Florida Mortgage Report

Fear of Recession Causes Fed to Cut Rates

Well, that headline is not entirely true as it had a lot to do with the worldwide financial collapse today.  With stocks dropping over 400 points out of the gate this morning, the Fed felt they needed to do something and they did a .75% rate cut, overkill if you ask me.  And for what?  Stocks rebounded a lot, but they still ended down considerably as traders felt there was more on the way.

I have heard arguments on both sides of the inflation spectrum with those stating that inflation is low, so the Fed should be lowering rates to fight a recession.  I also have heard arguments from those that believe inflation is too high.  Personally, the numbers show inflation at the core level to be above the Fed comfort zone and reducing rates will likely drive that number higher.

Am I wrong?  Maybe.  I hope so.

The Personal Consumption Expenditures Index (PCE) is due out later this month and that will be what I continue to base my inflationary beliefs on.  The last two reports showed inflation ticking higher, with the last one at 2.2% year over year, just above the Fed comfort zone.  So, for now at least, I will continue believing the Fed should not be cutting rates, at least not as drastically as they have been.

What is worse is that the Fed cut today makes traders feel that another cut is coming next week.  That puts the Fed in a precarious position since, if you remember, last month saw the market tumble after the Fed did not cut as much as traders thought they would.

Another scary point I would bring up is that of the bonds market's trading versus the Fed decision.  The normal markets have mortgage rates moving opposite of what the Fed does, meaning that if the Fed cuts rates, bonds will move lower and mortgage rates will move higher.  That is at least the initial reaction from bonds and that is what is normally supposed to happen.  When the Fed cuts rates and the bonds rally, things are not normal.

So, since the bonds has been rallying after the Fed rate cut, things are abnormal.  The question to be seen is whether or not the markets are in chaos, temporarily insane as it may be, or if the situation is much worse than we are led to believe.  Time will tell, but either way you look at it, the Fed's actions are devaluing the dollar, so inflation is growing, even if only as buying power outside the US.

Has America Lost Confidence in the Fed?

Based on the markets' reaction to the Big Ben's speech, there is a definite lack of confidence in our Fed.  Part of the reason is that Big Ben failed to emphasize inflation as he has done in the past and we all know that inflationary pressures are running high. 

Couple that with the fact he said the Fed was ready to cut rates as drastically as it feels is necessary on or before their next meeting, and you can see why the confidence is lacking.  Lowering rates increases the same inflationary risks he seems to want to avoid placing a spotlight on.  Of course, you knew that already if you have been a regular reader of this blog as I have been mentioning the Fed opened Pandora's Box in regards to inflation since September.

In a CNBC poll, 70% of the respondents are in disagreement with what the Fed is doing, however nearly 50% believe they should be cutting rates even more than they have been.  23%, me included, believe they are cutting rates too much.

Have you lost confidence in the Fed?  Leave a comment expressing your opinion on the subject.

Is Poole Drowning in the Deep End?

St. Louis Federal Reserve President William Poole said investment professionals' "shortsightedness" led them to make fundamental errors that led to the mortgage crisis and credit meltdown.  Well, there you have it.  Blaming others is commonplace among the Feds, even those that have moved on.

Remember, Big Al said he couldn't have done anything about it and now Poole is saying investment professionals are to blame.  Certainly it had nothing to do with low Fed Funds Rates for so long with slow increases too late, not to mention lack of oversight in the banking system.  Believe me, there is plenty of blame to go around, but I guess the blame needed to be redirected from the Fed, especially since they keep screwing the economy up more.

In a MarketWatch article, Poole laid the blame in a speech to financial planners.  In the same speech, he said...

"The fundamentals of our economy remain strong ... and 2008 looks to be a year of rising growth"

He must be drinking the same Kool-Aid Countrywide is.  The economic data that keeps coming out is showing anything but signs of a growing, let alone strong, economy.

Poole went on to say that 5 key mistakes were made and professionals made four of them.  Here are the 5 mistakes he mentioned:

• Borrowers took on mortgages they could not afford.
  (My Comment:  Well, duh!)

• Mortgage brokers put too many people in unsuitable mortgages. They knew, for instance, that adjustable-rate mortgages probably wouldn't be right for many borrowers if interest rates rose as the market expected.
  (My Comment:  While that may have been the case for some, on a "whole", hardly a correct statement.  Try again.)

• Investment banks jeopardized their reputations by securitizing mortgages without doing due diligence on the underlying assets, many of which were based on "inadequate or spurious information."
  (My Comment:  This was actually encouraged indirectly by the Feds own actions.  That being said, there is some truth to be found here.) 

• Rating agencies put their stamp of approval on securitized mortgages without considering whether AAA ratings could be maintained if house prices fell. 
  (My Comment:  Ratings agencies screwed up, but does that mean investment professionals using those ratings as a guide screwed up?  Let's see, if you are provided erroneous information disguised as factual and acted upon it, then according to Poole, you screwed up, not those providing the information.)

• Investors scooped up those securities without doing adequate analysis first. "Investors too readily accepted the AAA ratings at face value," Poole said. "A reach for yield with inadequate attention to risk in another basic lesson that apparently cannot be relearned often enough.
  (My Comment:  While not doing adequate research is a problem and a lesson needed to be learned, it also depends on where you get your information from.  They "trusted" the ratings agency, much like borrowers "trusted" there mortgage professionals.  Poole is right here as inadequate research leads to extremely costly mistakes, and that holds true for borrowers when they seek mortgages as well.)

As you can see, there is lots of blame to go around, but playing the blame game does not solve anything and remember the old rule...

If you point a finger at someone, chances are that finger is pointing back at you.

With Poole and some of the others like him in charge of our monetary policy, you can expect the continued devaluation of the dollar, increased inflation, and a screwed up economy on the whole.  Additionally, where is he going to lay the blame for the increases in credit card defaults, bankruptcies, auto loan delinquencies, and the rest of the coming financial issues?

I will give him credit as some of his advice for the future does hold water and I will address that advice in my post later today.  hat includes some advice he mentions related to mortgage brokers, so you in the profession that are reading this, as well as borrowers, should check out that post tonight or tomorrow.

The Feds Answer to Everything...Throw Money at It

Well, the Fed continues to devalue the dollar despite its "strong dollar policy".  After the success of throwing money into the banking system to bailout, ahem, I mean assist the idiots running those in trouble (Citigroup, Countrywide, Washington Mutual, and the list goes on and on), the Fed is going to throw another $60B into the system.

The Treasury Auction Facility is going to be expanded to handle two $30B each auctions, one on the 14th and the other on the 28th.  Keep in mind that the success of these auctions is due to the anonymity of those gaining the money.  Those institutions can feel free to grab all the money they can without disclosing to shareholders what is really going on, thus keeping their stock artificially inflated and keeping them liquid.

The Fed has also stated that they will continue throwing money at the problem until liquidity concerns are gone.  With more and more delinquencies spreading across the board, that guarantees that inflation will rise, the dollar will continue to lose value and we can all look forward to less purchasing power everywhere for a long time to come.

But, alas, the good news is that the Fed is now expected to lower rates by .50% the next run and we can all borrow even more money at lower rates.  But who cares since we won't pay them back anyway?

I Take a Vacation and the World Goes to...

Well, I guess I can't take a vacation from my blog anymore as the world just seems to find ways to screw things up.  That's right, bankruptcies were reported 40% higher, credit cards are reporting more and more delinquencies and even home equity loans are gaining on the delinquency acts.  Heck, even Florida got cold, what's up with that?

Will people ever start paying their bills, or has the home ATM machine dried up and no real money exists to pay those accelerated debts?

I guess everything is all fine and dandy since the Fed will likely set up a bail out program for credit card companies, like the 33.6% APR they charge is not a big enough ripoff.  Oh, wait, they will dream up a fancy name to try to pretend it is not a bailout program for anyone other than consumers.  Like we are going to fall for that one again.

Apparently there is some good news from this last week.  Mortgage rates are headed lower on all sorts of both fake and real news.  Also, people are apparently getting paid more, but more of them are finding themselves without a job.  Cool, huh?  But are the BS (sorry, I meant BLS) statistics trustworthy?  I doubt it, though we will have to wait until next month to see just which direction the revisions will actually go.

On a side note, one of my predictions for 2008 was that we would see unemployment break 5.0% and we saw that this morning.  I am guessing it will still go higher before people realize they need people to work in order to maintain competitiveness.

So, what is real and what is fake?

Real - Slowing economy, stagflation, inflation rising, weakening dollar.

Fake - "Strong Dollar Policy", "Strong Economy", just about everything out of the government's mouth right now.

Ok, I know I am being harsh (with a hint of sarcasm), but fundamentals have not changed, so why are bonds soaring?  Sure, bad economic news, but are we to believe that inflation is not going to push bonds back down?  Do we think the Fed is not going to continue to allow the dollar to lower in value?  Do we really believe that the economy is strong and growing?

The proof is in the pudding and eventually the numbers cannot be hidden.  Though I am glad that bonds are rallying and mortgage rates are heading lower, they are likely going to reverse course as we head into the "inflation" data coming, such as CPI, PPI and definitely PCE.

What Should be Done About the Continued Credit Crunch? How About Nothing?

The economy runs in cycles and that is a healthy thing.  When the government steps in to try and "fix" it, that is a bad thing as it prolongs the process.  Why doesn't the government just let it go, stop screwing around with the economy trying to fix things and just let it run its course?

Politics is politics, but politicians need to stop trying to "look good" and focus on reality.  Of course, it isn't just the politicians trying to fix things either.  What about Big Ben and the gang, making statements letting the market at least believe there is another rate cut coming?

Why can't we just let things work through the cycle, so the cycle can complete itself and start moving in the opposite direction?

That's right, it may get worse, but it always ends up getting better down the road, but only when the cycle has a chance to complete itself.  It is all part of a healthy economy.  Screwing with it only makes things worse, as we are seeing now.

• Let the foreclosures happen and affordable housing will be a reality again.
• Raise rates and recession (if the economy decides that's what it needs) will happen, then be over and we will see an economic bounce later.  At least the dollar won't continue its death spiral and we won't continue to have stagflation (that's when the economy slows, yet inflation increases).
• Countrywide, Citigroup, whoever deserves to go under for their past mistakes, let them fail.  It is a necessary part of the solution.  Bail outs only cause more problems and prevents companies from learning from their mistakes.
• Sellers need to lower prices to that which buyers are willing to pay, then the inventory will shrink and eventually the market will start moving higher again.

I could go on and on, but I think you get the point. 

Really Simple Currency Investing Creates More US Money

Ok, as promised, here is what would have happened with your $10,000 investment when converted back to today's USD during the same time as my previous post's housing comparison. 

For a quick overview, this chart is based on you simply converting $10,000 USD to another currency and switching it back to USD today.  There are numerous ways to add additional rates of return (safely) in those other currencies and you would be even further ahead.  It is also not adjusted for inflation.

Currency Used	Worth Today (USD)	Rate of Return (annualized)
Euro	$15,732.74	8.59%
Aussie Dollar	$15,353.15	8.11%
Japanese Yen	$11,394.45	2.40%
New Zealand Dollar	$15,609.41	8.43%
Norwegian Kroner	$14,397.16	6.85%
South African Rand	$14,157.64	6.53%
Swiss Franc	$14,030.85	6.35%
British Pound	$14,159.87	6.53%
Canadian Dollar	$15,365.33	8.12%
Russian Ruble	$12,882.26	4.71%

As you can see, a fairly good hedge against the devaluing of the USD, and your home is by investing overseas (or even next door).  Wouldn't you like to have investment rates like those all the time, except for the Japanese Yen, of course.

I did this particular post for two reasons.  The first is that you must include international investments as part of your investing.  That should be crystal clear.

The other reason is that, with an open mind, it is easy to achieve far greater rates of return than your mortgage costs, so stop "focusing" on paying off your mortgage and get onto investing.  Delaying will only cost you more money.

Don't have the money to invest?  Your mortgage may actually be able to help you by putting that idle equity to much better use.  Don't rush out and do it though.  There are a lot of variables that play into a mortgage and investment plan and you need to find the right team of experts to make it work.

That being said, if you are thinking about how to "employ your house", then feel free to contact me (link in upper middle column).  I will help the best I can and, of course, if you are in Florida, I can work you through the entire process.

Just How Cheap is That House in Florida for Foreigners?

For those of us here in the states, we see our home prices falling and in many cases, particularly South Florida, plummeting into an abyss (Ok, it isn't quit that bad, but for some it seems like it).  With Existing Home Sales dropping at their fastest rate in decades (many relating it back to the Great Depression) and the continued fallout for the credit implosion, foreigners may find themselves at the right time to buy up Florida vacation or investment properties.

I am going to use my own house as an example for this one as I know exactly how much I paid for it in 2002 and how much it can fetch today, that is a realistic as it gets.  This will be a lesson in how currency exchange rates affect your purchasing power as well as how cheap some foreign nationals can grab up nice Florida homes (even at retail prices).

I paid $325,000 for my home back in 2002 and using today's estimated $600,000 (rounded up slightly) here is the comparison across the globe:

Currency	Price Bought	Price Today	Total Appreciation
US Dollar	325,000	600,000	84.6%
Euro	344,280	403,823	17.3%
British Pound	222,618	290,248	30.4%
Aussie Dollar	568,182	683,216	20.2%
Japanese Yen	40,427,913	65,502,183	62.0%
New Zealand Dollar	664,622	786,061	18.3%
Norwegian Kroner	2,561,072	3,284,072	28.2%
Swiss Franc	506,388	666,297	31.6%
Canadian Dollar	498,161	596,896	19.8%
South African Rand	3,201,970	4,175,365	30.4%

As you can clearly see, in other parts of the world, our home prices have not changed much, such as for Europeans using the euro as their currency.  My home in euros only appreciated 17.3%!!!

That chart also gives you an idea of how diminished our own buying power is elsewhere, even after the recent rally in the USD.

So, if you live in another country and are thinking about buying in Florida, this may be the opportunity of a lifetime.  The comparison above is "retail" and many homes can even be bought "marked down".

(I will, of course, post about how much US money you could have made if you had taken just $10,000 out of your property and invested it in a foreign currency.)

Dollar Pep Rallies Don't Make a Strong Dollar

The government continues to talk about a "strong dollar policy", but the "pep rallies" don't mean squat when it comes to reality.  As I mentioned last week, the dollar is following the Miami Dolphins' season, which is rather dismal to say the least, and "cheering" doesn't help.

More and more countries that have currencies pegged to the dollar are thinking of de-pegging it due to the dollars decline into oblivion.  The Gulf States are currently looking to do exactly that, but can you blame them?  Our mortgage and financial crisis is already creating worldwide turmoil, should they also let the dollars plunge do the same?

Again, looking at the team as we did last week, all we see are the teammates of the dollar cheering instead of getting in the game to push the dollar higher.  The Fed has been cutting rates and the clowns keep cheering "we have a strong dollar policy".  Meanwhile, almost every other (not dollar pegged) currency is beating the crap out of it.  These currencies keep setting new records, almost daily.

Foreigners are net sellers of US long-term securities due to the unattractiveness of the dollar.  That puts pressure on mortgage backed securities to sell off as well.  Japan, China, Taiwan and others are all in the process of selling these investments.  Why does the government keep trying to put lipstick on the pig?

Will things change?  Not likely, but maybe the government will open their eyes to reality and start doing something "real" to fix it.  The next Fed meeting regarding rates is December 11.  Will that date also live in infamy? 

Will You Survive the Current Mortgage and Real Estate Crisis?

With all of the turmoil in the marketplace today and with the government doing their best to screw things up further, it begs to question whether or not anyone will be in business in the future, or simply think it is worth it.

Chances are, when the dust from the implosion of the industry settles, things will have changed, mostly for the better, certainly more regulated.  Being optimistic that the government won't overdue it (I know that is a stretch, but humor me), I plan on being around for the long haul, will you?

I have not been in business long enough to go through "valleys" like this, but I know one thing, persistence pays.  It also is at times like these that we can grow and become even better at what we do.  Owning your own business, like I do, flexibility and adaptation are essential to ride the waves of change and keep your head up.

So, to all of you wondering if the government will force you out or that it may not behoove you to stay in this business, I say leave!  It will make life easier for me!

Just kidding.  I challenge you to take a stand and hold your ground against the tidal waves of change that seem unending.  Take on the mountains that seem too high for you to climb and break through those barricades that keep holding you back.

This "era" is the time and this industry is the place for you to decide if you can face that challenge and succeed, or if failure will get the upper hand (and you will be an alien).