I posted something yesterday about the state of housing market in Northern Virginia. In that, I linked into Bill Gross (fund manager of the largest bond fund) article about the outlook for 2008, "Better Late than Never." Via PIMCO.
Approaches to monetary policy must change as well. 1% short rates were so effective 5 years ago that they not only bolstered demand but created a housing bubble of Frankensteinian proportions. Those days, however were influenced by the creation and implementation of adjustable-rate mortgages (ARMs) that were priced at the short end of the yield curve. Millions of ARMs were issued at 2% and 3% teaser rates, many with terms of up to 5 years before their inexorable adjustment upwards. Surfeits of houses were bought at artificial prices because of these generous terms and billions in home equity loans were taken out – both driving demand and the economy forward. But adjustable-rate mortgages are a dying relic. Originators will no longer offer them except on onerous terms. No more teasers or pleasers of that ilk; there are regulators to deal with, and lawyers on the prowl with class action lawsuits in their briefcases.
A loan officer called me yesterday. This guy was still trying to sell the easy money 100% kind of loans, low credit score and even similar products to NiNJa (no-income-no-asset) loans? I don't believe it! Didn't this guy get it that the problems we're having today starts from lenders lowering their standards? In the meantime, FBI has started working on cracking down lenders. Continue on.
A loan officer called me yesterday. This guy was still trying to sell the easy money 100% kind of loans, low credit score and even similar products to NiNJa (no-income-no-asset) loans? I don't believe it! Didn't this guy get it that the problems we're having today starts from lenders lowering their standards? In the meantime, FBI has started working on cracking down lenders.
And so the monetary attempt to halt housing’s – and therefore the economy’s – downward slide rests on the shoulders of the 30-year mortgage. If so, then Mr. Bernanke – we have a problem. First of all these 6-7% 30-year mortgages now require a significantly higher down payment than in prior years. 20% down? Say what? Where does a 30-year-old couple get that kind of money? Secondly, however, and just as important, what motivates a future homeowner to pay 6%+ interest for an asset that is going down in price? It was an easy decision to pay subprime yields of that and then some when housing prices were accelerating at double-digit annual percentages; the benefit was obvious. Now however, with prices in negative territory, the risk/reward is tilted towards the renter. [emphasis mine in this par.]
My point is that Chairman Bernanke must recognize the reduced benefits and obvious dangers of a déjà vu trek to 1% short rates. Those yields produced 5% 30-year mortgage rates to the homeowner for a 2-3 month period in 2003 and they could do so again, but bubble creating, inflation inducing damage to the U.S. dollar would be the likely result now. Best to stop far short of 1% and at the same time encourage reforms in FHA government assisted programs that would permit subsidized mortgage rates with minimal down payments.