Inflationary Interest Rate Creep Targets the Valley

by Gayle Plato

You may be bored with my quantitative easing talk and with my economics blogging, but this doesn’t get any more real. We are at Mortgage Implosion Ground Zero in Phoenix: every one of us is either upside down in a property or knows a loved one who is going belly up. Get ready, because the experts are NOT forecasting lots of positives. Do not believe the recovery story pushed out by the Obama Administration just yet. We are seeing the interest-rate hike I noted was coming. I just had hoped we’d have a bit more buy and sell of homes to actual residents and not just investors dropping cash on foreclosures and short sales.  

 On May 27th, the mortgage market was so volatile that banks and mortgage bankers across the nation had a number of price changes which then led to a shut down on the ability to lock loans around 1pm PST. Banks could not keep up with the lightning jumps of interest rates.

There might be a real concern for anyone not locked, or waiting out the refinance process. Short sales are notoriously slow in process, and meanwhile the average guy or gal realizes their rates have jumped. Some individuals in the middle of deals will be wooed to take 3/1 and 5/1 arms, and this too is a risky endeavor. For those of you thinking refinancing the little bit of equity will save you, get ready. Banks are nervous. Truth is, a number of people are going to see rates jump while waiting and then be told they don’t qualify. Banks are going to stall out as they want to wait and see if the rates drop back. What bank wants to lock when there are hyper leapfrog rates?

It’s the desperate fact than many people cannot turn any deal down as the biggest investment they have is dropping like a stone in value. For those of us who live in the outer reaches of the Valley, we also see gas prices are creeping again. It makes us wonder; how do we pay for it all? Many are just giving up.

Look at the major bankers and lenders giving up because they are not getting paid. Advanta just turned off the taps, a major lender to individuals but more aggressively to small businesses. Did you get the letter this week saying hey, ‘use it or lose it with your credit line, oh and we cut it?’ Advanta is liquidating because they are facing huge losses. Advanta is an example of a deflation.  The average guy and small businessman is in deflation.

But then inflation does not first hit the grocery store or the gas station, because this ‘bubble” of supposed growth is  governmental growth. It’s the Fed pumping in cash, buying up all of the trash loans. Remember the US Government owns Fannie Mae and Freddie Mac, and can absorb the Sham-Wow of toxic debt.  That money then eases in through stocks. Notice stories saying the stock market is better and it has gone up these months. It’s the FED Pump and it’s artificial—QUANTITATIVE EASING.

Know this: since January 20, 2009, the day Barack Obama took office, the 10-year Treasury bond rate jumped from 2.35% to 3. 46%; all interest rates are based off of this number. Therefore, interest rates are up 47% in just over four months. The bonds themselves went down in value. That’s why major mortgage backed bond holders (Asian markets) are asking very sternly, why are you, US Treasury, buying your own debt?

The US Dollar dropped in value during his same period of time 8.6%. So not only did the ten year bond value go down, the US dollar it’s valued in went down. This is a double loss for China and other major bond holders. So the US Government is literally borrowing huge amounts from China but only in short term. All  the long term buy is US buying US. It’s the snake eating its tail once again.

“Rates are all over the map as lenders assess the damage and price cautiously.  Now, it is a mad dash to only focus upon the loans that are locked and have a chance of funding. If the locked loans are not funded quickly and the interest rate complex continues to experience this extreme of volatility, serious losses can occur.”

‘With respect to yesterday (5/27/09) in the mortgage market — yes, it is as bad as you can imagine. No call can be made on the near-term, however, until we see where this settles out over the next week of so. If rates do stay in the mid 5%’s, the mortgage and housing market will encounter a sizable stumble. The following is not speculation. This is what happens when rates surge up in a short period of time”
Other References


  1. JR Snyder Jr says

    Thank you for putting into words what for a lot of people (it’s denial or fear on their part I think) has become unspeakable, off topic and not discussable. Arizona is among the top 5 states with literally no real capital of any substance left. The only real capital we had was real estate and we know how real that was.

    We really ought to be considering Arizona on all levels as a start-up operation, thankful we have a few companies that are not large, but national and of some substance and build again with a modicum of forethought.

    The unstoppable is rapidly heading for impact and exactly how it will manifest itself isn’t clear yet. Arizona is going to be very hard hit and I do not underestimate the shock some people will undergo, totally believing all the hype “it’s slowly improving and not that bad.”

    I’m a classic optimistic believe-in-America kinda guy but I’ve been tracking this since April 2007 and you can look at our state from all kinds of angles but it is still going to be difficult. One can only look at this as an opportunity to rise above if you’re going to stay here and survive. It’s the “how” part and the shape of our institutional structures that concern me.

  2. Grumpy Gus says

    I guess I am one of those scumbags who makes money when other people panic. Without saying I take her post seriously, I have to say Gayle’s “serious losses” are my “serious gains” and there are now lots of competitors getting in on my action. I make money when interest rates are high and no one can buy houses…because I own apartment buildings. I make money when interest rates are low…because I buy those houses and flip them. I make money when, regardless of the rate, banks don’t lend…because I do. I even make money when money is free…because some people are so transient or rich or stupid they pay me interest and provide collateral as well.

    I don’t apologize for this, because my name is Market.

  3. The Alan Smithee of comments, Mr Grumpy, I tip my hat–good one 🙂

    The invisible hand though of Alan Smith supposedly guides the market in nautural rolling ups and downs. Dumping fake money onto it is the FARTHEST thing from any laissez-faire action.
    Your name might be Market, but your first and middle names are Artificially and Manipulated.

  4. Grumpy Gus says

    Do you mean Adam Smith?

  5. Alan Smithee is a ref to movie directors and a nod ifyouwill to your approach parallel to a Smithee. But you’re correct and I didn’t fix that when writing Adam– Alan Smithee was purposeful.

  6. China buys dollars because this lowers the value of their currency relative to the dollar. This means Chinese imports are cheaper for the US market and this helps China continue to expand the trade deficit with the US. China will continue to be willing to lose money on its dollar investments in order to promote its exports. The switch to short term is because of likelihood of raising interests rates, which is hardly a surprise because rates were effectively as low as they could possibly get. What exactly is the story here?

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