If you are at all interested in the real estate industry, then you need to be reading Dan Green on a regular basis. I just met him at RE Blogworld, and have put his blog into my reader ASAP (and linked it here). Dan is brilliant, and understands the financial markets and mortgage markets better than most people in the world.
And even he finds himself getting verbal whiplash these days from having to contradict himself more than Obama does.
Exhibit 1: Dan’s post of Sept 16, 2008 titled, “How Mortgage Rates Are Responding To Lehman Brothers, Merrill Lynch, And AIG” which says, in part:
It’s a shame because the post went deep on Wall Street’s recent troubles and how each piece of bad news actually helps everyday homeowners. When I went to publish, the post vanished. And by that point, markets were already open, mortgage rates were already plunging, and I wanted to be the phone with clients. I did manage to Twitter, however.
A one-paragraph recap follows:
The government’s takeover of Fannie Mae and Freddie Mac rendered mortgage bonds among the safest investments in the world. Therefore, when political or economic uncertainty exists, mortgage rates should fall in safe haven buying.
The post was especially timely because safe haven buying driving mortgage rates down yesterday. As the stock markets shed $800 billion in value, investors moved into safer instruments like bonds — including mortgage bonds. With more demand, prices were up and rate were down. And how.
Because mortgage debt is now government-guaranteed, the sell-off in stocks was terrific news for both active home buyers and for homeowners that missed last week’s gold rush. However, it did little to soothe Wall Street’s nerves. That job falls to Ben Bernanke.
Then, a mere seven days later, on Sept 23, 2008, Dan posts “Mortgage Rates Respond To A Rapidly-Devaluing U.S. Dollar” which says in part:
And lastly, the mortgage market got hit. Because mortgage bonds are repaid in U.S. dollars, the value of those repayments dropped. This forced mortgage rates higher because the only way to entice investors to buy devalued mortgage-backed bonds is to offer them with a higher interest rate.
If you’re wondering why conforming mortgage rates are up by 0.750 percent since last week, this is it — it’s because mortgage rates are responding to the expectations of a weaker dollar going forward. This is the reverse of what happened in August.
Simply amazing, in part because Dan is spot on, and in part because politicians in government simply do not seem to understand the economy and markets, despite being Wall Street tycoons and brilliant academics and the like.
Why wouldn’t inflation rise when the government has just signed a blank check to big American corporations? Of course it would. And as inflation rises, interest rates — including mortgage rates — are bound to go up as well. People don’t enjoy getting paid 10 years out in dollars that are worth half what they are worth today, do they?
This whole fiasco with the bailout reminds me of my favorite Thomas Sowell quote, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
At the Blogworld event that just happened, the panelists on the Financial Blogs panel were unanimous in excoriating the government — and they appeared to be politically all over the board — for its latest actions in intervention. One panelist called it (paraphrasing) “the absolute triumph of socialism.”
I think we’re seeing the absolute triumph of idiocy as well — and all parties, all branches of government, are indicted in this.
Until things stabilize — and no one knows when that will be — we’re in for a wild ride. The markets behave in unpredictable (although common-sensical) ways to economic shocks like a $700B bailout of financials by the government.
But a couple of things seem possible, at least when one thinks about our industry.
1. If it was hard to find buyers who can afford to buy houses before, I’m thinking it’s going to get more difficult, not less, going forward. Even if the removal of junk mortgages from the market (thanks to the taxpayer bailout) means banks can breathe easy again, the inflation-induced rise in mortgage rates (combined with the shellshock of banks coming out of this mess) likely means fewer buyers for homes.
Of course, that means home prices are about to take another pounding. If I were a seller, I’d be shaving another several thousand dollars off the listing price right about now.
2. Selling a house in today’s environment — unless you absolutely have to — became far more complicated and likely less attractive. For example, I locked in 30-year fixed rates long before this crash (something in the 6% range, I believe). Inflation could very well hit 6-7% annually, as most financial experts appear to think the $700b figure is actually the floor not the ceiling of this bailout. If inflation = my interest rate, then my loan is effectively free. Unless I can get a bank to give me free money (zero-interest loans) to buy my next house, I just can’t see how it benefits me to be selling in this market. At all.
All in all, I have a feeling that realtors are going to have to get educated on this in a hurry. Some of them really understand finance, the markets, and macroeconomic factors and may be able to help clients make the right decision. But the ones who think “yield” is only a street sign are going to have a tough time getting people to trust them as real estate experts.
As Alex Periello likes to stress, real estate markets are all local. That remains true, of course. But giant macroeconomic factors will play a role, at least if your client is paying in (or looking to get paid in) U.S. Dollars. It’s high time to get boned up on financial matters.