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  • From: Don Bowen <don.bowen AT earthlink.net>
  • To: homestead AT lists.ibiblio.org
  • Subject: Re: [Homestead] Housing bubble or froth
  • Date: Wed, 08 Nov 2006 08:22:25 -0800

At 11/8/2006, you wrote:
I wonder what is in store for the
economy and for anyone connected with the housing industry in general. Just
thinking outloud.

There is a rising number of cancellations among new home builders.



Don Bowen Awl Knotted Up KI6DIU
http://www.braingarage.com
My travel journal
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I am omnivagant.
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Subject: Re: [Homestead] Housing bubble or froth
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At 11/8/2006, you wrote:
If the Fed finds that the economy is in
danger due to real estate market conditions it will lower their
already low interest rate to stimulate the economy. This will allow
yet another wave of refinancing.

Home finance rates have been somewhat independent of the Fed over night rate. One reason was the Chinese money in the market. All those Chinese goods in Walmart helped keep mortgage rates down so people could refinance and buy more Chinese goods in Walmart. Several factors have changed that and one small symptom is Walmart not hitting its revenue targets and going to even steeper discounts in Chinese goods. The Chinese people themselves want some of the goodies, refrigerator, TV, and automotive sales have climbed in China. This has resulted in heavy purchases of oil by China and the run up in prices. The slowdown in Walmart sales and other markets is reflected in slowing oil sales to China and a recent easing of prices. Just one little loop in a very complex global market.



Don Bowen Awl Knotted Up KI6DIU
http://www.braingarage.com
My travel journal
http://www.braingarage.com/Dons/Travels/journal/Journal.html

I am omnivagant.
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Subject: [Homestead] Real Estate 101, was Re: Housing bubble or froth
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Home finance rates have been somewhat independent of the Fed over night rate.

In my effort to keep it short, I over-simplified. In fact, the Fed rate is less connected to mortgage rates than bond prices because real estate loans are in competition with bonds for investor money. But the Fed rate drives many business decisions and does affect the housing industry. Wall Street and consumer psychology are always factors. Both are buoyed by good news from the Fed.

Lenders are free to set their own rates but must make them sufficiently high to sell the paper on the secondary market so they can make more loans. Rate setting is a balance between loan demand and money supply. Lenders will be willing to shave their profit margin to keep making loans. One tactic increase profit is to lower rates but raise fees.

Seldom understood by home buyers is that primary lenders do not get the interest. They make their profits by making and servicing loans or selling the servicing rights.

Before looking at houses, buyers are well advised to find a good lender first and determine all factors of their loan and knowing in advance how much loan they qualify for and what it will cost them. Finding the ideal home before finding the ideal loan is foolish. When a loan negative pops up at closing time it is usually accepted because emotions are high, in their minds the buyers have already placed their furniture. So very few buyers stop the deal.

One big negative is a prepayment penalty. I have rarely accepted and I almost always advised my clients to not accept a prepayment penalty. There are valid time exception but in general a prepayment penalty makes refinancing much more expensive and unless a buyer is certain of their income and certain that they will stay in the home beyond the prepay period, they are vulnerable. There is damned little certainty of either today.






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