It is very interesting that on Friday night Obama and McCain were debating while Congress debated the Administration’s $700 billion mortgage bailout proposal. All week, the President, The Chairman of the Federal Reserve and Congressional leaders tried to assure the public and the markets that the deal would get done and they worked through the weekend to make sure that happened. Of course, the devil is in the details. Proposals being debated included limiting executive compensation for companies that benefit from the plan, increased foreclosure assistance and the ability for bankruptcy judges to modify mortgage notes.

While most are absolutely blown away by the size of the proposal, most understand that the package is not only justified but essential to restore the ability of lenders to loosen their credit strings. One major point should be made. The government is not necessarily spending $700 billion. They will be obtaining an asset that could increase in value, especially if the proposal contributes to a recovery in the housing and financial markets. As a matter of fact, the government could wind up in a profit situation. That would be very good with the annual deficit soaring. The more important question is–will it work? This is a crisis of confidence. If loans of any kind could be sold more easily, then financial institutions are theoretically more apt to increase their lending capacity. There is no doubt that tightening by lenders is a major factor in the crisis and that they will not loosen up until they can be assured that there are takers for the loans they have on the books that are not performing.

One negative response to the proposal has been an increase in oil prices and interest rates. Why would that happen? Well if the markets feel the proposal will work and that the economy will recover, then a stronger economy would produce higher oil prices and rates. Of course, if there is no increase in economic activity, there is also no reason why rates and oil prices will not just adjust back to where they were. Speculation may be interesting–but there is no way to understand what will happen even in the near future in this case.

The recently passed $700 economic rescue plan contains news for homeowners within the area of home-loan debt forgiveness. The law brings some good news for homeowners who foreclose, sell for less than they owe or restructure their loan with their lender. Traditionally, when a lender forgives any home-based debt, the cancelled debt is treated as taxable income. So previously if you had lost your home, you would have also faced a big tax bill. Double whammy. The new bill extends a soon-to-expire law that temporarily stops homeowners from owing federal taxes on up to $2 million of forgiven debt. The catch? The debt has to come from purchasing, building or upgrading your primary residence (which includes your original loan) - and not from, say, a home equity loan taken out to pay off credit card bills, says Mark Luscombe, a principal analyst at CCH. The new law will extend the break until 2012. Source: CNN/Money

Veterans that want to get out of subprime loans will find it easier to convert their loans into Department of Veterans Affairs guaranteed loans thanks to a bill recently passed by Congress and signed by President Bush on Oct. 10. The Veterans’ Benefits Improvement Act allows veterans with conventional loans to obtain a zero-down VA loan with a loan limit of $729,750. Previously, lenders could only offer to convert those veterans into a $144,000 loan with 10% down and still get the full benefit of VA’s 25% loan guarantee. "With these changes to the program we can help more veterans — where we couldn’t before. So I am really pleased," said Judy Caden, director of the VA home loan program. The VA benefits bill (S. 3023) also extends VA’s authority to guarantee adjustable rate loans to September 30, 2012. Source: National Mortgage News

Apartment rents grew more slowly in the third quarter than they have since 2003, according to Axiometrics Inc., an apartment research firm. During and after the last recession that ran from March to November of 2001, the economy lost about 1.8 million jobs. Since jobs are what drive the apartment market, rents didn’t increase for nine consecutive quarters, Axiometrics says. Beginning in the first quarter of 2004, annual rent growth turned positive and continued to be positive through the third quarter of 2008, when rent growth slowed to 0.8 percent, the lowest growth of any quarter since 2004, Axiometrics says. Axiometrics predicts that apartment growth will continue to slow during the current economy. Source: Realtor Magazine On-Line

Oil and Rates

A few months ago when we stated our belief that oil prices have become a "bubble," even we did not envision that oil prices would fall so far and so fast. As of last Friday, oil was down approximately 50% from its peak just a few months ago. While this is welcome news for consumers and the economy overall, there are some downsides to "cheap" oil. For example, could it cause conservation and production efforts to stall which means we will be dealing with higher prices years from now because we were not inclined to act today? Remember, in the long-run oil is still a limited resource.

Rates are another matter. While oil prices have plummeted, long-term rates have risen even in the face of the Federal Reserve lowering short term rates. If oil prices are going lower and inflation will be less of a threat in the short-run, why would rates go up? One result of the bailout is heavier borrowing by the government. The markets seem to be anticipating the flood of treasury securities coming to the markets so that the Fed can fund the bailout. On the other hand, poor economic news which we have seen in the past few weeks will continue to put downward pressure on rates, especially since inflation pressures are easing. Just about everyone is expecting the third quarter snapshot of economic growth to be negative. If the number is sharply lower, rates could ease back despite the market’s anticipation of additional borrowing by the government.

The Markets. Fixed rates surged in the past week with adjustables rising less steeply. Freddie Mac announced that for the week ending October 16, 30-year fixed rates averaged 6.46%, up sharply from 5.94% the week before. The average for 15-year fixed rose precipitously as well to 6.14%. Adjustables also rose with the average for one-year adjustables increasing slightly to 5.16% and five-year adjustables rising to 6.14%. A year ago 30-year fixed rates were at 6.40%. "Interest rates for 30-year fixed rose this week to an 8-week high," said Frank Nothaft, Freddie Mac vice president and chief economist. "ARM rates, which tend to be based on shorter-term benchmarks, showed smaller gains in part due to the Federal Reserve’s October 8 inter-meeting rate cut in the overnight lending rate. Recent economic reports suggest the economy is still slowing. For instance, retail sales fell for the third consecutive month by 1.2 percent in September. In addition, in its latest Beige Book, released October 15th, the Federal Reserve indicated that economic activity weakened in September across all twelve Federal Reserve Districts and that several Districts also noted that their contacts had become more pessimistic about the economic outlook."

Current Indices For Adjustable Rate Mortgages
Updated October 17, 2008

	Daily Value	Monthly Value
	Oct. 16	September
6-month Treasury Security	1.18%	1.64%
1-year Treasury Security	1.29%	1.91%
3-year Treasury Security	1.90%	2.32%
5-year Treasury Security	2.84%	2.88%
10-year Treasury Security	3.99%	3.69%
12-month LIBOR–WSJ		3.337% (Sept)
12-month MTA		2.479% (Sept)
11th District Cost of Funds		2.693% (Aug)
Prime Rate		4.50% (Oct)

Let’s Not Sugar Coat This

We are supposed to sound upbeat and let you know that big things are around the corner. However, we can’t hide the fact that the markets are getting beat up. Before it was just housing. Now it is the stock market. Since hitting 14,000 last year, the Dow Jones is down about 40 percent as of last Friday. Obviously, stocks can be very volatile–much more volatile than housing. The one purpose of the $700 billion government bailout was a restoration of confidence. Obviously that has not happened in the short-run. The Federal Reserve Board has also lowered rates in an emergency session that was coordinated with central banks around the world. That did not restore confidence either.

What is the conclusion? The government can’t stop the markets. It must run its course. However, volatile swings are usually indicative of a market bottom and we very well may be at the bottom right now. The good thing about the bottom is that there is only one place to go from here and that is up. Let’s add a bit of perspective. In 2000, the national median home price was approximately $150,000. Today it is just over $200,000, or still up over 30 percent in the past eight years despite recent decreases in home prices. The stock market is actually down since 2000. Conclusion? Real estate represents not only security, but a great long-term investment–even in a down market. For example, in 1980, the median price of a home was approximately $60,000. The key word is long-term. For those who purchase today and live in or own their homes for a long-time, there are great bargains on a great long-term investment.

The Debate is Over!

What a difference a week makes. From the brink of oblivion the bailout bill rallies from defeat to the President’s signature. Just add a few unrelated tax breaks and we are set to go! The tax breaks were mainly extensions of tax breaks already in effect and therefore would have been extended anyway. On the other hand, we have no idea how to pay for this program and our deficit is already the largest in history. This deficit will have to be dealt with as well as the risk it brings of higher rates for the long-term.

For now the economic news is extremely grave. In the past week we have received bad news concerning the employment situation, durable goods, consumer spending and factory orders. This leaves little doubt that economic growth will be negative for the quarter which just ended. The slower economy should force rates down and the combination of easier credit as a result of the bailout bill and lower rates could be just what the doctor ordered. Many economists are predicting another rate cut by the Federal Reserve when they meet at the end of the month. This would be unusual, coming just days before a Presidential election. But a very welcome development for the future of real estate, at least until we have to deal with those deficits. More on that topic in future weeks.