Congress is on the verge of passing a financial system overhaul that, among other things, gives regulators authority to break up troubled financial firms, forms a financial stability oversight council to address risks to financial stability, mandates a one time audit of the Federal Reserve’s lending programs, eliminates the Office of Thrift Supervision, limits the largest financial firms from investing their own capital in hedge funds and private equity funds, extends regulation to the derivatives market for the first time, limits derivatives trading by banks, sets tougher capital requirements on banks, mandates a fee on the largest banks to raise $19 billion to offset for the cost of the bill, establishes a consumer protection agency within the Federal Reserve to examine and enforce regulations for mortgage related businesses at banks and credit unions with more than $10 billion in assets (as well as other non-bank financial firms except auto dealers), applies stricter state statutes to national banks, increases the federal deposit insurance limit to $250k retroactive to January 1, 2008, establishes national minimum underwriting standards for home mortgages, and a raft of changes to protect investors from deals gone bad (thanks to the Wall Street Journal for the great summary). It’s a pretty sweeping bill, and some say it will be years before we will know the impact.

This massive bill, along with the health care overhaul and economic stimulus bills, have been part of an initiative to impose greater government control on our system of capitalism and free enterprise. Politicians have condemned and vilified many of our largest corporations and their executives as a way of justifying the need for these changes, and there has also been a vocal opposition to these measures. Recently, the number one best seller on Amazon.com became, at the suggestion of the flamboyant Glenn Beck, F.A. Hayek’s “The Road to Serfdom”, written in the ‘40s as, among other things, a warning about the ill effects of socialism and the benefits of free markets. Readers may be surprised that Hayek does not advocate a system of laissez-faire economics, but instead has a significant role for government in areas where markets do not provide the best outcomes, such as operation of the monetary system, enforcement of labor regulations, and dissemination of economic information (and probably oil spill cleanups as well). Here's another take on Hayek from the Russell Roberts at George Mason University.

A more readable and relevant book about the current financial crisis is University of Chicago Economist Raghuram Rajan’s new book, “Fault Lines: How Hidden Fractures Still Threaten the World Economy”. He relates the causes of the crisis on a much more global scale than most other accounts. While the same basic causes are there, the context and underlying forces are much broader, relating, for example, how US income inequality (look at how Kitsap County median incomes have changed in the table below), performance of our educational systems, and the choices of some governments (Germany, China, etc.) to focus on exports relate to the crisis. The article in the Financial Times (link above) notes:

“The circle of blame goes wider than greedy bankers and negligent regulators, Rajan emphasises. It includes you and me, and the politicians we elected. Almost all the culprits acted in good faith and even rationally, given the circumstances, he argues. If this were not the case, avoiding the next crisis would be much easier. We could thump the villains and move on. If only it were so simple.”

Rajan’s book sheds some light on the major issues confronting the G20 meetings in Toronto this week. It also questions whether the complex financial regulatory overhaul is addressing the underlying problems.

The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. We’ve updated the income and 1st time buyer assumptions for this comparison to conform with current methods at WCRER. These updated data and calculations show not only that affordability has suffered because median household incomes have fallen the past few years, but also that affordability has not yet returned to where it was at turn of the century. Note that these calculations only compare the affordability of standard conventional loans. During the era of zero down subprime lending, other products with adjustable interest rates, interest only, or option ARM loans were used to qualify buyers for higher loans. History has shown that many of these were ultimately unaffordable. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 10% down on a house priced at 85% of the median and obtains a 30 year fixed rate mortgage with mortgage insurance. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2001, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2010 are estimates using the latest monthly data for median prices, interest rates, and median income.

 The interest rate for a typical 30 year fixed rate conforming loan has fallen to about 4.72%, a record low reflecting investment in US Treasuries as a safe haven. Even with the May median price rising about 7% from April to $243,498, affordability probably won’t get much better. Rates have been expected to rise at some point in the coming year, with some experts predicting they'll reach 6% by the end of 2010. However, fear of default by Greece or another of the suspect countries in the European Union may result in a longer period of low US Treasury and mortgage rates. Keep in mind that median prices can be deceptive and that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges (see graph showing distribution of June sales by price range).

The affordability index degraded to 1.19 in June from 1.24 in May. First time buyer affordability also degraded to .76 from .84 in May. The first time buyer index was effected more than the regular index because of the increase in the cost of mortgage insurance. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

Year	2004	2005	2006	2007	2008	2009	2010
Annual Average interest rate	5.84	5.87	6.41	6.34	5.80	5.03	4.87
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$243498
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$1013
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.19
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1114
1st time buyer affordable payment	$794	$853	$901	$885	$862	$842	$842
1st time buyer affordability index	0.79	0.70	0.64	0.60	0.68	0.77	0.76

June's APR is 4.812% on a 30-Year and 4.195% on a 15-Year, both conforming. May's rates were 5.065% on a 30-Year and 4.573% on a 15-Year, both conforming. The 15 year rate improved significantly over the past month. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. The homebuyer tax credit was reworked last year to give some incentive to move up buyers as well as first time buyers.  A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.643% on one major bank web site - same as last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.