Market Update for July 7 2014: Back in the Saddle

By chrisking • July 12th, 2014

I’m back in the saddle!

Since the last time I wrote a market update in November of 2013, a lot has changed. I threw my hat into the race for Culver City Council. Our team came up short, but we did well for a first attempt against two incumbents, and we learned a lot of valuable lessons for next time. And there will be a next time!

I mentioned above that “a lot has changed.” And while that may be true of our personal lives, I would argue that it is NOT true of the mortgage market. In my first newsletter of 2013, I hypothesized that “from an economic standpoint, I think 2013 will be a tumultuous year.” “Tumultuous” would be a great word to describe the stock market last year. But in terms of interest rates, when we step back, take a longer-term view, and analyze what rates did, there was actually a slow, steady, upward climb. 30 year fixed rates fluctuated from around 3.375% in January, held about constant through the 1st Quarter, ticked up to 3.750% in June, to 4.125% in September and ended the year around 4.500%. As you can see from today’s market update, rates have settled nicely at about 4.000% on a 30 year fixed rate mortgage. In general, though, we are noticing a slow and steady up-tick in rates.

In his February market update, Bill Gross notes that, “The amount of credit and its growth are critical to asset prices. . . [and therefore] to growth and job creation and future prospects for investment” (“Most “Medieval,’” Investment Outlook, February 2014). He continues, “In order to keep this system going, you need. . . more credit in order to continue, [but] the Treasury is fading as a source of credit growth.”

In short, we’re looking at a situation where more private capital (money from banks, NOT FannieMae and Freddie Mac) will be needed if our current “economic growth” in the US will continue. Private capital will seek higher profit than the Treasury, though, (read, “higher mortgage rates”) OR if private capital does not fill in the gap, we could be facing another credit crunch and economic down-turn.

In general, I agree with Gross’ idea that due to our current economy which is heavily reliant on the extension of credit to generate economic growth, “All financial assets are artificially priced,” because they are reliant on a bail-out heavy, corporately-timid environment (emphasis added, Gross, William; “The Second Coming,” Investment Outlook, March 2014).

To me, the take-a-way is that for real estate investors, the time to “get back in the saddle” is now. You have the benefit of still historically low rates in a market environment where rates will surely increase as banks seek higher returns for having to lend out more of their money and less government money. Further, rents are increasing, so investors can realize more positive cash flow from the lower cost of credit and the higher income from rents. As always, we’re here to offer advice and guidance on products and the mortgage markets.


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