Marc's Mortgage Matter's

From the You-should-have-taken-Little-League-more-seriously department: The average alary for major league baseball players last year was $2.7 million. It was $8.3 million for the New York Yankees. 

KB Home, whose joint venture deal with Bank of America is rumored to be in trouble, reported a 32% drop in home orders for the December-to-February quarter compared to it's year-ago results. Builders everywhere are grappling with potential buyers who are in no hurry to sign on the dotted line given the potential of falling prices and cheaper inventory coming onto the market, unemployment & a plodding recovery, and tighter documentation and underwriting standards. 

Mark Twain wrote, "The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin." It is "tax time" for many in the US, where interest paid on a home mortgage is still tax deductible. The government seems interested in phasing this out for many (2nd homes as a start, perhaps gradually lowering the interest dollar level). But this is a perk that many in the US seem to be foregoing as all-cash purchases of homes continue to increase . 

"You want proof of inflation? A 1998 Honda Accord EX was purchased new for $22,000. A 2011 Honda Accord EX now costs $22,324, with same options, and is a much more refined car. But that 1998 Honda Accord, when purchased, cost $11.50 to fill up and yesterday cost $60 to fill the tank - a 421% price increase!" Aside from that, subdued inflation is one of the components that are helping the US stock market, which is also being helped by low interest rates (the Fed's accommodative policy) and strong corporate earnings. Money is still pouring out of fixed income investments and flowing into equities and hedge funds are using leverage to buy more and more stocks. The big question is what happens to stock investments when the Fed starts increasing rates? But last week Federal Reserve Chairman Ben Bernanke said that the Fed will "respond" if inflation pressures persist, but made clear that is not his expectation.

Henry Kissinger was recently asked if he’d read a certain, new book on foreign policy and answered “I don’t read books. I write them.” Much less pompous is America ’s greatest movie director, John Waters, who said “I pride myself on the fact that my work has no socially redeeming value.” Here’s Kissinger showing his poor manners by attending an event with two Presidents and falling sound asleep. 

Here’s another wonderful, wacky Frank Gehry building, this one on the M.I.T. campus. I don’t know the details, but M.I.T. is apparently suing Gehry over it.

What if the U.S. government shut down and no one noticed? Even worse (or better, depending on one's point of view), what if all federal workers went on furlough and the public realized there were benefits, not just costs, to smaller government? Essential services will be maintained, including the distribution of Social Security checks. Employees involved in the military, national security and law enforcement will stay on the job. Non-essential workers will be furloughed. President Barack Obama says a shutdown would further reduce confidence in government. Guess what? It can't go much lower. The approval rating for Congress dropped to 18 percent last month, near the lowest in the Gallup poll's 37-year history of tracking the trend. Oh well - last ditch, no shutdown!

In the event of a shutdown, that never materialized, what about the rest of government? I can't believe this. First the mortgage woe nonsense, and now our entire government may take a break. No wonder folks are making jokes like, 'Ruger is coming out with a new pistol in honor of Obama. It will be named the 'Union Worker.' It doesn't work and you can't fire it." If the government had shut down, every non-essential government employee should wake up really late and smile. After all, they are lucky. When private companies have budget problems, the people on the non-essential worker list don't get a three-day weekend. They get a six-month "vacation" of filling out resumes, eating Ramen noodles, worrying about their mortgages, and looking for a job. In comparison, the furloughed government workers will get an extra day to enjoy the Cherry Blossom Festival in D.C."

Rising prices can be a great thing, provided you are holding an asset which is increasing in cost. If you've got a store of gold you bought some time ago, you are thrilled about record-high gold prices. If you have certain holdings in oil or silver, you might consider yourself fortunate. Since the lows of a couple of years ago, certain stocks have risen considerably in value, to the benefit of investors. Rising asset prices can generate wealth.

But price increases have a serious downside, too. If costs are rising throughout the economy (inflation), the buying power of a given income can be considerably diminished. Even when price increases are narrowly defined, rising costs for everyday basics like food and gasoline can affect consumer spending patterns as they absorb increasing portions of discretionary spending dollars. Without money to distribute more widely throughout the economy, consumer spending may still show an increase in total outlays, but there is little wide-ranging economic benefit from that spending, and a slowing of economic growth can occur as a result.

Rising interest rates can also be a two-edged sword. The party lending money welcomes the chance to see profits improve from higher yields, while the party borrowing funds isn't nearly as thrilled. At times, even a minor rise in interest rates can be a deterrent to refinancing and make affording a home that much more difficult. In turn, this tends to damp demand, subtracting from any economic momentum. Mortgage rates have been favorable, but are now on a slightly firming path. 

After the financial market meltdown, central banks across the globe pushed hard to reflate assets, since their collapse in prices -- stocks, real estate, commodities, what have you -- threatened to turn a recession into a depression. We may be starting to see the results of those reflation campaigns, which may not turn out so well in the long run. Over the past 18 months or so, the market's focus has shifted from one of immediate crisis management to one more comfortable looking forward, and the way forward looks anything but serene at this point.

It seems to us that we are likely to find ourselves in a period of softer economic growth with generally firming prices. While not a disaster in and of itself, the rate-lifting increase in inflationary pressures seems likely to overcome the rate-reducing economic drag of the higher prices they track, at least for a time, and those higher rates do threaten to some degree hopes for a improving housing market this Spring. As such, potential buyers would do well to take advantage of any small dips in rates which may occur.

That firming mortgage rates are unwelcome in light of the weak state of the housing market is a given. Refinance activity has come to a fair standstill again and is down by about 13% over the past four weeks, according to the Mortgage Bankers Association of America index of applications. Conforming 30-year fixed rates are about a quarter-percentage point lower than at the same time last year, but both refinances and purchase applications are materially lower now than then. The housing market remains far from normal, and there is little sense of urgency among purchase borrowers at the moment, as would be expected in a still deflating market. With some 25% of the nation's homeowners underwater, there remains a vast but unservable potential refinance market, one which may be many years away from again participating in the mortgage market.

Mortgage rates have nudged higher, and the step-up in underlying interest rates this week suggests more of the same in store for next week. There's nothing wrong with getting a 5%, 30-year fixed rate mortgage -- unless you really need a 4.5% one to make your deal work. 

In keeping with the jobs theme, Arcelor-Mittal Steel, feeling it was time for a shakeup, hired a new CEO. The new boss was determined to rid the company of all slackers.
On a tour of the facilities, the CEO noticed a guy leaning against a wall. The room was full of workers and he wanted to let them know that he meant business.

He asked the guy, "How much money do you make a week?"
A little surprised, the young man looked at him and said, "I make $400 a week. Why?"
The CEO said, "Wait right here." He walked back to his office, came back in two minutes, and handed the guy $1,600 in cash and said, "Here's four weeks' pay. Now GET OUT and don't come back."
Feeling pretty good about himself the CEO looked around the room and asked, "Does anyone want to tell me what that goof-ball did here?"
From across the room a voice said, "Pizza delivery guy from Domino's."