Sunday, December 7, 2008

Short Run Solutions

As Keynes was quoted as saying, "In the long run, we are all dead." With that in mind, lets look at the short run. Right now interest rates are at the lowest level I've seen since I started tracking them. Compared to rates earlier in the year, current rates could lead to almost $300 savings a month given our specifics.

In the short run, low interest rates are great for everyone. Buyers pay less each month, or can afford more house for their money. Home owners with ARMs, who are not already under water, can refinance into a low fixed rate mortgage. Thus low interest rates both increase demand, and help lower the distressed supply.

Lest we forget, low interest rates were one of the culprits fueling the housing bubble. Longer term, we will still have to ween ourselves from our low rate addiction, leading to the economic shakes. (I know some of the hardcore econ folks tackled this issue, but I had a sick kid all week, so no time for reading up).

With all the $$ being thrown around by the fed, inflation is bound to kick in, thus interest rates will inevitably be raised. Once again, we will be faced with housing market problems as demand dries up, but hopefully by then, all the toxic loans will be out of the system (either through refi, modification or foreclosure) leaving us with a slightly less onerous housing downturn.


Sold in '05 said...

Money is not coming out of the institutions that it has been given to. The real borrowed money from the treasury is being used to replace fake money that has vanished from balance sheets.

How about a housing bubble analogy. It is as if someone lied on their mortgage app and claimed $10k per month income when they really only made $3k and now by some strange happenstance can no longer afford even the neg-am payment. Now the government has decided that there is a collective benefit to not allowing them to default and so went out and borrowed on it's own credit line and has given the liar loan folks $10k (no strings attached), so that this month they don't have to lie about it and they COULD go ahead and make their full option ARM payment... but since the liars know that they still have a liar loan, they won't make the full payment and try to refi into an honest loan. They will just make the neg-am payment and stash the rest for the inevitable day that they get foreclosed.
Maybe next month the govt will give them another bailout.

We will not see inflation for the foreseeable future because the bailout money is being hoarded by the institutions that lied about their own financial health. This bailout money is effectively being burned by filling in the lies on the values of CDO's and other derivatives. Meanwhile, the market value of EVERYTHING is collapsing. Across the board, the value of raw materials has already collapsed, and there is no end in sight. Can you think of any major commodity that is inflating? Even gold is trending down.

We have reached "Peak Debt". We have finally hurt ourselves enough that most people are going to be reluctant to take on any more debt at any interest rate. We have also past the point of housing depreciation, where anyone who has purchased a home in the last five years CAN refi their house unless they have cash to get themselves right side up. To refi today, you will need sterling credit, and 80% LTV. How many pay option folks are in those categories?

We are in deflationary spiral and it is going to take massive economic pain and a significant amount of time to end it. If we thought the ride down on the realestate bubble was steep this next leg down in the economy is really gonna take our breath away. Face west toward Japan and chant along... deflation, deflation, deflation.


sacramentia said...

I agree with your first two paragraphs, but think the outcome will be different.

If the banks don't help inflate, I think congress will not give them any more money. The money will bypass the banks and go directly to the consumer.

Anyone with an option ARM will stay as long as it makes economic sense. If the Government keeps the interest rates artificially low, then paying on the ARM is a better option than trying to find a decent place for your family to live with a bad credit score.

I also don't buy the Peak Debt argument. Given low enough interest rates and the current social safety net, there is little reason to not borrow all you can if you are that type of person.

Oil at $50 saves about $2B/day compared to $145 oil. That helps a lot. Low interest rates also help. Infrastructure spending will help.

I think we're about half way through our 24-30month recession. No depression.

alba said...

In the short term, police, fire, teachers, government employees, city employees, etc, will be laid off, as each of their unions face the dissolvement of defined benefit pensions for all of their active members. Govt towns, and new-growth areas, where infrastructure has not kept pace with growth will be hit the hardest.

alba said...

Over the weekend, there were articles covering the next phase of private sector retirement funding: decreasing, or eliminating, 401K-matching funds, as part of Defined Contribution pensions. The public sector, like with everything else, is 3+ years behind. One "solution" I can see happening is deferment of the retirement fund eligibilty age for retired public sector employees. Fireman retires at the normal retirement age of 52, but isn't eligible to receive his full pension until he turns 62 (then, as years pass for subsequent retirees; 65, 67, etc).

RV6Flyer said...

"Anyone with an option ARM will stay as long as it makes economic sense. If the Government keeps the interest rates artificially low, then paying on the ARM is a better option than trying to find a decent place for your family to live with a bad credit score."

I totally agree. If I had an ARM at 4% interest only, but was upside down on the house, I would probably choose to stay since the payment would most likely be about the same as rent. As long as the income is there, why move? Moving sucks.

radiophilejapan said...

2 yr notes are now yielding less than 1%, pretty close to Japan's 0.57% during the Lost years. Zero rate policy in US is approaching making history repeat itself. And everyone eknows what has happened to Japanese real estate market since.

patient renter said...

Sold in '05: Nice analogy and nice analysis.

trying to find a decent place for your family to live with a bad credit score

It's not as hard as you'd think would be. Vacancy rates are high, and of all the foreclosed aquaintaces I personally have (there are quite a few nowadays), they've all had no trouble finding rentals.

PeonInChief said...

Please, please, if you're a former homeowner whose credit has been trashed by a foreclosure--be very careful when looking for a place to rent. Landlords on their way to foreclosure are taking huge deposits from people who have credit problems-just before the house goes into foreclosure. People are losing thousands of dollars because they think it's great that they were able to find a place to rent with bad credit.

alba said...

nearly 100 NODs this week in Placer County.

sacramentia said...

@pr - I'm on the other end of the phone call and I'm hearing a different story about how hard it is to find a place to live. Maybe it's just a sob story that isn't true. I really don't know.

Deflationary Jane said...

It was a cake walk for me to find a new place but then i have great score, etc.

What spooky is what's happening in the Bay area. I was visiting a friend in Alameda over Thanksgiving. We went out for a walk... every 10th house was empty. The families had just up and left in the last 60 days according to a neighbor.