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Editorial See other Editorial Articles Title: HOW THE FALLING DOLLAR IS SAVING THE MORTGAGE MARKET HOW THE FALLING DOLLAR IS SAVING THE MORTGAGE MARKET by Michael J. McDonald The declining dollar is about to rescue our housing market - and our stock market, too - not next year, but right now. Home foreclosures will be much less than expected and within a month, as many as 40% more people will qualify to buy a home. Homes sales should pick up and prices should respond to the pick up by increasing… and all this worry about subprime write downs will turn out to be over-blown. This isn’t a joke. I’m serious. I make a living following the dollar and its impact on international investments. It is very unusual to see a global financial event like the lower dollar affect a domestic issue like housing, but that’s what‘s happening; and housing in turn will affect the Stock Market. AS RATES SLIDE, BUYERS THRIVE I don’t know if you’ve noticed but interest rates have been plunging. Since June, one year Treasury bill rates, often used as a basis on which to re-set variable mortgage rates, have fallen from 5.0% to an astonishingly low 3.0%, most of it within the last month. Ten year treasury rates – to which 30-year mortgages are indexed, have declined from 5.2% to 4% in the same time period. What does this mean to the US housing market? “With plunging interest rates, will mortgage interest rate resets be as bad as everyone thinks?” It means that the record number of variable rate mortgages scheduled to reset this year could settle at a much lower rate than people expected. As a result, many homeowners who have been spooked into thinking their monthly payments will soar to unaffordable levels, will actually be able to afford their reset mortgages and stay in their homes after all. As a result, the expected high foreclosures rates will not materialize. Lower interest rates will also help temper the effect of subprime loans which were almost always issued as variable rate loans. This will help keep housing inventories from rising as high as many thought they would. Lower interest rates can also increase the number of qualified buyers. A rough calculation shows that dropping interest rates from 5% to 3% qualifies up to 40% more buyers for a given home price. That means more people can buy all those listed homes. We are getting help from lower, long term mortgage rates too - both for people who want to “refi” and take away the variable risk - or those who simply want to buy a home with a standard fixed rate loan. Again, this means more buyers can qualify to buy a home at the asking price. In my opinion, lower interest rates are about to free up the sales log jam created when rates went higher. These effects should begin to be noticed in two to three months; which is about the normal lag time. THE DECLINING DOLLAR LENDS A HAND Now we can say this happy scenario has come about because the Federal Reserve is lowering interest rates, and that’s partially true. But the FED can only affect short term rates. They have no control over longer term rates like mortgages. Our mortgage rates (fixed and longer term, variable rates) are really in the hands of foreign investors who buy our Treasury bonds and bills. Japan and China combined own close to 60% of our treasury debt! Judging from recent demand, as the dollar continued to fall these two countries began pouring money into our Treasury market, investing in the U.S. at bargain prices. Their huge demand for our bonds has been driving longer term interest rates lower – much lower. Their political rhetoric touted avoiding American investments but these large declining rates, resulting from their bond purchases, tell us otherwise. One major worry – that if interest rates continue to decline the dollar could free fall - does not seen to be a problem at this time. Because of certain technical factors, the dollar is poised for a significant and lengthy rally. Although slightly contrary to theory it seems we are going to have, at least for awhile, both a strengthening dollar and low interest rates. The important point for investors is this: The level of worry about the housing market and subprime mortgages has gone way too far. The current sell off in the stock market is based on subprime woes and the housing problem. What will happen to stocks if investors change their perception of these two problems? Today’s market perspective is largely based on the assumption that the resetting of interest rates for variable mortgages would be at levels too high for the homeowner to pay, resulting in foreclosures and a huge housing glut. With the plunging of short term rates this threat, while real, has been curtailed. Hence, the extreme default assumptions Wall Street used to calculate cash flows for CDOs and various packaged mortgage products could be way off. Since current prices of these CDO’s and subprime products still reflect these worst assumptions, in the new light they seem to me like bargains. I believe we will soon see a rapid price adjustment upward. Furthermore, the universal worry that the big financial firms still have large future write-down’s from these CDOs I think is misplaced. It has been difficult recently to value assets based on mortgages – sub-prime or otherwise – but balance sheets might get an unexpected boost if cash flows from these CDOs come in a lot higher then they assumed when they wrote them down. OF BABES, OBUCS AND CONTRARY OPINION I’ve written two books that include chapters on the theory of contrary opinion, and the recent developments in the housing and financial markets fits perfectly within the thesis of these works. The theory says markets always move opposite to what everyone believes once the vast majority holds that belief. This requires the presence of what I term a BABES and an OBUCS. BABES stands for, “Broadly Agreed to But Essentially wrong Scenario.” OBUCS stands for “Occluded But Ultimately the Correct Scenario.” In other words, when everyone is overwhelmingly negative you should look for the critical point they are all missing; the point that will emerge in the future which will explain why things went opposite to what everyone expected. In the present case, the answer is right in front of us, but most of us haven’t connected the dots: it’s plunging interest rates and the good they are about to bring to both the housing sector and the stock market. So maybe the FED is doing something right this time. We’ll have to see if they can keep this opportunity window open long enough to fix the housing disaster. No telling how long it will remain there but I see it as good news for now and I hope each of you has a wonderful Christmas and a very happy and prosperous New Year. Michael McDonald is president of Dollar Crisis and Recovery Partners, a registered investment advisor Dollar Crisis and Recovery Partners, LP is a registered investment advisor dedicated to helping investors successfully navigate through an anticipated long and unstable U.S. dollar period. Contact Name: Erin Gilhuly p: 760-641-0739 e: ering@kinercom.com
Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest Begin Trace Mode for Comment # 7.
#7. To: tom007 (#0)
So, if this guy is right (suffice it to say I'm not up to the task of spending 2+ hours attempting to prove otherwise), then hordes of degree leavened pocket protector wearers in places like GMAC and Morgan Stanley et. al. just happened to jump the gun and write off what at this time is probably an aggregate of 100+ billion and counting, crushed their companies stocks, anihilated their Christmas bonus' and hammered the stock market going into the prime shopping season merely for want of gutting it out a month or two to weather this??? Oh, and to top it off, the FED, for once in 95 years, probably isn't fucking something up??? Shit, I need to get to work!!! Dear Santa: I'd like a working Moeller Sky car, 100 ounces of gold in the form of pre-Civil war Charleston and Dahlonega mint gold coins (AU or better!), 10 cases of 40 year old Scotch with the hangover's removed (I'll be wanting to throw a party for some forum friends), Peace on Earth forever after starting the 26th, a purple flying pig, and a discriminating metal detector that is 99% accurate on dime sized objects at 3 feet. Thanks!
#8. To: Axenolith (#7)
lol!
Man - Sure hope I'm invited.
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