“All you see in your world is the outcome of your idea about it.” — Neale Donald Walsch: Spiritual author

NEWS & HEADLINES

Recently the National Information Center released consolidated financial statements for bank holding companies for the 4th quarter. Large banks have been the primary buyers of mortgage-backed securities, and this study looked at the top 50 bank holding companies. In the 3rd quarter they added over $48 billion of agency MBS, and in the 4th quarter added another $38 billion. Most of this was in Fannie/Freddie product; Ginnie Mae pass-through holdings fell by about $1 billion. Most analysts believe that banks should be a leading force in supporting the agency mortgage basis going into 2011. Compare this to banking data released from the FDIC for the fourth quarter, which reported an increase of $42.7 billion in MBS holdings, and $87.4 billion for the year. The demand for agency mortgage-backed securities continues strong, whereas the supply is expected to lessen.

More recent news (the latest H.8 report) shows that large domestic bank holdings of agency MBS have declined by $15.5bn but agency MBS holdings of small banks have increased by $11.5bn since the beginning of the year. This is a continuation of the trend seen from 2010 – in general, smaller banks are providing a relatively stronger demand for agency MBS recently. For instance, agency MBS holdings of large banks rose by 5.3% while those of small banks rose by 18% since the beginning of 2010.

If you’re familiar with crossing a bridge, like the Golden Gate, there is a toll. Economists are very good about figuring out what happens when one raises the toll from $5 to $10. Revenue does not double, since the increase will cause a drop in commuters, and a large drop in drivers can cause profitability problems for the bridge district. This is a simplistic example, but one that may pertain to a small part of what HUD’s FHA is dealing with, in that its mortgage insurance premiums have increased while volumes have fallen. The premiums are expected to help the Mutual Mortgage Insurance Fund to the tune of $3 billion a year, although (due to many factors) HUD estimates that FHA originations will total $218 billion during fiscal 2012. Volume in the current fiscal year is projected to come in at $289 billion, while fiscal-year 2010 ended at $319 billion.

Friday the commentary mentioned the FDIC’s meeting this week “to discuss principles for low- and moderate-income (LMI) mortgage lending, and supporting financial education,” but also, “There are many people in the business who argue that the government’s insistence on lowering lending standards in the past, in order to increase home ownership, especially to those who weren’t credit worthy in the past, accounted for a good chunk of the credit issues that we’re dealing with now.”

The markets were pretty quiet yesterday, with MBS trading volumes running at about average and prices closing roughly unchanged as did the 10-yr (3.41%). The highlight today will be Chairman Bernanke’s semiannual Monetary Policy Report before the Senate Banking Committee beginning at 10AM EST. In addition, Treasury Secretary Geithner testifies before the House Financial Services Committee on “Mortgage Finance Reform: An Examination of the Obama Administration’s Report to Congress” – also starting at 10:00, and Construction Spending. Early indications point to a decent stock market, mortgage prices worse by about .250, and a 10-yr yield sitting around 3.48%.

Construction spending decreased 0.7% in January  to a seasonally adjusted annual rate of $791.8 billion, which is 5.9% below the January 2010. Private construction was 1.2% lower than Dec, and residential construction was up 5.3%.

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IF YOUR GOAL IS TO BUY LOW, BUY NOW!

There is a very famous saying which asserts “Sell High, Buy Low”. It is obviously great advice no matter what the investment. Below is a graph showing the cycle of investments. It shows the points of maximum risk and maximum opportunity when purchasing. We want to sell high (point of maximum risk) and buy low (point of maximum opportunity).

The challenge is how to determine when we have hit bottom if you are a purchaser. The only time you can guarantee a bottom is after you pass it.

However, there is more and more evidence that the COST of a home has in fact hit bottom. Notice we have used the word COST. Unless you are an all cash buyer, you must take into consideration the expense of financing a property to determine the true cost of purchasing the home. Interest rates have increased over the last quarter; and the rise in rates has counteracted any fall in prices.

Let’s look at an example:

Let’s say you were going to take out a $200,000 30-year-fixed-rate mortgage in November of 2010. At that time, interest rates were 4.17% (as per Freddie Mac). Your principle and interest payment would have come to $974.54. According to the most recent report from Case Shiller house prices fell 3.9% in the 4th quarter of 2010. The most recent report from the Federal Housing Finance Agency shows a 0.8% fall in prices. Let’s use the larger percentage decrease: 3.9%.

For the sake of keeping the math simple, we will now say you can get the same house with a $192,000 mortgage (4% discount from November price). Interest rates are now 4.95% (as per Freddie Mac).

Your principle and interest payment would now be $1,067.54.

By waiting to pay less for the PRICE of the house, the COST increased $93 a month. That adds up to $1,116 a year and over $33,000 over the life of the loan.

We realize that there are other things to consider (ex. the mortgage tax deduction, etc.). This example is just a simple way to show that there is a difference between COST and PRICE.

Bottom Line

If you want to buy low, buy now. It appears COST has hit its lowest point.

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Buffett Says Buying Home Was Third-Best Investment He Made

Feb. 28 (Bloomberg) — Billionaire Warren Buffett said buying a home was the third-best investment he ever made, after the rings he bought for his first wife, Susan Thompson, and, after her death, his second wife, Astrid Menks.

“For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come,” Buffett wrote to shareholders of his Berkshire Hathaway Inc., in a letter released Feb. 26.

Buffett, the world’s third-richest man, still lives in the house he bought in Omaha, Nebraska, more than five decades ago. He said home ownership makes sense for most people, especially after a slide in prices and record-low interest rates.

The U.S. home ownership rate has fallen to the lowest level in a decade amid record foreclosures and a plunge in property values after a five-year boom. The S&P/Case-Shiller Index of prices in 20 cities is down 31 percent from its July 2006 peak.

“A housing recovery will probably begin within a year or so,” Buffett, 80, wrote in the letter. “In any event, it is certain to occur at some point.”

“A house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender — often protected by a government guarantee — facilitates his fantasy,” Buffett wrote. “Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

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WHY 2011 MAY BE THE END OF THE HOUSING CRASH