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jamesinca Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 03:26 PM
Original message
Mortgage rate hikes may be bad omen
Edited on Sun Jul-13-03 02:46 PM by Skinner
Kelly Zito, Chronicle Staff Writer Friday, July 11, 2003

Rock-bottom interest rates have fueled an epic housing boom while an economic slump has hammered technology, manufacturing, transportation and other sectors.

Although the Federal Reserve recently trimmed short-term rates, mortgage rates have been on the rise. On Thursday, the average rate for a 30-year fixed mortgage bounced up to 5.52 percent from 5.4 percent the week before, according to mortgage giant Freddie Mac.

That momentum could spell bad news for consumers. If rates continue going up, analysts say:

-- Fewer new home buyers would be able to afford monthly mortgage payments.

-- That in turn, could throttle price increases and even force them down, choking the refinance market and dampening consumer spending.

-- Moreover, homeowners with adjustable-rate mortgages will see their monthly payments jump.

FED'S ACTIONS
The debate over interest rates notwithstanding, one thing about the housing market is certain: The sector has provided an important crutch for the ailing U.S. economy.

EDITED BY ADMIN: COPYRIGHT

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronic...

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brokensymmetry Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 06:13 AM
Response to Original message
1. It could be very bad.
Some (me among them) believe we have a housing bubble in a number of areas - including California. If rates go up, then that bubble might burst with nasty consequences.

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union_maid Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 06:27 AM
Response to Reply #1
2. Long Island's housing bubble has to burst
It's bizarre and there's no way for it to wind up well for everyone concerned. These days you can't get anything for less than $250k and I mean ANYTHING. A handyman special in a bad neighborhood, a two bedroom condo, anything you can stuff a small family into. While young families are saving up a down payment of 50k or more, they can rent a two bedroom apartment, sometimes for as little as $1500 a month. Of course that can go a lot higher, too. There are still poor people, but there are no more cheap neighborhoods. It'll cost a small fortune to live in a veritable slum. This just can't be a good thing, and I speak as someone lucky enough to have had my home for 30 years and it's only lightly refinanced. If prices come down to a realistic level there are going to be thousands and thousands of people holding mortgages for 50-100k more than their homes are worth. If prices don't come down, no one who makes a normal living will buy homes here, businesses will not be able to hire and the area is headed for some very bad times. Or at least that seems to be the logical result of this situation.
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teryang Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 07:01 AM
Response to Reply #2
3. I recently checked some LI prices
...in a Freeport NY neighborhood. These detached homes with single car garages have sold in the 200 to 210,000 range. These homes were built about a century ago. They are out of date and require a lot of renovation. Not fully wired, no central air systems, outdated plumbing etc. Neighborhood was clean, quiet, convenient and picturesque. I know from experience and current residents that socially the area is considered down scale (large minority communities) and the school system below par. I liked the area very much and wondered if the rep on the area and schools was bs.

I couldn't afford to buy the homes there.
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kainah Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 08:45 PM
Response to Reply #1
27. I must say
Several years ago, my husband and I made some future looking decisions about where we wanted to live (Laramie, WY) and what house would suit us into the future (a remodeled version of where we were/are). So we sunk a bunch of money into our house with the firm expectation that we will spend the rest of our lives here. Since we now regard this as our home rather than an investment, per se, we should be pretty immune when the inevitable bust occurs.
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reprobate Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 09:32 AM
Response to Original message
4. Some of us predicted this over a year ago.

IMO, this is a reflection of the basic inequity of the system.

I don't really know exactly what I mean by that, it's a feeling that there is something at the core of the economic system that is out of control.
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paulk Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 10:58 AM
Response to Reply #4
10. economic system out of control
I have felt the same way for a long time - and I'm speaking as someone who owns a small business. It seems like a large portion of our economy (the stock market, real estate) doesn't operate with any relation to a real capitalist system, you know - buy low, sell high, pay your bills at the last second. :) Instead of making your profit when someone plunks their money down on your counter, you make it on speculation, speculation that the economy will be better 5 years from now, that all your investments will increase in value, that you can handle your debt load because your equity will continue to increase...
It's enrononomics.

The real trickle down happens when these bubbles burst - when the speculative markets collapse and people no longer have money to spend in the "real" economy. Actually, it hurts even before then, when people are paying too high a rent (both commercial and residential) or too high a mortgage because of an artificially high market. For a business, it means higher overhead, less profit; for a consumer it means less money to spend at that business.


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priller Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 09:53 AM
Response to Original message
5. EEEEEEEEEEEEEEEEEEEEEK! Wham!!!
What's that sound? It's the "refi" epidemic screeching to a halt, immediately followed by the crash of the economy.

Given the high unemployment and stagnant wages and the not-quite-recovered stock market, home refinancing and the housing bubble was the main thing allowing consumers to keep spending at it's current wobbly level. Take away that, and watch demand plummet.........
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RainDog Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 10:31 AM
Response to Reply #5
7. what happens when
people who have used home equity to cover their other debt, but then find their homes devalued?

when a housing bubble bursts, does if automatically follow that houses are devalued, or can it also mean that people who are looking for houses simply cannot afford to buy?

..which, if I try to follow the logic, would mean that houses would be devalued if people can't sell them for what they would need to in order to cover the price they paid...or the assumed appreciation in their "investment."

Isn't a house often the one investment most Americans have, those who are not afforded pensions or stock options (ha!), or other forms of long-term financial appreciation?

Yes, I've been looking at and predicting the real estate market would crash, simply because of the home equity borrowing and Bush's tax cuts for the rich.

Add to that the fact that Bush has the worst job creation record since Hoover, and I wonder how many people actually support Bush's policies?

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Lindacooks Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 10:28 AM
Response to Original message
6. Why are rates going up?
What I can't figure out is WHY rates are going up. This has to be one of the first times in history that the Fed lowers rates and banks raise mortgage rates. Is this some kind of price fixing conspiracy?
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Maeve Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 11:05 AM
Response to Reply #6
11. Foreclosures are very high right now
Record high, as a matter of fact. So are bankrupcy filings. Some of the mortgage companies/banks are getting hit by this and can no longer be as free with their money.
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brokensymmetry Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 12:04 PM
Response to Reply #11
12. But are they?
You said "Some of the mortgage companies/banks are getting hit by this and can no longer be as free with their money.
"


But let's face it, most of them don't hold the debt - it's packaged up and sold through FNMA and the others. And that's sold to investors. But if the default rate goes up, who covers? I seem to recall that it's you and I...who will be bailing out large investors...as the deficit soars...
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shocked_and_awed Donating Member (9 posts) Send PM | Profile | Ignore Sat Jul-12-03 12:33 PM
Response to Reply #6
15. ANSWER TO WHY RATES GO UP
The rate cuts can only effect interest rates so long as people continue to buy the T-notes that support the huge lending aparatuses that fund Fannie Mae and Freddie Mac. When the yield gets too low on investing in those bonds, the rate paid out has to be increased to attract more investors. Thus, we have reached the absolute bottom of interest rates that consumers can enjoy. Any further rate cuts would also not be passed down, as those would only serve to make the yield situation worse.

The result? The rate cut has lost its power. No more shots in the arm from Greenspan. Anything else he does, up or down, will cost you more, until the deficit starts shrinking again or until the market can happily bear higher interest rates (ha!)

Makes you wonder who gets the difference between the rate cut at the federal level and the increase shown at the bank in the form of loan rates advertised.

In short, we are fucked until the tax cut is cancelled and the economy takes off again to boost tax income and reduce the deficit, and make slightly higher interest rates necessary to curb inflation, thus yielding a bit more to bond traders with as little pain to the borrow in real costs as possible.
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aquart Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 12:44 PM
Response to Reply #15
16. Cancel the tax cut?
Bush would sooner cut off his dick. Or Dick.
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ze_dscherman Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 02:34 PM
Response to Reply #15
18. Two more: Japanese bond market crash + last FED cut of interest rates
Japan bond crash triggers interest rate rise
By David Ibison and Barney Jopson in Tokyo and Jenny Wiggins in,New York
Published: July 10 2003 5:00 | Last Updated: July 10 2003 5:00


The collapse in Japanese government bond prices in recent weeks has triggered a rise in interest rates that could hit consumer spending and business investment.

SNIP

In the US, the fall in bond prices has already boosted mortgage rates, reducing mortgage refinancing, which has been a key support for the US economy over the past year.

Refinancing activity slumped 21 per cent last week, the Mortgage Bankers Association said yesterday, the biggest weekly decline since the end of November.

SNIP
http://news.ft.com/servlet/ContentServer?pagename=FT.co...


-----

Another factor is the "Greenspan disaster", as the latest cut in interest rates was called:


"More worrisome, however, was its inverted impact on interest rates. The 3.24 percent rate on 10-year bonds soared into the 3.5-3.6 percent range. Thus, a cut of 25 basis points in short-term rates translated into a 25-basis point increase in long-term rates. That is the worst outcome for a central bank in any country at any time -- "an absolute fiasco" in the words of one ex-Fed official.

One former Fed governor called this "the worst single performance that Alan Greenspan has ever had." Former Governor Wayne Angel told me it would be "very, very costly." Yet, as usual, politicians at both ends of Pennsylvania Avenue were silent, seemingly oblivious to what was happening in the Federal Reserve's marble palace a few blocks away."

http://www.cnn.com/2003/ALLPOLITICS/07/03/column.novak....
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rocketdem Donating Member (496 posts) Send PM | Profile | Ignore Sat Jul-12-03 05:31 PM
Response to Reply #6
20. rates are not based on short term interest rates
They're based on the bond market.

I got lucky, somehow, and quite by accident apparently locked in my refinance at the bottom of the trough.
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bemildred Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 10:39 AM
Response to Original message
8. I think the bubble has a little ways to run yet.
Rates are about as low as they can go, so they will
bounce around a bit. They will do their best to keep things
papered over until after 2004, that is the governments nature,
to play for time and hope for better luck.

It's interesting that the Repubs are stone-walling a min-wage
increase, which is probably the single most useful things that
could be done for the economy, along with a steep increase in
high-end earner and corporate taxes.

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RainDog Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 12:21 PM
Response to Reply #8
14. if Bush had wanted a tax cut to stimulate the economy
he would have enacted a payroll tax cut.

this would have put money in the pockets of people who need to replace their cars, or ovens, for instance.

the tax cut he enacted was a con game scheme, it seems to me.

he cut the taxes of the uber rich, who turned around and gave him how much in their billionaire plate lunch fund raisers?

the process has become utterly corrupted, folks.

it is time to restore democracy in America, and it starts with campaign finance and the fairness doctrine and accountability for CEOs in the same way a bank robber is held accountable for his crimes.
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bemildred Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 08:00 PM
Response to Reply #14
22. That works for me.
:thumbsup:
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starroute Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 10:52 AM
Response to Original message
9. High housing prices have terrible effects on community
In the county where I live, it's becoming harder and hard for people of average income to buy a house at all. One result of this is that many of the ordinary people on whom communities depend to maintain public services and staff businesses can no longer afford to live in those communities. Another is that young people find they can't afford to live in the places where they grew up.

The result is that communities are weakened, the bond between generations is weakened, and the connection between people who do the work and people who depend on the work is weakened.

My own town, up in the corner of the county, has been about the last area of affordable housing. (Which is why I live there.) It doesn't have much in the way of cultural amenities, but it still has those old-fashioned bonds of community. For example, when I need a roofer or an electrician, I know I can find someone who lives just a few blocks away.

But even here, house prices have gone up ridiculously. A house down the block is on sale, and the asking price is twice what we paid for ours eight years ago. Granted, it's a little larger (it has a full upstairs, while ours is a Cape Cod), but that's still kind of scary.

As painful as a fall in housing prices would be for many people, the long-term results of inflated prices may be even worse.

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jpak Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 12:11 PM
Response to Original message
13. This is a direct result of ChimpCo's record deficits
More government debt means more government borrowing which leads to higher interest rates.

All the Repugs that soft peddled the effect of their irresponsible fiscal policy can kiss my ass.
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Neutrino Donating Member (609 posts) Send PM | Profile | Ignore Sat Jul-12-03 02:06 PM
Response to Original message
17. Frantic emails are circulating in Washington, I read in

a Washington blog "Don't let anything happen to the Real Estate
market, no matter what". It's an idiotic statement because no matter how
you massage the figures, no matter how long Banks drag out Foreclosures,
the handwriting is on the wall. The huge Unemployment numbers that
are increasing exponentially represent homeowners who reached for
prices well above the rule-of-thumb (2 1/2 times Gross Income) in
Purchase prices. Those who have Re-financed three and four times
will never get out even, and as in the late 80's, will likely simply
walk away because there is no Equity left.

The Housing bubble is being held up with duct tape. What goes up
must come down--



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grasswire Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 03:01 PM
Response to Reply #17
19. add this in...
Edited on Sat Jul-12-03 03:02 PM by grasswire
...a generation of people with the highest home ownership is about to begin to die off over next decade. Millions of homes will hit the market from this huge 60-70 year old population.

I keep telling my retired sister to sell her home and get the equity now, and then buy a smaller place after the bubble pops. That's the smart strategy.
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newyawker99 Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 05:33 PM
Response to Reply #19
21. jamesinca
Per DU copyright rules
please post only 4
paragraphs from the
news source.

NYer99
DU Moderator
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sandnsea Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 08:30 PM
Response to Reply #19
24. And after that.. boomers
I don't think boomers are going to stay in their large family homes anywhere near the rate that our parents did. I see lots of family homes on the market in about 5 years. I agree with you, I think it's time to sell.
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classics Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 08:12 PM
Response to Original message
23. I must be in the bottom 1% of wage earners.
Who the hell can afford a home that costs a million dollars... wtf.
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sandnsea Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 08:34 PM
Response to Reply #23
25. Or even $250,000
WTF? Somebody posted yesterday that a family can live in an apartment with a low $1500 rent while saving up for a home. WTF? I have a fairly average income and I don't pay that kind of money for my home. I swear I'd live in a tent first.

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classics Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 08:40 PM
Response to Reply #25
26. Low $1500 rent?
I may have to live in that tent with you.
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paulk Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 08:55 PM
Response to Reply #26
28. that's what rents are like here in denver
Although they've been coming down some - $1200 - $1500 for a 3 or 4 bedroom house is not unusual. A 900 sq. ft., 2 bdrm. bungalow will get up to 225k, easy. It sucks. The high cost of real estate here is trashing our economy.
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bleedingheart Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Jul-12-03 10:47 PM
Response to Original message
29. This thursday I sign on to my new
refinanced mortgage at 5%...but I am shaving over 8 years off my existing mortgage and saving money! However I don't live in any fancy schmancy house... I love my house but it isn't a McMansion..in fact it has taken over seven years of work to get it to the point its at now..

My banker told me that people aren't borrowing more to stimulate the economy so the only effect these low rates have had is to help people get better rates...in the hopes that they might spend more eventually.

We will see...

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