How can I use this information?
1) Don’t keep more than $100,000 in any bank. Many banks invest in real estate loans including second mortgages.
2) If you have invested in bond funds that hold mortgage backed securities, you may have exposure to losses. If your
investments are in Ginnie Mae funds, your principal and interest are backed by the “full faith and credit” of the U. S.
Federal government, . There is a widely held, but mistaken belief, that Fannie Mae and Freddie Mac mortgages are
guaranteed by the U. S. government. They are not. Fannie Mae and Freddie Mac are both publicly held
corporations. Their symbols are FNM and FRE. Fannie Mae was created as a government agency in 1938, but in
1968 it was converted to a publicly held corporation. Nevertheless, it has been mistakenly referred to as a
government agency for many years.
Check with your broker to see if you own mortgage backed securities and if they are guaranteed by the
“full faith and credit of the U. S. government”.
3) Stay informed regarding home depreciation. Check the HPI each quarter at http://www.ofheo.gov. Remember
that the home appreciation figures above are quarterly figures. A 1% quarterly depreciation is very serious since it
equates to 4% depreciation annually. You can see in the graph above that many times we have experienced slight
depreciation for short periods of time since 1974. If quarterly depreciation falls below the -1% level and stays there,
expect turmoil in the financial system... bank failures and mergers, tight credit etc.
4) Although many consider their home to be an investment, home appreciation cannot be converted into usable
funds unless the home is sold and replaced by a lower cost residence. If the payments, utilities, taxes, insurance
and maintenance on your home are so large that you are not able to provide for your retirement, consider
downsizing your home so that more of your funds are available for investment. This is especially true if you don't
have the option of retiring from a high appreciation area to a low appreciation area.
SignalTrend's unemotional computer timing system is currently bullish, but it may change its buy / sell
signal in the near future. If that happens, SignalTrend will notify you by email. Remember, SignalTrend's
stock market timing system was backtested 100 years with excellent results!
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|Quarterly U. S. Home Appreciation Rates
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
|What's Next in the Credit Crunch?
Proprietary Graphs, Tables and Analyses - All Rights Reserved
Contrary to reports throughout the year that U. S. home values are falling, homes actually appreciated 1/10 of 1% in
the second quarter of 2007. See the above graph of quarterly home appreciation rates. The quarterly rate of
appreciation has plummeted from over 4% in 2004 (A) to just barely above 0% in 2007 (B). We’ve already
seen significant problems associated with subprime loans. More serious problems will erupt if home values across
the nation do actually begin to depreciate. Appreciation rates by state can be found below.
● Home prices in the U.S. rose 1/10 of 1% in the second quarter of 2007.
● Risk of a deepening lending crisis is not over.
● The next crisis may be a second mortgage crisis.
● Seven states experienced home price deflation during the first quarter of 2007.
● Fifteen states experienced home price deflation during the second quarter of 2007.
Home Price Index (HPI):
The home inflation graph below was derived from the HPI. The HPI is "designed to capture changes in the value
of single-family homes in the U.S." and is published by the Office of Federal Housing Enterprise Oversight
(OFHEO). "The HPI is a weighted repeat sales index, meaning that it measures average price changes
in repeat sales or refinancings on the same properties. This information is obtained by reviewing repeat
mortgage transactions on single-family properties whose mortgages have been purchased or securitized by
Fannie Mae or Freddie Mac since January 1975." OFHEO reports the HPI for 285 cities and each of the nine US
divisions used by the Bureau of the Census. See http://www.ofheo.gov for more information.
We’ve heard startling stories of home buyers purchasing homes in 2007 with no money down just a few months after
filing bankruptcy. They received 80% first mortgages and second mortgages for the remaining 20%. Second
mortgages in these types of situations may be sold in the secondary market and end up in a pool of mortgage
backed securities. If you own mortgage backed securities, you may have second mortgages.
In a depreciating housing market, the second mortgage holders can get clobbered. Take a $100,000 home, with an
80% first mortgage ($80,000) and a 20% second mortgage ($20,000). Assume that the home depreciates twenty
percent to $80,000. If the home is foreclosed by the first mortgage holder and sold for $80,000, the first mortgage
holder will receive all of the proceeds of sale and the second mortgage holder will receive nothing. The borrower will
still owe the second mortgage, but if he can’t pay, then the second mortgage holder will incur a 100% loss on that
mortgage backed security.
The housing market should have cooled off years ago. But lending standards were loosened and the housing boom
was extended. Loans have been made that never should have been made. Consequently, homes have been built
that never should have been built. Recently tightened lending standards have left the housing market with fewer
buyers. An over-supply of homes coupled with a reduced number of buyers can cause depreciating prices. It is a
dangerous formula for homeowners and lenders alike that could take many years to correct.
Don’t assume that the worst of the lending crisis is over. At the national level, rates of appreciation may continue to
decline to the point that significant nationwide depreciation actually occurs. In that event, depreciation will cause
additional losses for lenders. Those losses will continue until the depreciation stops. That could be many years. If
you own mortgage backed securities, remember… you are a lender!
|Quarterly Home Appreciation Rates by State (HPI)