Princeton, NJ Real Estate Announcement
Industry Update from Arlington Capital
The Federal Reserve (The Fed) increased the Discount Rate to .75% on
February 18th, 2010. This is the rate that large banks pay to borrow
directly from The Fed.
In the world of unsung "Bailout Hero's" (not to be confused with Guitar
Hero) it actually performed better as a tool than any other measure that
the Government undertook. By keeping the Discount Rate low, The Fed
pumped banks full of cheap money, and slowly (too slowly for nearly
everyone!) these large banks have started to loan anew, and most
importantly they have been able to use the cheap money to earn their
ways out of the money hole they were in.
Today the spread (difference) between 2 year US Treasuries (this is
associated with what banks "pay" for deposits) and 10 year US Treasury
bonds is 2.89%. That is the widest margin many, many years. So if
banks do make loans, and the borrower do repay them, then the banks are
more profitable than EVER!
If you have billions in capital and can make nearly 3% on it, and have a
small equity base, you can be a superstar in banking, and that is
exactly what happened.
The Fed lowered this key rate (The Discount Rate) as a "back door"
bailout, that few have focused on, nor even understood. It's really not
important to understand, other than the results that have come about as
an outcome of this policy. Banks are literally minting money. This
money (in theory) is to be used by the banks to replenish reserves, and
lend to customers. Basically it was a program to help the banks help
themselves. Guess what, it worked!
All but the sickest banks (GMAC and Citi) have recovered under this
program.
We know unemployment is at 10%, and foreclosures are rising, especially
in the luxury home market, and 1 in 4 owned homes are "underwater", but
truthfully the economy has changed for the better. It just doesn't
"feel" like it has because the hangover is brutal and will go on for
another year or two. Stocks, which predict future earnings, have risen
40%. Current earnings are 75% surprises to the "upside", manufacturing
companies are hiring again, and the biggest news....home sales are up!
Why are home sales up? Well, "unit" sales are up because (rational)
sellers have now lowered their asking prices, 25 - 30%. So homes are
selling, but the ones that are selling, and creating the market, are
selling for "less than everyone thought". This has the effect of
lowering the values of everyone's home. Newsflash, if you own a home,
the chances are excellent that it is officially worth 25% - 30% less
than it's highest valuation, which was probably around 2007. If your
individual homed fared better than down 25% -30% you are lucky indeed,
but you are also a statistical anomaly.
If your home "under appraises" (which really means "appraises for what
it's worth now, not what it was worth" in 2007) and you are refinancing,
you should think carefully about coming to the closing table with money,
to re-establish equity in the home. If you bought a stock, and bought
it with borrowed money, and the stock went down, the stockbroker would
request more money from you, or sell-out your stock. The same is true
now in real estate today.
So with values lower, and The Fed making noises about raising rates,
what should you do?
Well if you are a home buyer, this is the time you have been waiting
for, low rates, motivated sellers, tax credits, and much lower home
prices. You are an unintended winner of the chaos in the credit and
housing market. Go buy something/anything now....you will be bragging
at cocktail parties for years to come about just how smart you are.
If you own a home with 20% equity based on the values today, you should
jump on the rate train before it leaves the station. Mortgage rates
will not sky rocket, but they are much more likely to go up, rather than
down, as we move forward. Consider paying that horrible thing called
"points" to buy the rate down, especially if you are staying in the home
a long time. Shorten your term from 30 years to 15. On a $500,000
loan, this can save you the cost of a 4 year Ivy League education!
If you own a home with less than 20% equity, consider bringing money to
the closing or selecting a FHA loan, if the loan amounts work.
Here's our analysis, money is cheap, and getting more expensive. You
should borrow as much as you can now, and lock in the lowest possible
cost of money.
The discussion basically changed three weeks ago when Ben Bernanke (a
Montgomery, NJ denizen) started talking about "when" rates would change
rather than "if" they would change. That was word subtly was worthy of
his predecessor, Alan Greenspan.
The game has changed, rates are going to go up gradually.
You can win by eliminating the static and talking to your mortgage
banker about getting a great rate and locking it in now.
Scott Kelsey
VP/Branch Manager
Gateway Funding
d/b/a Arlington Capital Mortgage
33 Witherspoon Street
Princeton, NJ 08542
609-945-7507 direct
866-331-8528 fax
609-577-4164 cell
https://www.arlingtoncapitalprinceton.com
