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Why This Mortgage Party Might Go on For a Long Time

For the heck of it, I went back and looked at the column I wrote in October of last year, a time when almost everyone in the industry assumed that the refinancing party of 2002-2003 was indeed finally over.

What was I saying a year ago? Here goes: "I'm going to go out on a limb here and say, for the record, that mortgage rates could fall in the months ahead - that would be October, November and December of 2003."

OK, so I wasn't exactly right, but rates did fall in the spring of 2004 and in the second quarter of this year mortgage bankers funded $818 billion in loans, the industry's best showing in two quarters. The second quarter was also the industry's fifth-best quarter ever.

Am I a genius or what? Why doesn't Wall Street hire me to trade bonds? Actually, I am indeed no genius and I pity the investment banking house that would let me gamble with it clients' money.

But how did I get that feeling that there might be one last hoorah to the unprecedented refi boom? Answer: it just felt that way. I'm not an economist and I certainly don't intend on playing one in this column, but it doesn't take a rocket scientist to figure out that as long as the overall U.S. economy stinks, the mortgage industry will do just fine.

The weird thing, now, is that even though the economy is supposedly improving, mortgage rates have actually declined once again. At press time, the yield on the 10-year was at 4.17% and Freddie Mac had just released a revised forecast, saying loan production would total $2.6 trillion this year.

At $2.6 trillion, that would make 2004 the third-best year ever for the industry, just shy of the $2.76 trillion mortgage bankers funded in 2002. (Last year, of course, the industry set an all-time funding record of $3.9 trillion.)

We're in an election year and even though all the nation's most brilliant minds tell us that things are getting better, it seems that the only thing that is getting better is the housing market, as in price appreciation.

Unemployment is under 6% - which historically is a great number - but some economic naysayers keep arguing in the media that the only reason the employment picture appears to have improved is that people are leaving the workforce and have either taken early retirement or given up looking. (By leaving the workforce they are not counted as unemployed.)

And then there's all that talk - on the campaign trail and in the media - about outsourcing even more blue-collar jobs and decent paying white-collar jobs overseas.

In short, there's a lot of fog out there and not much sun. One thing's for certain: the stock market is going nowhere and that means investors (as well as consumers) need to put their money somewhere. That "somewhere" is the bond market and real estate. The more money that pours into bonds the lower the yield on the 10-year. And the more money that chases real estate the higher home prices will climb. Inventories are tight.

Yes, it appears that despite all the "good" economic news, we keep hearing that the only real game in town continues to be real estate, as in housing. The technology bubble has long burst and even non-dot-com tech bellwethers such as Applied Materials, Cisco, Intel, Microsoft and Oracle now trade like old-line "industrials" with P/E ratios that are anemic compared to their hey days.

The hot-growth companies of the future? I dare predict: mortgage companies and banks. Why? Because they're earning real money and the yield curve is darn good.

Can anything change this outlook? Only if America starts creating real jobs that pay real money and the stock market takes off. And I don't see that happening for a long, long time. Past isn't prelude. We're in unchartered waters here.

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