Time to refinance your home (again?)

One year ago I stated it would be a good time to refinance your home.  Once again the opportunity presents itself. The 30 year conventional home loan rate is near historic lows.

Conventional 30 year home loan rates

Theoretically the vast majority of home loans out there could be refinanced but there are a few unfortunate facts which may prevent many from refinancing: Negative equity, conservative valuations and high unemployment.  

CNN Money has a good article detailing the these 3 challenges.  

If you are wondering how monetary policy can have limits this is a good example of how and why.  In an effort to continually re-stimulated the economy and encourage society to take on more debt over time we have reached a point where historic low interest rates will just not do much for the US consumer. They are already too tapped out and low interest rates will not encourage them to borrow more let alone take advantage of the lower interest rates and buy a home; they just can't.  People 'trapped' in their homes due to negative equity also hinders future home sales as it inhibits consumers from being able to move or trade up.

Consumer home debt / GDP

The ratio of consumer mortgage debt to gdp (both nominal) was at data series highs at the beginning of the great financial crisis. Yes I know I'm comparing home debt to national GDP and not home prices but it's yet another reminder of how much debt our society has taken on.

If you are in the position to refinance and have questions give me a ring and we can talk about some of the options / pitfalls when looking for a new mortgage.

Thanks: David Merkel

Long term treasury rates in a bubble? Maybe not?

Talk of a bubble in long term treasury rates has been careening around the financial markets for a while now and considering the rate on the 10 year T note is approximately 2.22% right now I went looking for some perspective.

10 year versus nominal GDP:

Econompic has a great series relating nominal GDP growth versus the 10 year and the long term patterns are impressive. 

Note how during the rise in nominal gdp growth rates from the 60's to the 80's interest rates were below nominal gdp and this pattern flipped as nominal gdp growth rates declined.

90 day tbill rates versus 10 year:

Rarely does the spread between the 90 day tbill and 10 year rates go beyond 4% and with short rates at zero this puts a cap on interest rates further out the curve.  With 10 year rates at 2.22 this does provide some upside to the range of interest rates, but those recently calling for 10 year rates higher than 4% were calling for something truly exceptional.

Until we see nominal GDP growth really perk up and/or the Fed start raising interest rates I find the possibility of the 10 year going above 4% unlikely. 

Disclosure: I own long term treasuries in personal and client accounts.

Risk: As described by Chanos, Hendry and Gundlach

Some videos new and old which may provide some perspective on the recent downgrade of America by Standard and Poors and the current market thrashing.
I could attempt to write something eloquent but I'm busy right now. Instead I'll refer you to some successful investors voicing their opinions.

Chanos talking about credit ratings versus CDS rates
http://youtu.be/kRxAMM7UU_k

Gundlach on how the US will never not pay its debt, it just may pay its debt back with devalued currency
http://video.cnbc.com/gallery/?video=3000037858

A series by Hugh Hendry from late last year which I don't believe I have published before.  Considering the current market thrashing I think the discussion is important.
part 1: http://youtu.be/zvzKgjaVnlE
part 2: http://youtu.be/MJSO3H4GLqw

ht: HistorySquared

Home prices going up? Not until you show me the money.

Are home prices going up in a sustained manner anytime soon? No

A recent presentation by Australian Professor Steve Keen inspired me to search for a similar American data series. One exists and it does not predict any sort of sustained bounce in American home prices. (I am simplifying Mr. Keen's presentation as he looks primarily at the 2nd derivative of loan levels but the level of destruction in American mortgages outstanding is epic)

As Mr. Keen states, it is not people who buy homes, it's people with money who buy homes.  Just to show you the magnitude of the home devastation we are experiencing here's the entire home loan series:

For the entire data series, going back to the mid 50's we've never seen a year over year decline in the total value of home loans outstanding.  Yes, some of this decline is due to homes being foreclosed and the loans vaporizing as a result, but that also eliminates yet another person who cannot trade up from their current home to something larger as their equity and credit score head towards zero.

Until we see year over year growth in mortgages outstanding we will not see a sustained nationwide rise in home prices. We will of course see localized variation in this with some pockets of growth but nothings happening until You show me the money.



Disclosure: The author is short some housing related stocks.

Italian and Spanish yields keep climbing

I recently highlighted the rise in Spanish and Italian government bonds yields. Today they are shooting higher yet again and I'm certain this is a contributing factor to the equity market's weakness, US budgetary problems notwithstanding.

I usually don't mention my trading activity but I sold off an equity ETF position Friday due to this European contagion situation.

The challenge of Google+ and entering my circle of trust

I recently signed up for Google+ and in typical Google style its somewhat spartan in style and instruction on how to use it.  I'm slowly stumbling around trying to figure the system out.

There are some improvements over Facebook in my opinion, most specifically the 'circle' system where you can place individuals in multiple different groups so as to filter and direct your comments, pictures and information to specific groups.

Even if Google+ is 'superior', will it eventually exceed Facebook in popularity?  Not necessarily.  Part of the challenge Google+ faces is the size of their network is MUCH smaller than Facebook's (which is currently over 750 million people!) Network size is very critical as a social network with very few 'nodes' provides a much lower utility even if it's 'better'  [See Metcalfe's law]  Google+'s strategy of slowly rolling out the system via invites from current members mitigates this problem as people are automatically creating more connected 'nodes' in the network instead of random additions you don't personally know.

Right now my plan is to use Google+ as a social media outpost/gateway for my twitter and virtual friends versus Facebook for my 'in the flesh'  friends.  It will be curious to see how the two competing social media platforms evolve.

Many thanks to downtown Josh Brown for being the first person to put me in one of his circles.  Hopefully I'm not in the deranged fanboy category but in the circle of trust...

Club Med Hangover -- Bond yields climbing in Spain and Italy

Nearly a month ago I mentioned rising yields in Spain possibly causing problems.  I underestimated the number of countries. Both Italy and Spain's treasury yields have spiked higher.

Italy 10 year

Spain 10 year

Spain 10 year versus German 10 year

 

None of the charts are pretty.  While Italy was getting most of the headlines for the rate of yield increase please note how Spain's yields are higher.  Any EU country bordering the Mediterranean is having serious problems right now.