Ok, what is one to do? One minute they are diligently reading the papers and are told emphatically that the Bank of Canada is raising rates in September and likely October as well, then this week a total about face?

August 10, 2007 – 2:52 pm

By: ROMINA MAURINO

TORONTO (CP) – The global financial turmoil that has rocked global financial markets may have a bright side for some Canadians – it could end up keeping interest rates lower despite rising inflation in the economy, economists say.

With stocks under siege and the world’s central banks trying to calm markets down and prevent a global credit crunch caused in part by a battered U.S. housing sector, economists say the Bank of Canada will likely hesitate to raise borrowing costs in such a volatile environment.

“If anything, the turmoil might actually, possibly, lead to lower interest rates than would have otherwise been the case,” Doug Porter, a senior economist with BMO Capital Markets, said Friday.

Widely anticipated September increase to overnight lending rate in question
Reuters Published: Monday, August 13, 2007

The Bank of Canada may shy away from raising its key overnight lending rate in September due to the global credit woes that have rattled financial markets, RBC Capital Markets said on Monday.
The central bank had been widely expected to hike interest rates by a one-quarter of a percentage point to 4.75% on Sept. 5, but last week’s turbulent financial markets cast doubt on such a move.

The real question is why is this happening, and could you explain it in layman’s terms? Sure, last night I found one of the best explanations of what’s going on, so here it is;

Andrew Busch is global foreign exchange strategist with BMO Capital Markets and author of soon-to-be-released World Event Trading
August 13, 2007, and he writes;

The origins of this crisis began in 2003-2004, when central banks around the globe lowered interest rates to extremely low levels to avoid deflation. The Fed dropped overnight rates to 1 per cent and kept them there for a year. This spurred an explosion in the housing market, an explosion in subprime lending and an explosion in private equity buyouts.

Cheap money also created the phrases such as “no doc” or “covenant-lite” loans, as lenders required fewer and fewer requirements for borrowers to get the money. Cheap money also drove investors around the globe to search for yield, and that brought them to the subprime market. This debt had interest rates 2 to 3 percentage points above U.S. Treasuries.
However, the central banks reversed course and began to normalize interest rates. The Fed raised rates 17 times from 2004 to 2006, lifting them to 5.25 per cent from 1 per cent. This is when the party stopped. It took a while, but subprime loans began to unravel and banks began to notice they had a problem.
Foreclosures began to soar and this forced down the price of the subprime debt or loans (which were collateralized with homes). HSBC made an announcement in early 2007 about its losses in subprime, and then in March, the second-largest subprime lender went under. Stock markets around the world sank, but then recovered when no credit crunch followed.
So then, why is there a panic/crisis now? Didn’t everyone deal with this problem then? The answer is an emphatic No. The reason is that subprime debt and its derivatives (collateralized debt obligations, or CDOs) are illiquid, and valuing them is difficult. This means that many in the market didn’t reset the price of them in their portfolios and didn’t take the precaution to increase reserves to cover losses.

It has taken the announcement of losses by a major U.S. investment bank to trigger the rush to reprice these securities. This was forced by investors in hedge funds that owned this debt. These investors wanted to know what their investments were worth or what they had left.
In turn, this triggered a repricing heard round the world, as the global financial community endeavoured to figure out what exposures it had to subprime and what it could do about it. Many concluded that they simply wanted out and wanted back whatever was left.

This is where the fun starts. Redemptions by investors create havoc in the financial markets when there is a rush for the exit. In this case, it was a global rush as the subprime contagion extended from Australia to South Korea to Germany to the United States. Hedge funds dumped all trades to fund redemptions. What they didn’t want to get out of, they attempted to borrow the money to pay out.

My call is for this cycle to end when this debt is valued somewhere between 30 and 35 cents on the dollar. Foreclosed homes are now selling for about 40 to 50 cents on the dollar. A price discount of 5 to 10 cents should be a powerful incentive for investors to take the risk. Approximate subprime debt is now at 38-40 cents on the dollar.
Therefore, we should see this segment of the market stabilize and fear of the unknown subside, as the price will have fallen far enough to draw buyers.

So what does this mean? I would not bet on a rate increase by the Bank of Canada in early September as was last week a sure bet. The better news could be that fixed rates may come down through all this, which might make a good case to consider choosing this strategy .

Stay tuned for more insight and analysis as we go through very turbulent waters.

The Prez.

Welcome to One Yellow Door. Why did I create One Yellow Door? Simply put I saw that their was a need to match eager customers with suppliers of real estate services who were willing to discount their services in periods when they wanted additional business. It really is not unlike any other business. When you are a retailer and you have excess capacity of product what do you do? You put it on sale.

For Real Estate Agents and Mortgage Brokers their product is time. When they have additional time, they are not making money. Therefore when they have additional time, they put that time on sale. Additionally for Realtors and Mortgage professionals, before One Yellow Door when they had additional time they had to go out and try some marketing campaign or cold calling. Both of these unfortunately came with risk. They are spending additional time creating and delivering their chosen marketing idea with the risk that it may not achieve the desired result of filling up their excess time with actual customers.

With One Yellow Door once they decide to post their availability with us, they can sit back and be assured that we will deliver as many willing customers as they ask for.

This s a win/win for both our customers and suppliers.

Welcome to the only place on the web where you can be matched with a professional Realtor or mortgage broker who has already agreed to significant discount their business. Savings passed on to you without you having to do any of the work.

Check back often to this Blog to see ongoing evaluation of the market and advice around mortgage, real estate and the overall interest rate environment.

Thanks for visiting

Greg
The Prez.