Real Estate Investors and refinancing current homeowners to lower payments or pull money out of their equity (through a cashout refinance). He can be reached through his website at and originates mortgages only in the state of California.

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