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alstry (35.38)

Mortgage Equivalent Rates 13%????

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June 18, 2008 – Comments (2)

"The rate on 30-year fixed-rate mortgages averaged 6.57% last week, up from 6.24% the previous week...."

We all know rates have been going up steadily over recent weeks climbing from under 6% to now over 6.5%.  But in order to factor higher non housing related expenses and it impact on housing affordibility, I created a new metrix called MER or mortgage equivalent rate using 2000 as the baseline.

Most can agree that family incomes have been relatively stable since 2000.  Further, the cost for almost everything we spend money on has just about doubled including food, fuel, insurance and property taxes.  It appears that the average family is spending approximately $10K to $15K extra per year for those non housing related items.

If those items did not rise in price, or incomes increased to offset those costs, then the consumer would simply have maintained over the past eight years.  However, that is not the case. 

If we were to transfer the non housing expenses into the mortgage, it would be like taking a $200K mortgage at 6 1/2% and converting into a 13% mortgage. 

And for those families whose incomes have been stable since 1990, factoring the rise in home prices and non housing expenses, including college payments, it would take MER to over 25%!!!!

 

2 Comments – Post Your Own

#1) On June 18, 2008 at 8:11 AM, alstry (35.38) wrote:

Factoring the higher MER with the now rapidly slowing economy....and this train wreck could become a really big train wreck....a really really big train wreck.

This morning from CarMax and FedEx:

Our first quarter sales were modestly below expectations and earnings were disappointing,” said Folliard. “Sales slowed through the quarter, and since Memorial Day weekend, traffic and sales weakened further. If the current trends persist, results for the full year could be significantly below the bottom of our original earnings guidance range. As a result of the combination of the uncertain economic conditions, rising fuel and food costs and weak consumer sentiment, exacerbated by the rapid depreciation in SUVs and trucks, we are temporarily suspending guidance on comparable store sales and earnings for fiscal 2009.

 

 “The operating environment for fiscal 2009 is expected to be very difficult due to the weak U.S. economy and extremely high fuel prices,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer.

Earnings are difficult to predict in light of very volatile and high fuel prices and an uncertain economic outlook."

 

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#2) On June 18, 2008 at 9:18 AM, dwot (72.07) wrote:

That is an interesting way to look at it.  Certainly the artifically low rates have cause huge price distortions all over the economy and these things coming back in line is going to be painful.

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