mortgage

The Perfect Storm

By Bill Starrels

June 2008

The first week on June was punctuated by a perfect economic storm on Friday, June 6. The storm consisted of an abysmal employment report, historic spike in oil prices and a plunge in the stock market.

All economists were expecting a loss of jobs. What the economists did not anticipate was the nearly unprecedented spike in the unemployment rate. The index surged to 5.5 percent in May, up from 5 percent in the previous month. This was the single largest monthly spike in more than 22 years. 49,000 jobs were shed.

Oil prices continued the misery, spiking by an unprecedented $10.75 a barrel to a record $138.00. Gas prices pierced the $4 a gallon level for regular gas. The spike in oil prices coupled with the employment report sent the stock market reeling. The Dow Jones Industrial stock average plunged over 394 points.

The trio of terrible economic news precipitated President George W. Bush to make remarks on the economy. Bush highlighted the stimulus checks that have started to be sent out in recent weeks saying, “We’re beginning to see the signs that the stimulus may be working.” The remarks were made during the swearing in ceremony for Steven C. Preston, the newly minted Housing Secretary. At least the President is consistent in his wisdom.

The expectations of the new Housing Secretary are that he will be a caretaker in charge since there are only eight months left in the Bush Presidency.

The housing crisis shows no signs of abatement. According to the Mortgage Bankers Association, nearly 1 percent, or roughly 447,723 loans, fell into foreclosure during the latest January-to-March period. The delinquency rate jumped to 6.35 percent – or 2.87 million loans – compared with 5.82 percent for the previous three months. Typically a mortgage holder will fall into foreclosure when they are delinquent for three consecutive months.

Mortgage interest rates are still seventy-five basis points higher than “normal” due to the illiquid financial markets. Until things settle down in the overall economy, the liquidity crisis will continue and rates will stay in their narrow range. The one bright note is for holders of most adjustable rate mortgages that are adjusting this summer. Most of these mortgages will adjust somewhere close to 5 percent to 5-1⁄2 percent.

The bond market should start to moderate. The “thought” that the Fed may raise rates later this year should have been put to rest for the foreseeable future by last weeks employment report. The “perfect storm” looks like it may be a classic sentiment changer.

Bill Starrels is a senior loan consultant and he lives in Georgetown. He can be reached at 703 625 7355, Email: bill.starrels@gmail.com