patrick.net

IO does not have to be a balloon. The change in payment when the IO period ends is not huge, so it is not speculation as long as the borrower can reasonably expect an increase in income.

So yes at already low interest rate using IO to stretch is more serious than at high interest rate, but it is hardly suicidal if one’s income rises by 5.8% a year (last YoY data).

But many people bought using 4% IO.

During IO period, the 100K loan will cost 333 per month. After 5 years, it will adjust to the current interest rate. At 6%, the payment jumps to 644, or 93% more!

The 10 year rate moves on many factors.

Any TY/ZN trader here?

Historically, the Fed has been a bit slow to react to needed interest rate changes. They got much better during Greenspan’s years. In the slower days I believe that the Fed was largely following the market… so it appeared that there was more causal connection than what really existed. The Fed has been far more proactive and has kept the measured inflation in a tight and low range, so the bond market stayed stable. When the Fed dropped to an artificially low level, the bond market did not move so much.

With the Fed artificially below the market for while, the market did not need to rise as the Fed came back toward the natural level for interest rates. Hence the conundrum…

Of course, in the final analysis it is all supply and demand for capital, and these various factors are all influences on that reality.

H. Z.,

I believe that most commercial investors do seek to maximize return within the context of maintaining a reasonable duration match or profile.

The foreign central banks seem to be very motivated by currency/trade considerations.

Peter P Says:
“Any TY/ZN trader here?”

Care to elaborate? Obviously I am not one.

10-YR Note future.

TY is the pit-traded symbol.
ZN is the electronic symbol.

I always admire people who trade bonds successfully.

I always think that the bond markets are much less emotionally driven.

Would the percent remain the same?

Yes. Just multiply them.

Zephyr Says:

This is not true. The average Fed Funds rate was 6.4% in December of 2000 and dropped to about 1.8% by Dec of 2001. A major decline. During the same period the 10 year treasury declined from 5.25% to 5.09%… an insignificant movement.

Zephyr,

Good catch --I believe "lock step" is overstating the relationship between Fed funds rate & the 10-year. However, if you look at the movement of both over the period when the Fed was cutting (Jan 2001 to June 2003), I think you'll see there is a definite correlation, though not one-for one as you pointed out:

See second graph under "HOW ARE MARKET RATES STACKING UP?"
tinyurl.com/ayl27

I think it's also worth pointing out that the Fed Funds rate's direct influence on the mortgage market is greater now than ever before, due to the predominance of ARMs over fixed-rate mortgages in the last few years.

the Fed Funds rate’s direct influence on the mortgage market is greater now than ever before, due to the predominance of ARMs over fixed-rate mortgages in the last few years.

As in the 10-yr bond rate only matters to you if have a fixed-rate mortgage, which most who have financed or refied recently do not. OTH, the Fed funds rate matters a great deal to you if you took out an ARM, option-ARM or IO-ARM.

Newsfreak,

I agree with your points. But it is a complicated issue… here is my take on it:

The immediate aftermath of the tragedy is a unique period, and can not be relied upon heavily for indications for other times.

The fear of a recession or worse in the wake of the terrorist attacks on 9/11 was an important consideration and the Fed lowered the Fed Funds rates during the following three months to 1.75%, and left it there for about a year and then lowered it again until reaching 1.00% by mid 2003. At that point they were worried about the risk of deflation.

On the declining inflation numbers the bond yields crept slowly lower… living in the neighborhood of 4% for most of the period. The Fed started its quarter point march upward in mid 2004, as the strength of the economy became clear. The bond rates continued to track with the low inflation and changed very little as the Fed funds rate rose from 1% to almost 4%. However, as inflation expectations grew (oil price shock…) the bonds began to stir. Then with the Sept inflation report (suddenly 4% inflation) the yields have started to climb.

The bond boys are constantly debating this situation. Some say it is a buying opportunity, while others insist that we have only seen the beginning of the movement.

The world is awash with excess capital. Credit is not likely to dry up severely in the near future.

I thought the world was awash with excess capital during the Roaring 20's.

I am surprised that for a self proclaimed financial conservative, you are so into options/futures.

I am a moderate conservative, both socially and financially. I am risk-adverse but I have to say that leverage is not all bad. Exposure matters more.

pbass, Look at the world capital markets for a better view.

Peter P,

The real question is whether the Fed will choke the money supply into a deflationary spiral at the end of this cycle, like they did at the end of the 1920s.

The real question is whether the Fed will choke the money supply into a deflationary spiral at the end of this cycle, like they did at the end of the 1920s.

No, of course not. I hope they learned the lesson. :)

ARMs are directly linked to various short term rates and once they start adjusting will follow them… of course, the 3 and 5year ARMs have been very popular and most are probably still in their fixed rate period. Those starting rates are a function of the longer rates.

Those starting rates are a function of the longer rates.

Last time I checked they are a function of shorter (2YR, 5YR) rates. Maybe I have mistaken.

If an emergency need for liquidity should arise, the Fed could always drop cash from helicopters if needed to stop deflation…

Our incoming Fed Chairman Ben Bernanke is famous for that reference… Hence the nickname of “Helicoptor” Ben.

Peter P, Yes, matching or close to the duration of the starting period. But definitely longer than the Fed Funds, Prime Rate and others that are used for the more volatile adjustable features.

The USD is the main reserve currency of the world. We can do a lot to affect dollar inflation, if we must.

YOU are betting that rents will not double. Pure and simple. And if you claim that you are not betting, then your “non bet” is at least as risky as my non-bet.

Huh??

Sorry Jack, but I don't see how renting is equivalent to committing to a NAAVLP 0-down special solely due to your 'guaranteed' windfall from 20%/year price appreciation. For starters, you can always move. Second, the only thing you're "risking" is moving costs (vs. being upside down to the tune of hundreds of thousands on your "investment property").

Shoot, if rents double in five years, then this means incomes will have to double as well (unless you assume most working class people can devote 50-75% of their gross incomes to rent). At that point (assuming housing prices remain relatively constant) the "Buy vs. Rent" equation would tilt strongly in favor of buying and the current imbalance. This is what's been referred to as the "optimistic" scenario in past threads --and for good reason (ain't gonna happen ;-) ).

YOU are betting that rents will not double. Pure and simple. And if you claim that you are not betting, then your “non bet” is at least as risky as my non-bet.

Sure, I'll butt-in here :)
The correct answer is:
Yes, he is betting on this. But this is approximately the same as betting that incomes will not double in 5 years. Likely a pretty safe bet. The relationship of rent rates & incomes should be pretty reliable. So, if rents double, pbass' income will likely double.
(NOTE: I'm ignoring the possibility of a new paradigm in the relationship between rental rates & median incomes. I sure as hell hope it's safe to ignore this possibility).

Meant to say:
"At that point (assuming housing prices remain relatively constant) the “Buy vs. Rent” equation would tilt strongly in favor of buying and correct the current imbalance."

And who sees a skyrocketing of those in the next year or two?

5-YR yield and 2-YR yield have been steadily rising.

http://tinyurl.com/8wrv7

http://tinyurl.com/87ae2

The Fed goals are stable prices, full employment and more generally a stable financial environment for the economy.

I think the Fed will continue to do well at accomplishing their goals, and prevent or counteract high inflation or any hint of deflation…

With price stability we will have rate stability.

And who sees a skyrocketing of those in the next year or two?

5-YR yield and 2-YR yield have been steadily rising.

tinyurl.com/8wrv7

tinyurl.com/87ae2

If you could’ve bought for the long term 2 or even perhaps 1 year ago and you didn’t due to prices, you’ve gambled and lost.

I gambled and lost. So what? Losing is part of the game.

If an emergency need for liquidity should arise, the Fed could always drop cash from helicopters if needed to stop deflation…

No way. The ACLU would block this with a court order on behalf of the short, the blind and those who tend to stay indoors.

If you could’ve bought for the long term 2 or even perhaps 1 year ago and you didn’t due to prices, you’ve gambled and lost.

You're assuming the gains from last 1-2 years are permanent and will not reverse at some point. If you could've bought 4-5 years ago but didn't, sure, you screwed the pooch, but 1 or 2? I think not.

Rents tend to follow a long term trend line of about 4% in California. In Southern California this has been pretty steady. In the Bay area it has been volatile -- more of a roller coaster ride.

"No way. The ACLU would block this with a court order on behalf of the short, the blind and those who tend to stay indoors."

Perhaps we could give them a one hour head start.

All roads must converge and lead to that destination. Interest rates must skyrocket, job losses must be massive, prices must plummet in real terms, all resulting in loan defaults on a massive, unprecedented scale in order for a bubble CRASH on the scale envisioned here to become reality.

Reflexivity. One leads to another... almost by design. :)

BTW, Average apartment rents did double in San Francisco between 1995 and 2000.

BTW, Average apartment rents did double in San Francisco between 1995 and 2000.

Yet there was no housing bubble in 1999-2000.

Sorry Jack, didn't mean to gang up on you. ;-) The simultaneous comments by my & SJ_Jim was just a spooky cooincidence, as he already pointed out.

Now that I know the context, I see your point a little better. Even so, I'd say profit taking (selling) right now --especially if it's investment property-- is a far less risky bet than buying into the current market. It's still gambling though.

I am all in favor of a buying opportunity. However, if prices drop too much the economy ill be a shambles and the opportunity will be very limited.

If we have statewide declines of more than 30% for detached homes you will be more likely to be standing in a soup line than to be buying a home.

You’re assuming the gains from last 1-2 years are permanent and will not reverse at some point. If you could’ve bought 4-5 years ago but didn’t, sure, you screwed the pooch, but 1 or 2? I think not.

Exactly! In fact, I was going to say that while he may be currently losING, he won't know if he won or lost until he finally actually buys. So PeterP if you never buy, then you will never lose; although you will probably always be losing :) .

The last “crash” included default levels 5 times what we have today and resulted in a statewide decline of 12%. The 30% - 70% declines many of you are banking on will require a foreclosure level not seen since ’29, and perhaps not even then.

I recall declines larger than 12% in local markets, which is what really counts, no?
SoCal was dropped pretty hard in the early 90s. How much did people foreclose back then?

Btw, I'm seeing price reductions over 10% already here, and the foreclosure rate is nil.
Granted, the end scenario is a huge guess--since this boom is unprecendented.

Good to have HARM back and giving me s**t again!

*sniff* Feels good for me too, Jack! :twisted:

There was a rent bubble.