The bail out money given to banks was to keep them solvent, but also to loosen their purse strings. But bank balance sheets are so weak, that if they want to continue to operate as banks, they have to husband their resources. By law, banks have to maintain capital ratios and until these toxic assets are removed from their books they wont be lending much at all.
So far, we have seen federal funds go from 5% to 2%, and interest rates drop to the lowest rates since January, 2009. Considering all the effort to keep rates down, you would think mortgage rates and mortgage credit would have responded better. Not so....the agency mortgage pass-throughs yields are substantially higher than Treasuries.
Mortgage credit costs are actually rising. Bill Gross, managing director of Pimco funds and bond guru accurately points out that If the cost of credit – the discount rate for present value – would go down, then asset prices would be better supported.
1. Global Imbalances: Investors are demanding a higher yield from Agency mortgage-backed securities because we dont know what's next...uncertainty
2. Banks: The banks are husbanding bail out money to keep their balance sheets in shape and themselves in business.
3. Lenders: They fired so many people they are having trouble meeting the need. They have all the business they can handle and are not likely to be more rate competitive.
4. Cost of Borrowing: Add to that increased fees, points and increased spreads a home buyer has to meet to finance and it is obvious that homes are not yet the bargains they appear to be.
Until we meet that magic intersection that Greenspan calls price equilibrium, the space where home price and borrowing costs cross, its home prices that will decline to meet the buyers ability to carry.
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