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Jun. 20, 2007: Mortgages with a pretty good lawyer joke
Rob Chrisman
What
price matters the most to you? Gasoline? Milk,
which has almost doubled in 6 months? I-Tunes? The most
important price in the
American economy is not the price of oil, computer chips, wheat
or cars. It's
the price of money: interest rates. When rates move, they
ultimately affect the
price of almost everything else. Which poses some intriguing
questions. Is the
era of low interest rates ending? If so, what's next? The
answers will hover
over the 2008 election. The economic expansion, both in America
and the rest of the world,
has rested on a foundation of abundant credit. Low interest
rates drove the
housing boom. In the 1980’s, mortgage interest rates averaged
10.9
percent; after inflation, the "real" rate was a hefty 7.2
percent.
During the decade, home prices rose a meager 1 percent beyond
overall
inflation. Since then, mortgage rates have dropped sharply. From
2000 to 2006,
they averaged 6.5 percent, and after inflation only 4.2 percent.
Lower rates
meant people could afford to pay more. The result: Existing-home
prices rose 29
percent more than overall inflation from 2000 to 2006. It's not
just real
estate. Low interest rates have fueled the private equity
bonanza. Private
equity refers to investment funds that, borrowing massive
amounts, buy all the stock
of publicly traded companies. Similarly, low rates enabled
governments and
companies in developing countries to borrow huge amounts. From
2005 to 2007,
borrowing will total about $900 billion, reckons the Institute
of International Finance.
Russia,
Turkey
and South
Korea are all big borrowers. But now rates are edging up.
There are two
ways that credit tightens -- that is, the price of money rises
-- and we're seeing
both. The first is that government central banks, such as the Federal
Reserve in the United
States, deliberately try to restrict the amount of new
credit. The second
is that private investors and lenders (collectively known as the
market) become
more stingy and risk-averse. They demand higher rates on bank
loans, bonds and
mortgages.
Housing
starts decreased 2.1% to
1.474 million units in May. Housing permits
increased 3.0% during the month.
The housing market shows little strength and is
not expected to bottom out till
late this year. U.S. Treasuries were little
changed after a government report
showed home construction declined to a four-month
low in May, while building
permits increased. ``The housing arena is not
going anywhere,'' said Kevin
Flanagan, a Purchase, New York-based fixed-income
strategist for Morgan
Stanley's individual-investor clients. ``It
continues to remain the soft
underbelly of the economy. It's debatable whether
we've reached a bottom.''
Evidence that a slowdown in housing will restrain
the economy may bolster
demand for U.S.
government debt. Treasuries completed their first
two-day gain in a month
yesterday as an industry report showed confidence
among homebuilders dropped to
the lowest since 1991. The yield on the benchmark
10-year note was little
changed at 5.13 percent at 8:47 a.m. in New York,
according to bond broker Cantor Fitzgerald LP.
The price of the 4 1/2 percent security due in May
2017 rose 1/32, or 31
cents
per $1,000 face amount, to
95 4/32. Bond yields move inversely to prices. The
10-year Treasury will
probably trade between 5 percent and 5.35 percent
through the end of the year.
Flanagan said.
One afternoon a lawyer was riding in his
limousine when he saw two men
along the roadside eating grass. Disturbed, he
ordered his driver to stop and he
got out to investigate.
He asked one man, "Why are you eating grass?"
"We don't have any money for food," the poor man
replied. "We
have to eat grass."
"Well, then, you can come with me to my house and
I'll feed you," the
lawyer said.
"But sir, I have a wife and two children with me.
They are over there,
under that tree."
"Bring them along," the lawyer replied. Turning to
the other poor man
he stated, "You come with us, too."
The second man, in a pitiful voice, then said,
"But sir, I also have a
wife and SIX children with me!"
"Bring them all, as well," the lawyer answered.
They all entered the car, which was no easy task,
even for a car as large as
the limousine was. Once underway, one of the poor
fellows turned to the lawyer
and said, "Sir, you are too kind. Thank you for
taking all of us with
you."
The lawyer replied, "Glad to do it. You'll really
love my place. The grass
is almost a foot high."
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