Monday, May 19, 2008

The New Mortgage Rate Calculus

In my previous article I talked about the swinging pendulum of credit, it appears to be easing slightly - however it is also being re-priced. What does that mean? The chart to the left shows how much extra you'll pay for a mortgage if your FICO score is below 720 - it can get pretty hefty. I think these fees will come down, but it shows the direct correlation between Risk and Return - the riskier the borrower, the heftier the fees and the higher the rate the borrower will pay. Perhaps the market is starting to figure out that a person with no income and a poor credit score isn't the same risk as a person with money in the bank, a steady job and pays their bills on time.

The higher fees will hurt, but hopefully they will serve their intended purpose, encouraging more borrower responsibility and being compensated for risk.

Scott Dauenhauer

Lending Pendulum Begins To Swing Again

The Pendulum is swinging again, as it always does. During the rush to correct the lending mistakes made during the past several years the government sponsored agencies started increasing the amount of down payment needed to get in on a home....this of course led to perfectly qualified borrowers who didn't have a down payment to be priced out of the market. With the decline of housing prices, low interest rates - its a pretty good time to be a house shopper in many areas. Now, its getting a little easier, Fannie Mae is now going to once again allow 3 - 5% down payments.

We still have a long way to go until this downturn stabilizes and starts to head back up, but this is a good first step. This move should put more buyers on the market......which means more potential properties can be purchased, including foreclosures.

As lending eases and risks are re-priced (see next post) you will begin to see a resurgent real estate market. It won't boom, but it will stabilize and good people, with good credit and willingness to repay will be able to purchase homes at reasonable prices......the market works.

This is not to say that things are suddenly easy or that there are no risks, heck, I predicted the housing bubble and still own a home worth $100,000 less than what I paid, how's that for timing!

The bottom line is that credit is easing and this is important to a recovery, the key is to not let it get out of control again.

Scott Dauenhauer, CFP, MSFP, AIF

Monday, May 12, 2008

$200 Oil - Why I Don't Believe It....

If you click the above link you'll find an article about an analyst predicting $200 a barrel oil, I don't buy it.

Let me first state that I've said in the past that $120 oil is not probable.....hmmm, can you say WRONG!

Actually, what I said is that oil at $100 a barrel is a bad idea of the oil producing nations as it provides a huge incentive for people across the globe to find legit alternative sources of fuel (recall that last year a scientist figured out how to burn salt water). Even now I'm betting OPEC (while loving the revenue) is getting nervous that the price is high enough to encourage either a major new global exploration of oil (America has been pulling back production - down 40% since 1995, but if gas is $10 per gallon do you think they'll change their mind?) or a the formalizing of previously thought non-legit alternative sources will suddenly be heavily invested in.

$200 a barrel oil will be a long term disaster for the oil producing nations, especially the ones whose economy is run by oil. Unless they take the extra money and invest it wisely to diversify their economy (Dubai), they will soon find that the world will not put up with oil at such a high price. One of two things will happen, more exploration leading to oil flowing from places not previously thought possible (California coast, Gulf of Mexico, Alaska, North Dakota and Canada) or some enterprising young (or old) inventor will figure out a way to run everything that oil currently runs on with something that is cheaper and easier to produce.

If OPEC is smart they'll increase production and try to get a gallon of gasoline down to the $2 range again - Americans are willing to pay that for a gallon of gas without getting upset, but they will not pay $5 or $10 per gallon and if they are forced to it will be the end of OPEC and the oil producing nations as we know it.

We may see $200 a barrel oil, though I doubt it, but in the long term, its bad, very bad for the oil producers.

I think we'll see lower priced oil soon, the middle east wants to keep their monopoly (ok, Cartel) going as long as possible.

Scott Dauenhauer, CFP(r), MSFP, AIF

Should We Worry About the Plunging Dollar?

"All told, we do need to worry about the plunging dollar. We are now at the point where the Fed has done enough to stimulate the economy by lowering interest rates and must turn its attention to the inflationary implications of the sinking dollar. I hope that the recent hints that Fed is done easing are enough to strengthen the dollar. But if they are not, the Fed must reverse direction and raise interest rates. Ultimately price stability will benefit our economy far more important than the short-term stimulus of another rate cut."

The above quote is the last paragraph of the article and quite interesting as Siegel has usually been a Bernanke cheerleader, this hints that if the Fed doesn't start doing something different.....Siegel may not be so cheerful.

I've been critical of the Fed during this crisis, mostly for the same reasons Siegel has been a cheerleader. Buffet even supported the Bear Stearns "bailout", I wasn't so sure. Both Siegel and Buffet are much smarter people than me, only time will tell.

For those of you who are worried about "the dollar" read this article.

For those of you who have been watching the dollar, it seems it has turned a corner over the past week and is now getting stronger. I've said it before and I'll say it again.....everything cycles, keep that in mind.

Scott Dauenhauer, CFP(r)

Friday, May 02, 2008

Luskin: Housing Prices Near or at Bottom?

"How bad is it? It's bad, alright. According to the latest GDP data released on Wednesday, the housing sector of the economy contracted at a 27.1% annual rate in the first quarter, making it the 10th worst quarter since records have been kept."

However, he goes on to say the following:

"And guess what? Today home prices have fallen so much, mortgage rates are so low, and personal income is so high — that homes are more affordable today than at any other time, ever — with mortgage payments on the average home eating up about 40% of income. (Keep in mind, disposable personal income is after-tax income; also, this is calculated on an individual basis, not a household basis.)"

Whether or not Luskin is right will be determined over time, what is apparent to me is that there is still a lot to be worked out in housing - specifically the fact that it is still very difficult to get a loan and there are still homes out there that will be coming into the foreclosure process. Having said that, prices have gotten to a point in some places where they are strong buys long term. I'd love to buy my house again at today's prices - instead I get to make a mortgage payment on a home that is underwater.

For the first time since 2000, homes are becoming affordable - now, if only people could qualify for a loan!!

Scott Dauenhauer


Deja Vu: The Fed's Interest Rate Dilemma

A very interesting article that puts todays economic environment in perspective as well as what needs to be done to improve it.

On a separate note, I've said for the past three months that we probably weren't in a recession, but that I didn't know and it didn't matter. With GDP of .6% for the first quarter and the jobless rate FALLING to 5%.....well, you figure it out.

I'm not saying things are great - we have major structural issues our nation must deal with. What I am saying is that staying invested during the good and bad times works, as April has proven.

Stay the course, it works. Read Wesbury's article, it is great.