The U.S. government plans to lend an addition $800 Billion to help ease the current economic crisis. According to Edmund Andrews of the New York Times, the government has already pledged close to $7.8 trillion dollars in financial obligations this past year alone. The additional $600 billion allocated to purchases of debt for Fannie and Freddie seems like a mere pittance. Several analysts feel that this will help increase liquidity, as the 30-year fixed-rate mortgages fell almost an entire point.

THE GOVERNMENT HAS ACCESS TO DATA NO ONE ELSE HAS

I have faith in that they will make the best decisions with the tools available to them, but understand that there is a great deal of uncertainty involved. Even the most powerful nation on earth can not effectively manipulate market forces with a high degree of certainty. Some investors will greet this news with optimism while skeptics will point to further fundamental weakness in our economy. Whichever side of the fence you are on, you must explicitly take into consideration changes in policy, uncertainty, and risk in making informed investment decisions

Though it is impossible to forecast financial events with absolute certainty, it is important to realize that it is the anticipation of certain events and the expectation of various rates of return that will determine the present value of investments and income producing property. As expectations change, so does the investment value.

RISK MEASURES

Investors often use probabilistic and non-deterministic methods of analysis, depending on the situation and data available. One approach could include developing an expected cash flow and a standard deviation measure for each year, establishing probabilities of error, and investigating perfectly correlated, partially correlated, and uncorrelated cash flows.

Sensitivity analysis investigating how influential certain forecasts (rent, expenses, taxation etc) affect present value is often quite useful and easier to compute. Establishing different investment values under optimistic, probable, and pessimistic scenarios is quite effective as well. On the other scale of difficulty, if you have sufficient data, you could run Monte Carlo simulations which could help quantify risk in quantitative terms.

I would love to hear from our readers whether they incorporate changes in risk in their decision models and what approach they use. Though it’s easy to become overwhelmed with all the economic data and volatility in the market, there are plenty of analytical tools from the financial world that could greatly help Real Estate investors understand their investments.

Photo Credit: Mike Licht, NotionsCapital.com

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Tags: bailout, real estate investor, volatility

In Frank Sinatra’s famous tune “That’s Life”, he penned the lyrics: “That’s life, that’s what all the people say. You’re riding high in April, Shot down in May” I am going to change them to “You’re riding high at 4:36pm on Tuesday, Shot down at 3pm Thursday” Lame intro–I know–but my point is made. The market was all over the board last week.

In response to market volatility, mortgage lenders issued as many as 8 distinct rate sheets in a holiday-shortened, 4-day trading week.  Lately, shopping for a low mortgage rate has been as much about timing as anything else.

There wasn’t much economic news to digest last week save for Friday’s Retail Sales data.

The numbers reflected what most of us already know — consumers are not spending as freely as in the past.  And, because consumer spending accounts for 70 percent of the U.S. economy, retail restraint can mean the difference between a growing economy and a slowing one.

October marked the 5th straight month of declines for Retail Sales.

This week, markets will have their hands full with new data, 7 Fed speakers, and ongoing rescue effort discussions from Washington.

From a data perspective, the two most important data points are the Producer Price Index and the Consumer Price Index.  Both measure the “cost of living” as it applies to businesses and consumers, respectively, and both can signal inflation when the readings are too high.

Falling energy prices will likely cause PPI and CPI to post negative readings, but if those negative numbers post higher than expected, mortgage rates should rise in response.

Regardless, mortgage rate shoppers should standby in Ready Mode.  Changes to the mortgage market — like changes to the stock market — have been furious and swift, measurable in minutes, not hours.  The only way to beat a market like this is to not play in it.

Once you find a rate-and-payment combination that suits your household budget, consider locking it in with your loan officer.  The risk of not committing can be too great in a market moving as quickly as this one.

(Image courtesy: The New York Times)

Tags: Economy, housing, mortgage rates, volatility