We're Baaaack!

And we’re back.  Florida was great.  The weather was terrific, we ate tangerines straight off the tree, and my wife’s family is wonderful.  Special thanks to the Florida Jensens who sacrificed more than most for this trip.  See my review of Disney World here.

Let’s see, where are we?  The market is essentially flat.  Thanksgiving was not a downer for bonds, which it generally is, and we’re still hovering in the high 4.4s on the 10-year price.  That makes the 30-year full-doc conforming loan about 6%, give or take.  ARMs remain not much better, with the 5-1 ARM hovering at 5.75%.  Needless to say, we’re not doing too many of those.

New home sales shot up in October by the largest margin in 12 years.  This accompanied a small decline in existing home sales and a good-sized jump in housing inventories.  All this means is that higher interest rates are having a depressive effect on some parts of the housing market.  Amazing.

Meantime, one of our clients (you read about his situation here) got his appraisal back today and his house is worth roughly $30,000 more now that it’s built than it was projected to be worth three months ago.  Did you make $10,000/mo for the last 3 months from someone else’s labor?  No?  Come to think of it, neither did I.  A situation, mind you, that I am rectifying immediately.  Call me (801-310-3407) or email me and let’s do it together.

Plans for Twelfth Night are rolling along, and you are definitely not going to want to miss this event.  I have three words for you: Two Chocolate Fountains.  And one other word: Free.  RSVP right here.  We’d love to have you.  January 6, from 7-9pm at the Apollo Theater in American Fork (50 East 50 North).

Oh, yeah, and the Cougars lost to the Utes.

The Happiest Place On Earth

At 3:17pm today I was leaning against a railing on Main Street, U.S.A., watching Mickey Mouse cruise by in some sort of giant plastic bubble. He was surrounded by dancers and characters from Disney movies. I have a digital camera with 256 meg on the storage card, which gives me 317 pictures, so my motto is "if you keep shooting, they'll start to go in eventually," which Ray will tell you is also how I play basketball. I took about 50 photos of the Main Street Parade, and I've been looking at them the last couple hours.

What strikes me immediately is not the plastic bubbles or the gigantic floats, but the faces of the spectators, of which there are some thousands. Practically everyone is at least amused. Many, many people are smiling. Almost all the children under 10 seem to be laughing. Disney bills itself as "the Happiest Place on Earth," which is marketing, sure, but judging from the photos I took and the faces of those close to me, there's some truth tho the slogan.

Now, Disney itself is a marketing machine. The park costs $65-70 to enter, and that only gets you in the door. We rented a double stroller for $15, then there was lunch for those of us that did not bring a sack, which cost $10 for a hamburger and fries. My family has 8 people in it, so you can do the math on that. Altogether this family reunion is possessed of 19 people, so we contributed to Walt's legacy a little less than $1000. Just today. Well, with ice cream ($3.15 for a 4-oz sundae), probably a little more than $1000.

In our reunion, we split into three groups: the pregnant women (Jeanette and her sister-in-law Valerie), which group includes the four children six and younger; the middle kids (7-10); and the older kids, which is the group I got to spend the day with. There were seven of us, six children from Nicholas (11) to Michelle (17). I've never had a better day at a theme park. I could have been a real drag, being the old fogey in a group of rowdy teens, but the kids treated me just like one of them. And they were having a ball. So I did, too. There was not one negative word, not a single argument, despite very long lines, tired feet, and the fact that with that many people, it's impossible for everyone to get his way. Some say that there's no magic left in Disney. They're wrong. I felt it.

Yes, there's a motherlode of kitsch. Practically nothing for sale in the park has any durability, and most of it is a little weird, even embarrassing out in the real world. I saw a number of couples wearing Mickey-and-Minnie ears, the male half sprouting from a top hat and the female half trailing a veil. Wear that in Lehi, and you could get arrested. On Main Street, what did that outfit get? Smiles. People pointing and asking where they could get some. It's kitschy, yes. But it's also magic.

There is a temptation when surrounded by the full neon glare of a US industrial marketing machine to look for the tinsel, so to speak, to scratch the surface and try to find that what's underneath is poor quality or even decaying. I do this myself, and think I'm generally performing a service by doing so. But not here. Not only did I not want to do any digging, I think that those that do will find something surprising: it's not all about the money.

I watch people. And in a place that advertises itself this way and that openly calls its employees "cast members", I spend time watching the employees. Some were less than enthusiastic, especially early in the morning. But over and over again, I saw employees, staff, even food servers going out of their way to do something nice for the guests of the park, even under stress and occasionally abuse. One guy at an ice-cream shop, whose entire job was to take people's money and send them through to get their cones, stopped us and chatted for a couple minutes. he turned out to be from West Jordan, had worked at Kennecott Copper Mine for 15 years, and had come down to Florida to get away from the snow. Here he was working at Disney in what is, frankly, a fast-food job. Did he like it? "Been here four years. Loved every minute of it."

Can you spend too much on this?

This is a theme I'll revisit in my "I'm Sick of Hearing About the True Meaning of Christmas" post in a week or so, but I am a huge fan of marketing, especially when it's done well, and Disney does it well. They have a theme. They stick to the theme. It's not Tomorrowland, where the line for Space Mountain was 80 minutes long at noon. It's not Frontierland, where the line for Splash Mountain was a gigantic 140 minutes at 1pm. It's not even "Dreams Can Come True", though that's a big part of the magic of Disney. The theme is happiness. Everywhere you look, there's happiness. The kids are happy. The adults are happy because the kids are happy. Lots of people spend a great deal more money than they can afford on Main Street, U.S.A., but I think they get their money's worth. I did.

Cougars Roll!

I didn’t exactly promise to talk about the builder/lender thing yesterday, and I think it’s going to have to wait until Monday.  I’m feeling positive today.  We’re leaving in about 24 hours for Florida for a week, and I’m going to be checking out shortly, so here are a few parting shots:

The newsletter article on Thanksgiving (posted here) has been picked up by Utah Politics.  Thanks to Phil Windley for his excellent work on that site.

We’re busy cranking out the next letter here, and it’s going to be a departure from the normal personal missive.  We’re going to be discussing the new Office of the Comptroller regulations on credit and what turbocharged minimum payments on credit cards means to those of us that have them.  Just don’t carry balances.  Trust me.

On blogging in general, I love doing it.  It’s so much better and faster than normal reportage.  I was writing the Thanksgiving piece for the newsletter and there were ten different places I wanted to hyperlink something.  Of course, that doesn’t work on paper, only on the web.  I grew up in the very infancy of the computer era (I still remember my Sinclair 1000 and its membrane keyboard, plugged into my television for viewing and my tape recorder for saving the files) (you’ll really want to click the link for a trip down memory lane), did the dotcom thing, thought the Internet was the greatest thing ever and still do.  

I don’t think we realize how profoundly the Internet has changed almost everything we do, but I can tell you that if we did realize it, we’d be down on our knees weeping out thanks to a merciful and benevolent God.  Yes, we could get along without it – we did, as a species, for a good while – but many, many of the things that make our lives easy and fun are due to the speed and power of the little cables in the ground.  And most of the things that make our lives possible are improved and made less expensive by Al Gore’s invention.

And finally, tomorrow is the big, big game, the BYU/Utah football game of the year.  Last season, the undefeated Utes put one of the best teams I’ve ever seen on the field, trailed only once all season, and never won by less than 14 points in any of their 12 games, including a mauling of totally overmatched Pitt in the Fiesta Bowl.  That team beat a mediocre BYU team by about 136.

How a year changes things.  Utah is 5-5 and has to win this game to go to a bowl.  They have lost 4 out of 6 games, including an ugly loss to New Mexico last week when they led most of the game until fumbling away the lead in the 4th quarter.  On the final drive, which ended in an interception (Utah’s 5th turnover of the game), the Utes lost their starting quarterback for the season with a blown ACL.  Earlier in the game, their top wide receiver broke his leg.  This ain’t yesterday’s Utes.

Meanwhile, a mediocre BYU team has improved dramatically from the early season, when it went 1-3 to start the year.  The Cougars are 6-4, and three of those losses are to ranked teams, one of them in overtime.  They have scored 50 points 3 times this season, and are playing their best football right now, having won 5 out of 6.  The last three weeks the Cougars have utterly dominated their opponents, averaging over 200 yards a game rushing, good for 17th in the country over the past 5 weeks.

These games are always dangerous.  Rivalry games can go any which way.  But this time, the Cougars are just too strong.  Curtis Brown will go for over 100 yards, John Beck will throw for 350, and BYU will lead from start to finish, winning 37-21.

Unfortunately, I’ll be on a plane, and will miss the entire game.  So please, don’t tell me what happens until after I get the tape next week.

E-loan E-liminated

There’s been lots and lots of chatter recently on the TV about E-loan.  They’ve made a big marketing push, and essentially are attacking two specific vulnerabilities in the mortgage market:

1. Customer service at the normal lender sucks.


2. People think their closing costs are way too high.

Not a bad idea.  If I had to rank the top two complaints I hear, those two would be #1 and #2 for us as well.  It makes sense, then, for E-loan to go after the disaffected in this manner.

And it seems to be working, if our most recent experience is any guide.  We have a client that is building a house and decided to see what E-loan could do for him.  We did the construction loan, and as always happens when we have to do a 100% deal (no money down) on construction, it takes a little time for the deal to go through.  The client, with whom I spoke (according to my phone logs) 24 times in two weeks, was unhappy with that, and frankly I don’t blame him.  It’s his first house and he’s not familiar with how complicated this stuff is.

Accordingly, now that we’re down the road a piece, he’s thinking that maybe he can get a better deal somewhere else on his long-term loan.  He tries E-loan.  They quite him 5.75%, and he’s ecstatic.  He ought to be, under ordinary circumstances.  We’re seeing rates about 3/8 higher than that.

Oh, but the fine print.  I asked him to send me a Good Faith Estimate from them.  He doesn’t have one (this is, incidentally, a violation of Federal law).  He has some numbers, and they are most revealing.  For a $220,000 loan, at 5.75%, E-loan is quoting him a payment of $1284 with over $10,000 in closing costs.

Two things were immediately obvious:

1. E-loan is not adding taxes and insurance to the payment, and is not disclosing the fact.  The math says that $220,000 at 5.75% = $1283.86/mo.  Of course, that’s not the real payment, because practically everyone has escrows.  Not only is E-loan not counting that, they are also not telling my client that they are not counting it.


2. He’s paying massively for a discount to the rate.  We responded with a discounted quote at the same rate, and the cost to do it with us is a whopping $2000 less.  At least.  Since he didn’t get a GFE from them, I can’t be sure about this, but my deeply-held suspicion is that they have not included escrows in their quote, either, and since we are including them, the total difference in closing costs is likely to be closer to $4000.

This is what is known in the trade as a classic ripoff of a naïve borrower.

You want to be disaffected?  Fine.  You think client service is bad?  Maybe it is.  If ours ever is, we want you to tell us about it.  You think closing costs are too high?  Maybe they are.  But maybe they aren’t.  This is one reason we provide free second opinions.

I ought to tell you about the other clients we had in here yesterday, that got a “$10,000 credit” from their builder for using their builder’s mortgage company, and what we found out about that, but I don’t have time at the moment.  Tune in tomorrow.

Give Thanksgiving a Chance

You’re Getting’ Nuthin’ For Christmas
At Least Not Yet

I heard my first Christmas song on the radio on November 4.  My arraignment for willful destruction of said radio is next week.

Look, I know it’s been a hard year for retailers and that Christmas is the raison d’être for most anyone that sells things, but that only explains WalMart, not FM100.  Is there really that strong a demand for Christmas music on the radio?  Are we afraid we’re not going to get to hear Bing Crosby warble “White Christmas” ever again?  Is 46 times a year not sufficient?  Is your season enhanced by SheDaisy and Snoop Dogg singing Jingle Bells?

Christmas is great.  Nice holiday.  It has all the ingredients of the truly powerful celebrations: its own food, a big event, a selfless rationale, (usually) a day off other than Monday.  Christmas has the added bonus of being at the end of the year, which psychologically is extraordinarily powerful.  It has none of the creepiness of Hallowe’en, little of the Hallmarkiness of Mother’s Day, the “when-is-that-again” of Easter, or The Government Thinks This Is Important of Labor Day, which has become “the last holiday before the grind of school kicks in.  And by the way, the pool is closing.”

But please, people.  Independence Day is a huge holiday, too, has its own actual date (for the opposite example, see Presidents’ Day), is the only holiday other than Super Bowl Sunday that is at least mostly about grilling, and it comes with fireworks.  But when was the last time a radio station began playing John Philip Souza in April just so we could get ready?  Heck, it’s unusual to hear any patriotic music at all even on the day itself.  I like Independence Day because it doesn’t pretend that it’s the Reason for Summer.  Christmas, which has perhaps the best claim of all to real celebration, has got so much attitude now that I’m starting to get seriously annoyed.

There’s an antidote.  It’s a holiday with a solid reason for existence, a selfless purpose, a quirky midweek date (unlike other holidays it is ALWAYS in the middle of the week), and by far the best food of any celebration.  It requires no massive expenditures of cash to observe.  It does not require an endless round of parties.  No competitive decorating.  No entire month of false cheer.  No Snoop Dogg.  It has practically no music at all anymore, which is a shame, because it used to have a great deal, most of it very simple but elegant, profound, and moving.  It is almost always celebrated by families together.

Sound familiar?

We used to call it Thanksgiving.  It falls on the last Thursday of November, conveniently situated between the hedonistic mooching of Hallowe’en and the tinsel-deep marketing bonanza of Christmas, for those that have forgotten.  Never mind what it celebrated originally, because that’s not all that relevant.  It is a day to give thanks, and realize you have something to be thankful for.  It’s about giving, even perhaps more than the Anointed Giving Holiday on December 25, because at Christmas, though it may be better to give than to receive, it’s almost never more memorable (ever ask a 5-year-old “what are you giving for Christmas?”).  But giving thanks, by contrast, is purely one-way.  Nobody can give it back to you, or get a better one than you have, or spend three hours in line at Target returning it.

Now I know that Thanksgiving these days is mostly about the food and football, not that that’s a bad thing, but the day is still wrapped up in family, and family is an antidote to most of the world’s ills.  Thanksgiving demands nothing but a grateful heart, and preferably loved ones to share it with.

Here is a call to revolution: start making a list of what you’re thankful for.  Post it on the wall.  Leave it there.  Add to it a little every day.  You could even, if you wanted to get crazy, leave it up after the tinsel and mistletoe have Decked the Halls, just to remind yourself.  I realize that this would be Thanksgiving intruding on Christmas, but don’t you think there’s room for a little payback here?  Seriously?

Give Thanksgiving a chance.  You’ll be glad you did.

Cj

P.S. You are on my gratitude list.  Each one of you.  Thank you for being my friends.

P.S.S. I remain a fan of Christmas, though not for the reasons you might think.  Look for the “I’m Sick Of Hearing About The True Meaning Of Christmas” essay on this blog in early December.  See you there.

This article first appeared in the November/December edition of The Chris Jones Group Experience newsletter, subscription available here.  No charge to readers of this blog.

A Few Quick Takes

A few quick takes:

Here’s Kathleen Hays on the Fed and why it keeps raising rates.

Here’s Les Christie on housing affordability (or lack thereof), mirroring our post on the same thing last week.  Our analyses are remarkably similar.  So I guess our math is good.

Here’s the Deseret News story on the new development at Traverse Mountain (which is technically part of Lehi).  We’re talking about 1.2 million square feet of retail development, which roughly doubles the entire retail space in Lehi – including the new Costco which just broke ground two weeks ago.  It is going to be an amazing project.  As the Vice-Chair (and, I understand, the Chair-elect, though I don’t remember that part) of the Lehi Area Chamber of Commerce, let me say “this is freakin’ awesome, dudes.”

Here’s a story about me, also from the Deseret News.  It’s an election year.  It’s always an election year.  I can apparently get in trouble for doing almost anything.  Howard Johnson won the election, and it wasn’t particularly close, but we had an hour-long conversation on Monday and apparently there won’t be any reprisals.  This isn’t Chicago, after all, let alone someplace really nasty, like Provo.  We didn’t have anything to do with this site, but we wholeheartedly endorse its sentiments on the subject of my former city of residence.

Reminding everyone about the Twelfth Night Ball on January 6 and urging you to RSVP before we fill up.  This is going to be an event you’ll want to make.

Mortgage Rates Are Rising

Rates are rising.  Period.  We lost another .05 on the bond price today, which means roughly .25 less tomorrow on the rate/price sheet, meaning that we’re likely right on the bubble between 6.25% and 6.375% on the 30-year fixed.  We’ve explained before how rate sheets work, so I’m not going to do it again here.

But rates are rising. What does this mean for the average homebuyer/homeowner?

Homeowner: if you have a fixed rate, it means you ought to keep it if it’s lower than 7%.  If you have an ARM with less than 3 years to go until the rate adjusts, you ought to look at swapping over to a fixed rate.  If you have a fully adjustable rate, and you can’t get off it without a massive prepay penalty, just hang on.  If you can, we definitely ought to talk.

Additionally, in order for a borrower to qualify for a loan, there are debt-to-income ratios that have to be met.  The higher the payment, the harder the qualifying.  As those ratios rise, they exert negative pressure on housing prices.  A $200,000 seller has to reduce his home price by $10,000 to drive the payment at 7% down to where it was at 6.5%.  A $150,000 home has to be discounted to $142,500.  Per $10,000 of home value, a .5% rise in mortgage interest rates strips $500 off the price of the house.  The rise in interest rates from 5.75% in June to 6.25% has cost homeowners $500 for every $10,000 of value in their home.

Interestingly, the Fed is increasing interest rates in order to fight inflation.  Inflation drives up the value of your home.  The Fed moves are therefore negative for homeowners in two ways – it depresses the buying power of your potential purchaser and it restricts the potential increase of your equity.  I know, you’re saying you don’t like inflation because it makes milk more expensive.  It does indeed.  But inflation is expressed as a percentage, right?  The larger the amount in question, the greater the increase in raw dollars as inflation rises.  So I have a question: how much milk would you have to buy before you paid out an additional $10,000 due to inflation?  But that’s what the “inflation-fighting” has cost you on your home.  Do you think you’re ahead on the deal?  Me neither.

Homebuyer: rising rates make things complicated.  Here’s an example: if you’re trying to buy a $200,000 house, and you get the regular rate of 6.25%, the monthly payment is $1231 (all these numbers are principal and interest).  However, if the rate rises to 6.5%, the payment is $1264.  $31/mo doesn’t sound like much, but how about $360/yr?  At 7%, you’re paying $1330.  That’s $1000 more every year.

It may seem like, due to the numbers above about negative pressures on home prices, that you’re getting a good deal by having rates go up.  Well, actually, no.  At best, you’re getting an offset as prices rise to meet the amount you have to pay.  But there’s a better way to offset the increase in interest rate, and that is an increase in wages.

First off, wages generally rise with inflation.  Second, recently, wages in most industries have outstripped inflation, so that’s a good thing.  Calculate it like this: you make $3500/mo.  Interest rates are rising, so that $200,000 house you want is going to cost you $100 more per month to get into.  To break even, your income will need to rise just 2.8%.  Expressed in hours, based on a 40 hour workweek, you’d need to work about 1 more hour a week.  If you got a Christmas bonus of $500, you’d need to work 1 more hour every two weeks.  Even if you were working at McDonald’s, you’d need only 17 hours a month to break even.  It’s much easier to make up the loss of purchasing power with an increase in wages than any other way.

Wage increases depend on business growth, which is retarded by rising interest rates.  So the Fed is out to get you, too.

The good news for both homeowners and homebuyers is that so far, we don’t have a major collapse underway.  Trying to make up the loss from a rise in rates to, say, 9% is much harder.  And though that much increase is not inconceivable, it would be enormously unexpected.

Bottom line advice to the general populace: if you own, hold.  If you don’t own, buy.  And I’d do it as soon as possible.  We can recommend the people to help you, and we guarantee you’ll like them.

Rapid Fire

Okay, well, there’s been some serious stuff happen the last couple days and I have had no time whatever to comment.  So here’s our take in rapid fire:

Scooter Libby’s indictment: uncertainty in government is bad for the economy and good for the bond market, which means good for mortgage rates.  In this case, the indictment is weak and Scooter is nobody, so he uncertainty is muted and will have no real impact on the stuff that matters to us in this forum.  This could change, but I think there’s less than 5% chance that any significant turmoil will result from the trial.

Samuel Alito’s appointment: Alito is aggressively pro-business and pro-law, whatever else he is.  The battle over his appointment will be hot but I believe it will be sound and fury signifying nothing and he will be confirmed without destroying the fabric of the Republic.  Should have very little impact on financial markets, but what impact it has will be good.

Fed movement: the Fed did what everyone on earth expected and raised rates by .25% again.  This will happen at least two more times before the end of January, just bank on it.  That means that Prime moved to 7% this morning and everyone’s HELOC went up another .25%.  If you are on an Option ARM, watch for another rate increase in December.  The move further flattens the yield curve, which is bad for mortgage rates, and it makes a recession more likely without doing anything whatever to keep inflation low.  We’ve been through this before in this forum.  Short-term ARMs also became a worse deal versus the 30-year fixed.

Rate movement: Everyone is reporting that rates are on the rise, and they are.  This means that for A-paper borrowers things are not as rosy as they were in June, or heavens, in Blessed June of ’03.  The 30-year fixed is hovering at about 6.25% and the 15-year at about 5.75%, depending on a huge number of other factors.  The 5-year ARM is about 5.75% as well.  Short-term adjustables have become a far worse deal than before.  Tomorrow we’ll have a dissection of the impact of rising rates on home prices, which you are absolutely not going to want to miss.

BYU’s crushing of Air Force: Gotta love the scrappy Falcons, but BYU is showing power on the offensive line that makes Cougar fans weak in the knees.  Any time you score 62 points and roll up almost 700 yards of offense without a single play of more than 40 yards that has to scare people.  UNLV is next, and it will not be pretty in Vegas.

CSU’s demolition of UNM: the Rams were totally outplayed in the first half, then did not allow the Lobos to cross their own 40 yard line in the second half.  I have no idea what happened.  But CSU/TCU for the Mountain West Championship suddenly looks like a good game to see.  Not that it’s televised.

Twelfth Night: We’re doing our Third Annual Twelfth Night Benefit on January 6 at the Apollo Dance Hall in American Fork (50 East 50 North).  Dancing, partying, food, you name it, and some fellow named Osmond is going to be there.  No kidding.  RSVP required, but if you read this, you are hereby invited.