August 22, 2011

LOW RATES, No Interest: “A major problem, of course, is that current low interest rates are a result of falling confidence in the economic outlook. It’s cheaper than ever to borrow, but that’s because no one wants to borrow.” How’s that hopey-changey stuff workin’ out for ya?

UPDATE: Reader Kevin Ryan emails:

I think one underappreciated factor is the difficulty buyers are having in taking advantage of those rates. Anecdotally, at least, it remains extremely difficult to get a loan, even for well-qualified borrowers. Banks are no doubt gun-shy given their weaknesses and recent experience, but an increased regulatory burden also seems to be an issue.

I’m a case in point. I haven’t had any W-2 income (except from a part-time National Guard gig which ended with my retirement at 30 years’ service) for years, and last year when I was buying the current Hog Manor, mortgage underwriters were alarmed by this. For two decades my principal income has been on 1099s (consulting returns), K-1s (partnership returns), and from investments (also reported, mostly, on 1099s). My income has been high but variable — I was living by my wits, but living well, before it was cool. I had $2million plus in cash and zero debts — I paid for college and grad school as I went, and didn’t borrow a dime. I run a credit card (one) for travel, but pay it off every month.

I’m an ideal borrower, right? The guy who doesn’t need the loan?

Apparently not. I had no credit score (not a low credit score, NO credit score, like a newborn baby. I’m 53!). After months of messing around with underwriters, I simply cut a check for the house.Didn’t do my nonexistent credit score any good but put a roof over my head. The divorced couple I bought from were delighted to get the check, as were all the realtors involved. (listing broker, my buyers’ agent). The bankers didn’t care about the lost mortgage opportunity — they get paid the same whether they lend or not; with the long-needed demise of the brokers who were paid for originating paper without respect to quality, we now have misaligned incentives in the other direction. “The pendulum done swung.” My price was about $340k below the peak appraisal. I expect the house is now worth $100k less than I paid, but it’s a good “machine for living” so I am happy.

Funny thing: who is more likely to be in a position to make his payments five years from now, the 1099 flexible-career dude, or the guy with a W-2 from GM or some green-jobs boondoggle? If you can answer that, you are overqualified to work in banking. But we knew that.

I ride my bike around town and could show anyone properties that I looked at in 2009 and 2010 that are still for sale. Some of those had been on the market for two years already. The market is not clearing; other, empty properties are going unlisted because they are so far underwater, and/or listings are saturated.

One question: what happens to the people who haven’t saved a couple of million, or haven’t earned it in the first place? A lot more of them than there are of me.

I’m sure.

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