THE SOURCE OF THE SOURCE

Dec. 17, 2008


The Feds say that they will use all means possible to pull us out of downward spiral economy, the boldest statement to date. For starters, the federal fund rate was lowered to a range of 0 to .25%. Yes, a range. Is zero possible? Perhaps, if the economy worsens. Feds also made a commitment to purchase mortgage-back securities with support from President-elect, anticipating driving down mortgage rates. The 10-year-bond rate immediately reacted downward below 2.2%, even touching 2.1%. Rick Santelli from the Chicago bond pit, a few days ago, said the 10-year-bond rate would touch 2.5%, and we since plowed below that. One analysis said we could see the 30-year-mortgage at 3.5% in 2 – 3 months.

A major reason for the feds move is to stabilize housing prices. If rates go low enough people will buy…that’s the hope. However, the only people that can buy are those with secured employment, high FICO scores and down payment. How many qualify? Local economist predict housing prices to further fall in 2009, but it is unknown as to how much it will decrease. Though housing prices may decrease buyers should also consider the low interest rates. It is unknown how long low interest rates will remain, but it is important to consider that low interest rates can compensate for prices. Some considerations: First, buy only if your hold is 5 years or more…the longer the better. Second, have sufficient cash flow to survive your worse forecast. Scrutinize your potential purchase very carefully, considering how the market is behaving, and how the subject property has behaved in terms of how long its been on the market; price changes; comparables; location; historical perspective; seller’s situation; etc.

Remember the article in the East Oahu Sun, quoting Keith McClintock about the impending second fallout in the mortgage market from Option ARM mortgages. I first heard about these mortgages about 6 months ago at a seminar with mainland economist, while we were being confronted with the onerous sub-prime situation, and again on 60 minutes this past Sunday, December 14th. The Option ARM loans are coming due from now to 2011 or 2012, and the expected foreclosure is 50%, perhaps as high as 70%. The feds are hoping to curtail the second wave of foreclosure. The success is contingent on many variables, some of which are not in their control, and not always tangible, such as consumer psychology, a slow changing perception of future conditions. We’ve all said from one time or another, “I should have bought then.”

There’s always opportunity to prosper! Sometimes you have to work harder, especially now. Start your homework. Confer with your mortgage broker, real estate agent, accountant, etc. Take heed, experience is especially important at this juncture because you don’t want to compound a misstep in this economy

Get down to bare bones! Consider refinancing your home and investment property to lower mortgage payments but insure that it justifies related expenses. This is not a time for new debt, like credit cards or car payments. Rather get rid of debt or lower your debt. Gas prices may be down but it may not be forever. OPEC announced today cutting oil production by 2.2 million barrels. However, the expected decrease in world demand did not affect the downward movement of oil prices today. Yes, the whole world is hurting. Cut back on spending; build a reserve to handle any surprises. Those who control their finances best will be better prepared to take advantage of opportunities.

Remember, this is a world of scarcity that applies to everyone. You must make tough choices in tough times. If you can’t, you lose.

GET PREPARED TO BE PREPARED!