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Rates on 30-year mortgages sink, match record low
Average rates on 30-year mortgages fall, matching record low reached in spring
Wednesday November 25, 2009

(AP) -- Average rates for 30-year fixed mortgages fell this week, matching a record low set last spring and more than a full percentage point below what they were a year ago, Freddie Mac said Wednesday.

Rates for 30-year mortgages averaged 4.78 percent this week, down from 4.83 percent last week and equaling the record low reached the week of April 30.

Interest rates began dropping last November, when the Federal Reserve began spending $1.25 trillion to buy up mortgage-backed securities in an effort to lower rates, loosen credit availability and bolster the long-suffering housing market.

The average rate on a 15-year fixed-rate mortgage fell to 4.29 percent, down from 4.32 percent last week, according to Freddie Mac. The 15-year rate hasn't been this low since Freddie Mac started tracking it in 1991.

PeakTrader: Homeownership has been the best way to build wealth (or equity) historically.

Dr Perry has shown the Housing Affordability Index (HAI) before. It shows, housing affordability fell from 1973-82 (which coincides with a bust phase in a long-wave business cycle). The HAI fell from roughly 150 in 1973 to 65 in 1982 (i.e. homeownership became less affordable). HAI peaked at 180 in Spring '09, and remains at an elevated level (165 in Sep '09).

Of course, the homebuilding boom, generally from 1995-06, created newer, bigger, and better houses.

There's been a lot of coverage about the homebuilding boom taking place in four states, i.e. California, Arizona, Nevada, and Florida. However, Colorado had a huge homebuilding boom, at least in relative size.

In the '80s, there were few housing tracts around the Denver Tech Center (about 20 miles south of Denver). However, by 2000, the area was built-up with houses, high-tech buildings, and impressive malls, to the mountains in the west and to Castle Rock in the south. The houses were generally large and would be viewed as upper-middle class.

Also, Denver itself saw three new pro sports stadiums (the Pepsi Center, Invesco Field at Mile High, and Coors Field), a light rail system, the renovation of lower downtown, the first new international airport built in the U.S. in many years, an impressive central library (which held the G-8 meeting one year), a convention center, sidewalks and streets redone, etc.

Moreover, many housing tracts were built in Boulder county. I visited a former classmate in 2004. He bought a new house a few years before for about $170,000 and then refinanced it at a lower rate. He said it was worth over $250,000. It was a three bedroom two story with two baths. It also had a large den, living room, dining room, large kitchen, which the back door led to a very large backyard, and a large basement, along with a big hallway at the front door. There was plenty of room for a family of four, and could easily be converted into a five or six bedroom. There were several new housing tracts in the area, which was mostly a patchwork of small farms. He had to drive two miles to the nearest store, and then there were many stores and malls. He lived less than 30 minutes away from the university. It was a great deal (reflecting a high living standard), particularly compared to many of the older, smaller, and much more expensive houses in California.

Dexter: The Housing Affordability Index is complete garbage. It's based on the assumption of a 20% down payment and a cap on mortgage payments to income which are both totally unreasonable under current circumstances in many markets.

The HAI has been above 100 since about 1983. What does that tell you? NOTHING. It tells you nothing about the buy-rent decision. There are few points in time where market conditions are right to make a house an "investment". It may serve as a store of value which is also a commodity, but few "investors" actually do the math of the total cost of ownership including property taxes, maintenance and improvements, interest on the loan, the opportunity cost of the down payment and difference between mortgage payment and rental rate, origination fees, search costs,moving costs, transfer fees, and realtor fees. Least of all do they take into account the fact that when they sell at a high, they are buying at a high. Also important, but seldom calculated, is the risk you face in owning rather than renting.

Most of what you get in "profit" when you sell a home is just a rebate of money you already paid, and with a low rate of return. There are nonpecuniary benefits to owning a home, but people who push houses are usually ownly pushing their own commissions.

PeakTrader: Dexter, I dispute some of your data and assumptions. However, I agree there are benefits and consequences to homeownership. Nonetheless, the facts remain, homeowners tend to live in better homes than renters and accumulate much more wealth than renters.

The Basics
Why its smarter to buy than rent

The tax benefits help somewhat, but its the long-term gain in value that's crucial to building real wealth.

By Liz Pulliam Weston
MSN Money

Average net worth of homeowners vs. renters:

Annual income $80,000 & up: Homeowners average net worth $451,200; Renters average net worth $87,400

Annual income under $16,000: Homeowners average net worth $73,000; Renters average net worth $500.

(Incomes between $16,000 and $80,000 show similar results)

Article:

"When I bought my first house, for example, Southern California was experiencing its worst-ever real-estate slump. The property, purchased with two friends, lost about 10% of its value in my initial years of ownership, then recovered to post a 20% price gain.

Not bad, huh? Except after considering all my outlays for maintenance, repairs and insurance, and factoring in the tax benefits, I determined that I had barely broken even when compared with the rent I would have paid during those six years.

Had I invested my down payment in an index fund that matched the Standard & Poors 500 instead, I could have tripled my money in the same period.

The case has been almost exactly reversed with our current house: The stock market has basically been treading water for the past five years. But our home in the insanely hot Southern California market has more than doubled in value.

There's no way I could have predicted the performance of either market -- stock or real estate -- in advance."

The article below does the math between renting and buying:

Renting vs. Buying: The Realities of Home-Ownership-Get Rich Slowly

You may also want to see the article:

Housing Affordability at Record High
By CATHERINE RAMPELL
Economix
New York Times
(Dr Perry is cited below the chart)

The facts:

1. Homeowners have much more net worth than renters, in all income categories.

2. Homeowners generally live in better homes than renters.

3. Houses are an appreciating asset (not a depreciating asset like autos).

4. The homeownership rate has been in an uptrend for decades.

5. Trillions of dollars were extracted by homeowners during the recent housing boom, including lower income homeowners, who really couldn't afford the houses, initially.

You should calculate the difference between buying and renting similar houses (you can use the example in the article above), e.g. using a 5% mortgage rate, the real appreciation of houses per 10 year period using historical data or an estimated value, historical data on inflation or an estimated value (including rising rents), and a 3% annual rise in income. Then tell me who'll be better off in 10, 20, and 30 years (you may also want to note we're in a structural bear market, i.e. the Dow Jones will likely trade sideways, between 7,000 and 14,000, for another eight or nine years, and currently it's in the middle of that range).

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Here's what a British entreprenuer said:

"The Nordic Countries "success story" economies are a joke. I've been living here the last couple of years after being dragged here by my wife, and trying to run your business here is tough. It just isn't a business friendly place at all. Taxes in Denmark are 60-odd% as soon as you have the cheek to earn more than £35,000 a year!

My guess is that 50-70% of the population are in government jobs, and they rely heavily on exports of oil, timber and fish in order to generate the foreign earnings to pay for it all."

PeakTrader: Mark Twain may have said it best:

"The trouble with the world is not that people know too little, but that they know so many things that aren't true."

If you liked Reagan, you loved Bush. It was the same game plan, i.e. cut taxes and expand American power. Of course, Bush didn't get much help from Fed Chairmen and couldn't put together a complete sentence.

QT: Peak,

At least, GWB did not grant the constitutional rights of a U.S. citizen to the mastermind of 9-11. It is difficult to argue the value of rhetoric over substance...i'll grant that some prefer sizzle..personally, i like steak.

PeakTrader: QT, I agree. Obama must be a magician, because the steak disappears after some sizzle.

People "misunderestimate" the Bush Administration. The Paulson Treasury did well in the financial crisis, with the exception of Lehman, which of course was a disaster.

I'm sorry to say, Obama would've likely spent more time on a solution and then pick the worst one, given his past performance. Obama's best economic policy so far seems to be raising the minimum wage.

Also, I think, the Middle East is much more complicated than the Soviet Union. History is rewritten almost as fast as it's made. Americans didn't complain too much about bases and troops in Europe (NATO), Japan, Korea, etc. during the Cold War. Yet, they've been complaining a lot about combating a much greater mortal threat. I guess, some people now believe protection is too expensive.

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Signs of economic problems began in 2006:

July '06 - Home prices hit an all-time high.

August '06 - Home prices nationwide post first decline in 10 years, and gas prices now average $3 a gallon - staying there for multiple weeks (later rose above $4).

April 2 '07 - New Century Financial, the nation's largest subprime mortgage lender, files for bankruptcy.

July 17 '07 - Investors are told two Bear Stearns hedge funds, heavy into mortgage-backed securities, are now worth nothing.

Aug. 10 '07 - The Federal Reserve injects $38 billion into the banking system as fears of a freeze-up in the credit markets mount.

Aug. 22 '07 - Countrywide Financial, a big mortgage lender, sells $2 billion in stock to Bank of America to raise cash as borrowers default on subprime mortgages.

Sept. 7 '07 - The country loses jobs for first time in 4 years.

Sept. 18 '07 - Fed cuts interest rates for first rate cut in 4 years.

Oct. 19 '07 - Dow hits all time high of 14,198.

Nov '07. - Home prices fall by over 2% from the month before, the biggest drop since 1987.

Feb. 3 '08 - Lawmakers approve the economic stimulus plan, sending $168 billion in cash to consumers in an attempt to revive the economy.

March 16 '08 - Bear Stearns, a storied Wall Street investment bank, collapses.

June '08 - Gas prices cross $4 for first time ever.

July 11 '08 - California bank IndyMac fails, customers line up to withdraw money.

Sept. 7 '08 - U.S. government seizes control of Fannie Mae and Freddie Mac, the nation's largest home mortgage lenders.

Sept. 14 '08 - Bank of America buys investment bank 94 year-old Merrill Lynch.

Sept. 15 '08 - Lehman Brothers, another big Wall Street bank, goes bust, leaving just two investment banks standing.

Sept. 16 '08 - Federal government takes over American International Group, one of the world's largest insurance firms, in an $85 billion deal.

Sept. 25 '08 - The government seizes Washington Mutual, the nation's largest savings and loan. Sells bank to J.P. Morgan.

September '08 - Economy sheds the most jobs in five years, total losses for 2008 hit 760,000.

Oct. 3 '08 - Lawmakers pass $700 billion Wall Street bailout.

Oct. 10 '08 - Dow falls as low as 7,884, a 44% drop in one year, and millions of American's watch their retirement savings disappear.

Business
Friday, Nov. 06, 2009
U.S. productivity soars 9.5 percent
MarketWatch

U.S. companies increased their output in the third quarter even as they slashed working hours, driving productivity up at a 9.5 percent annual rate in the quarter, the Labor Department estimated Thursday.

Unit labor costs - a key measure of inflation - dropped at a 5.2 percent annual rate in the quarter.

Productivity is output divided by hours worked. Output rose 4 percent annualized, while hours worked plunged 5 percent. Real hourly compensation increased at a 0.2 percent annual rate.

With productivity high and real compensation low, companies captured the lion's share of the benefits of higher productivity in the form of profits. Inflationary pressures remained very low.

The huge increase in productivity explains why the U.S. economy could grow at a 3.5 percent annual rate in the third quarter even as jobs were being lost at a rapid pace.

But some economists believe companies have squeezed just about all the extra work they can out of their remaining work force and that more hours of work will have to be put in if output is to increase much more.

In the second quarter, productivity increased at an upwardly revised 6.9 percent annual rate. Unit labor costs fell a revised 6.1 percent in the second quarter.

In manufacturing, the gains were more impressive, with productivity surging at a record 13.6 percent annual rate. Unit labor costs in manufacturing fell 7.1 percent.

Productivity, a concept that's simple in theory but elusive in practice, is output divided by hours worked. Productivity gains are the key to higher living standards, higher wages, increased profits and low inflation.

After undergoing a productivity boom in the late 1990s, productivity slowed heading into the recession, rising 1.8 percent in 2007 and 2008.

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There's not only misinformation about the tremendous increases in absolute U.S. living standards, but also about the steep rises in U.S. upward mobility.

Of course, anyone who buys a house at the top of the market will lose, like someone buying the stock market at its peak. However, tens of millions of Americans bought houses before they doubled or tripled, after inflation, and they won, including through extracting trillions of dollars of home equity, spending on home improvements, and living in better homes (even if their nominal values fall to zero).

Many Third World immigrants, who would earn $1 an hour in their home countries, if they could get a job, were able to buy houses, buy new autos, and live much better lives in the U.S. through hard work (many Third World immigrants in the U.S. earn $30,000 to $50,000 a year with overtime).

Tiger: The Devil in in the Details

1. Appliances are now made in China as opposed to the U.S.

2. Most of those iteams have been financed.

3. A truer indication of middle class could be the per-capita debt to income ratio...

PeakTrader: Tiger, that's why government should cut spending, cut taxes, and print money; to increase assets and goods faster than liabilities and expenses again.

Although, this is an unrelated topic, it provides some perspective:

Stalin, Mao And … Ahmadinejad?
Oct 29, 2007

"Here is the reality. Iran has an economy the size of Finland's and an annual defense budget of around $4.8 billion. It has not invaded a country since the late 18th century. The United States has a GDP that is 68 times larger and defense expenditures that are 110 times greater. Israel and every Arab country (except Syria and Iraq) are quietly or actively allied against Iran. And yet we are to believe that Tehran is about to overturn the international system and replace it with an Islamo-fascist order? What planet are we on?"

Dr T: The European house size comparison is misleading. Europe, with its urbanocentrism, has almost no suburbs. Most houses are urban, and developers must follow stringent construction guidelines. To make money, they must build many row houses on small plots. I'll wager that a comparison between urban homes (Chicago vs. Paris, for example) would show that our urban homes are only slightly larger than Europe's.

Most US houses are suburban or small town. Lumber costs are much lower in the US than in most of Europe, so many people can afford large homes. But, due to poor design, the space in many American homes is so badly utilized that a 3000 sq ft home is functionally equivalent to a 2000 sq ft home in Europe. (I visited Germany a few months ago and saw how they get high utility from each square meter of living space.)

PeakTrader: Dr., do you have any evidence German houses in urban areas utilize space better than American houses in urban areas (in square feet or meters)?

Typically, houses are designed, built, and sold based on consumer demand. Of course, German consumer choices are severely limited, which may help explain why it takes them so long (two years on average) to buy a house.

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According to the National Association of Home Builders, the average home size in the United States was 2,330 square feet in 2004. The average square footage for new U.S. homes completed in 2007 was 2,521 square feet.

Canadian Home Builders' Association (CHBA): The average new single-detached house built last year (in 2003) in Canada was 1,800-square-feet, on a lot 50-feet-wide and 110-feet-deep, builders say.

There are greater disparities in homeownership between U.S. states than between the U.S. and Canada:

Article:

"The state with the highest home ownership rate in 2007 was West Virginia (77.8%), followed by Delaware and Utah (76.2%). The state with the lowest home ownership rate in 2007 was the District of Columbia (44.1%), followed by New York (55.0%) and California(57.5%)."

Another article:

The Midwest had the highest rate of homeownership, while the West had the lowest. The difference between the two regions was almost ten percentage points—72.0 percent in the Midwest versus 62.8 percent in the West.

There is a large difference in homeownership rates between rural and metropolitan areas: the homeownership rate was 67 percent in metropolitan areas, versus 75 percent for nonmetro areas. The South and Midwest, which have high rates of homeownership, also have fewer major cities than the West and Northeast, where homeownership rates are lower.

Among racial and ethnic groups, Whites had the highest homeownership rate: 75.0 percent. Both Hispanics and Blacks had rates under 50 percent—48.9 percent and 47.1 percent, respectively.

I stated before:

The bank's gain is the borrower's loss.

I wonder how many Canadians were able to buy a house without a job, extract a large amount in equity within a few years, refinance at lower rates more than once within a few years, lock-in a low 30-year rate, etc.

Terrence added: And if a Canadian mortgage holder walked away from the house for any reason, they STILL hold the mortgage.

And I added: I also wonder if Canadians can live in their houses without paying the bank for a year or two?