Steve Papapietro's Mortgage Bulletin: D Word Could Change Direction of Sales

For the week of Nov 24, 2008 --- Vol. 6, Issue 48

 Last Week in Review

        "THE IMPORTANT THING IN THIS WORLD IS NOT SO MUCH WHERE WE STAND, AS IN WHAT DIRECTION WE ARE MOVING." Oliver Wendell Holmes. And when it comes to the direction our economy may be moving, there was some surprising news from the Fed last week that the "Minutes" from their October meeting revealed.

After years of being concerned about inflation, the Fed is now concerned about deflation. So what exactly is deflation? Deflation is when prices drop, which generally is due to lack of demand, and therefore lack of pricing power. With the economy slowing down, we are hearing economists forecast that we may be in for a deflationary recession. In a deflationary environment, investors flee into fixed instruments like Bonds, because the fixed payment received would actually buy them more goods and services over time as prices decline.

 So what does this mean for home loan rates? Remember, home loan rates improve as Bond pricing moves higher - and more demand for Bonds would mean higher prices for Bonds. In the spring of 2003, when Alan Greenspan uttered the "D" word, deflation, Bonds rallied 400bp in just a few weeks, bringing a significant drop in home loan rates. Of course, the economy is different right now, but as more money may be headed towards Bonds in a deflationary environment, we could again see a significant improvement in home loan rates down the road.

On the inflation front, last week's Producer Price Index indicated that wholesale inflation plummeted last month - by the most since records began in 1947 - largely due to declines in energy prices. In addition, the Consumer Price Index showed that inflation at the consumer level fell by a record 1.0%, thanks again to lower costs of energy.

When it comes to the direction the economy is heading, the week did end with some hopeful news. Federal Reserve President Jeffrey Lacker said that an economic recovery could begin in 2009 as low interest rates, low energy prices, and less drag from the housing sector may shore up spending. In the meantime, Bonds and home loan rates spent much of last week trading near a key level of technical support called the 200-Day Moving Average, finally moving and staying above this level on Friday. As a result, Bonds and home loan rates ended the week unchanged to slightly better than where they began.

WHEN IT COMES TO CREDIT SCORES, IT'S MORE IMPORTANT THAN EVER TO DO ALL YOU CAN TO KEEP YOUR SCORE MOVING IN THE RIGHT DIRECTION! CHECK OUT THIS WEEK'S MORTGAGE MARKET VIEW FOR HOLIDAY SHOPPING TIPS THAT WILL HELP KEEP YOUR CREDIT SCORE ON THE UP AND UP.

        Forecast for the Week

        It will be a holiday shortened week in the markets as Thanksgiving is celebrated, but there are several important reports that could determine which direction Bonds and home loan rates move. On Tuesday, the Gross Domestic Product (GDP) Report will be released, and on Wednesday we will get the details on the Fed's favorite gauge of inflation, the Core Personal Consumption Expenditure (PCE) data, from the Personal Income report. Given the Fed's recent talk of deflation, it will be important to see what these reports reveal.

Also on Wednesday, we'll get a read on consumer and business consumption and buying behavior from the Durable Goods Report. Durable goods are items that are non-disposable, like cars, furniture, appliances, games, cameras, business equipment, etc. In addition, we'll get a read on the housing market with Monday's Existing Home Sales Report and Wednesday's New Home Sales Report.

Stocks hit some important technical support last week, and bounced higher on Friday, with the rally being boosted by the appointment of incoming Treasury Secretary Timothy Geitner. Some follow through to the upside in Stocks could pull money out of Bonds and cause some short term worsening of home loan rates...but if deflation starts grabbing more headlines, smart money will be headed towards Bonds, which will help home loan rates improve.

Keep an eye out for words from SEC Chairman Chris Cox, who must comment on some potential easing to "mark-to-market" accounting before January 2nd. If there is indeed some easing in mark-to-market accounting - which accelerated the financial crisis - it could set off a significant...perhaps very significant...rally in Stocks, which may temporarily hurt Bonds and home loan rates.

 The Bond market will be closed on Thursday in honor of Thanksgiving, and will also be closing early at 2:00pm ET on both Wednesday and Friday. I wish you and your family a very happy Thanksgiving!

        The Mortgage Market View...

Save on Your Credit Score this Holiday Season

With the economy slowing and holidays just around the corner, many consumers may be looking to credit cards to help them get through the heavy shopping season. While that may be a good short-term solution, you want to make sure you don't overlook the long-term impact on your credit rating. After all, the actions you take today could hang over your head for years to come--and may make it tough for you to get the home loan or car loan you want in the future.

 To help you make sure you manage your credit cards--and your credit score--during the upcoming holiday spending season, follow these steps:

 Double-check your card limits. Many credit card companies today have started lowering credit limits. That means you have less credit available, but it also may mean that your credit score is about to take a hit. That's because approximately 30% of your credit score is based on the amount you owe in relation to your available credit. So, if a credit card company cuts back your limit, you may find that you're suddenly almost maxed out. That's not a good sign for your long-term credit score rating.

Ask, pay down, or move around. If some of your credit limits have changed or are nearly maxed out, you can take a few steps to help alleviate the problem. First, consider simply asking for a higher limit to your card...not necessarily to use up with spending, but to allow more unused credit line to be available and therefore boost your credit score. You can also pay more money to the cards that are near the credit limit, if you can. Or, if you have cards with little to no remaining credit line, transfer some of the larger balances onto the cards with lower balances. That'll give you a more... well... balanced financial picture.

Leave home without it. One of the best tips for the holiday season is to: make a budget, identify specific items, and then leave home without your credit card. Instead, bring just enough cash to purchase the items on your list. That will help you resist the urge to impulse buy, and keep your credit card balances lower.

Pick a card... not just any card. If you can't bring cash, make a credit card plan. Identify specific items that you'll pay for on specific cards. By making a plan and spreading your purchases to different cards, you won't overspend and you won't risk running up one or two cards that are near the credit limit, which will hurt your credit rating.

 Resist card offers at the counter. Retailers are famous for offering "savings" when you open a credit card. But those savings often don't outweigh the long- and short-term negatives. For one thing, opening a new account--or multiple accounts in a short period of time--can negatively impact your credit score. In addition, consumers often spend more than planned when a new card is suddenly available. So this holiday season, resist the temptation.

Stay active. If you have older cards that you don't use, make sure you keep them active. For one thing, some of those older cards help establish a longer history of positive credit. For another, the available credit on those older cards can help keep your credit score higher because it improves your overall debt-to-credit ratio. To keep those cards active, make sure you charge one or two items on them throughout the year... like, say, when you go shopping for the holidays. Then, pay them off when the bill comes in.

Always pay on time. Your payment record is a very large part of your credit score, so it's crucial that you have an idea how your holiday shopping will impact your credit card bills and that you make a plan to pay those bills on time. If you have trouble for any reason, contact your card companies right away to work out a plan that helps you pay down your debt... and save your credit rating from a huge hit.

Upsides to Owning

Making the decision to purchase a home is nothing to scoff at. Before you make this life-altering choice, there are a few things to take into consideration.

First of all, when you own a house, it's yours. If you want to paint the walls fuschia and orange, no one can stop you. If you've always dreamed of covering a wall with family photos, there's no need to hesitate and wonder how your landlord will react. Your house is literally an empty canvas. If you always wanted a studio where you could try your hand at painting, owning a home is your chance to build one. 

This freedom and permanence is often the first reason people migrate from renting to owning. It extends beyond the realm of paint colors and layout choices--when you own, you also take care of maintenance, which can either be a blessing or a curse. If you're sick of dealing with landlords and leases, your credit score is good, and you know you'll be in the same place for a while, it might be time to start looking for a house to buy. 

Another huge upside to owning is financial. When you pay rent, you're essentially not making any progress toward owning anything--you're simply paying for the privilege of occupying space that's owned by someone else. When you own a house, every mortgage payment you make takes you one step further up the ladder towards ownership. Plus, if you hit a financial roadblock or you need to make a major purchase, you can always refinance your home or borrow against your equity (the amount of money you've payed toward the price of your house.... so if your house costs five hundred thousand and you've payed one hundred thousand in mortgage payments, your equity is one hundred thousand and you can borrow against that money). 

The Call Heard Round the World

An article by Jeffrey Cane on Portfolio.com pins the birthdate of the credit crunch on last August 9th, when a call from a French bank pulled the rug out from under the U.S market. According the Cane, the credit market's issues had already begun last February, after the disintegration of the subprime mortgage market. The gravity of those issues wasn't revealed until French bank BNP Paribas stopped investors from withdrawing money from funds, claiming the market was too unstable for them to determine their holdings.

In a statement, the bank said--

"The complete evaporation of liquidity in certain market segments of the U.S securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating."

This call sparked a landslide of rumors about problems at other banks and with hedge funds. People began to get worried, and the stock market illustrated their fear. This lack of confidence in the market caused banks to distrust other banks and investors to rely only in the safe zone. Getting a loan got a lot harder.

The aftermath of the credit crunch has been huge. Bear Sterns and Countrywide are gone, and the future of Wall Street is hazy. The re-vamping of Fannie Mae and Freddie Mac is just the start of a necessary total over-haul of this country's financial system. 

Cane ends his article with a mention of how much financial pain the new President (Obama!) will have to deal with. President Bush has been downplaying the problem all along--constantly repeating that the economy is fundamentally strong, etc. That is, until the problem became too big to ignore. So how much of this is his fault?

Frequently Asked Questions--Mortgage, Mortgage, Mortgage

WHY DOES THIS BLOG SPEND SO MUCH TIME ON MORTGAGE ISSUES?

This is a very easy question to answer. In 2005-2006 the only requirement for getting a mortgage was having a pulse (although there was probably some mortgage fraud going on that allowed dead people to acquire mortgages as well). The crash in the credit market has made getting a loan very difficult, if not downright impossible for many. The desire to own a home hasn't changed, but the ability to do so has changed radically. I am often asked when will the housing market recover. My best guess is that when the credit loosens the market will improve.

Investors, Look No Further Than Santa Clara County

The Realty Times has a section where you can read recent analysis of market conditions by area brokers for nearly every county in the country. Two days ago, Karen Biglarderi posted her forecast for Santa Clara County. It's titled--EVERYTHING IS ON SALE! SAVVY INVESTORS ARE BUYING NOW! 

She's got a point. Silicon Valley has an incredibly iron-clad economy. It's been one of the last areas to tighten its belt during the housing crisis, and it'll be one of the first back on its feet. The reason--plenty of jobs, and most people have them. 

Biglarderi says in 20 years of real estate, she's never seen a Buyer's market this strong. She calls it the "Perfect Storm" and relates what we've all been seeing--attractive interest rates, large numbers of houses on the market, and sellers ready to make some pretty hefty concessions. It's also pretty easy to lock a loan as long as you've got a good job, good credit, and some cash stashed in a savings account. Because Silicon Valley isn't likely to see a significant long-lasting downturn in the economy, investing now, while a lot of houses are on the market and things aren't as expensive as usual is definitely worth considering and will likely pay off. 

The areas that aren't necessarily part of this perfect buyer's storm are in those resistant pockets of Santa Clara County (Palo Alto, Los Altos, Cupertino, parts of Sunnyvale) where properties still get multiple offers and often sell for much higher than the list price. It's probably not a good idea to swoop into any of these areas in search of the perfect investment. Other parts of Santa Clara County, however, are up for grabs. 

Frequently Asked Questions--First Things First For Potential Buyers

Naturally, new clients (both buyers and sellers) come to me with a list of questions before I represent them. Usually these questions are pretty predictable--there are some things that people always want to know before they buy/sell their home. In order to make the process clearer for everyone and to make this information more accessible, I've decided to run an FAQ's section on this blog. Every now and then I'll post something I'm often asked, and if you think of anything, please feel free to email me your questions or post them in the comments section---maybe I'll feature one of your questions in a future post! 

QUESTION: WHAT IS THE FIRST THING I SHOULD DO WHEN STARTING TO LOOK AT HOMES TO BUY?

ANSWER: Before you go house-hunting, it's important to know how much you can afford. Get a pre-approval from a reputable lender. Your agent will be able to suggest reliable sources if you don't know where to start. In today's tough credit market you need to know exactly what you can and want to pay on a monthly basis BEFORE looking for a home. It is important to get a full pre-approval, not just a pre-qualification from a good lender. A pre-approval will include a credit check and verification of income, assets, and liabilities. You should get pre-approved for the maximum you qualify for and then decide if you want to spend less. After you get your pre-approval you can move on to the next steps in the process. Plus, you want sellers to know you're financially qualified when you make an offer-- a letter from a lender that attests to your credit worthiness can boost your chances of getting that home. 

For more information on what to do next and more answers to frequently asked questions, keep checking the blog. It's updated regularly.