Market Conditions- October 2008

Market Conditions-October 2008 By CJ Winchester Current credit crunch and liquidity of financial institutions has rippled fear across our nation and beyond. Started with 4 specific instances- 1. 1997 Community Reinvestment act forcing reduction of lending standard. 2. Tax Payer Relief act of 1997 which made home ownership the best tax free investment in America. (No taxes on profits up to $500,000 when home is sold) 3. 9/11 terrorist act which resulted in artificially low interest rates to stimulate the economy (to dodge a recession) 4. Innovation in mortgages in order to comply with the reinvestment act—just happened to be extremely profitable for everyone in the Real Estate Industry. Home ownership in America soared to 69.2% of all households in 2004. Should 7 out of 10 people be homeowners? Homeownership may be more responsibility than some people can manage. Were we all participants? Because of lower rates, did we take on more debt? Perhaps a home loan with an interest only feature. Did we stretch our income to buy a larger home? Did we borrow money to start a business? The previous generation worked to pay off their mortgage as soon as possible. They operated their businesses without appreciable debt. They understood that the lack of debt is an important part of freedom. Recently we have seen problems with mortgage-backed securities as market conditions have changed. This has forced banks to tighten their lending standards ultimately reducing access to credit. This was created by lax lending standards and providing loans to people who could not afford the homes thru adjustable rate mortgages or other programs that were not sustainable. Compound this with deceptive lending practices and overconfident investors wanting higher yields –and the deck of cards comes tumbling down. No one likes the Government bailout –especially how it was rushed thru and passed as an emergency measure. But if the government had allowed Bear Stearns, FHLMC, and FNMA to go into bankruptcy---almost every money market fund in the US and almost 25% of pension funds would have spiraled downward. 401 K plans could have become worthless. Of the 9000 commercial banks, 98% of them could have gone into receivership if their capital was gone. There is a real chance that City; County, State, and Federal governments could have failed. We can wring our hands and complain about the government stepping in but it was the best thing that could have happened in the circumstances. Do not blame the politicians alone—we were all at risk. Lets hope that the funds put into the Economic stimulus act to buy mortgage related assets from troubled firms and hold them until a stabilized market can effectively determine their true value which will then allow them to be sold on the Open market. Ten years ago, Chrysler was given an assistance package and it has been paid back in full. Let’s hope a profit can be made and taxpayers will be paid back. Let’s talk about a Bear Market-a natural occurring event about every 5 years. It is an extended period of time when people sometimes panic and sell all of their stock. Bear market is a temporary interruption of a market upward trend. Dow Jones averages 1. Oldest US market index 2. Way of measuring stock values. Snapshot of how the market is trading. 3. Started with 12 major companies. It is now 30 big US companies 4. 3M, Alcoa, American Express, AT&T, Bank of America,Boeing,Caterpillar, Chevron, Citigroup, Coca-Cola, Dupont, ExxonMobile, General Electric, General Motors, Hewlett-Packard, Home Depot, IBM, Intel, Johnson & Johnson, JP Morgan Chase, Kraft Foods, McDonald’s, Merck, Microsoft, Pfizer, Proctor & Gamble, United Technologies, Verizon Communications,Wal-Mart, and Walt Disney Everyone knows that we have had a global financial breakdown with banks unwilling to lend to other banks but what about mortgage and Real Estate. There is no shortage available for home loans. No freezing of credit to purchase or refinance- 90% of loans are made thru FHA, FHLMC, or FNMA. All three are now run by US government and the new mortgage backed securities are backed by the Federal government therefore there will be a global market for these securities. Loan terms and credit requirements have strengthened but you can still get in a home with 3% downpayment and mortgage rates are still low. Why are rates not lower? In order to fund the rescue, the government is guaranteeing the Treasury securities and in order to raise money, the Treasury has had to offer higher interest rates to sell the bonds. The rate is always higher than the FNMA 60 day price as delinquency and prepayment has to be factored in . Since the bonds are guaranteed, it is more attractive to investors but all of this increases the interest rate for home loans. It is also a common practice now to price loans according to risk which is determined by FICO score and amount of downpayment. Money is clearly available and long as the client can qualify for it. Getting back to basics, doesn’t this make sense to determine if someone can truly afford to make the mortgage payment? On a positive note—Sunday Dallas Morning News business section shows the real estate market in this area is stabilizing. Average days on market is about 80 days. Not bad. We are fortunate to be in a growing community with people who are willing to understand that “This too shall pass”. Let’s make each day count as we reach out with a smile and a willingness to lift up our neighbor and face the future together.