The 4.0% Solution is Upon Us!
Recently I had blogged about a 4.0% solution to help stabilize housing. It appears the powers in our government have made the ultimate determination that, regardless of what new program has been created, that nothing will be fixed until housing has been stabilized. As you are well aware many of the programs created by the Fed and the Treasury have succeeded in unlocking the seizure of the credit markets. This was a critical first series of steps to restore order and some confidence to the financial markets. Now the focus is to address the systemic root of the problem and that is the cause of the housing market imbalances.
The housing market is still in a deflationary spiral down. Demand has been eliminated by the disappearance of credit for many people due to lack of qualification and a major contraction in credit for the rest of the population that can qualify. This, in conjunction with record foreclosures that have to find their way back to market, is causing the supply of housing to grow disproportionately. It is so bad that is it adding to the deflationary push downward in the prices of housing nationwide.
If natural demand can be restored then equilibrium in housing can be forecasted, and the deflationary spiral down in housing prices can be slowed, and the market can return to its proper function. It’s a complex problem when you amass it in with all the other issues we are currently facing. However, if you just focus on housing and the 4.0% solution it becomes much less complicated.
Here is how it will work. Recently the ultra conservative 30 year fixed rate mortgage for a new perspective homeowner was approximately 6.50%. Today with the mention of initiatives subsidizing 30 year mortgages with legislation the yield is now closer to 5.0%. Soon you should expect the implementation of a program that will yield 30 year fixed rate mortgages to the general public in the 4.5% range. You do the math. 6.50% down to 4.5% is just shy of an immediate 31% reduction in available credit for new mortgages. When credit is made available and the cost significantly reduced it has a direct affect on affordability and also injects confidence back into the market. Just like equities, when rates are lower, the value of the earnings stream of a company are higher and reflected in a stocks expanded price to earnings ratio. It’s the same basic relationship with housing. The cheap available credit will create an air cushion under the deflationary forces of housing and slow the decent. Natural demand from those that desire a roof over their head will begin to work on the inventory levels of housing.
I believe the nasty spat of deflation in all asset classes will subside once we finally address the housing supply demand issue. The problem does not have to be solved for our markets to recover. There only needs to be a perception of a pending solution that is in place and the ability to forecast equilibrium and we will see stability. The 4.0% solution is probably the government’s most powerful weapon to directly address this issue at this stage of the crisis.
Having said that, please do not be naive and assume that everyone will be able to get a new 4.5% mortgage. There is no question that any perspective borrowers will have to fully qualify under current credit guidelines for the loan. Specifically, I am talking about full documentation requirements that will require two years of tax returns, W2’s and recent paystubs. There will be no fancy handouts from lending institutions to entice demand so don’t expect them. The program will focus on natural housing demand with well qualified and gainfully employed individuals as the only beneficiaries. I wouldn’t be surprised if this new financing is married with a tax incentive for a period to encourage the purchase of a new home.
All other home owners that are stuck in situations where they don’t qualify or where they are upside down with negative home equity will not benefit. These people will have to find an alternative solution such as a Real Estate Short Sale, Hybrid Refinance, or a Loan Modification. You can now see the moment of truth is arriving for all the homeowners that are currently stuck and hoping the government is going to bail them out. I gave you a guarantee in September on the blog. I told you the government was going to save the free market and capitalism would not die. Please watch and witness the power of capitalism and keep a close eye on the people that are stuck. It happened in the early 90’s during the Savings & Loan crisis. If you are stuck with affordability or any other issue with housing, it’s time to get constructive and get moving on a solution for your problem. Being so direct is not always fun, but if I can get you to focus on a solution vs. doing nothing, I may save you from getting into real financial trouble. The 4.0% solution that the government is going to create out of thin air is going to help many people but not everyone
Some people will call this socialism and criticize the government of meddling in the free markets. Don’t be fooled. Look at history over the past 100 years. This is why we have government and its institutions like the Fed and Treasury. Capitalism is great but it is also very destructive. When the wheel comes off the cart history has shown that the government has to put it back on and straighten things out before its influence can recede and markets can return to normal. Blogging from the front line of the current housing crisis.
GHunter
June 9th, 2010 at 9:46 pm
I strayed on here a couple weeks ago and I truly can’t get enough! Please keep writing!