1% interest rates

[Aliantha]

OK, I understand there's a 'credit crisis' going on, but I was absolutely astounded to see that interest rates in the US are down to 1% and predicted to go lower and may in fact go into the negative.

Can someone please tell me how that works, and why can't people pay these mortgages.

I thought you were all lucky with only 4% interest.

[smoothmoniker]

This is the rate that the central bank charges for overnight loans. That rate is not available to consumers, only to other financial institutions.

[Aliantha]

OK...so what's the average American paying on their home loan at the moment then?

[tw]

Originally Posted by Aliantha

OK...so what's the average American paying on their home loan at the moment then?

No longer know what the interest rates are. But the problem is this. Triggers on ARMs adjust those interest rates closer to 10%.

Why is this problem? Before George Jr, the average American had an outstanding debt equivalent to 80% of his disposable income. Since the average American income has dropped 2%, then Americans have debts of 140% of disposable income to maintain his standard of living.

Obviously, this meant America should have entered a recession. Recessions fix irresponsible economic activity. Instead, government stimulus encourages new money games so that recession would not occur (rather than address the fundamental problem). People who could not and should not own homes were able to obtain ARMs mortgages - that were virtually non-existent a decade earlier. Even worse, these money games were given to the richer and richest. Suddenly a successful middle class homeowner who could only afford a 3,000 square foot house was now buying 4,000 square foot homes - at even higher prices. ARMs and mortgage backed securities (all with virtually no underwriting) made this possible.

Further making reality ignored were massive investments from China, Japan, UK, etc because the ROI in America was higher due to these money games and because so many American dollars are now overseas. Risk assessement? Virtually non-existent even in risk rating companies such as Moodies, S&P, etc.

Obviously, a lower Fed rate means the banks can offer lower mortgages. But then another consequence of deregulation this past decade creates more problems. Because of those low interest rates, prices of houses increased 40% above real value. How do you refinance a homeowner who owes more than the new house value? He cannot refinance because he is technically banckrupt. Due to credit card and car payments, he cannot acccure equity. Banks just don't know who is safe to offer a loan AND can no longer sell that loan to others who worshipped NINJA (ie mortgage backed securities).

In short, a money shortage is not the problem. Lower Fed rate is how we pump money into the economy. We are literally trying to unfreeze markets by flooding finance companies with even more cash even though many need to first fire bad management. Cold water on ice takes a long time to thaw that ice. Welcome to an America where the spread sheets have been lying for a long time.

The American economy has frozen for reasons created by easy money and economic stimulus where we routinely threw money at problems rather then let recession fix the problem - ie fire so much business school trained management such as Rick Waggoner of GM. Now that the economy is frozen, we will spend almost $2trillion of cold cash to eventually thaw the ice. Then borrow from all over the world or sell off America to cover those $2trillion debts while suffering the inevitable inflation or recession or both.

Only thing I cannot say - how severe economics will punish us and who will be punished for the sins encouraged by the few in highest positions of industry and government.

[Juniper]

Around 5.75 - 7%

[Aliantha]

Interesting. That's a little bit lower than we have here at the moment, but it's expected our rates will drop again next week.

[SquidGirl]

Sorry - my two cents of ranting.

I am currently 27. I bought my house when I was 24 on a impulse buy (I know, I'm a little odd). I was all alone buying the house, not even a boyfriend and I still pay the mortgage all by myself regardless of 'the boy' whose lived here for 1 year. Anyway...I was utterly dumbfounded on why all of these foreclosures were occurring. Hell, if I can do it...why can't others. Some days I don't understand HOW I can do it, but I manage and am okay. Then I realized what people (perhaps 'young people') were doing. They were trying to live out the American Dream in one giant step. People are no longer buying 'starter homes.' I actually saw one of my friends go through it pretty bad. They see what they qualify and MAX it out. Sometimes they get an additional mortgage/loan to fix up their house or make it livable. I drove past my house, thought it was cute (600 square feet) and 30 days later was living in it, no joke. I have no clue what I qualified for. I just saw a simple, starter home, good enough for just little me and bought it. People see they qualify for $200,000 homes and they go for it, because they can. I could be wrong, but that is my interpretation. Also, I think some hopeful/gambling homeowners got into signing onto a 'balloon' mortgage it does not have a set interest rate so as the economy struggles and there is a lack of control in the mortgage industry the interest rate goes up, resulting in more $$ and people can not pay it in the long run. I believe I am at 5.88% set. Just my thoughts.

Also - tw - I just gotta say....you are smart!

[tw]

Originally Posted by SquidGirl

Also - tw - I just gotta say....you are smart!

I was never smart. I simply spend much time learning the facts behind what so many others knew - but could not specifically cite. None of this is complex. It's all in the newspapers today or years previous when I was being so poltiically incorrect by posting these warnings. Just wondering how many so doubted when I discussed that falling brick labeled "Housing prices".

Despite rumors to the contrary, I read far more than I write. How long ago did we know we had a problem? (My first indication was in 2001 when the Norwegian foreign minister said George Jr would destroy the Oslo Accords.) From the Economist of 16 Jun 2005:

Perhaps the best evidence that America's house prices have reached dangerous levels is the fact that house-buying mania has been plastered on the front of virtually every American newspaper and magazine over the past month. Such bubble-talk hardly comes as a surprise to our readers. We have been warning for some time that the price of housing was rising at an alarming rate all around the globe, including in America. Now that others have noticed as well, the day of reckoning is closer at hand. It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years.

3 years and 2 months later ...

[Aliantha]

In the city I live in, a starter home price begins at about $400k.

I've noticed the difference in starting prices between US and Australia are huge. In fact, if we sold our house, we could buy several properties in the US and have no mortgage at all hardly. (Obviously I know that depends on where you buy, but even in rural areas in Oz prices seem to be much higher)

[SquidGirl]

Okay, I should then clarify MY 'starter home' cost me $62,000 on a good deal. But, my income is lower because I'm in a rural area as well... so, for someone like me going from 62,000 to 200,000 is really drastic. 100,000 in my area is pretty normal/reasonable....in my area for a 'starter home.'

And, my friends - that's why I don't/can't move into a big-bad city, cost of living is so high I can't afford there what I have here all by myself....maybe then I would be one of the foreclosed many...

[Juniper]

Our "starter home" 15 years ago was $50K. It was a two-bedroom, cute little brick craftsman-style house built in 1927 in a marginal neighborhood (which is now not a good place at all, unfortunately...we got out while the gettin' was good.)

We worked like crazy to make extra payments. We're on our 3rd house now, and each time we approximately doubled the purchase price. OTOH, we qualified for a LOT more than we actually borrowed, especially if we were willing to take one of those crazy speculative loans.

We always opted for the boring old conventional 30-year. The DH and I are not risk-takers, particularly. Take an ARM out on the off chance you might be earning more in 5, 10 years? Ha ha ha. Even if people do end up earning significantly more, chances are they are spending more too. Dumb.

Now, it really ticks me off to hear all the whining about "predatory lenders." Hey listen -- these were BANKS. Or mortgage brokers, who make money by selling a loan as a product. These are not noted for being nice, caring, altruistic people: Caveat Emptor.

Hey listen -- you buy a product, you make a mistake, it's YOUR fault. You should've done the research ahead of time and figured out what you were signing up for.

I could have bought a $500K house instead of my $200K house, but I thought it might have been nice to eat, too.

[SquidGirl]

Originally Posted by Juniper

I could have bought a $500K house instead of my $200K house, but I thought it might have been nice to eat, too.

Oh...yes. Well put!

[glatt]

Originally Posted by Juniper

Now, it really ticks me off to hear all the whining about "predatory lenders." Hey listen -- these were BANKS. Or mortgage brokers, who make money by selling a loan as a product. These are not noted for being nice, caring, altruistic people: Caveat Emptor.

So you are saying that these predatory lenders were bad, but because you were too smart to fall for their tactics, you think it's OK that they were bad to stupid people?

[Juniper]

Originally Posted by glatt

So you are saying that these predatory lenders were bad, but because you were too smart to fall for their tactics, you think it's OK that they were bad to stupid people?

No, it's not OK. But that's a moral issue, not a legal one.

[TheMercenary]

Originally Posted by Juniper

No, it's not OK. But that's a moral issue, not a legal one.

I don't think that is entirely true. They got bad loans for people that they knew the people could not qualify for. I do believe that 60 minutes did a whole expose on it, I will look for the link.