Thanks Dave for your perspective.
Someone just mentioned to me, that at a CB Residential sales meeting this week, the "financial expert" was talking about interest rates "going through the roof" in the 2010-2011 timeframe.
I wish I could have been there to get the details first hand.

So you are essentially saying that now is a good time to buy AND a good time to sell, if you're in the market for either??!! Thanks for your outlook. I always appreciate your thoughts, as you have cleared up a lot of confusion for me on mortgage info!!

We are remodeling and "plan" to finish by the end of the summer. Do you think the rates will be below 5% then or in the low fives?

Thanks Dave..glad we made the decision to refinance our 6.75 a few weeks back...

Hi totallyblessed,

So you are essentially saying that now is a good time to buy AND a good time to sell, if you're in the market for either??!!

Well... sure! (Depending, of course, on what it is you're considering buying and what it is you are considering selling ;~)

Currently its likely a best time (actually, 10-14 days ago) to "buy" a new mortgage.
Similarly, it is/was a best time to be selling a mortgage-backed security (bond.)

Hi Robinson,

We are remodeling and "plan" to finish by the end of the summer. Do you think the rates will be below 5% then or in the low fives?

My hunch is you'll still have mid-to-low 5%s available... and who knows, we could still see bottom-bounces in the high 4%s yet... I just wouldn't carve anything so close as to COUNT on it.

Cheers,
Dave Donhoff
Leverage Planner

a CB Residential sales meeting this week, the "financial expert" was talking about interest rates "going through the roof" in the 2010-2011 timeframe.

I can totally see this happening. With the massive increase in the money supply that the federal government has unleashed on the US economy, how can this *not* result in inflation?

Monetary inflation is basically the government figuratively cranking up the printing presses and increasing the money supply. It's the increase in the amount of currency in circulation that will in turn cause prices to rise. How much did the money supply increase? Try $8.5 trillion.

We have just embarked on the largest bailout program ever conceived with the blessing of a lame-duck president and a complicit Congress, and now our newly-elected president is on board the train as well. This program so far will cost taxpayers $8.5 trillion. This staggering sum encompasses: loans backed by worthless assets ($2.3T), equity investments in bankrupt companies with negative net worth ($3.0T), and guarantees on crumbling derivatives and other hollow collateral ($3.2T).

Now granted, this $8.5 trillion is not the net increase in the money supply. We've suffered a huge contraction in the stock market, and billions of dollars have been lost in housing prices. To make matters worse the mortgage industry took the initial mortgages on homes and leveraged them using derivatives to compound the gains on the upside. This leverage was by a factor of hundreds of times. Actually no one even knows the full magnitude of how much compounding went on. So there could easily be trillions more of liquidity that evaporated when housing prices stopped going up and began their downward descent.

However, to the extent that the government is on an unchecked spending spree, the money supply will continue to increase and ultimately result in inflation. Will it happen in 2010/2011? I'm not qualified to say, but I am very concerned.

We as a country are in so much debt already that we have no savings left to invest. Turning to foreign sources of capital is not longer a viable option: the foreigners who have financed our irresponsible spending for so many years will no longer be able to afford it, let alone finance more of our reckless behavior.

The result? A devaluation of the dollar and price inflation. Since price inflation affects the time value of money, a rise in interest rates is inevitable.

The link between monetary policy and inflation is covered in Econ 101 classes, this is not rocket science.

Hi annkathryn,

The result? A devaluation of the dollar and price inflation. Since price inflation affects the time value of money, a rise in interest rates is inevitable. The link between monetary policy and inflation is covered in Econ 101 classes, this is not rocket science.

Ahhh... IF ONLY it were truly this simple... I really wish it were, but its not.

The interest rate markets are not, however, directly correlated to generic inflation. Short-term rates are affected by central banker policies which are inevitably politically influenced (and I dunno about you, but the *ONLY* thing I find predictable about government is that it will continue to attempt to grow, expand, bloat and encroach like a cancer... regardless of right or left.)

Long term rates are affected by the global demand for long-term bonds... and this is affected by SO MANY factors it cannot ever be laid strictly at the feet of monetary policy (after all, different country's policies can exacerbate demands of one country's bonds for another's despite BOTH deprecating their currencies, albeit unequally.) Bonds are considered a "safe haven" for monetary defense from a long list of alternative investment classes (from stocks to real estate to business to war budgets, and much more.)

IN SHORT (and now I show my true colors ;~) trying to divine where the markets will go strictly by projecting fundamentals is futile. Fundamentals are interesting (in an entertaining way) for justifying why markets do what they do IN ARREARS... but determining future probabilities is best done with technical analysis (again, caveat; I'm a technicalist market geek... apologies ;~)

Cheers,
Dave Donhoff
Leverage Planner

I wanted to post here as I am a product of this discussion. This is probably a thread worth reviving as well.

Tonight I did a 120 day extended lock (we are doing new construction) at 5.125% for 1.5 pts (1/2 pt lock, 1 pt discount from 5.5%). We also have the option of floating down inside our 30 day window for 1/4pt. While I'm happy our lender could offer Friday's rates over the weekend, I wasn't thrilled about doing this, but given a huge amount of uncertainty in the markets, along with what sounds like a giagantic sale of bonds by the Treasury, I felt this was the lesser of two evils. While I didn't get bit by greed on my part, some slow occurances by others involved in our process to build, probably cost us a week or two in getting a contract signed. I'm not even going to try and figure out how much that delay has cost me...

I do a lot of reading in forums, and Dave's thoughts here are shared by others. There are those that believe rates will fall again into the 4's with no points. In reality, there will probably be plenty of hills and valleys in this environment, but knowing which is the strongest valley and which will be highest peak is impossible to predict. Is it worth chancing?

Bottom line is I believe it is best to be able to sleep at night. I'm good with the rate, but not thrilled with what I have to shell out to get it. But in the long run, I have a fantastic rate which will pay itself back in probably under 5 years. Why mess with the uncertainty, when in the long run it is a small price to pay. If you feel rates can make or break you, jump in at a comfortable place and let it go. Try to get a float down option...what a great insurance policy on your lock. Be happy knowing you will be able to make your payments and live a good life. The alternitive could be a potential financial disaster!

My wife and I really felt this would be our best way to hedge all possibilities. Rates moved up enough over the past month to really takes us to a place where a continued up trend could begin to be a strain on our finances. Now we shouldn't have to worry.

This all makes my head spin. It's like trying to watch Spanish language TV when you only speak very basic Spanish. You know the stuff I learned going to public school in California.

We are in the market to "move up" and rent our current house. We applied for a pre-approval but the lender (major bank) only put together an approval for an FHA loan. We are having her put together a conventional loan as well. I don't know anything about FHA loans and thought they were only for people that would struggle to buy otherwise. We are not in that position. We have a descent (not great) reserve, excellent credit, and enough monthly income to carry both homes. We don't HAVE to rent this one. I think we could do better than the package she put together, but the more I read the more confused I am.
Isn't the a Cliff Notes on this stuff?

Hi Danihoney,

We have a descent (not great) reserve, excellent credit, and enough monthly income to carry both homes. We don't HAVE to rent this one. I think we could do better than the package she put together, but the more I read the more confused I am. Isn't the a Cliff Notes on this stuff?

First off, don't be overly dismayed at being confused... a large majority of the people INSIDE the business have a very poor professional comprehension. Its big, there are lots of moving parts, and if there ever were published a Clif's Notes about it, it would be outdated & needing revision 2-4 weeks later anyway.

Further, based on how you seem to have been treated so far, your chosen advisor (at this "major bank") isn't exactly offering you outstanding financial guidance & treatment. It sounds like nothing more than a retail clerk, if I may be so blunt.

My suggestion for you is to shop a few more potential advisors. Find someone who communicates clearly and takes the time to help you understand your options (ALL of them... not just a single deal that's likely most profitable to that bank.)

EVEN FURTHER... if you are really considering what I call the "hermit crab shuffle" of finding a new home, and leasing out your old home (a great strategy if you're interested in landlording by the way... its how I began my portfolio, which has been VERY kind to me during these financial meltdowns...)

... sorry, I digress....

If you are REALLY considering the rent-the-old-then-move-up strategy, I would strongly recommend shopping for a financial advisor who not only provides mortgages, but can also help you prepare for the specific issues you'll face financially as a new landlord.

Luck!
Dave Donhoff
Leverage Planner

Thank you Dave, I appreciate your input. I doubt this bank will get our business. It took too much effort on my end to get action on hers. That has been par in my neck of the woods. Local business seem to run on their own time and "get to it when they get to it". I'm always left wondering if I can do better.

We are not desperate to move but want to take advantage of the market and move ourselves up a little. At the same time, because we don't HAVE to move, we are a little afraid of the risk. The neighborhood we are looking at, I feel, will recover better (someday) than the one we are in now. The house we are in would make a great rental and still maintain descent resale value in the looooonnng run. It just wont comp to the level of the newer neighborhood. Here in the Central Valley the rental market is big because of the number of foreclosures. Renters are having trouble finding stable rentals because so many of the homes are for rent and in foreclosure at the same time. I'm hoping we will be able to find someone that wants to rent long term.

Any tips on locating and choosing a proper adviser?

For some reason buying our first home (this one) was so much easier. Maybe ignorance really is bliss.

Hi Danihoney,

Any tips on locating and choosing a proper adviser?

Heh... funny you should ask.... I wrote my post a bit earlier, and was actually running around doing my Sunday errands thinking about exactly that.

A common refrain you'll see in my posts is "go find a worthy professional advisor, and GET AWAY from the retail clerks & commodity salespeople." The oh-so-obvious response to this is; "OK... and HOW do I go about finding such an Advisor????"

Perhaps my not-so-obvious answer to that is also what I used to be so heavily accused of; self-promotion. I really try to give everyone as much of the orienting financial principles as possible (up to the level where people start saying they can't understand a thing I am saying,) and I TRY to show people how to go about finding quality professionals who also understand financial planning including the leverage management pice (which is usually a hidden quarter to half-million dollar piece, or more!)

My firm does this... but I'm not really shy of pointing out that we're not the only ones. The trouble is that its not something you can simply flip through the yellow pages to find.

I think that first of all I would start from a large list of potential advisors, and then narrow them down by qualifications.

A) are they a licensed broker, or banker? Brokers (in most states) have a legal fiduciary duty to you, their client. The brokers (and their licensed loan officers) in such states *MUST* put their clients financial interests ahead of their own. In contrast, licensed bankers (and loan clerks) strictly represent their corporate interests.

B) do they offer software-generated leverage/mortgage analysis & plans... either on a fee-only basis, or in conjunction with their financial services? (Some examples of programs used by some; Loan Magic, Equity For Life, Mortgage Coach, Forgotten Equity, and Loan Analyzer.) While actually executing a particular plan doesn't make nor break the quality of a professional... anyone who doesn't even have it as an offer OBVIOUSLY has no way of properly determining what is actually in your financial best interests.

Beware the loan salesperson who, when asked about analytical programs, refers to their online application gathering forms, or processing software, or some nebulous secret black-box website only they have access to. The bottom line is if they cannot generate a nice presentable report that gives you a full, graphical explanation of where you are financially, what you are seeking to accomplish, and the future-looking results of several options... they are blowing smoke.

C) do they regularly work with real estate investors (and EXTRA points if they are one themselves... "eat their own dog food" so to speak.)

D) do they analyze your financials from a holistic perspective? That is to say; do they gather and review *ALL* your financials before making suggestions? Anyone who starts suggesting 6-figure financial debt structures WITHOUT having any clue of your qualified retirement accounts, insurance coverages (life, health & disability as well as property & casualty,) is acting as a dangerous renegade, in my opinion.

SO OFTEN the general public randomly takes the "lowest points" 30 FRM (the absolute *MOST* expensive way to borrow money) and throws as much cash into their down payment as possible (the most dangerous cash management moves)....
AND THEN they clip coupons, skip latte's, and think they are "conservative & practical."

Having someone who truly understands BOTH sides of the financial balance sheet... the assets AND the liabilities... and their interrelationships, is essential to financial success, in my opinion.

SO... there ya go (are you sorry you asked?)

Cheers,
Dave Donhoff
Leverage Planner

"SO... there ya go (are you sorry you asked?)"

No - not at all, I needed more to think about!!

Thank you (really) - At least I am feeling a bit better about which direction to look. I wonder though just how easy it will be to find this person in my community of dairy farmers. I know they are out there somewhere.