Wednesday, December 24, 2008

Another refinancing boom

People respond to changing incentives, and there is a lot of that going on these days. Mortgage rates have dropped to all-time record lows, and refinancing activity, not surprisingly, has exploded. New applications for mortgages are starting to pick up as well, but so far most of the activity is centered around refinancing. For all of those homeowners who have enough equity in their home to qualify for refinancing, which I assume must be the majority, refinancing now can result in locking in historically low mortgage rates and reducing monthly payments by a meaningful amount. Even those with negative equity in their homes might consider using some of their cash or liquidating other assets in order to reduce their loan amount and thus refinance.

My nephew who deals with foreclosed properties in the Inland Empire (about 40 miles west of Los Angeles) tells me that buying interest is strong and prices appear to have stabilized in the past month or so. And it makes sense, since mortgage rates are exceptionally low and prices in many of the previous high-flying areas have dropped 50%. Homes are now reasonable again. Buyers can even finance the purchase of a property and then rent it out for a positive cash flow.

It's taken about three years, but the market seems to have found a new equilibrium. To be sure, there are lots of foreclosed properties yet to hit the market, and many more in the pipeline, but there does not appear to be any shortage of buyers, and financing costs are extremely attractive. I find all of this news extremely encouraging.

Look back at the chart. The last time we had such a massive refinancing boom as is now underway was in the first half of 2003. As you might recall, that was a time when economic gloom was pervasive. The Fed was "pushing on a string;" interest rates had collapsed because demand had collapsed; it was a "jobless recovery" that threatened to morphy into a global deflation/recession. The entire world was thus astonished when the U.S. economy surged ahead in the second half of 2003. Bush's tax cuts undoubtedly had a lot to do with the recovery, but who's to say that Obama won't cut any taxes early next year? This is no time to despair.


Spiral said...

The Inland Empire is about 40 miles east, not west, of Los Angeles.

A very minor point. But I went to grade school through college in the Inland Empire. So, I couldn't let that one go.

Good post though. I am getting ready to refinance myself. I hope the value of my house hasn't declined significantly in the 5 months since I purchased it. Othersiwe I will have to put some cash into the house in order to avoid Private Mortgage Insurance.

Spiral said...


The entire world was thus astonished when the U.S. economy surged ahead in the second half of 2003. Bush's tax cuts undoubtedly had a lot to do with the recovery, but who's to say that Obama won't cut any taxes early next year? This is no time to despair.

Let's say hypothetically that Obama doesn't enact any tax cuts, at least in terms of changing incentives towards work, savings and investment, and just limits his "tax cuts" to people who don't pay federal income taxes.

Let's further stipulate that Obama supports a 700 billion dollar stimulus plan that emphasizes subsidizing alternative energy, bailout out the state and local governments and increasing spending on food stamps and what not.

Do you think that this difference between what Obama might do next year and what Bush did in 2003 would cause a significantly different result economically?

Or is the business cycle, the economy's natural ability to rebound from a recession, enough to blur the differences between the GWB approach and the potential Obama approach?

I ask because I think this is the question Obama's "team" should be asking.

In short, the question is:

Is liberalism (socialism) affordable right now, politically and economically?

Scott Grannis said...

Good grief, I must have been in a rush this morning, mixing up east and west!

I think there is a huge difference between Obama's (stipulated) approach and one that uses tax cuts to increase incentives to work and invest, with the latter being much more powerful and the former being very slow to take effect and very lacking in stimulus power. Cutting taxes is so easy and quick, but spending hundreds of billions on infrastructure and politically correct projects takes a long time and is very wasteful.

So I think there's a chance that some of the smart people that Obama has surrounded himself with may figure this out.

But if there are no tax cuts, I think the economy can recover on its own, it will just take awhile longer. Big spending projects will actually sap some of the economy's natural strength for several years at least.

Tom Burger said...

The boom starting in 2003 was driven by cheap money and imprudent (to say the least) lending standards, and it worked so well! Oh yes, bring on another episode. With luck we could get another two or three years of insane speculation before succumbing to an even more catastrophic set of market dislocations.

How anyone can still laud the Bush policies is a mystery to me. If the Treasury and the Fed had not stolen a few trillion dollars from sensible, hard working savers and given it to the financial buffoons we would be looking at financial system losses that completely erase all the supposed gains of the Bush boom. As it is, the rest of us have to eat the losses and these members of the banking cartel get a chance to do it all over again.

These mortgage interest rates are obviously and admitted created by the Fed via excessive reserve creation and debt purchases; the Fed is proud of its "accomplishment."

It will, however, be impossible for the Fed to keep this up forever. When the credit expansion slows this time, assuming they can get it going again, I believe the Fed will then be looking at a situation which is even less desirable than the economic chaos their 2003 policies created. These people in Washington are jeopardizing all of our futures; it really is a shame.

It confuses me, Scott. How can you claim a "free-market orientation," let alone a libertarian view point, and at the same time see wisdom in these policies?

Tom Burger

Unknown said...

Interesting quote from Hilary Kramer on the Nightly Business Report:

KRAMER: "Oh, the U.S. dollar, this is a major problem that I see that's brewing because ultimately it will create inflation. But right now, we are printing so many dollars. Did you know that some were outsourced to Switzerland to print? That's how come the U.S. government can't print it fast enough. Dollars are sticking together when you get them from the bank. But what's happening is, it's too much money being printed and then we have the recovery. It's just an economic equation. We will have significant inflation (INAUDIBLE) inflation."

Spiral said...


I think we need to junk the discussion over George W Bush's economic policy for a few mintues and simply talk about some of the options policy makers have (or should have) now.

On the one hand is the option of reducing marginal tax rates, on corporations, on personal income, on capital gains and dividends.

On the other hand is the "do nothing" approach.

And on the other hand is the "spend your way to prosperity" approach, which includes massive infrastructure projects and so on.

All of this doesn't even get to the issue of whether the Federal Reserve should quickly and significantly expand the money supply or if we should move to "free banking" and/or a gold standard.

The debate over George W Bush isn't productive because Left-wingers see Bush as a radical Right-winger and the Right sees Bush as a socialist.

Pretend it's January 21, 2009 and you are among 7 smart economic advisors to the President. It's your turn to speak and give your suggestions. What do you say?

Oh, and "Bush sucks," isn't a good answer, even if true.

Tom Burger said...


That's not all I said. I strongly disagree with CURRENT Bush policies: i.e. the bailouts, the handouts, the central bank manipulation of interest rates, and the intention of reinflating the credit driven consumption patterns that caused our economic dislocations.

As painful as it will be, the ONLY possible fix for these difficulties is to let market prices go where they need to go to move us in the direction of a sustainable economic equilibrium.

We should not be inflating, we should not be preventing industrial or banking failures, and we should not be manipulating interest rates. These are the very actions that caused our bankiing failures, our auto industry failures, our over built retail sector, and virtually all the economic dislocations we are now looking at.

Do it again, and we will have a situation that presents even more intense problems. Keep this up long enough and our Fed/government combo really will bring on the end of the world as we know it.

I hope this is clear enough for now? Obviously, one could go on for pages or even chapters ... but nobody would want to read that. :-)

Tom Burger

John Peters said...

It may be more relevant to discuss what options are open to us, given more bailouts, huge spending, and manipulation ahead. I was considering things like tips and gold, but recently have begun considering things like wheelbarrows and bread.

Scott Grannis said...

I think it is constructive to view inflation as the consequence of a significant change in the value of a currency when viewed from objective benchmarks such as gold, commodities and other currencies. By that standard, what the Fed has done has not been inflationary. As I've argued many times, all the Fed has done to date is to satisfy an almost unquenchable thirst for dollars. When the supply of a currency equals the demand for it, there is no inflationary or deflationary consequence.

This supply/demand balance may well change in the future, and being alert to this is the task at hand for investors and the Fed.

Scott Grannis said...

John: re the Kramer quote. I don't think she knows much about monetary policy. The Fed supplies currency only on demand, and in exchange for reserves. The amount of currency outstanding is thus a measure of the demand for currency, not the force-fed supply of it. Therefore currency is not what you should be watching if you want to judge whether the Fed is creating inflation or not.

And in any event, the growth of currency is well within historical norms.

Tom Burger said...

Yes, an unquenchable demand for money at zero percent interest.

I wonder what the demand would be for Porsche 911s at zero dollars per copy?

Tom Burger

Scott Grannis said...

Tom, you're confusing the definition of demand. When the demand for a currency is strong, that is when the desire to borrow that currency (or short it) is weak. That's the situation now: everyone is trying to deleverage, and they need dollars to do it. Collectively, the market believes there will be significant deflation, so holding paper dollars will produce a positive return in terms of purchasing power.

With intense demand for dollar currency and dollar cash, it is logical that interest rates on cash should be extremely low. Indeed, the yield on T-bills has even been negative at times in the past week. People are willing to pay the government money just to get the security and portability and liquidity that T-bills offer.

Oleh-oleh from Bali Island said...

the market at this time is not stabilized

Oleh-oleh from Bali Island said...

the market at this time is not stabilized

Tom Burger said...


A lot of the money the Fed is pouring into the economy is in the form of loans. They have allowed how many finance-related companies declare themselves to be "bank holding companies" so they can borrow at the Fed Funds rate?

When people need cash, they normally get that cash by exchanging something of value: their labor, the product of their labor, or a good they had previously acquired via exchange. Having to give up something of value is the only reason that the demand for money isn't infinite.

The Fed has altered that market condition in a dangerous way. The Fed has been giving cash to banks (and now others) in return for worthless securities. The Fed is giving something for nothing.

I say again, the demand for cash is going to be unquenchable if the price is zero, or close to zero.

The new cash is itself "inflation" and it will distort relative prices and cause further market dislocations. It is not a good thing for the Fed to be doing.

Tom Burger

Public Library said...

I cannot help but think that while Scott is most likely right about a recovery, with the potential for it to be quite powerful, that the outcome from such extreme behavior will be to end in another bust of gigantic proportions. We are already seeing mortgage brokers exploiting loopholes in every possible way, car companies is back to 0% interest, God knows how much in cash back incentives (why not it’s govie money), and retailers are offering 20 - 30% discounts just for signing up for one of their credit cards @ 18.99% interest. I feel like I have read this book before and if memory serves me right, the final chapter is a boom/bust led by Wall Streets ability to wrap up the lust and greed with a little bow and pedal it the world over leveraged 35 to 1. This time they have the Governments checkbook and blessing to do it all in the name of saving capitalism.

It seems we have entered a period of perpetual boom and bust led by the central banks willingness to step in at the slightest sign of a cold. This represents nothing near a free market environment and investors best bets are to workout 1- 2 year forecasts while continually hedging against catastrophic events. The catastrophic events will occur; there is no other way to deal with the seismic forces that are continually flowing through our economies. Eventually the leak in the hose will bust wide open. Those fortunate enough to forecast this will be rewarded, however, the rest of us will suffer the consequences of excess volatility and a future of greater uncertainty about our daily lives.

Tom Burger said...


I agree with much of what you are saying. It does seem possible, however, that we are already at the juncture which prevents more easy money from rekindling a boom. The economic dislocations around the world are momentous. Time will tell.

I didn't expect the housing bubble boom to happen, either. We would all be better off if the Fed hadn't created that mess, obviously, and we will all be worse off if the Fed can engineer yet another inflationary boom.

However, the Fed is clearly going to put everything they have into creating another boom. It's become the American way: destroying people who save money and try to invest in productive activity.

Tom Burger