- The Washington Times - Wednesday, March 7, 2007

The markets proved to be very interesting lately. On Feb. 27, the Dow Jones industrial average plummeted 416 points, or 3.3 percent.

What caused the sell-off? It appears to be the convergence of a variety of things, and when you look a little closer, it’s kind of scary. First, a plunge in Chinese stocks rippled through global markets. It seems a rumor, which has been denied by the Chinese government, that it plans to slap a 20 percent capital gains tax on Chinese stocks caused the plunge.

That’s Scare No. 1: The notion that a rumor from a government halfway around the world can cause such an effect on American stock markets. Clearly the “global economy” is alive and well.

On Feb. 26, however, former Federal Reserve Chairman Alan Greenspan suggested that the U.S. economy could slip into a recession by the end of the year. His remarks clearly contributed to the market’s sell-off.

Here’s Scare No. 2: A simple and seemingly benign comment by a former Fed chief contributing to the sell-off is a pretty clear indication that investors are jittery, indeed.

That same day, the U.S. Commerce Department reported a 7.8 percent decline in orders for durable goods. The markets were expecting a drop of only about 3 percent.

That’s Scare No. 3: Evidence that Mr. Greenspan may be right.

I have been making noncommittal predictions in this column for months that the economy is not as strong as experts suggest and that a fall in long-term interest rates, including mortgage rates, is certainly a possibility. Aside from the reasons already mentioned, let’s take the argument into the arena of mortgages and real estate.

In 2003, my small, 10-employee company originated more than 1,200 loans. The majority of these applications were homeowners refinancing their existing mortgage to take advantage of sharply lower rates.

With the exception of those converting to shorter-term, 15-year loans, most refinancers dropped their monthly payment by taking a lower rate or took out a larger loan, resulting in “cash out.”

Either way, these folks wound up with more money in their pockets.

Multiply these numbers with the thousands of other mortgage companies that shared the same refinance volume in 2003.

Americans are not known for being big savers, so this money went into the economy.

Fast forward to 2006. My company’s refinance volume was a fraction of what it was in 2003. And many of the refinances were not to lower the interest rate or obtain cash. Rather, many folks with adjustable-rate mortgages were moving into fixed-rate products, often abandoning the current “teaser” rate for a higher, fixed rate.

We also have a very different housing market today than we did in 2003. During most of this decade, homeowners were watching their wealth increase by leaps and bounds just by looking at the rapid rise in home values.

Not anymore. The fourth quarter of 2006 saw U.S. home prices fall by almost 1 percent. Taking 2006 as a whole, home prices were up by less than 1/2 percent.

Considering the fact that it costs 6 percent or more to sell a home, I’d say values have dropped.

This does not bode well for the psychology of the American homeowner and his spending habits.

We have jittery investors. We have a global economy where events out of our control can occur and affect the U.S. economy.

We have a former Fed chief talking about a recession. We have economic reports indicating an economic slowdown.

We have a very different housing and refinancing market than we did a few years ago.

We also have something I haven’t yet mentioned: a subprime mortgage market in the midst of a meltdown.

Indeed, former Chairman Greenspan may be right.

Stay tuned.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]pmcmortgage.com).

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