Tales from the Thai Thai

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By sonnypage
May 25, 2004

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The Thai Thai, as I have mentioned in previous posts, is the Thai restaurant down on the terrace level of our office. It also seems to be where Brian, our mortgage lender of choice, and my wife and I, North Atlanta realtors, do much of our brainstorming. By that I mean, of course, trying to figure out what is really going on in real estate, interest rates and the economy. It was just Brian and me today; my wife was out with a buyer. Melanie, our favorite waitress, has gradually worked me up to Thai medium hot over the months, but tells me that I am still not ready for Thai hot-hot!!

I reminded Brian today that when my wife and I bought our new home last August, he had recommended, and we had agreed, to go with a six month LIBOR (London Inter Bank Offered Rate). It's interest only, a floater, with rates subject to adjustment every six months. I told him today that I still felt comfortable with it. He smiled and reminded me that he personally has one, his area manager has one, and finally, the president of his company has one. I asked Brian how he was sleeping at night these days and he said just fine, thanks. So what gives, a realtor and three mortgage professionals, all with interest only adjustables. Are we all nuts, or is there method to the madness? Brian reminded me again that the six-month adjustment has a max of 1%, plus a 12% life of loan cap. The 30 year fixed rate today is around 6 3/8's. Even if short rates when straight up from here, and stayed there, it takes my loan three adjustments, eighteen months, to get to 6%; another year to a year and a half before my total payments would equal my total payments with a fixed rate for the same total time span. Brian points out that the LIBOR, in its twelve-year history, has never experienced a full max 1% adjustment. If times get that bad, three max adjustments in a row, I, and all of you, will be having much more to worry about than our mortgage payments. I now fall firmly in the camp that believes those kinds of rate hikes would trigger a massive deflation and that we will hyperinflate, if need be, rather than suffer a deflation. I have read the arguments for both cases and have placed my bets. In a massive deflation, there may well be, literally, few survivors.

Lunch was over; we took a refill on the Thai iced tea and kept talking. Brian had just had a conference call with an economic advisory group. He shared some notes with me. More than interest rates have been fueling this housing boom. Two other key factors have been, and still are, demographics and tax law changes. Over 60's have always been the demographic group with the highest rate of home ownership. That has not changed, and the baby boomers are heading into their 60's. Secondly, the tax laws changed back in 1997. Under the old tax law, homeowners could defer capital gains taxes on home sales if they bought another home of equal or greater value. Owners were granted a one-time exemption after they turned 55. All of that has changed to a much easier standard. The exclusion can be used at any age and every two years with some residency restrictions. That is letting everyone move up and trade homes much more frequently without tax implications. Brian's economists think even if rates rise somewhat, they will not kill the housing market. I think I am at least that optimistic if not more so. Remember back to the Lockheed crisis, and later the savings and loan crisis, and with it the expression, "too big to fail"? Has the American consumer, and perhaps more specifically, the American homeowner, become, "too big to fail"? I am now convinced that the Federal Reserve will go to extraordinary lengths to keep this particular balloon inflated. And I think that they are a long way from playing all of the cards up their sleeves.

On other matters, traditional stocks. I am still very uneasy. Many of you know that I was a Merrill broker in my previous life, back from 1982-1993. Something just doesn't feel right this time, I continue to pretty much sit this one out with only 15% or so in traditional equities.. On the other hand, we have a solid 35% in the miners. I like the chances here vs. the risk. You guys are doing a great job of posting and linking, keep it up. I feel like I have my own independent economic think tank, and you guys work really cheap:) But that still leaves 50% in cash, and that's the gray hairs on my temples speaking. I earned them the hard way; they have taught me caution and to sense danger. These are not normal times.

Brain and I took a third Thai iced tea to go. Now that is a real caffeine high, Thai iced tea is lethal!! Again, an open invitation to all. If you find your path bringing you to Atlanta's north side, I expect a heads up from you and lunch at the Thai Thai is on me.

I wish you all well.


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