The real cost of home ownership must be calculated with all factors including price, repairs and maintenance, utility consumption. But with the cost of fuel rising, it is more common Tulsa, OK home buyers are considering the cost of commuting to and from their homes. This consideration for Green Country home buyers may be even more important that that of many other home shoppers across the country since Tulsa, Broken Arrow, Jenks, Owasso, Skiatook, Collinsville, Sand Springs, and other communities in the Tulsa Metropolitan region cover a vast expanse of undeveloped area making travel to and from destinations a longer distance.
Comparing two homes with different locations and different prices? Use this special Commuting Calculator available to help with your decision.
Darryl Baskin sells homes in the Tulsa area and assists home buyers and sellers with the complex decisions of real estate. Make a plan for your financial future with the right real estate adviser. Call the Baskin Real Estate Specialists of cGraw Reaotrs at 918-258-2600. Shop Tulsa, OK houses online here.
Wednesday, March 26, 2008
Buyers Preferences In Soft Housing Market
Even in the depths of the current cyclical housing downturn, consumers continue to be interested in housing and home builders can tap into that potential by paying careful attention to home buying preferences, according to two experts on market trends who presented their latest research findings at the International Builder's Show in Orlando last month.
Emerging as a strong draw for consumers this year is anything “green,” a market force that has been gaining strength with the continuing rise of energy costs, according to Gopal Ahluwalia, NAHB’s vice president of research.
“New home buyers are most influenced by greener choices that include energy-efficient features and equipment-based energy saving features,” said Ahluwalia. “They are also very interested in exterior features, such as a front porch, deck or patio in the rear, and exterior lighting. In addition, laundry rooms and dining rooms are widely considered to be essential in new homes.”
Gayle Butler, editor-in-chief of Better Homes and Gardens, confirmed that eco-friendly building is also very much on the radar of a growing number of consumers.
In a research study conducted by the magazine in January surveying more than 2,000 home enthusiasts from across the country who bought a new home in the past 10 years or plan to build one in the next 10 years, more than half of the respondents said they wanted green building and remodeling options presented to them. This number jumps to more than two out of three in the millennial age group.
Nineteen percent said that it is the responsibility of builders to use eco-friendly materials and build highly energy-efficient homes, even if it adds to the cost of the home, said Butler.
Thirty-one percent said their neighbors would buy a green home “when the cost of such homes are within 3% to 5% of conventional homes.”
Sparking Interest in a Down Market
When asked the best way for a builder to spark a buyer’s interest in today’s market, the Better Homes and Gardens survey found that 44% of the respondents prefer bonus home amenities and upgrades; 42% would like a discount on the price of a new home; 37% want the builder to buy their old home at a fair price; and 31% desire free professional decorating and landscaping advice.
“What we’ve discovered is that home continues to be our emotional center and the sweet spot of everyday life,” said Butler. “Economic uncertainty aside, we won’t stop spending, improving and dreaming when it comes to home.”
Better Homes and Gardens found that its readers prefer a home that accommodates modern lifestyles, has the flexibility to be adapted for future needs, is special “for me” and provides greener choices.
More specifically, 71% identified an all-new kitchen that looks great and is a fun place in which to work as an exciting feature to look for when shopping for a newly built home. Forty-three percent rated sufficient storage as a top priority and 41% cited a master suite “that feels like a luxurious hotel room.”
In the next five to 10 years, Butler reported, 50% of those under age 43 expect to need a home office that functions as a full-time work space, 30% of baby boomers expect an aging parent to move in and 66% of boomers expect to need guest accommodations for grown children and grandchildren.
Today’s home buyer prefers designs tailor-made for their specific needs. “Sixty-nine percent said no more cookie-cutter houses,” she said. “They want a house that has character and charm.”
Satisfaction With Kitchens and Baths
Although consumers generally prefer homes that are bigger and equipped with more amenities, said Ahluwalia, some features of new homes have now improved to the point where home buyers are relatively satisfied.
For example, while large kitchens are desirable, many consumers would be reluctant to see the kitchen expand further at the expense of other space, said Ahluwalia.
“Just over 37% of shoppers would sacrifice living space for a larger-than-average kitchen,” he said.
Home buyers are generally content with the number of bathrooms in typical new homes being built today, Ahluwalia said, and continuing a trend identified in earlier NAHB studies, more than one-third of home buyers do not think it is necessary to have a living room.
These conclusions come from a new NAHB survey of more than 2,300 recent and prospective home buyers that examined the features, amenities and layouts preferred in a new home.
Top-10 ‘Must-Have’ Features
Among the 10 features or designs most frequently rated as “essential/must have” before a consumer would consider buying a specific home, four were energy-related and two were exterior features.
A laundry room topped the list, rated essential by 55% of the survey respondents. Energy-related features in the top 10 included a high level of insulation (48%), exhaust fans (48%), Energy Star-rated windows (36%) and equipment-based energy saving measures (34%).
Exterior lighting (33%) and fenced yards (33%) were the two outdoor features that also made the top 10 list.
Of 21 different kitchen features, a walk-in pantry was rated as essential/must have or desirable by 86% of those surveyed, followed by an island work area (80%), built-in microwave (72%), drinking water filtration (69%) and special use storage (wine rack, spice drawer, pots and pans, cabinet, etc.) by 16%.
Granite/natural stone was the most popular kitchen counter material and a linen closet topped the list of bathroom features, with 89% of respondents categorizing it as essential/must have or desirable followed by an exhaust fan (88%), separate shower enclosure and water temperature control at 79% each.
The median home size of those surveyed was 1,835 square feet and the respondents said they wanted a median of 2,354 square feet in a new home. With the additional space, home shoppers expected to pay a median of $241,699, about 6% more than the $227,500 estimated median value of their current homes.
More than half (52%) of respondents prefer a master bedroom only on the second floor of a two-story home, while 16% prefer it on the first floor only and 22% would accept it on either floor.
More than two out of three respondents preferred nine-foot or higher ceilings on the first floor, and, continuing a popular trend of the last 20 years, more than 40% said they wanted the kitchen and family room to be adjacent and visually open, but with a half-wall separating the two rooms.
More than half of the respondents said they would like a minimum of four bedrooms, while 39% would accept three bedrooms.
Twenty-eight percent of those surveyed preferred at least three full bathrooms, one-third would like to have 2-1/2 bathrooms and 31% expressed satisfaction with only two bathrooms.
On the front exterior, brick was the most preferred, followed by stone, vinyl and stucco.
Remain positive even with the negative economic stories seen each night on the evening news. We live in Tulsa and still have a fantastic housing market and low mortgage rates. The above information is from the National Association of Home Builders and is very descriptive of present new housing trends. There are many great deals out there as new and existing homes continue to be listed.
For information about buying or selling a home please call Darryl Baskin or any member of his team of real estate specialists at 918.258.2600. For questions on mortgages, rates or expert advice on mortgage economics, please contact Jeff Sargent of ONB Bank & Trust Co at 918.481.6833. You can tune in to "The Future of Real Estate" show locally on KWHB TV Channel 47 (Cable 7) at 10 am Central Time each Saturday, Tulsa's Source for local real estate news and information.
Thank you and have a great week!
Jeff Sargent
President
ONB Bank & Trust Co/Residential Mortgage Division
8908 S Yale, Suite 250
Tulsa, OK 74137
Office: 918.392.6572
Cell: 918.636.0630
jeff_sargent@onbbank.com
Emerging as a strong draw for consumers this year is anything “green,” a market force that has been gaining strength with the continuing rise of energy costs, according to Gopal Ahluwalia, NAHB’s vice president of research.
“New home buyers are most influenced by greener choices that include energy-efficient features and equipment-based energy saving features,” said Ahluwalia. “They are also very interested in exterior features, such as a front porch, deck or patio in the rear, and exterior lighting. In addition, laundry rooms and dining rooms are widely considered to be essential in new homes.”
Gayle Butler, editor-in-chief of Better Homes and Gardens, confirmed that eco-friendly building is also very much on the radar of a growing number of consumers.
In a research study conducted by the magazine in January surveying more than 2,000 home enthusiasts from across the country who bought a new home in the past 10 years or plan to build one in the next 10 years, more than half of the respondents said they wanted green building and remodeling options presented to them. This number jumps to more than two out of three in the millennial age group.
Nineteen percent said that it is the responsibility of builders to use eco-friendly materials and build highly energy-efficient homes, even if it adds to the cost of the home, said Butler.
Thirty-one percent said their neighbors would buy a green home “when the cost of such homes are within 3% to 5% of conventional homes.”
Sparking Interest in a Down Market
When asked the best way for a builder to spark a buyer’s interest in today’s market, the Better Homes and Gardens survey found that 44% of the respondents prefer bonus home amenities and upgrades; 42% would like a discount on the price of a new home; 37% want the builder to buy their old home at a fair price; and 31% desire free professional decorating and landscaping advice.
“What we’ve discovered is that home continues to be our emotional center and the sweet spot of everyday life,” said Butler. “Economic uncertainty aside, we won’t stop spending, improving and dreaming when it comes to home.”
Better Homes and Gardens found that its readers prefer a home that accommodates modern lifestyles, has the flexibility to be adapted for future needs, is special “for me” and provides greener choices.
More specifically, 71% identified an all-new kitchen that looks great and is a fun place in which to work as an exciting feature to look for when shopping for a newly built home. Forty-three percent rated sufficient storage as a top priority and 41% cited a master suite “that feels like a luxurious hotel room.”
In the next five to 10 years, Butler reported, 50% of those under age 43 expect to need a home office that functions as a full-time work space, 30% of baby boomers expect an aging parent to move in and 66% of boomers expect to need guest accommodations for grown children and grandchildren.
Today’s home buyer prefers designs tailor-made for their specific needs. “Sixty-nine percent said no more cookie-cutter houses,” she said. “They want a house that has character and charm.”
Satisfaction With Kitchens and Baths
Although consumers generally prefer homes that are bigger and equipped with more amenities, said Ahluwalia, some features of new homes have now improved to the point where home buyers are relatively satisfied.
For example, while large kitchens are desirable, many consumers would be reluctant to see the kitchen expand further at the expense of other space, said Ahluwalia.
“Just over 37% of shoppers would sacrifice living space for a larger-than-average kitchen,” he said.
Home buyers are generally content with the number of bathrooms in typical new homes being built today, Ahluwalia said, and continuing a trend identified in earlier NAHB studies, more than one-third of home buyers do not think it is necessary to have a living room.
These conclusions come from a new NAHB survey of more than 2,300 recent and prospective home buyers that examined the features, amenities and layouts preferred in a new home.
Top-10 ‘Must-Have’ Features
Among the 10 features or designs most frequently rated as “essential/must have” before a consumer would consider buying a specific home, four were energy-related and two were exterior features.
A laundry room topped the list, rated essential by 55% of the survey respondents. Energy-related features in the top 10 included a high level of insulation (48%), exhaust fans (48%), Energy Star-rated windows (36%) and equipment-based energy saving measures (34%).
Exterior lighting (33%) and fenced yards (33%) were the two outdoor features that also made the top 10 list.
Of 21 different kitchen features, a walk-in pantry was rated as essential/must have or desirable by 86% of those surveyed, followed by an island work area (80%), built-in microwave (72%), drinking water filtration (69%) and special use storage (wine rack, spice drawer, pots and pans, cabinet, etc.) by 16%.
Granite/natural stone was the most popular kitchen counter material and a linen closet topped the list of bathroom features, with 89% of respondents categorizing it as essential/must have or desirable followed by an exhaust fan (88%), separate shower enclosure and water temperature control at 79% each.
The median home size of those surveyed was 1,835 square feet and the respondents said they wanted a median of 2,354 square feet in a new home. With the additional space, home shoppers expected to pay a median of $241,699, about 6% more than the $227,500 estimated median value of their current homes.
More than half (52%) of respondents prefer a master bedroom only on the second floor of a two-story home, while 16% prefer it on the first floor only and 22% would accept it on either floor.
More than two out of three respondents preferred nine-foot or higher ceilings on the first floor, and, continuing a popular trend of the last 20 years, more than 40% said they wanted the kitchen and family room to be adjacent and visually open, but with a half-wall separating the two rooms.
More than half of the respondents said they would like a minimum of four bedrooms, while 39% would accept three bedrooms.
Twenty-eight percent of those surveyed preferred at least three full bathrooms, one-third would like to have 2-1/2 bathrooms and 31% expressed satisfaction with only two bathrooms.
On the front exterior, brick was the most preferred, followed by stone, vinyl and stucco.
Remain positive even with the negative economic stories seen each night on the evening news. We live in Tulsa and still have a fantastic housing market and low mortgage rates. The above information is from the National Association of Home Builders and is very descriptive of present new housing trends. There are many great deals out there as new and existing homes continue to be listed.
For information about buying or selling a home please call Darryl Baskin or any member of his team of real estate specialists at 918.258.2600. For questions on mortgages, rates or expert advice on mortgage economics, please contact Jeff Sargent of ONB Bank & Trust Co at 918.481.6833. You can tune in to "The Future of Real Estate" show locally on KWHB TV Channel 47 (Cable 7) at 10 am Central Time each Saturday, Tulsa's Source for local real estate news and information.
Thank you and have a great week!
Jeff Sargent
President
ONB Bank & Trust Co/Residential Mortgage Division
8908 S Yale, Suite 250
Tulsa, OK 74137
Office: 918.392.6572
Cell: 918.636.0630
jeff_sargent@onbbank.com
Tuesday, March 18, 2008
why mortgage rates are still heading higher
Why mortgage rates are still heading higher
The Fed has cut interest rates again, but long-term fixed-rate mortgages may go up.
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By David Goldman, CNNMoney.com staff writer
Last Updated: March 18, 2008: 5:01 PM EDT
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NEW YORK (CNNMoney.com) -- The Federal Reserve cut interest rates by three-quarters of a percentage point Tuesday, but don't expect mortgage rates to go down too. In fact, home loans could be heading higher.
Consider recent history: The Fed issued an emergency cut of short-term rates in early January, and then trimmed more just a few days later - but the 30-year fixed mortgage rate has responded by bouncing up from 5.6% to 6.4%.
The Fed's main tool is control over the short-term fed funds rate, which determines what banks charge each other for overnight loans. Long-term mortgage rates are mostly tied to the 10-year Treasury yield, which is determined by bond traders worldwide.
"There is a long disconnect between the fed funds rate and fixed mortgage rates," said Keith Gumbinger, vice president of mortgage and consumer loan information publisher HSH.com.
Inflation drives long-term fixed rates. When the Fed cuts short-term rates, the intent is to lower borrowing costs for corporations so that they'll invest and hire. But this economic growth can lead to inflation.
That in turn leads bond traders to demand higher rates on their long-term bonds - and that drives up mortgage rates too.
"Mortgage rates are determined by how fearful the market is of inflation," said Gumbinger.
The Fed began a series of cuts to its key interest rate last September, taking the rate to 2.25%, from 5.25%.
ARM borrowers may get help. There is more of a connection between Fed rate cuts and short-term and adjustable rate mortgages (ARMs). In fact, homeowners with ARM loans could see lower rates from further interest rate cuts.
Adjustable rate mortgages are pegged to a number of different indexes, including the one-year Treasury yield and the international Libor, or London Interbank Offered Rate, which tend to move with the Fed funds rate.
With Tuesday's rate cut, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners.
For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan.
But after Tuesday that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride of Bankrate.com. "The Fed rate cuts far are more significant to [borrowers with ARMs] in terms of staving off delinquencies on loans," he said.
Long-term rate solution. Sending long-term fixed rates back down will be more complicated than fixing inflation, because the continuing housing crisis is also exacerbating the rise in long-term fixed rates.
Generally mortgage rates are about 2 percentage points higher than the yield on the 10-year Treasury, which currently stands at 3.29%.
But the housing market is in such turmoil that rates are even higher right now, with lenders concerned that borrowers will not be able to pay back loans.
"The 30-year fixed rate mortgage should be at 5.5%, but instead it's above 6%," said McBride. "The 30-year jumbo loan [a large mortgage that is not federally guaranteed] is a full two percentage points higher than it should be."
So for long-term fixed mortgage rates to go down, the Fed must successfully make banks more willing to lend again.
The Fed has cut interest rates again, but long-term fixed-rate mortgages may go up.
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Last Updated: March 18, 2008: 5:01 PM EDT
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NEW YORK (CNNMoney.com) -- The Federal Reserve cut interest rates by three-quarters of a percentage point Tuesday, but don't expect mortgage rates to go down too. In fact, home loans could be heading higher.
Consider recent history: The Fed issued an emergency cut of short-term rates in early January, and then trimmed more just a few days later - but the 30-year fixed mortgage rate has responded by bouncing up from 5.6% to 6.4%.
The Fed's main tool is control over the short-term fed funds rate, which determines what banks charge each other for overnight loans. Long-term mortgage rates are mostly tied to the 10-year Treasury yield, which is determined by bond traders worldwide.
"There is a long disconnect between the fed funds rate and fixed mortgage rates," said Keith Gumbinger, vice president of mortgage and consumer loan information publisher HSH.com.
Inflation drives long-term fixed rates. When the Fed cuts short-term rates, the intent is to lower borrowing costs for corporations so that they'll invest and hire. But this economic growth can lead to inflation.
That in turn leads bond traders to demand higher rates on their long-term bonds - and that drives up mortgage rates too.
"Mortgage rates are determined by how fearful the market is of inflation," said Gumbinger.
The Fed began a series of cuts to its key interest rate last September, taking the rate to 2.25%, from 5.25%.
ARM borrowers may get help. There is more of a connection between Fed rate cuts and short-term and adjustable rate mortgages (ARMs). In fact, homeowners with ARM loans could see lower rates from further interest rate cuts.
Adjustable rate mortgages are pegged to a number of different indexes, including the one-year Treasury yield and the international Libor, or London Interbank Offered Rate, which tend to move with the Fed funds rate.
With Tuesday's rate cut, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners.
For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan.
But after Tuesday that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride of Bankrate.com. "The Fed rate cuts far are more significant to [borrowers with ARMs] in terms of staving off delinquencies on loans," he said.
Long-term rate solution. Sending long-term fixed rates back down will be more complicated than fixing inflation, because the continuing housing crisis is also exacerbating the rise in long-term fixed rates.
Generally mortgage rates are about 2 percentage points higher than the yield on the 10-year Treasury, which currently stands at 3.29%.
But the housing market is in such turmoil that rates are even higher right now, with lenders concerned that borrowers will not be able to pay back loans.
"The 30-year fixed rate mortgage should be at 5.5%, but instead it's above 6%," said McBride. "The 30-year jumbo loan [a large mortgage that is not federally guaranteed] is a full two percentage points higher than it should be."
So for long-term fixed mortgage rates to go down, the Fed must successfully make banks more willing to lend again.
Thursday, March 6, 2008
INCREASE IN FHA LOAN LIMIT!!
The FHA loan limit for Oklahoma has been increased to $271,050!!!! This is a fantastic opportunity to help our local economy!
Why are mortgage rates increasing when Fed rates are decreasing
Answer Desk: Why are mortgage rates jumping?
Fed Chairman Ben Bernanke explains credit spreads to Congress
COMMENTARY
By John W. Schoen
Senior Producer
MSNBC
updated 6:27 p.m. CT, Sun., March. 2, 2008
A lot of readers have been wondering why mortgage rates are jumping — even as the Federal Reserve is busy cutting interest rates. This week, Fed Chairman Ben Bernanke makes a special guest appearance at the Answer Desk to help explain what’s going on.
Why is it, that even though Bernanke and the Fed have been lowering interest rates, ostensibly to "help the economy and the housing market", the rates on 30-year mortgages have actually risen?— Brian W., Knoxville, Tenn. One of the more touching moments of Mr. Bernanke’s two-day testimony on Capitol Hill last week came when Democratic Congressman Luis Gutierrez of Illinois quizzed the Fed Chairman on this very subject.The Congressman told the Chairman of making a call last month to his daughter, a first-time home buyer, to offer her some fatherly guidance on locking in her mortgage rate.
“I think I gave her good advice: I said, ‘Go and lock it in for as long as you can,’" Guiterrez said. “Because it was like 5-1/2 percent. I said, ‘It's time, honey.’ And then I checked The Wall Street Journal, and it's like 6.38 percent. What happened?”What happened is that mortgage rates jumped by three-quarters of a percentage point in a matter of weeks — reversing a sharp drop that began in the middle of last year.
Here’s Mr. Bernanke’s answer to Congressman Guiterrez from the hearing transcript:
“Even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spread, particular for risky borrowers, like risky firms, for example,” he said. “Our easing is intended to, in some sense, you know, respond to this tightening of credit conditions. And I believe we've, you know, succeeded in doing that, but there certainly is some offset that comes from widening spreads. This is what's happening in the mortgage market.”
The Congressman moved on to another question, leaving the discussion of tightening credit and widening spreads for another time.
But, judging from our mail, the question is still on many readers’ minds these days. How can mortgage rates go up if the Fed is cutting rates? Doesn’t that mean that banks are, in effect, price gouging?
It turns out that lenders don’t control the price of long-term loans any more than consumers do. What’s happened in the past month or so is that, even as the Fed has been aggressively slashing short-term rates — and flooding the banking system with as much money it will take — the global capital markets are still very nervous about the latest headlines on rising foreclosures, a weakening economy and losses from banks and other lenders that have topped $100 billion — so far.
It turns out there are two mechanisms for setting interest rates. All the Fed can do is target the interest rate paid by U.S. banks for overnight loans among themselves. But using short-term loans to back long-term mortgages can be risky.
If National Bank takes out a short-term loan of $200,000 from the Fed and lends it to Jane HomeBuyer for 30 years, it still has to come up with $200,000 right away to pay it back. It could do so with another short-term loan, but then it has to keep doing this over and over, indefinitely “rolling it over.” If, during this process, short term rates go up, the bank loses money.
That’s why mortgage lenders making long-term loans turn to the capital markets — a global network of banks, corporations, institutions, pension funds, governments and individual investors who buy and sell money. When these players lend money for the long term, they agree to get paid back in installments, plus an interest rate that’s usually fixed for the life of the loan. As long as the rate the mortgage lender agrees to pay the investor is lower that the rate it charges its customer, the lender makes money.
Interest rates on long-term lending are based largely on the rates paid by the U.S. Treasury when it auctions off new paper to fund budget shortfalls. Because Treasuries are considered the gold standard of safety, turning over your money to other lenders is considered riskier — so the interest rates you get are a little bit higher. When an investor with money to lend in the capital markets get nervous, they demand an even higher interest rate to make up for the risk that they won’t get paid back.
During the easy-money days of the housing boom, investors showered cash at mortgage loans and asked relatively little extra “risk premium” in return. The feeling was that housing prices would continue to rise forever, and investing in mortgages – which paid higher returns than “super safe” Treasuries — was a no-brainer. Or so it seemed at the time. Now that home prices are falling, that risk premium — the “spread” between the higher rate on mortgage loans and the benchmark rate on Treasuries — has widened.
As long as that’s the case, the Fed could cut short-term rates to zero, and it wouldn’t cut the cost of long-term mortgage rates.
What is a recession? — Kathy, Bettendorf, Iowa
Mr. Bernanke was asked this one in his testimony to the Senate Banking Committee, and the answer he gave was a little clearer.
“Recessions are generally ‘called,’ so to speak, by a committee called the Business Cycle Dating Committee, which is part of the National Bureau of Economic Research, a committee of which I was once a member, by the way, which looks at a wide variety of indicators to see essentially if the economy contracted over a period of time,” Bernanke said. “And it's a somewhat subjective decision and is often made well after the fact, because of the revisions of data and so on.
“A more informal but widely used definition of recession is two consecutive quarters of negative growth. That would be an alternative that people use," he said.
Using the second definition, the economic data has yet to confirm that the U.S. economy is in recession. The widest measure of growth, the Gross Domestic Product, rose by 0.6 percent in the last three months of the year — the latest data available. That’s down sharply from the 4.9 percent growth rate in the third quarter of 2007 — but it’s still growth, not recession.
The GDP, according to the keepers of the data, measures “the output of goods and services produced by labor and property located in the United States.” But it’s an average of all regions and all industries; the housing industry is clearly in a deep recession, as are some parts of the country, especially in the industrial Midwest.
Some readers — along with some economists, Senators, investment managers and CEOs — believe we’re already entering a national recession. So the entire U.S. economy could well be in the middle of the first of those “two consecutive quarters of negative growth.” But because it can take months for the economic data to be collected and revised, we won’t know for sure that a recession has hit until at least the second half of this year at the earliest.
© 2008 MSNBC Interactive
Fed Chairman Ben Bernanke explains credit spreads to Congress
COMMENTARY
By John W. Schoen
Senior Producer
MSNBC
updated 6:27 p.m. CT, Sun., March. 2, 2008
A lot of readers have been wondering why mortgage rates are jumping — even as the Federal Reserve is busy cutting interest rates. This week, Fed Chairman Ben Bernanke makes a special guest appearance at the Answer Desk to help explain what’s going on.
Why is it, that even though Bernanke and the Fed have been lowering interest rates, ostensibly to "help the economy and the housing market", the rates on 30-year mortgages have actually risen?— Brian W., Knoxville, Tenn. One of the more touching moments of Mr. Bernanke’s two-day testimony on Capitol Hill last week came when Democratic Congressman Luis Gutierrez of Illinois quizzed the Fed Chairman on this very subject.The Congressman told the Chairman of making a call last month to his daughter, a first-time home buyer, to offer her some fatherly guidance on locking in her mortgage rate.
“I think I gave her good advice: I said, ‘Go and lock it in for as long as you can,’" Guiterrez said. “Because it was like 5-1/2 percent. I said, ‘It's time, honey.’ And then I checked The Wall Street Journal, and it's like 6.38 percent. What happened?”What happened is that mortgage rates jumped by three-quarters of a percentage point in a matter of weeks — reversing a sharp drop that began in the middle of last year.
Here’s Mr. Bernanke’s answer to Congressman Guiterrez from the hearing transcript:
“Even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spread, particular for risky borrowers, like risky firms, for example,” he said. “Our easing is intended to, in some sense, you know, respond to this tightening of credit conditions. And I believe we've, you know, succeeded in doing that, but there certainly is some offset that comes from widening spreads. This is what's happening in the mortgage market.”
The Congressman moved on to another question, leaving the discussion of tightening credit and widening spreads for another time.
But, judging from our mail, the question is still on many readers’ minds these days. How can mortgage rates go up if the Fed is cutting rates? Doesn’t that mean that banks are, in effect, price gouging?
It turns out that lenders don’t control the price of long-term loans any more than consumers do. What’s happened in the past month or so is that, even as the Fed has been aggressively slashing short-term rates — and flooding the banking system with as much money it will take — the global capital markets are still very nervous about the latest headlines on rising foreclosures, a weakening economy and losses from banks and other lenders that have topped $100 billion — so far.
It turns out there are two mechanisms for setting interest rates. All the Fed can do is target the interest rate paid by U.S. banks for overnight loans among themselves. But using short-term loans to back long-term mortgages can be risky.
If National Bank takes out a short-term loan of $200,000 from the Fed and lends it to Jane HomeBuyer for 30 years, it still has to come up with $200,000 right away to pay it back. It could do so with another short-term loan, but then it has to keep doing this over and over, indefinitely “rolling it over.” If, during this process, short term rates go up, the bank loses money.
That’s why mortgage lenders making long-term loans turn to the capital markets — a global network of banks, corporations, institutions, pension funds, governments and individual investors who buy and sell money. When these players lend money for the long term, they agree to get paid back in installments, plus an interest rate that’s usually fixed for the life of the loan. As long as the rate the mortgage lender agrees to pay the investor is lower that the rate it charges its customer, the lender makes money.
Interest rates on long-term lending are based largely on the rates paid by the U.S. Treasury when it auctions off new paper to fund budget shortfalls. Because Treasuries are considered the gold standard of safety, turning over your money to other lenders is considered riskier — so the interest rates you get are a little bit higher. When an investor with money to lend in the capital markets get nervous, they demand an even higher interest rate to make up for the risk that they won’t get paid back.
During the easy-money days of the housing boom, investors showered cash at mortgage loans and asked relatively little extra “risk premium” in return. The feeling was that housing prices would continue to rise forever, and investing in mortgages – which paid higher returns than “super safe” Treasuries — was a no-brainer. Or so it seemed at the time. Now that home prices are falling, that risk premium — the “spread” between the higher rate on mortgage loans and the benchmark rate on Treasuries — has widened.
As long as that’s the case, the Fed could cut short-term rates to zero, and it wouldn’t cut the cost of long-term mortgage rates.
What is a recession? — Kathy, Bettendorf, Iowa
Mr. Bernanke was asked this one in his testimony to the Senate Banking Committee, and the answer he gave was a little clearer.
“Recessions are generally ‘called,’ so to speak, by a committee called the Business Cycle Dating Committee, which is part of the National Bureau of Economic Research, a committee of which I was once a member, by the way, which looks at a wide variety of indicators to see essentially if the economy contracted over a period of time,” Bernanke said. “And it's a somewhat subjective decision and is often made well after the fact, because of the revisions of data and so on.
“A more informal but widely used definition of recession is two consecutive quarters of negative growth. That would be an alternative that people use," he said.
Using the second definition, the economic data has yet to confirm that the U.S. economy is in recession. The widest measure of growth, the Gross Domestic Product, rose by 0.6 percent in the last three months of the year — the latest data available. That’s down sharply from the 4.9 percent growth rate in the third quarter of 2007 — but it’s still growth, not recession.
The GDP, according to the keepers of the data, measures “the output of goods and services produced by labor and property located in the United States.” But it’s an average of all regions and all industries; the housing industry is clearly in a deep recession, as are some parts of the country, especially in the industrial Midwest.
Some readers — along with some economists, Senators, investment managers and CEOs — believe we’re already entering a national recession. So the entire U.S. economy could well be in the middle of the first of those “two consecutive quarters of negative growth.” But because it can take months for the economic data to be collected and revised, we won’t know for sure that a recession has hit until at least the second half of this year at the earliest.
© 2008 MSNBC Interactive
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