The problem with the carrot on a stick approach is that the guy holding the stick is behind the donkey. One jackass behind another, so to speak. My mind's eye conjures up all sorts of potential for disaster.
Since Thanksgiving, short term money (3 month USD) has been much more expensive than the 10 year bond yield. "So what," you ask, "What does that mean?"
It means that banks themselves are afraid to lend to other banks, fearing that undisclosed subprime exposure by the borrowing bank might make it unable to repay the loan on time.
Did you think banks only worried about their mortgage portfolios? Think again. Since the August credit collapse, a bank's biggest boogyman by far is another bank asking for the most normal thing in the banking world--a very short term loan to balance its books.
QUICK TUTORIAL ON THE FEDERAL RESERVE
The Fed publishes two rates, and changes them periodically to influence financial markets, 'a la the donkey and the carrot. It controls the first rate, but not the second.
(1) the Primary Credit rate (discount rate) is set by the Fed, and has been lowered twice since August, in an effort by the Fed to ease the credit crunch. That didn't work. In fact, mortgage rates went UP each time. Oops!
(2) the Fed Funds Target rate (benchmark rate,) is currently 4.50%. This is the rate at which the Fed wants banks to lend to each other. The Fed controls the discount rate. It does not control the benchmark rate. It merely sets it as a target, and market conditions and perceived risk determine the actual rate.
The spread between the two rates is usually 1%.
That's where it was in June of 2006, when the real estate market was a lot rosier.
Right now, it's half of that, as you can see by the chart above.According to economist Lou Crandall, the spread will narrow to .25% after the Fed's December 11th meeting, "The Fed has to re-liquefy the markets to reduce the risk of a financial accident," says Crandall.
I like Crandall. He's a former member of the New York Federal Reserve Bank, which gives him credibility, and he writes clearly. He's easy to understand.
My Opinion: THE SKY IS NOT FALLING.
As a mortgage lender, my main focus right now is reassuring borrowers and their Real Estate agents that the sky is not falling. My main adversary is the tendency toward inaction by both buyers and agents.
"I just can't do anything right now," is what I hear. "Things are too uncertain." One Agent who commented this week on my blog indicated that he's afraid to counsel his client to buy. Fearing that he'll be sued if the market worsens, he's preparing a release form indemnifying him as the agent, should things go south for the buyer after closing! That approach won't do much to bolster the buyer's confidence, so it's not likely to generate much in the way of business. It will drive the buyer away.
My Challenge: SIEZE THE DAY.
Dig deep and find courage. Many have left the businesses of Real Estate and Mortgage Lending. We're still standing because we believe in it, and we've prepared financially to ride out the downturn. Let's educate ourselves on current events and move forward confidently. Expectations have a way of turning into reality. To say it another way...
Outcome rides on intention. And that's the real estate opinion of this Tucson, Arizona mortgage lender,
Mike in Tucson
Content copyright Michael W. Jones
Photo by Shaze2, courtesy FLIKR
"Many have left the businesses of Real Estate and Mortgage Lending. We're still standing because we believe in it, and we've prepared financially to ride out the downturn."
Great observations Mike.. Many of us will benefit from the mass exodus of people in our fields.
Mike, you're a great source of knowledge. I love to read your blog. It makes me feel like I'm getting smarter.
Sandy
Mike,
"We're still standing because we believe in it, and we've prepared financially to ride out the downturn." Did you set some money aside for me?
Hi Mike!
I agree with Gayle above, I've never really understood the Fed and all the workings of. But your point is well taken about expectations turning into reality.
There was a term in my psychology class years ago that has always stuck in my head, self-fulfilling prophesy , what you believe in yourself or others is what you/they will become - that's another phrase that comes to mind when I read yours.
Hi Mike!
I agree with Gayle above, I've never really understood the Fed and all the workings of. But your point is well taken about expectations turning into reality.
There was a term in my psychology class years ago that has always stuck in my head, self-fulfilling prophesy , what you believe in yourself or others is what you/they will become - that's another phrase that comes to mind when I read yours.
Very informative post Mike. I always feel encouraged when I read your posts.
Rita,
thanks for visiting and commenting; your comment encouraged me in return!
Robin,
You're so on target! We're blessed to be in business in Tucson right now.
Joan,
I appreciate your comment; it will be interesting to see how yesterday's announced intervention by Congress plays out in the markets today.
Karen,
The FED isn't hard to understand; if I can do it, pretty much anyone can! LOL
Fran,
That would be the royal "we." I'll be over to your blog to see what's going on in your neck of the woods. Thanks for visiting and commenting.
Gayle,
You're so right. People are afraid. We have the privelege of helping them work through it. Regarding understanding the Federal Reserve, please see my comment to Fran. :)
Marchel,
He's a new agent, and he's young. This will either be a learning experience, or he'll get a job.
Kevin,
I'm encouraged by your comment. Stop by any time!
Sandy,
But do your kids think you're getting smarter?LOL Thanks for the encouragement!
Kate,
I agree! Contact the AR Gods. Mortgage articles rarely get featured.
Nick,
Sad but true, my friend!
Linda,
Thank you. I appreciate hearing from you; your perspective always adds to the discussion.
Marc,
True, true. With age might come wisdom in the case of our agent. Thanks for commenting.
Dan,
Thanks for being the first to comment. It's hard to be simple, but I work at it! LOL
Mike in Tucson
It does not matter what is going on with real estate, there are always buyers and there are always sellers in any market. People want a roof over their head for their family. As far as those who fear being sued because they helped someone buy a house.......sigh.......walk in fear, live in fear, breath in fear , exist in fear.......If you took a shotgun and forced someone to purchase then I can understand your fear.
I tell all of my clients, that the price of homes is market driven. They may break even, they may make a profit or they could lose money. It is as simple as that. The real estate market always has its ups and downs, just like the stock market. There are no guarantees. The key for the buyers is to 1-Don't attempt to purchase a home out of your comfort level 2-Go over the comps carefully with your agent 3-Research the neighborhood and get a feel for what is happening in that area, including driving there at various times and days to see activity or lack of activity...4-Look at it as a business decision 5-Be very clear of your expectations in a home with yourself and your REALTOR(R)6-Check with your CPA-Will this benefit me to purchase now or should I wait?
What I found with most buyers in the past is that their friends and families were the one who pressured them to buy in a sellers market. Driven by ....guess what....FEAR.......that if you do not buy now you will never own a home......Those are the ones that got hung up in multiple offers.........
There are some fantastic deals out there for qualified buyers. There are still some overpriced homes that will remain on the market for quite awhile until the market changes and/or the sellers come down to reality.
Sarah,
The right justification helps me scroll down to the new comments quickly. A visual aid, so to speak. Thanks for the compliment. How's our referral going? Call me.
Jan,
You're welcome! I'm glad you stopped by.
Terry,
Thanks for commenting. Fear of scarcity drives buyers in a sellers market. Fear of looking foolish keeps buyers home in a fantastic buyer's market. Go figure.
Mike in Tucson