Financial News

Seasonally-adjusted mortgage applications dropped 12.3 percent in the week ending Oct. 23, 2009 from the week prior while refinancing applications dropped 16.2 percent, according to the Mortgage Bankers Association (MBA). These numbers have dropped for several weeks - right alongside mortgage interest rates (30-year fixed mortgages are roughly 5.03 percent). This makes you wonder why the demand for homes is dropping if the interest rates are so attractive.

People Are Afraid

It's pretty evident that people are feeling leery about spending their money, no matter how low mortgage rates fall. This is mainly because companies are still laying people off and others are imposing a hiring freeze. In other words, if you get laid off, you might stay that way for a while. And with the status of unemployment benefit extensions still being debated by the Senate, not many people feel excited about taking on a new mortgage with unstable means.

The Double-Edged Sword

It seems that Americans are living with our backs against one big double-edged sword. On one end, we have low home prices and a sizable tax credit begging for some attention. On the other hand, we have millions of individuals with no jobs and homes in foreclosure. The bad economy has driven people off of their jobs and out of their homes. As a result, home prices have dropped. But who wants to buy homes in such distressed times? Even more, who feels comfortable profiting from a distressed home with former distressed homeowners?

This may mean that until the economy truly starts to turn around (not just in numbers as Bernanke stated about the recession) people will not feel right about taking on a new mortgage. The only question we need to concern ourselves with, however, is will home prices and mortgage rates increase dramatically as the economy improves?

Are you turned on or turned off by the thought of purchasing a new home?

The Treasury Department recently reported that the United States debt is dangerously close to reaching its self-imposed limit of $12.1 trillion dollars. Currently, we are only $211 billion shy of reaching the ceiling with an increase rate of nearly $3.8 billion per day. What is the Treasury going to do?

The Debt Ceiling Will Likely be Raised

Most likely, the way that lawmakers will resolve the issue is by simply raising the debt ceiling. According to recent Standard & Poor's data, this has already been accomplished 76 times since 1960 and will likely be done again before the debt reaches its self-imposed ceiling, possibly in Nov. 2009.

What Happens If the Ceiling Isn't Raised?

If lawmakers don't raise the ceiling before it is penetrated, the government will be forced to shut down. While this has occurred in the past without devastating results, there are still potential downfalls. One is that the value of the U.S. dollar will likely plummet, which could affect portfolios worldwide. Also, the Treasury might have to pull off some impressive tricks to come up with money. A few options include:

• Government securities: There is $113 billion available in government securities that are held in a 401k-type plan for federal employees (funds would need to be repaid with interest).
• Government dollar holdings: The Treasury can sell $16 billion in government dollar holds that are held in a currency stabilization fund.
• Fannie Mae and Freddie Mac debt: The Treasury also has the option to sell $165 billion worth of debt from these organizations.

What This Means for You

As already mentioned, not raising the debt ceiling can weaken the dollar. However, raising the ceiling sends the United States further into debt, which can result in higher taxes, reduced benefits and federal aid programs, as well as higher interest rates on home loans and more.

At this point, are hands are tied either way. So for now, all we can do is wait out the storm, hope the economy gets better, and find ways to save money while preparing for an uncertain future.

How do you feel about the nation's growing debt?

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