Wednesday, October 08, 2008

Buying A House In The Face Of... Well, All This

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Roland-- but not the house he's buying

I'm watching the interest rates far more than I normally would, when it would be mostly a political or an academic exercise. My friend Roland is buying his first house. He's an elementary school teacher in Compton and every eighth of a percent on his 30 year fixed mortgage loan is a big deal to him. Yesterday we sat with the family who are leaving their home. As great a joy as it is for Roland, the consequences for this family of 6 are tragic. They bought the home three years ago for $509,000 and paid 2% down on a variable rate, which recently varied so catastrophically up that they could no longer make their payments. So they're moving... out to the desert. Roland is getting the house for $270,000.

A lame mortgage broker didn't lock in the 5.5% interest rate a few weeks ago and the rate is now 6.37%. Fortunately when we fired the lame mortgage broker, the new one had locked in a 6% rate. This morning Paul Krugman wrote that the coordinated rate cut was the right thing to do but that he doesn't expect much from it. Neither do I. Like everything Inside-the-Beltway government does, this is geared to help the wealthy, not workers and not consumers. (Example: McCain's awful mortgage proposal last night.) Workers and consumers-- certainly almost the entire voting age population-- seem to be easily manipulated into supporting politicians who earn they income by... manipulating voters into thinking that a vote for a bribe-taking scumbag like, say, David Dreier (R-CA) or Rahm Emanuel (D-IL) is a vote for... something nontoxic. That's tragic.

Krugman explained, somewhat more elegantly, what the mortgage broker just explained to me: "the relationship between Fed funds rates and the rates most businesses actually pay is very weak right now, thanks to the messed-up state of the financial system. So will this latest rate cut make any difference to borrowers? Maybe-- but only to a few of them. We’re way past the point at which conventional monetary policy has much traction." And one of those for whom it will make no difference is a dedicated elementary school teacher in Compton.

The stock market is plummeting (again), unemployment rates are rising, and retail sales are abysmal. "Retail stores on Wednesday began to report September sales and most companies, from off-price to luxury chains, saw significant, sometimes double-digit declines, that surprised even the chains’ executives. Many retailers-- including Nordstrom, J. C. Penney and Kohl’s-- lowered their earnings guidance for the third quarter."
In general, the weakest categories were non-essentials like house wares, electronics, jewelry and women’s apparel. Sales were driven by and large by necessities like food and, in some cases, children’s clothing.

Indeed, warehouse stores, where affordable groceries can be bought in bulk, continue to be the bright spots. Costco’s same-store sales in the United States were up 6 percent (not including gasoline price inflation) compared with the period a year ago. BJ’s Wholesale Club’s same-store sales increased 5.6 percent, not including sales of gasoline. Wal-Mart’s sales were up 2.4 percent (excluding fuel), though the retailer noted that sales of discretionary items were soft.

Wallets snapped shut in the last month as consumers faced a plunging stock market and were made even more skittish by headlines about rising unemployment and declining home prices.

Ever since stealing the presidential election in Florida, George Bush has always imagined himself a world leader. His extreme right wing policies or Greed and Selfishness have indeed led the world-- to the brink of financial ruin and probable Depression.
The Federal Reserve, the European Central Bank and other central banks from Britain and Switzerland to Canada and China announced rate reductions within seconds of one another. The British government separately announced a plan to pump billions of pounds into the country’s leading banks as part of a plan that would result in considerably greater government influence over the financial sector there.

The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous.

Yesterday rumors started circulating that Pakistan is liable to declare bankruptcy. There are worse off countries than Pakistan likely to do the same.
Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion - enough to buy about 30 days of imports like oil and food.

Nine months ago, Pakistan had $16 bn in the coffers.

The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy.

A few weeks ago when Roland and I were looking at houses for sale in L.A., a realtor told us that one in nine houses in America were either in foreclosure or on the path to foreclosure. The one Roland is buying hadn't be foreclosed on; it was a short sale, meaning that the bank agreed to take significantly less for it than they were owed. I didn't believe the 1 in 9 figure; it seemed impossible. Today's Wall Street Journal sounds even worse: Nearly 1 in 6 Owners Under Water. I've always been afraid that what Bush and his cronies meant by "the ownership society" was that Bush and his cronies would own society.
The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

Last night John McCain tried, ineptly, to weave a tale of how Barack Obama is a Bush clone and how Barack Obama is Herbert Hoover. I never heard a clearer case of projection in my entire life. Republican Party ideology and policy implementation caused the Great Depression of 1929. They decided to go for it again... and with the same results. And the voters? Over 40% are prepared to vote for them again.

Earlier today, Jason Furman, the Obama Campaign's Economic Policy Director, took a look at McCain erratic behavior regarding the economy:
"Senator McCain's first response to this economic crisis was to say that the fundamentals of our economy are strong. Since then, he's acknowledged that there is a crisis and offered multiple plans, sometimes conflicting. Last night, in his latest attempt to get it right, he threw out a proposal that appeared to give the Treasury authority it already has to re-structure troubled mortgages. But now that he's finally released the details of his plan, it turns out it's even more costly and out-of-touch than we ever imagined. John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don't recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.

"Since this beginning of this crisis, Barack Obama has demanded that any rescue plan must protect taxpayers and ensure that they share in any profit once the economy recovers, and he worked to include that principle in the plan that passed Congress. John McCain's plan to overpay for bad mortgages by handing taxpayer dollars over to big financial institutions is erratic policy-making at its worst, and it's not the change we need to strengthen our economy, create new jobs, and keep Americans in their homes."

A firm, steady hand and a cool head is what this country needs. That's why Obama won the debate and that's why millions of Americans recoil in horror at the idea of a flip-flopping, erratic hothead like McCain getting into the White House. Obama's probably as good as we'll get at this point from either of the two Inside-the Beltway parties. Now if we could elect the kind of candidate I'd really like, there would be some televised executions tomorrow.

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