Thursday, May 28, 2009

Honey, did you finish that refinancing yet?

If not, you might have missed the boat. Refinancing isn't for everyone because it resets your payment clock - ie, if you've paid 8 yrs on a 30yr mortgage, you're 22 years to owning your house free and clear, but if you refi, now you're facing another 30 years of payments (unless you refi into a 15 yr).

The Federal Reserve made a conscious decision to lower mortgage rates by buying US treasuries in an effort to stimulate refinancing and home buying. It seems to have worked for awhile as mortgage rates plunged below 5% in April. However, there has been a steep jump in long-term interest rates in the past week and 30yr mortgages have climbed from 4.85% to 5.1% in the past couple of weeks.

That doesn't sound like much, but that move increases the monthly payment by $20/mth or $7,200 over the course of a 30 year mortgage on a $150,000 loan.

If rates continue to move up (there is evidence that regionally rates are already north of 6%), this could sharply curtail the recent run on low-end housing.

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I try to offer some big picture insights into trends that are overlooked by most. One argument I've made before is that our total payroll growth in the US has been flat for the past decade. You can't have a robust growing economy when payrolls are flat. Thankfully another blogger pulled some data to put behind that assertion....

Decade % of payroll increase by decade
1940s 38%
1950s 24.5%
1960s 31.5%
1970s 27.2%
1980s 20%
1990s 19.9%
2000 to date 1.2%

Admittedly, you would expect the percentage of payroll growth to slow over time as the nations population has grown. However, the drop from 20% growth in the 80s and 90s to just 1% growth in the current decade is startling. For all the talk of green shoots, you can't grow the economy without jobs. I'd also argue that the quality of the jobs created in the last nine years has been far below that of past decades. Many new jobs were "created" in low-end service and retail, while higher wage manufacturing and service jobs were lost. You could argue that the rise in undocumented workers might account for some of this decline as well. That's probably a fair argument, but it doesn't change the fact that payrolls are flat to declining and that means tax revenues are flat to declining for the foreseeable future.

We also got a glimpse into the future as initial unemployment claims dropped slightly (but were revised higher for last week). As continuing claims race toward 7 million people I think the odds of 10%+ unemployment continues to increase.

The markets seem to be happy today with the durable goods data which was surprisingly strong. However, the Non-defense/ex-aircraft durable goods number actually fell again this month (indicating government spending was the main factor propping up orders).

Also, note that despite a jump in April durable goods orders March's estimate was revised down sharply more than offsetting April's gains. No one cares about facts however, lets get back to playing the perception game.....

If the market gets a rally going watch the 10am new home sales number. This is a practically meaningless number when compared to existing home sales, but some times the cheerleaders at CNBC like to pump it up.

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