Monday, September 04, 2006

The Interest Rate Squeeze

There is a lot being said about the real estate bubble and whether or not it has popped. The issue here, is the sellers. They don't want to loose any money on a real estate sales transaction and\or want that dream price they saw last year ("In their hearts, they know they deserve it!")

So if they still have their job and have say 5 credit cards, there is no real problem with the mortgage. $50,000 in credit available ($10,000 per card) gives them one to two years to ride out the popping bubble. Then figure another 9 months for the bank to foreclose in the worst case scenario.

Up to now, people have been refinancing and paying off their credit cards with cheaper home equity line of credit money (HELOC). Here is where it gets interesting. The credit card companies advance more credit to more people. Then, there is a need for additional capital. This call for capital will result in lenders offering more interest for deposit money. Bank credit card loans are currently returning %18. Ever notice how those rates are listed as Prime plus some number? Raising the prime would be considered a "happy event" for the banks. I can see Bernanke biting into that credit bubble--go get 'em Ben, the banks will love you!

I'd like to see Master Card package a million in debt and turn it over to Fannie Mae for cash (the way the banks do with real estate)(my attempt at a very absurd train of thought).

The real estate cash infusion into our markets, spawned by Fannie Mae refunding, is drying up. The need for new additional capital to keep the ball rolling, will be have to be created in part, by increased interest rates. Where this new money is to come from, is the real question, we're all tapped out.


bubble_watcher said...

No more money from the housing ATM.

We will soon see the effects of this in retail sales after the peak holiday season.

Jim in San Marcos said...

You could be right Bubble Watcher.

I tend to think that credit cards could get us through the Christmas Season.

The problem could be the bill you receive in the New Year.