Weak Dollar Good for US?
While most citizens generally grimace at the notion that the dollar has plummeted in comparison to other currencies, there could be some silver lining to the situation. There exists the potential for a weak dollar to fuel growth and foreign investment; as well as increase US exports. Should this occur, inflation would be heavily curbed and the economy could potentially boom rather than crash. While perhaps unlucky, US Treasury Secretary is confident the future for the US will be strong.
Bloomberg quotes:
Treasury Secretary Henry Paulson, whose signature appears on every new dollar bill, may find the weak currency with his name on it helps the U.S. economy more than the strong one he publicly endorses.
The dollar’s 8 percent slide during Paulson’s 15 months in office is good news on the docks of Long Beach, California, where shipping containers are making their return trip to Asia filled with U.S.-made computer, auto and aircraft parts whose prices have become more competitive abroad. What’s more, economists don’t foresee the weaker currency generating higher import prices and accelerating inflation.
“The dollar is in a quasi-sweet spot,” says Joseph Quinlan, chief market strategist at Bank of America Corp. in Charlotte, North Carolina. “It’s dropped enough that it’s creating an earnings upside for U.S. multinationals, while I expect many foreign companies to hold the line on prices they charge U.S. consumers.”
While such a sweet spot is speculative, many in the US are hopping that the economy can recover from it’s latest stumble. One thing to note for those in strong housing markets such as Utah is that inflation could actually make it easier to pay down a mortgage or Utah home equity loan. Income increases as a result of inflation, house payments do not.
Huge Inventory of Homes for Sale
The number seem to be climbing upward daily. Millions, yes millions of homes are sitting vacant; every builder’s worst nightmare has become a reality.
Many home builders are desperately liquidating assets in a desperate attempt to stay afloat.
Bloomberg has an interesting story regarding the auction format some builders are now attempting:
hen D.R. Horton Inc., the second- biggest U.S. homebuilder, couldn’t sell the one-bedroom condominium in San Diego it listed for $349,800, the property was auctioned as a last resort for 37 percent less.
D.R. Horton, with annual revenue of about $11 billion, and Hovnanian Enterprises Inc. now face the worst choice in the worst residential real estate slump since the 1930s. They’re selling homes at any price they can get.
“It’s desperation time and some companies may not make it,” said Alex Barron, an industry analyst at Agency Trading Group Inc. in Wayzata, Minnesota. “At this point in the housing cycle, if you have too much debt, it’s hard to get out from under it.”
This is excellent news for anyone considering purchasing a property. It may prove wise to in fact wait a bit longer for inventory to really increase to the point that prices plummet. One concern for some potential buyers is the lack of available loans.
Often a home equity line of credit can be used to help make the down payment on a property.
Lease to Own - A Worthwhile Method for Purchasing a Home?
Leasing to Own is a creative method of essentially writing a long term purchase contract on a home with two big differences. You can move into the home immediately, and you lease the home until the contract closes.
Such ‘Lease to Own’ options tend to appeal to a few select groups:
1. First time homebuyers with low-credit, no down payment, or are in some way unable to afford/obtain a mortgage or even a second mortgage loan.
2. Illegal aliens, persons seeking citizenship, or persons who need time to find a family member to cosign with them.
3. Investors who wish to gamble that a home will go up in value, but don’t want to risk too much if it does not. They will occasionally make use of a home equity line of credit or a 2nd mortgage loan in order to float the rental costs.
4. The constantly evicted who otherwise cannot find places to rent. (Sellers sometimes get desperate to fill the property and as a result are not as thorough in background checking)
For most first time home buyers leasing-to-own is a BAD IDEA. Chances are that almost every lease to own property you find will be constructed to result in one of the following outcomes:
1. Buyer agrees to rent the house for more than it would normally rent for, with the understanding that a small amount per month will be applied to the purchase price should you purchase in a year or more.
2. Buyer spends all kinds of money fixing up the house, making repairs, and so on. Buyer generally believes he or she will own the house so they take better care of it than if they were just renting.
3. X year(s) pass, and it’s time for the buyer to buy the house. One of three things happens:
a) The property has decreased in value —–> so the buyer walks away, losing a few thousand dollars in what was paid to extra rent, plus all the repair costs, new carpet, custom blinds, paint, landscaping etc.
b) The property is worth less —–> buyer stupidly buys at originally negotiated price because of money already sunk into the home.
c) The property has increased in value —–> seller then tells buyer about the new, higher price. Buyer threatens to sue, seller laughs. Seller sells for higher price, either to buyer…or a new sucker.
Keep in mind that smart real estate investors use the lease-option scam to extract extra money out of their investment properties. If you own investment property, a carefully constructed rent-to-own option can make you several thousand dollars AND get you a good renter.
Leasing to own is usually a BAD idea for illegal aliens, and others who are currently unable to get a loan, but think they might be able to find someone to cosign or get the loan for them in a year or two.
Having someone else own your home is just asking for trouble. Also, since home loans can be such a complicated process, it is very difficult to predict accurately that you will be able to get a loan or even a Utah home equity loan in time to purchase the home.
That said, if you find a deal (which investors often do) locking it in a long term lease to own contract could be a wise way of gambling. Should home fall in value, you can walk away relatively unscathed (vs actually owning it).
Doing so REQUIRES a good attorney to help you construct a bullet-proof contract so that you can actually purchase the property should it increase in value. You should also try to contract the option of subleasing, as you may not actually want to live in the home, and subleasing is an easy way to minimize loss, and possibly even break even. Sellers may resist this (for obvious reasons, as you could potentially sublease to a very destructive renter)
Always be creative when approaching a seller, as proposing a rent-to-own could be an excellent method of buying a property with minimal risk. For the reasons already listed above, a buyer should generally avoid properties already being marketed as lease-to-buys.
Northern Rock’s Stock Falls a Further 20%
The mortgage and home equity line of credit bank Northern Rock, based out of Britain, continues to suffer from the housing decline. TimesOnline reports:
Northern Rock shares slumped as much as 20 per cent to a fresh record low today amid renewed speculation it could be forced into a cut-price sale or break-up.
Sandy Chen at Panmure Gordon slashed his price target on Rock shares from 300p to just 100p, pointing out that bargain basement bids for the Tyneside mortgage bank “could be easily justified”.
The respected banking analyst predicted the Rock’s financial performance would plummet from a £298 million pre-tax profit next year into a £120 million loss. He said pressure on margins would most likely continue and that there was little room for effective cost-cutting.
Shares fell as much as 34.7p to 144.5p, although they traded slightly higher at 150.3p as the afternoon progressed.
While investors have been increasingly believing that there is hope for Northern Rock being bought out, until such a bid is successfully accepted it seems unlikely that Northern Rock’s stock will climb much.
Citigroup Reports Further Losses
Some bad news from Citigroup, the largest US bank. Lending in the subprime markets has led to increased cuts in profit for the bank. Bloomberg has the latest:
Citigroup Inc., the biggest U.S. bank, said third-quarter profit fell 60 percent after $5.9 billion of credit and trading losses on loans and mortgage- backed securities.
Earnings may drop to the lowest since the second quarter of 2004 because Citigroup will write down loans for leveraged buyouts by $1.4 billion before taxes, the New York-based company said in a statement today. It lost $1.3 billion on subprime assets and about $600 million in fixed-income trading, while higher loan-loss reserves contributed to $2.6 billion in credit costs in the consumer-banking business.
Home equity line of credit loans, along with other subprime lending has obviously inflicted its damage upon the lender.
Indymac Bribes Employees to Quit
Rather than embrace massive firings, Indie Mac has begun downsizing its mortgage operations by offering voluntary severance packages. Such packages along with a home equity line of credit may be enough to help some employees survive until they can find another job.
According to an insider:
I’ve been told that the size of the severance package varied based on current salary and how long the employee has been with the company, but all in all they’re said to be quite generous.
I’ve heard that some of the severance packages include compensation for up to a year, possibly longer, as well as extended health benefits.
Apparently the severance packages were extended to operations staff, though it appears they were not offered to members of the sales team (surprise, surprise).
Two weeks ago, IndyMac said it would offer the voluntary severance packages in an effort to shed 1,100 employees, and would follow those attempts with layoffs.
According to IndyMac employees, the lender said it was looking to “right-size”, not downsize its workforce in an attempt to fall in line with current market demand.
In a recent letter to company shareholders, IndyMac Chief Executive Michael W. Perry said he expects the lender to either break even, or lose up to 50 cents a share in the third quarter as loan origination has waned.
While it’s nice to at least get something prior to leaving a company, it’s unfortunate that many who do not leave voluntarily will be laid off as well.
Indymac’s stock has taken a huge beating in recent months as a result of financial hardships, sub prime foreclosures, and a myriad of other bad financial choices.
With loan volume plummeting by up to 50%, the need to cut employees is obvious.
Dollar Falls to Lifetime Low Compared to Euro
Inflation is clearly upon us, gold is skyrocketing in value and the Euro has become more expensive than ever. Those with home loans and home equity line of credit loans have cause to rejoice as their loans become easier to pay off. Those without homes may find themselves struggling to pay rent as things become more expensive and jobs fail to keep pace by adjusting wages upwards.
Reuters is reporting:
The dollar hit a record low against the euro for the third straight session on Monday amid fears that a deepening housing slump could rein in economic growth and trigger more cuts in U.S. interest rates.
Trade was light as attention shifted to existing-home sales and consumer confidence data due on Tuesday.
Investors are worried that weak economic reports will push the Federal Reserve to follow last week’s half-percentage-point rate cut with more policy easing, further eroding the dollar’s yield advantage over other currencies, particularly the euro.
After last week’s cut, U.S. benchmark interest rates stand at 4.75 percent, compared with 4 percent in the euro zone.
With a Euro now costing $1.40, there are concerns that the dollar could fall even further in relative value to the European currency. A high exchange rate encourages European imports of American goods, but makes it prohibitively expensive for Americans to travel and purchase European.
Further Trouble for Northern Rock
Ailing British lender Northern Rock has found its value plummet despite a promised bailout from the Bank of England. The Financial Times has further details:
Northern Rock’s market capitalisation has shrunk to less than 1 per cent of its assets. That means wild swings: within one hour the shares moved by 36 per cent. It has also attracted bottom-fishers, with a prominent hedge fund taking a stake and buy-out vehicles said to be circling. Clearly, if Northern Rock’s business recovered fully, it would be a steal on about two times 2006 earnings and half of adjusted book value. But there is a convincing case that the shares will fall further.
Critically, market borrowing rates – three-month Libor is 6.36 per cent – remain above the roughly 6 per cent yield on Northern Rock’s loan book. If this book was gradually run down and funding rolled over at market rates, net interest margins would turn negative. Citigroup takes adjusted book value of 380p per share and then deducts estimated running losses to get to a range of 200p to 324p. That is above yesterday’s close of 172p, but impairments must also be considered. After assuming write-offs of less than 1 per cent of assets, Citi’s standalone fair value range falls to 6p to 130p.
A market value of 1% of total assets is a sign that investors have next to no faith in the lender having much of a future. A similar situation to a lesser extent has plagued homeowners who find themselves owing more on their homes through mortgages and home equity line of credit loans than the property is worth.
Iran Drops Dollar, Moves to Euro
An interesting press release from Iran has stated:
Iran has massively cut down its dependence on the dollar in the face of US pressure over its nuclear programme and now 70 percent of its foreign assets are saved in other currencies or in gold, an official said on Monday.
“After the strong fall in the dollar and the decision to transfer our foreign currency reserves into euros, we have taken measures and now 70 percent of Iranian assets are in euros, other currencies or gold,” said Deputy Economy Minister Mohammad Zahedi Vafa.
A decreased reliance on the US dollar as a form of reserves generally indicates future inflation. Should other nations choose to follow suit, the US dollar could decline even further against the Euro than it already has.
Such a decline would actually be good for borrowers with a mortgage or home equity line of credit loans. Loans become easier to pay off as the dollar declines in value. This hurts the banks however, and for that reason the Federal Reserve generally does everything it can to avoid inflation.
Major Subprime Lender Leaves Mortgage Business
Etrade, a major subprime lender, has made a major announcement. The immediate exit from the wholesale lending market. In usual spin-talk, E-trade announced that this would be a method of returning to its core business in order to benefit its retail customers.
Sounds like another way of saying that they were losing large amounts of money making bad loans and have decided to fire a bunch of employees with little warning.
From the release:
With this additional reserve, allowance for loan losses as a percentage of non-performing loans is expected to increase to 75 percent based on assumptions for the second half of the year, up from 45 percent on June 30, 2007. Within home equity loans, where the Company and the marketplace have seen the most significant stress, the coverage will be approximately 100 percent, up from 51 percent as of June 30, 2007.
As a result of the actions outlined above, the Company is revising its earnings outlook for 2007 to account for 1) higher provision for loan losses; 2) potential securities impairments; 3) slower balance sheet growth and composition expectations; and 4) exit and other restructuring charges. For the full year 2007, E*TRADE FINANCIAL expects GAAP net income of between $450 million and $500 million, and earnings per share of between $1.05 and $1.15 per share. This is down from its previous range of $1.53 to $1.67.
This could be bad news for those in need of a home equity line of credit, as E-trade was a major wholesaler of such loans.