Tuesday, January 15, 2008


Last summer a 30 year fixed rate mortgage went for 6.74% and last week the same mortgage went for 5.87%. This decline seems small to folks who do not appreciate what it means over a 30 year span. The short answer is that it lowers the payment on a house by 10% each month for 360 months. We are talking big dollars here, much bigger than the extra dollars people will spend on gas over a few years of out of whack prices. A person who saves $75 per month on a $100,000 house loan or the one who saves $300 on a $400,000 house loan can stand an increase in his monthly gasoline bill from $100 to $120. The $20 increase in gasoline is more than offset by the savings on the house payment. Furthermore, once new supplies overwhelm reduced demand, the price of the gasoline will go back down but the payment on a fixed rate mortgage will not go back up. I happen to believe in variable rate mortgages that are tightly fixed to the 1 year treasury rate but the fact and these rates will be dropping more than the fixed rates in the coming months.

Houses are once again very affordable. At the peak a couple of years ago, the median house price was getting dear. The combination of the high price and the high mortgage rate made the median house more than the median person could afford. Since that time, three things have happened: 1) personal income has soared as more people are working at higher levels of pay, 2) the average price of homes has slipped a little in many markets, 3) the interest costs have fallen significantly.


One of the big fictions being spread today is that there is a housing-banking crisis. Clearly the people and the media have forgotten what a crisis is. During the big down turns in housing in the past, such as 1973 and 1990, scores of banks and lending institutions went busted. Indeed, in 1973 there were thousands of bank and saving and loan bankruptcies. During the 1990 down turn, an agency of the US Government was formed to bail out thousands of banks and to purchase billions of dollars worth of real estate. The current down turn is 1) a weak down turn at best and 2) almost over. Potential buyers are being put off by the fear mongers but the lower prices and pent up demand will soon show up in higher sales.


One of the fears expressed in the media is that China could actually start exporting inflation. What a joke? For the past 20 years or so, we have enjoyed watching the price of consumer goods fall because of lower manufacturing costs in China. It is likely that over the next 5 years that hundreds of millions of peasant farmers in China will migrate to cities and towns where they will quadruple their earnings but provide disinflation for the next generation of American shoppers.

At the same time, the savings from innovations just in the past few years has been incredible and is on track to continue. One big story hear is about the storage and distribution of information. The rumor making its rounds today is that the new model of the iPhone will have 32 Gigs of storage! Only a few years ago, that amount of storage would have cost a couple of million dollars! Only a few years ago, I came close to buying a 10 Gig drive for $3,800 and it was fortunate that I waited and bought a 30 Gig drive for just a few hundred. The power of this steep drop in storage is just starting to change the world.

Last Friday, I drove to a Winston-Salem library to check out "The FairTax Book" by Neal Boortz and Congressman John Linder. Before I drove the distance, I checked to see if the text was available online. Just think about the time, effort and expense of driving to the library as opposed to down loading this book on line. We are talking about 45 minutes of my time versus 10 seconds to find the link and to click the mouse, a time factor of 270! I'll say that again, it took me 270 times as much time to get this book from the library! Now lest you forget, I must remind you that I still have to take the book back.

Once again, I must mention that when one substitutes a mouse click for a trip to the library then he has dramatically reduced inflation! The law of substitution does not apply just to buying apples after an orange crop freeze but it includes any action that we can substitute for another.


Sanity is coming to a drug store near you! This week another state opened up its laws to help drive down health care costs. In one more state it is now true that you can go to health clinics, staffed only by nurse practitioners, to get checked for common illnesses. Many a minor ache or illness can be diagnosed quickly and many a more serious illness can be referred. This is a smart use of resources.


Never is a long time and it is rare to be able to use the word but never in my life time have stocks been so cheap. I have said it a few times but I must say it again that it is time to take action. Can stocks go lower than they are now? Yes, they certainly can! Are they likely to be much higher soon? Yes, they certainly are!

Again, I recall how extremely difficult it was to get my customers to buy bonds in the early 1980's. For a few months, in 1982 I sold my customers 4 year band CD's that yielded 14.75%. Even those were hard to sell because there was such great fear that interest rates were going much higher. When I switched to selling 30 year government bonds at 13.75% it was even more difficult to find buyers. Again the great fear in those days was that interest rates were going much higher.

Today, I find it amazing at how many trillions of dollars the public has in money market accounts and in short term and long term bonds. Many do not even know what they own but they have purchased blended mutual funds that hold significant amounts of these securities. It is always smart to keep a little powder dry but fear has pushed the public to the "other extreme". The bottom line is that when the 30 year treasury bond was offering 13.75% state income tax free for 30 years, the public was afraid to buy a bond and now that these bonds are offering 4.3% the public is afraid to buy a stock.