Are You Feeling Stimulated By A Jumbo?

Congress yesterday passed a $168 billion economic stimulus package to head off a recession. The bill will allow Fannie and Freddie to raise the limit on purchasing ``jumbo'' loans to $729,750 from $417,000. Mortgages will be eligible if they were granted between July 2007 and Dec. 31, 2008.

The bill would also allow the Federal Housing Administration to insure loans up to the same $729,750 limit. President George W. Bush said today he will sign the bill next week.

See full article at: Jumbo' Loan Increase May Not Stem Housing Decline

Breaking Down the Jumbo Loan Increase
Here's a couple points from my friend in the mortgage business.

• It is based off median house limits on an area. It is not based off current conforming limits ($417k). Details to be posted officially.
• There will be a slight waiting period for the changes to be integrated into the system. (This isn't going to happen right away. Weeks if not months.)
  
• The bill still has to pass the Senate (who vetoed it the first time) and the president (who is unlikely to veto it).
• The bill affects loans originated from July 2007 to December 2008

Impact on Lenders
The issue right now is that investors will not buy certain loans on Wall Street. Mortgage companies who used their lines of credit to fund these types of loans cannot sell them. This ties up the available capital and forces the lenders to tap their own funds to fund these loans. A side effect of this is that some lenders have already gone out of business (see American Homes). If this bill is passed, many of these loans can be sold to Fannie Mae and Freddie Mac, which will allow lenders to get these loans off their lines so they can continue to use the line to fund new loans. This allows the lender to do business without using its own capital. If Fannie Mae and Freddie Mac will buy them, these will immensely relieve the pressure that is in the system right now.

Impact on Buyers
It all depends on the median housing limit in your area. This could be a dramatic reduction in monthly costs for those in jumbo loans. I'm estimating the current spread between a conforming and a jumbo loan is currently about 1.5%. This has traditionally been about 0.5%. Refinancing might be a great idea in the near future. If this bill reduces your interest rate by 1.5%, that is a 10-15% increase in buying power!!

Conclusion
This part of the bill might actually help bottom out the anemic real estate market.
It really depends entirely on the median housing limits. Allowing the lenders to flush out the loans in their system is a good thing in itself. Hopefully, it will also restore some balance and some investor and buyer appetite. That said, it may take a little while for things to pick up as it takes time for people to get past the investments that may have burned them in the past.

This bill has a high potential impact on the ~$500,000 to ~$900,000 market. If the max jumbo increased to $700k, the reduction of 10-15% on monthlies would probably be a nice boost for those with a longer term view. Of course, this might stall the market until it actually happens.

Desperate Times Call For... Arson?

So I saw this interesting video news report on ABC.

Using Arson to Avoid Foreclosure

Out of desperation, people are burning their homes down just days before foreclosure. Or is it an act of vengeance? (If I can't have it, nobody can!) Either way, do they really think they can get away with it? I mean, come on... coincidence?

Is Arson a traceable indicator that can be linked to recession forecasting? Can we combine this with other indicators to create a VIX like volatility measure for real estate?

Anyway, this is obviously not a good sign. With all the other existing housing hoopla, I think it's pretty clear that we're entering a recession. Logically, it makes sense to me that the troubles in housing precede a recession and lead in the recovery. (See calculatedrisk.blogspot.com for the analysis.) One of the last things anyone will give up is their home. If you buy into housing as an indicator for the economy, it is critical that we watch real estate in order to gauge the health of the economy.



Has the worst already passed? Or is there more to come? Only time will tell, but I think the worst will come after the election and regime change when the economic stimulus and a$$ covering stops.

How Stimulated Are You?

WASHINGTON (Dow Jones) -- Congress on Thursday passed a $152 billion economic stimulus package designed to provide a timely, targeted and temporary boost to the flagging U.S. economy. The plan would give tax rebates of up to $1,200 for households, with $300 more for each child. The full rebates would be sent to individuals with incomes under $75,000 and to families with incomes under $150,000, including seniors and disabled veterans. The rebate would be phased out for those earning more. Rebate checks would likely be mailed beginning in May. Taxpayers will not have to apply for the rebate; it would come automatically based on their 2007 tax return.

I'm trying to understand this stimulus package that Congress just approved. What exactly are we trying to accomplish with it? Don't get me wrong, I'd gladly take the money. But it seems to me like this is a very short sighted move.

Are They Really Saving People With It?
In the grand scheme of things, does it make that big of a difference? For those in bad loans, how long can this really postpone the inevitable foreclosure? Is someone who gets themselves into these bad predicaments really going to responsibly utilize the rebate? How much time could this possibly buy us?

Do They Want Us To Spend It?
So following that line of thought, maybe it's because they want us to spend the money, because that will get the economy out of trouble. Hmm okay let me think about that. Someone tells you they are giving you money because the economy isn't doing well lately. Is my first instinct to spend it or save it?

Do They Want Us To Save It?
Okay, I hope your instinct would be to save it. (With us Americans, that seems to be debatable these days, but I digress.) So it seems as if the likely outcome is that people are going to save the money and not spend it.

Where is this money coming from? Oh right, we're creating money out of thin air and distributing it to the masses to not really fix the current problems. This is to enable the masses to put it in the bank, which is giving less interest by the day and could possibly go bankrupt. Not to mention more dollars in circulation lessens the value of those already in the system. Meanwhile, the Fed vigilantly "remains on inflation watch" [ha ha].

Conclusion
The stimulus package is just a marketing spin by the government to inject inflation to avoid recession. Gold ETF's are looking better and better by the day.

I've been really trying to analyze the performance of gold in recession/depression and the information I saw from many other sites/blogs is pretty inconclusive. I wouldn't be shocked at all if the price of gold doubled in the next few years though just because of the herd mentality. I just need to make sure I have an exit point so this isn't the NEXT bubble I follow along with.

What Should I Invest In When The Fed Cuts Rates

Flashback to August 2007
Ok, close your eyes. It's August 2007, the stock market is chugging along. The Fed has been giving inflation fighting speeches for months, but taking no action on rates. There is actually some doubt as to whether or not the Fed will be raising or cutting rates.

Everyone has been ignoring the subprime warning signs for almost half a year. Some of us don't even know what subprime really is. We don't realize that many people in our great nation are refinancing from low teaser rate mortgages to new low teaser rate mortgages, thinking this could continue forever. (Guilty as charged!)

Cramer's Meltdown
Suddenly one day, the infamous "Love Him or Hate Him" Jim Cramer has a meltdown on CNBC, basically pleading for the fed to cut rates. Many people laugh at him and mock him.

[Let's just be clear here... if you surfed around, particularly on some bear finance sites or blogs that I frequent, there was an overwhelmingly large number of people that thought the Fed was going to raise interest rates.]

Correct Prediction
I watch the recap once to see what its all about... but I'm not laughing. I KNOW at that instant, that we're in trouble and that the fed will be cutting rates soon. And I'm right. Less then a week or so later, the credit crunch hits us hard, and the Fed responds with a quick rate cut... just days after an inflation fearing speech.

Reality Bites
Now back to the present.
You say: "Wow, you're a genius! How much money have you made since?"
I say: "... Hrm... well actually... I've lost money since August."

Sigh, I know I made the RIGHT prediction, but I made ZERO money off it. I knew the Fed was going to cut rates, but I still didn't know what to do!

What Should I Have Invested In?
If I had known the Fed was going to cut rates, what should I have invested in?. Is there an "easy money" investment that can be made? Let me take a stab, let me know what you think:

1. I should have started selling my questionable stocks fully into any strength.
2. I should have take my initial investment out of the stocks that I still thought had growth potential. (Playing with house money.)
3. I should have started buying bonds or bond ETF's or bond funds.
4. I could have locked in a multi year CD with any cash I didn't need for the next few years.
5. I should be watching for real estate to make a bottom sometime soon.

Am I wrong about the bonds? Any other thoughts? What should we have done in August 2007? Is it too late now?

Why Do I Always Lose Money?

Like most people, I'm not an investment pro. I typically lose money in whatever I invest in. My biggest accomplishment from the tech boom is that I received years of tax loss credits. I became so afraid of the stock market that I avoided it when I should have been buying. Instead, I bought real estate, apparently like everyone else, including subprime borrowers. And now look, real estate is in the worst shape it has ever been in decades. What the heck is wrong with me???

So I ask myself "I'm a pretty smart guy... Why do I always seem to follow the herd? Why Do I Always Lose Money?"

To try to figure out what I did wrong, I surfed for the web for years seeking answers on where to invest. I surfed chat boards, pay investment sites, etc. I couldn't find very much that didn't have an agenda or that gave good advice. But I couldn't find anything giving me good, real, free, UNOFFICIAL ADVICE. I did find a few websites that were good in helping me learn about individual sectors or investment types, but nothing that tied them all together for me. That is the point of this blog. To bring the big picture together and to try to get some "experts" to help me and other people out.

Now, back to analyzing where I went wrong:

• I invest emotionally. I am unable to cut losses or take profits. I believe in "Buy and Hold"
• I pick "blue chip" stocks that don't do anything or I try to hit a home run with unknown stocks.
  
• There is just something sexy about finding the next Microsoft, that always seems to lead me to Technology stocks, but I always seem to miss the high flying stocks that just keep going higher.
• I am not diversified. I don't have the proper asset allocation of real estate, stocks, bonds, cash that I should. Specifically in stocks, I am also not diversified by sector.
  
• I'm not in sync with the business cycle. I sell stocks when I should be buying them. I don't invest in bonds at all. Real estate is confusing.
• I pay attention to my investments for only a little while after I make them, then I forget about them. When I do pay attention again, its because I've lost money, which causes me to panic sell.
  

Is it just me? What can we do about it? I searched high and low and gathered the following [unofficial advice] that seem to make a lot of sense:

• Buy low, sell high.
• Rule #1: Never lose money.
  Rule #2: Don't forget about rule #1. - Warren Buffet
• Be fearful when others are greedy
  and greedy when others are fearful - Warren Buffet
• Asset allocation explains investment performance.

Okay, Okay. I know what you're thinking. Everyone knows these basics. It's easier said then done. After some thought, these are my takeaways:

• Be suspicious of what the media says. Use it to determine market sentiment. Think for yourself. Don't be afraid to be a contrarian.
  
• There's no need to research and follow hundreds of stocks or pick the right stocks. Use technical analysis and high level knowledge of the business cycle when timing your stock investments. Then invest in known and obvious trends (More posts later on this).
• TAKE PROFITS and don't be greedy. This enables you to have cash for when the media and everyone else is fearful.
• Don't overextend yourself in investments. Don't invest money that you need.
  

With the economy in uncertainty, I think this is a great opportunity to "reset" my portfolio to mostly cash and to take my time to try to make the right investments at the right time.

The purpose of this blog is to think publicly about the problems that I am facing in investing, the economy, bonds, stocks and real estate. I hope you will follow along by posting in the comments.

Learn with me.
Learn from my mistakes.
Help me because I'm Seeking Your Unofficial Advice.

Stay tuned for more blogs with more specific topics and questions.