Friday, December 15, 2006

CPI Data and the Santa Claus Rally

So the CPI numbers came out today.
That's the Consumer Price Index (just in case)

It's put together by the Dept. of Labor and is a weighted average of prices of a specified set of goods and services purchased by consumers.

In simple terms, it tracks the prices of a "specified basket of consumer goods and services, providing a measure of inflation". It's considered a cost-of-living index.

When that shopping cart of goodies rises dramatically we have inflation.

You'll hear from time to time people referring to "Core Inflation".
Core Inflation is when you take the CPI numbers and back out the most volatile components - food and energy.

Why you ask?

Because these two groups can have dramatic mood swings, which then will skew the monthly numbers, which then might have even more dramatic results on the market.

Why do we care?
> CPI is very closely watched by the Feds.
> The Feds raise and lower short term interest rates.
> That changes influences the markets in general (not 30 yr mortgages)
> Which then determines how much investment money is out there for lenders to use and at what rates.

So other there are other reasons why we as members of society care about CPI than just how much it's going to cost us to live here, cloth our children in the latest fashions, and so on.

I'm not a betting man.
It's not a moral, ethical or religious stance, it's just that I don't find gambling fun.
I promise not to go into tirade on why poker, billiards, and the like actually takes up space on my sports channels,
(if you know any good reason I'd like to hear it)

But did you know you can bet on pretty much anything?
Even on whether the Fed's are going raise or lower rates in the future?
Pretty cool, eh?

And guess what?
The "Tame" CPI numbers that came out just changed the odds of that bet.

The odds of a future rate cut DOUBLED this morning!

"The odds of an interest rate cut by the end of the first quarter of 2007 increased after tamer-than-anticipated retail inflation data for November. April fed funds futures rose 0.03 to 94.81, which implied a 24% chance that the Federal Reserve would lower its target for overnight rates to 5% from 5.25% by the end of its policy setting meeting in late-March. Late Thursday, the odds of a rate cut were 12%. Earlier, the U.S. Labor Department said its November consumer price index was unchanged, as was core CPI, which excludes food and energy prices."

These "tame" numbers also seemed to have spurred on the Dow, the Nasdaq, the Russell, the S & P and so on. The Santa Claus Rally is now in full swing.
Or is it?

There are many economic analysts who do not believe in the S.C.R.
They believe the market is just doing what it is supposed to do.

I'll bet you can bet on that somewhere as well.
I just hope they don't start putting that on my sports channel.

Thursday, December 14, 2006

First Time Home Buyers

Here's a great follow up story to yesterdays PMI topic.

The reports coming out today are that the FTHBs are getting back into the market.
I found a small chart showing the cost differences between renting and buying in various markets. I have a couple of complaints about this graphic.
The first thing I have to say is that this is gross. Not bad gross, BIG gross. Gross in the that it broadly covers the US.

What size magnifying glass should we be using?

I see report after report on housing declines.
If I look at specific areas in the bay area, or the country I get radically varied numbers.
Median Existing Home Sales for Oct. in the bay area (as a group) were identical to those a year ago, $614,000. So we were unchanged year over year. We were if you look at the bay area in general.

In that same period, Santa Clara County went up 3% yet Napa dropped 8.7%
Want to focus even closer?

I have a motorcycle friend, Alan who just opened a therapeutic massage business in Los Gatos.
I'm using Alan as an example because he's a well educated and thinking person who would have done his due diligence homework.

Moving from SLO, if he was looking at Los Gatos charts depending on the actual zip code he'd see two drastically different pictures.
Zip 95033 gave it's residents a 33.6% drop year over year!
That's a huge hit! Why would he ever think about moving?
Maybe it's a good buying opportunity?
That aside, if he looked at Los Gatos' zip just one away 95032 - he'd see appreciation of 10.5%!

Get the idea?

It also is a very short term graph. It deals with just the here and now.
It does not account for appreciation over time.
It does not account for tax deductions.

I had a Probability and Stats professor who drilled into us students that we had to know the time frame, the sources, and the facts that go into any graph. You have to be careful.

Enough of the graph. Let's talk about FTHBs.

The share of first-time home buyers dropped earlier this year to its lowest level since 1987, according to the National Association of Realtors. First-time home buyers now account for 36% of home purchases, according to a study released last month by the Realtors group, down from 40% in the three previous years.

First-time buyers play a key role in the housing market. They provide a source of new demand for homes, and they also make it possible for owners of entry-level properties to trade up, creating a ripple effect that affects higher-priced sectors of the market. Declining affordability has made it difficult for many first-time buyers, an important factor in the recent housing downturn.

First-time buyers are particularly sensitive to rising housing costs, in part because they don't have equity from an existing home they can tap as prices shoot higher. And lower incomes provide less of a cushion when monthly payments climb. In a sign of just how hard it is for first-time buyers to come up with the cash needed to buy a home, 45% of first-time buyers bought their home with no money down, according to the recent National Association of Realtors survey, up from 43% a year earlier.

How and why did that happen?
In part, as the Lenders saw the demand for 100% financing, they responded by creating reasonable programs to allow the high LTV loans. Because values were appreciating at a pretty good clip a FTHB saw the opportunity to act and did so. Many of them got in using short term loans. These may have been ARMs with fixed period portions. The "credit window" was wide open. Underwriters and the guidelines they wrote loans by were very lenient to say the least.

Flash forward to today:
That same credit window is closing.
It won't shut, and it may not even be noticed to most.
Simple fact is that as more and more lenders take bigger and bigger hits on defaults in their portfolios they have to adapt and make changes. You will not read this in any newspaper, nor on the TV. The last thing a lender's marketing department wants is for potential borrowers to feel they cannot qualify and hence not even make an application. And really, they are right. They want to get you in the door, make the application, then turn you down if they have to. Remember this, turning you down costs them money. The only way they are going to make any money is on approving people. We're all in the business of completing loans.
But they are smart enough to know that there is no way the average or even highly informed borrower could possibly make that determination on their own.

I did a quick search of news articles and here's the one and only snipet I could find on the topic:

"New guidelines for nontraditional mortgages, recently issued by federal banking regulators, could make it tougher for some first-time buyers to use these products. Some lenders are also beginning to tighten their standards as mortgage delinquencies rise."

I'm sure everyone else saw that too - right?

Here's an analogy for you...
You find out you need to have your gal bladder removed.
You want to educate yourself as much as possible.
So you go online and gather as much info as you can.
You talk to as many other people who had the same operation.
You talk to doctors, nurses, and those guys that give you the laughing gas.
You even find out your Brother's Wife's best friend used to perform the same operation on underprivileged Pygmies in the jungle bask in the day. You even get a 2nd opinion.
He thinks you need to lose some weight and have the operation at the same time.

No matter how much you think you know - will you ever know as much as the guy who is going to ultimately make the incision?

Moral of the Story:
You have to use professionals who know, professionals you trust.
Additionally, I have to say these same professionals have to be able to trust you too.
But that's a story for another day.

Wednesday, December 13, 2006

PMI, Have the rules changed?

P.M.I. - Private Mortgage Insurance.
For years it's had a bad name.

But what exactly is it?
And maybe more importantly "why" is it?

First of all it's insurance.
It protects the lender - not the home or the homeowner.

When a borrower buys a home they will have a certain amount of equity depending on how much they put down in relation to the purchase price.
If that equity is less than 20%, that's where PMI comes in.

Let's look at it from the Lender side first.
For a lender it's all about default rates.
Given any particular portfolio there will be a measurable amount of defaults that will happen.

As the LTV (Loan to Value) goes up, so does the chances a loan will end up in default. The less "stake" a borrower has in a home the easier it is for them to walk away should something happen.

Coincidentally, as a LTV goes up so does the exposure, or risk that a lender will be taking.

Looking at two typical owners...

First Case:
We have a homeowner from a typical Country Western song:
Billy Bob just lost his job.
Billy Bob just lost his truck.
Billy Bob just lost his wife.
and then yesterday, the dog ran away!

But he still has his home.
A 2 bedroom / 1 bath modular home they bought as a fixer upper a year ago.
Problem is, he has little or no equity.
(they bought it with 100% financing but since then they've seen prices in their area drop)

Second Case:
Mr. and Mrs. Dink.
They both work, and as you may have guessed, no kids.
They both work for the same drug company.
When they were transfered here they sold their old home, and used the proceeds towards the purchase of their new one here.
Right now they have about 65% LTV (or 35% equity).

But, Oh No!
Their company's newest wonder drug just failed FDA clinical testing.
It was supposed to help rednecks with depression but it turns out it has a very weird side effect.
It seems it reduces I.Q. by 100 points and causes buck teeth in grown men.
The stock plummets and the company lays off 1/2 it's workforce.
Mr. Dink, who worked in the Marketing Department got his pink slip via email the next day.

In which of the two cases do you think the homeowner will do most everything they can to continue making the payments?
I'll bet you would see Mr. Dink working a WallyWorld if he needed to - right?

Lenders see people with the best of intentions walking away from their homes all the time. They track the numbers, they minimize their risks. That's what business is all about. No surprise there.

Enter PMI.
Like I said, PMI is insurance that protects the lender.
The borrower pays a monthly premium and if they default on their loan, the lender forecloses, and PMI steps in and minimizes the losses for the lender.

For the lender that means they can go out on limb with who they loan money to yet still be covered on their risk.

To the borrower with little money down, this means is that there are lenders and loans available that will allow them to buy their first home.
If there were no PMI, these loans might not be available.
So PMI is a good thing?

It is.
It helps people get into their first home where they might not be able to without it.
It helps the lenders provide loans that they could not have risked without it.
It helps the economy, the housing industry, the market in general.

But then again, paying PMI was always like throwing money down the toilet.
PMI isn't tax deductible.
That's where the bad rap came from.

So PMI is a bad thing?

It is as well.

But guess what?
That is changing!

"New legislation allows eligible borrowers with adjusted gross incomes of $100,000 to deduct 100% of their borrower-paid MI premiums on their federal tax returns*.

Based on the new legislation passed December 9, 2006, the provision is effective for transactions closed after December 31, 2006. MI premiums paid between January 1 and December 31, 2007 may qualify for tax deductibility on borrowers’ subsequent federal tax returns as follows:

* Borrowers with adjusted gross incomes below $100,000 may deduct 100% of their MI premiums.

* Deductions are phased out at 10% increments for borrowers with adjusted gross incomes between $100,000 and $109,000.

As always, your mileage may vary. Consult your tax professional.

In the end, the jury is still out on weather paying PMI is wise or not so wise.
We've always had high LTV loans that do not require PMI.
You could think of the PMI as being built into the rate.
(that would make your payment higher as well but also tax deductible)

What we'll have to see is how these high LTV loans are priced.
Once again, supply and demand will come into play.

Follow along with the thought here.
If PMI loans now make more sense than non-PMI loans with higher rates,
fewer non-PMI loans will be originated.
Those Lenders will then lower the rates to make the non-PMI loans competitive with PMI loans.
How much will they lower their rates?
We don't know yet.
That's why the jury is still out.

Here's the Crux:
As the market changes, you absolutely must work with a professional in your corner who understands the implications of these changes.
You cannot use your that guy who does mortgages down the street or your Sister's Husband's Friend.

I can guarantee a year from now, I'll run into loan officer's who still don't know PMI is tax deductible.

Yeah, they'll still be driving their T-Top Camaro, listing to CW on their 8-Track, with their mullet flowing in the breeze. And they'll still be doing bad loans for people.


PMI is an acronym for private mortgage insurance,
there are many companies who provide this insurance,
but there is also an international mortgage insurance company called PMI - headquartered right here in Pleasant Hill, CA.
That's great "Branding", eh?

In actuality, what many refer to as PMI should be called MI - or Mortgage Insurance.
The distinction probably started in reference to government loans which carry their own forms of MI.

Tuesday, December 12, 2006

Feds Press Release

Here it is:

For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

Ben Speak

The Market's are in a holding pattern right now.
The 10 Yr opened a little lower than yesterday but it'll just flat line for a while.
You see, we're all waiting on the Fed.

The Fed's will announce today their decision at approximately 11:15 Pacific Time.
They can only do one of three things:
they can raise, lower, or hold the course on interest rates - simple, eh?

Actually, most everyone knows the Fed's will stay right where they are for now.
So why are millions of people holding their breath?

Along with the actual decision, we'll also get a little narrative - "Fed Speak".
It's the words, the tone of those words, and the manner in which they are used that the world is hanging on for.

Boy, that has to be a lot of pressure.
Get one word wrong and screw it up, and the whole world changes.
That certainly tops the typical wedding toast.

Maybe that's why people think the most influential person in the country, or even the entire world is NOT our President, but the Fed Chairman.

On of the best at understanding how his inflections could positively or negatively change the markets in the way he wanted may have been Alan Greenspan. While some have criticized his convoluted and confusing statements as being overly hard to decipher, others credit him with saving the US from devastating economical disaster back in late 1987 with his simple yet strong statement, "the Fed stands ready to provide all necessary liquidity".
It may be wierd but I remember watching him say that on live TV that day.

(I know - OOOOOOOOOH!)

From Wikipedia:
Greenspan was famous for his ability to give technical and confusing speeches. U.S. News & World Report reported that, "Few can confuse Wall Street as thoroughly as Federal Reserve Board Chairman Alan Greenspan can." [11] Greenspan was sometimes so hard to understand that the Motley Fool radio show included a game called "What Did the Fed Chief Say?", where contestants were challenged to interpret snippets of Greenspan's speeches. Greenspan mocked his own speaking style in 1988 when he said, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said."

When the actual press release comes out, I'll post a link to it here.

Have a great day but be very careful of what words you choose and how you use them.

Monday, December 11, 2006

December Seminar

Scheduling a seminar in December is crazy!

With so much else to do, why in the world would anyone want to take time out of the busiest month in the year?

Between shopping, partying, skiing, and the holidays themselves - it's a pretty short month.

I know plenty of people in the real estate field that take the entire month off!

In the end though, I would guess 130 people felt a Rob Black Seminar was important enough to put off the shopping, put off the partying, the skiing, or whatever else they could have been doing. Instead they braved the rain and traffic and drove from as far away as Santa Rosa to sit and learn what it takes to invest in real estate properly! My hats are off to all of them!
I thank you and I certainly hope you came away with some valuable information.

I'd also like to thank Rob Black for putting this on.
Unfortunately, he wasn't able to make it - something last minute came up.
(and no it wasn't shopping, partying or skiing)

A big thank you to my co-presenter Charlie Krackeler.
I'd be happy if I was 1/4th the speaker Charlie is.
Wow! is he entertaining!

Also thank you to Santa Clara's Network Meeting Center.
A great facility to hold most any size meeting.

But once again, thanks to all those that came out to learn something!

I'll try and see if I can get presentation notes and maybe even the presentation itself available to download soon.