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Adios to the Long Bond
Almost every time my wife hears about interest rates, she wants to know when they will go lower than the current 7% that we pay on our home in Portland, Oregon. She wants to know, not for reasons of cashing in on some of our outstanding property values, but to lower the overall house payment.
Well good news came the other day when the long bond was announced as finished. No longer would it be sold, and for most of us, the news was just as exciting as it sounded. So what? you may ask.
Well I'll tell you what.
There is a guy who is relatively new to Washington. And every time I see him, I can't help but feel somewhat sorry for him. He looks like he is unsure of himself and his place and he looks more like he is unaccustomed to being in that position> Paul O'Neill, the Secretary of the Treasury, once the head honcho at Alcoa Aluminum and a man used to calling the shots and having people ask how high when he said jump. looks as though he had lost his way, wandered to Washington and wished he never had. He was, as was reported here, the wealthiest of the folks that Mr. Bush chose for his cabinet, and was, by all logical choice, the man to run the Treasury. But the economy turned south for many reasons, and no matter how hard he'd seem to try, something always got in his way when he tried to fix it.
Alan Greenspan comes to mind. Now the guru of the short term cut, Greenspan seemed reluctant to give up center stage as he tried to keep his image of head economist in place while the economy that he had encouraged to grow, suddenly stopped at his discouragement. I have gone on record as saying that many of the things Greenspan did was right, late, but right. But lets give Mr. O'Neill his due.
Canceling the long bond was a good idea, but may lack as much umph! as the numerous interest rate cuts orchestrated by Mr. Greenspan. The effect will mostly felt by consumers. Those of us with equity.
The housing market has been, according to most economists and money watchers, the one remaining bright spot. But that has started to slow recently, or should I say, it isn't rising as fast as it has in the past. Could this recession miss the housing market altogether?
It is highly possible. The length of the recession is now the source of great debate. It is almost a given that the market has hit some sort of a bottom, although it looks more like a lead sinker at the end of a baited hook. Bouncing along the bottom of the lake, looking for something to bite, is not the way we want to view the current state of our investments, but hey, it's what it looks like to me. But the recession does not need to be reflective of the market.
And the housing market doesn't have to participate. If the housing prices in your area rise, you feel wealthier. the idea is that if that happens, you are more inclined to spend what you have made, and perhaps a little more. If interest rates drop in tandem with higher values, then equity, which is the difference between what you owe and what you house is worth, will rise. This may cause you to take some of that money out of your property, or, like my wife wants to do, lower the monthly payment.
On a loan of $150,000, the difference in monthly payments from 7% to 6% is about a hundred bucks. Over the course of thirty years, that's some serious money saved in payments. Roughly about $32,500!
Of course there are those that could use the money to adjust their credit card payments and wipe out their debt entirely, add further value to their homes through a remodel, or you could do what Mr. O'Neill hopes you do. Spend it.
This would make him the hero of the economy in a round about way. It is a far better scenario than killing the Alternative Minimum Tax on businesses and rewarding the wealthy with more tax breaks.
If you do, however, decide to refinance, do it with some sort of plan in mind. Pulling money out of your home for a vacation, or a new car are two of the wrong reasons. There are numerous others. Using your equity to buy down your debt, lower your monthly payments, or repair your "cash cow" are better suited reasons for tapping into this source of wealth. If you are older, and I mean, headed towards retirement in a few years, consider the equity much differently.
The equity in your home is probably left better right where it is. The cost of a refinance could be prohibitive and the time it will take to recover those costs may be longer than you have. Perhaps now is the time to take your equity, find something more manageable while money is cheap, and your equity, which you could roll into a sizable down payment, will allow you to retire with a smaller mortgage.
Will Mr. O'Neill be the hero of this flagging economy? Unlikely.
To find out why this happens, click here
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