Friday, January 25, 2008

The $600 Mortgage Multiplier

by Ken Houghton

Via Minyanville:
The CFO at Los Angeles-based KB Homes (KBH) sums up the conflict of interest by saying the stimulus package “[is] a shot in the arm to the market. It’s going to spur people to move up to a more expensive home, and that’s going to get the new and used markets moving again.”

Yep, the market for KB Homes especially has always been driven by people who make less than $75,000/year, and who think that $600 justifies adding mortgage debt.

Not even a hedge fund can make that math work.

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I think you missed the part of the stimulus package where they temporarily authorized the big leap in the definition of a Fannie Mae "conforming" mortgage to over $730,000 for high income areas. Right now, the delta between conforming and jumbo mortgages is between 5.25% and 6.12%, so that's a very big difference in affordability for "bigger house".
I wish I had missed that part. The "temporary" increase means that you can get a reduction in interest. If Fannie and Freddie can still maintain their capital requirements, instead of just suboptimally allocating it. (Yes, post coming soon, if Tanta and CR leave any idiocies standing.)

So all those $75,000/year people can now afford a house that costs about...oops, $225K ($300 if you're really stretching it), which is under the current limit.

And the increase is explicitly NOT temporary for the FHA, so we'll have people putting 3% down on a $732K house--leaving them with about a $710K mortgage, or a monthly payment of just over $4,250 for 30-years at 6% fixed.

So the best "benefit" is going to either (1) those who can pay $51,000/year for their mortgage or (2) the getting-more-desperate sellers who get one last boost from "the market" and stick the next person with the house.

Don't get me wrong: I may well be one of that second group, and will happily take the cash from some poor sap if so—but that's not a boost to the economy, just a bad loan and a large deposit in Everbank.
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