Wednesday, October 15, 2008

Housing, Retail Sales, Etc...

Today's Wall Street Journal hits on a number of key points that I've been repeating for the past three weeks.

"The Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices.

The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures.

At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. "If the financial system doesn't get working again, then the economic downturn is going to be much worse, and that means the housing market will be a lot worse than it otherwise would be," says Frederic Mishkin, a Columbia University economist who stepped down as a Federal Reserve Board governor in August.

Over time, the government's rescue effort could make it easier for borrowers in high-cost markets such as California, New York and Boston to get a mortgage by reducing rates for jumbo loans, those too big for government backing. Rates on fixed-rate jumbo loans currently average 7.91%, according to HSH Associates, more than a full percentage point above rates on conforming loans eligible for government backing, which jumped nearly a third of a percentage point Tuesday to 6.6%."

As I noted two weeks ago:

What Does The Bailout Mean To US Consumers?
1. Mortgage rates - If you're shopping for a mortgage, the bailout might make a loan more available -- but higher interest rates might make it less affordable. "The prospect of an additional $700 billion in Treasury issuance is suggestive of higher Treasury yields and consequently higher mortgage rates," McBride said. I couldn't agree more. It is very important to watch the 10 yr note this week, it climbed much of last week and mortgage rates moved up back over 6% on talk of a bailout.

Mortgage rates have jumped to 6.6% this week as a result of rising yields on the 10 year note. What does this mean to the average person? Well all other things being equal this means that if you were going to buy a house today, you could afford to pay 6% less than you could just two weeks ago. As rates go up, house prices should continue to go down and the cycle continues to feed upon itself.

As discussed last night, retail sales were terrible in September and I expect more of the same for the balance of the year. Stocks have been weak so far today on this news.

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