Florida Mortgage Report

Happy New Year: 2008 Version

Well, I want to again thank all of you for helping Florida Mortgage Report grow and I look forward to 2008 and what it has in store for you and for me.  I am already planning on some posts that will really get you thinking and some that may just knock your mind for a loop.  But all in due time.

For now, I just want to wish you all a joyous, prosperous and blessed 2008.  HAPPY NEW YEAR!!!

Postings Will Be Scarce While I am On Vacation

This post is just to let you know I am off on vacation so there will likely be fewer posts for the next week.  Normal posting should resume on or after January 4th, but check back once in a while or subscribe to the feed as I will be doing some posting here and there and you won't want to miss what I have up my sleeve.

I will be doing my normal posting at Lenderama and likely a few at Agent Genius as well as I find some down time or spin up my thought process on some topic.  So, please check those sites for what I add there as well.

I wish you all a Happy New Year (post to come later) and look forward to growing this site and providing more mortgage truths as well as education next year.

Is There Madness In The Mortgage Market?

Mortgage bonds have been rallying since Bhutto was killed yesterday, all due to uncertainty about who will take control of the nuclear power there.  As is typical with uncertainty, there is a "flight to quality" which means bonds, including mortgage backed securities, benefit even when the fundamentals are lacking.

Is it madness?  Not really, just temporary insanity.

Once the dust settles on the geopolitical issue and we return to fundamentals, bonds will find themselves without much to stand on.  The drastic swings in prices are fueled by low volume and that is rarely sustainable, especially without solid fundamentals.

So, mortgage rates will tick down temporarily, and the correction that has been foreseen will complete itself before the trend higher will resume (readers of my company blog, Florida Mortgage Daily, already knew this was coming).  So, enjoy the rally, but don't expect it to last.

Why not?  In one word, inflation.  CPI and PCE, as well as other economic reports, point to rising inflation and that spells trouble for bonds.  With the Fed still dumping money into the system through auctions and lowering rates, inflation is only going to get worse before it gets better.  That means that when fears subside and reality returns, bonds will not be feeling any love.

New Home Sales Hit Lowest in 12 Years

Surprise?  Get real, you should have been expecting it.  What is interesting is that of home prices.  Keep in mind that the prices on builder's homes does not take into consideration the incentives they are giving, and there are loads of them.

The seasonally adjusted numbers were 647,000, well below expectations of 715,000 and they dropped 9% from October to November.  Median prices dropped 0.4% as well, though the average price ticked up 0.5%.

Depending on what region you were in, you may have experienced large drops or even gains.  The Northeast dropped 19.3%, the Midwest dropped 27.6% and the South dropped 6.4%, but the West gained 4%.  Annual sales in the last year have dropped over 34% nationwide, the largest annual slide since 1991.

Will the end come soon?  Don't count on it.  Keep in mind though, that the two hardest hit regions had bad weather to deal with as well.  If you read my forecast for 2008, you can see I expect the bottom to show up in 2008 for Florida, though it is still a ways below the current level.

What's In Store for 2008?

Many have asked what are my predictions for the next year and now I feel compelled to provide you the answers.  I have read many forecasts across the realm and agree with some and disagree with others.  I will focus the real estate forecast to that of Florida, namely South Florida, since that is where I am located and do most of my business.

I warn you that it is not a rosy picture, and hopefully I am way off with many of the predictions as I am certainly not going to sugar coat it.  Here are my predictions for the 2008 year:

• Florida real estate will see an average price drop of 22-25% before achieving its "reality price".  That will be fueled by more lenders taking on guidelines similar to IndyMac, but is necessary to begin the improvement cycle.  We will see the bottom in Florida during 2008 and probably even a slight improvement as well.
• Mortgage rates will continue to climb as inflationary pressures continue.  Rates will likely stabilize around the 7% mark, but will likely reach higher at least short term.
• Fed Funds Rate will likely see at least one more rate cut before the Fed changes stance.  They will continue to do everything in their power to flood money into the system and fuel inflation and fight the next financial bubble bursting.  They will likely start raising rates again by year's end.
• Credit cards will be the next liquidity crisis as more and more Americans will fail to pay off their Christmas spending spree fueled by lower interest rates.  Auto loans may not be far behind.
• Bankruptcies will continue to climb as Americans have drowned themselves in debt and are unable to tap into their house ATM machine.
• Inflation will continue to increase, reaching 3% or higher during the year settling around the 2.8% mark.
• Economic growth will continue to be slow as "stagflation" takes hold.  expect growth to be around .5-1.0% for the year.
• Unemployment rates will continue to climb, breaking 5.0% during the year.
• The dollar will see a rally before it continues to plunge further, setting new record lows against virtually every non-dollar pegged currency, except maybe the pound (it will start its own devaluation).
• Gold will pass the $1,000 per ounce mark and silver will trend to the $17.50 mark.

As I said, not a rosy picture, but the good news is I am not an economist, so I may be way off and things will be better.  I highly doubt it though.

As for South Florida, things will get worse before it gets better but the "end" is near.  Changes in real estate tend to start here and IndyMac's changes in mortgage guidelines are a good example of that.  More lender's will follow suit and change will take place and do so rather quickly.

Once prices have dropped, buying will begin and we can finally start seeing the inventory numbers drop back below 2 years.  We can weed out amateur investors that were chasing a quick buck.  We still have plenty of investors, and they are making money right now despite the market.  Many other buyers, including investors) are waiting on the sideline until the pricing becomes the "reality price".

Thank you for taking the time and expressing an interest in my 2008 predictions.  I invite you to add your predictions in the comments or email them to me.  I also want to take this time to thank you for helping Florida Mortgage Report grow during 2007 and wish you a Happy New Year!!!

What Do You Do With Your Loose Change?

I do not advocate keeping your change lying around the house as it should be at least earning some interest somewhere, but here's a story about a man's "coin jar" (courtesy of 5 Min. Forecast)...

Paul Brant, a 70 year old man from Indiana, strolled into his local Dodge dealership and purchased a $25,000 half ton pickup.  The strange part of the story is not him purchasing the truck, but rather how.  He used hundreds of pounds of coins, spare change stored for such a day.

“(The old truck) didn’t have four-wheel drive, and living in the country, I figured I better get a new one to help get me through the snow,” Brant humbly explained. That old truck, by the way, was also bought with spare change. Brant’s 2007 pickup will be the third car he’s purchased using only coins.

“As long as you don’t put your hands back in the till, it really adds up,” he said.

We can only speculate as to how many more cars or how much more of a car he could have purchased had he invested the money instead, or at least placed the money into a high yield savings account, but that was apparently not his style.

I will hand it to him, though.  He certainly knew how to save a lot better than the vast majority of Americans.

Mortgage Conformity Can Cost You Bundles

I was reading Asch's Conformity Experiment (hat tip Yves Smith at Naked Capitalism) and realized a new perspective on why people still flock to pay off their mortgage, rather than learn the rules of money applicable today and seek new strategies.  The simple answer is "everyone else does it, so why should I be different".

I suggest you go read the article to fully understand what I am talking about, but I will summarize my thoughts here.

Asch's Conformity Experiment proved that people do not follow logic and reason when in groups.  So, when several people say an incorrect answer, even when the answer is obvious, others will answer incorrectly even when they know the correct answer to be correct.

Apply that to today's mortgage shopper.  The media, government, neighbors, family, you name it, all say get a 30 year fixed (or even a 15 year fixed) and stay away from ARMs, Interest Only, and especially Option ARMs.  You will also see masses (usually agents) pushing Money Merge Accounts and other mortgage acceleration programs since the "group logic" is that it is the fastest way to get out of debt, including your mortgage and is the best thing for you.

But why listen to them?  Do they know your specific situation?  Are they the real experts?  Can they analyze your situation, look at ALL strategies and truly determine what is in your best interests based on your overall financial goals and dreams?

Think about that for a while.  Are you falling prey to "group logic" even though the real answer is something else?  Well, in mortgages, as well as most other financial decisions, it will cost you dearly if you choose incorrectly.  The time value of money will work against you if you make the wrong decision, whereas it will work for you when you choose wisely.

Business Week's Economic Survey Shows Economists Expect Slow Growth, Inflation, and Lower Home Prices

Business week interviewed 54 economists as they do every year end and posted their results here.  The general consensus is that the economy will be slow and steady, but will not fall into recession.  I can already tell you they are looking at the wrong numbers for inflation though.  Why?  They use CPI instead of the Fed's favorite gauge, which is actually PCE.  This shows they still don't "get it".

The survey shows a wide range of answers across the categories, with some really off folks included.  Let's just wipe some of these guys reports out simply looking at the inflation numbers.  Anyone thinking inflation will be below 2.0% is likely off their rocker so we can file their forecasts into the "yeah, right" (ie circular) file.  The consensus does show a 2.4% CPI and 2.2% CPI, which I think will be higher. 

Interestingly enough, the ones thinking CPI will be less than 2.0% are from the companies making headline news these days, and for the wrong reasons.  They are economists from Merrill Lynch, UBS, Swiss Re and others.

Ok, what about the Fed Funds Rate and why is this important?  The importance is that what the Fed does drives inflation.  If they keep cutting rates, inflation will continue to rise for sure.  According to the latest PCE report, it already sits at 2.2%.  Additionally, the Fed's decisions determine Prime Rate and that drives credit card, HELOCs and other credit vehicles.  It does not, however, drive mortgage rates, which are heading higher.

So, the consensus is for the Fed Funds Rate to be at 3.9%, so round it to 4.0%.  That means at least one more cut, which should help push inflation higher.

What about unemployment?

The consensus here is for it to drop to 4.5% from its current 4.7%.  If that occurs, that will further drive inflation higher in all likelihood.

And what about home prices?

The consensus here is for them to drop 7.1%.  If you are in South Florida, you can only dream they will only drop that much as we will likely see upwards of 30-35% drops before homes become "reality priced".

I am not an economist, but many of these economists are way off in their predictions, some are absolutely insane, just take a look.  I will provide my first annual forecast in the coming days for those who care (and if you live in Florida, you probably should care).

Sluggish Real Estate Market Creates Property Tax Problem

The Sun Sentinel ran this article highlighting a unique problem that faces property taxes for next year.  The article focused on Broward County as it interviewed Broward County's Property Appraiser, Lori Parrish.

Ms. Parrish highlighted the fact that there will be decreased numbers of properties sold, and thus fewer comparisons to which determine property values.  She highlighted that there were only 24,000 sales this year, down from 53,000 last year and 71,000 the year before.

As you can see, the real estate market in South Florida is roughly 1/3 of what it used to be.  While that puts pressure on home prices, it is also putting pressure on the Property Appraiser's office to find a viable method to determine property values for next year's taxes.

IndyMac Bails on Florida Homeowners

There is a major wave on changes on the horizon as the more conservative lender, IndyMac Bank starts the trend with the following:

Florida Guideline Restrictions

Transactions securing properties located in the state of Florida are subject to the following restrictions/limitations:

For all Loan Programs:

• All loans are restricted to Full Documentation
  
• Primary Residence transactions:
  
  - The maximum LTV and CLTV otherwise available for the transaction type must be reduced by 5%.
  - The Borrower’s current primary residence must be sold and closed prior to,
  or concurrently with Indymac’s funding.
  - If the to-be-secured property is a single family residence, condominium or planned unit development, it must be located within an established project. An established project is one in which 90% of the total project units have been sold, and the subject property has been previously occupied / owned by someone other than the developer.
  
• Second Home and Investment Property transactions are limited to a maximum 60% LTV / CLTV.

Thinking of investing in Florida?

Well, you might want to speed that thought as other lenders will likely follow suit, furthering reducing access to credit for investors, at least those who don't want to shell out the 40% down payment requirements.  Since cash is king and liquidity determines success, investing in Florida may be "drying up" soon.

But that is actually good news...

WHAT?!?

That's right.  Home prices in Florida, especially South Florida, will start getting "priced to reality" (what I like to call it), meaning house prices are going to drop dramatically, and quickly.  Once they do, the improvement in the market I have forecasted will take place.  It will take some time since there is over 24 months of inventory that need to move, but hope is on the horizon.

Investors, don't fret.  There will still be plenty of opportunity throughout Florida.