Mortgage rates are still so low because it’s a big world, full of surprises

Expectations for QE taper, economic acceleration tempered by fragile nature of recovery

Chimera  image via Shutterstock.Chimera image via Shutterstock.

It has been a quiet week for new data, except for the quarterly beaching of the Fed’s whale, the Z-1 Flow of Funds tracing the movement and landing spot of every dime in the economy.

Long-term rates have stayed under control despite expectations of a Fed QE taper as early as next week, and assumptions of an accelerating economy next year. Mortgages are just above 4.5 percent, the 10-year T-note holding politely near 2.85 percent.

Why still so low? It’s a big world out there, full of surprises.

The Bank of Japan began this year to print an immense volume of yen, a last-ditch effort to end deflation and to get the place growing. The BoJ’s purchases of its government bonds have driven their yields below 0.7 percent, negative versus tentative inflation. So to get some real yield, Japanese investors in the last 90 days bought $98 billion in U.S. Treasurys.

November retail sales rose 0.7 percent, and October’s were revised up to a 0.6 percent gain. The retail sales figures are good, but were boosted by giveaway discounts, and by one of two areas in which if you want a loan, you get one: to buy a car (the other, to go to college).

All of that howling about the perils of shutdown was a tad overdone, but it did have one clear effect: Both parties in Congress learned that voters are tired of the show and in a mood to throw everybody out. Thus we got two-year mini-deal on the budget. “No progress and quiet” beats “no progress and noise.”

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The November small-biz survey by the National Federation of Independent Businesses found … nothing. Another year mired in recession-level activity while the big-biz S&P 500 goes nuts.

How are we going to open opportunity to those in the wrong two-thirds of our bifurcated society without dragging down the most productive remainder?"

Another week, another $2 billion settlement paid by Chase. Who knew Bernie Madoff was making up results? Chase. Does Chase’s one-man chairman and CEO still have a job? Right. We will have no real banking reform until we make malfeasance personal.

The Z-1 whale

In a financial news market polluted by salesmen and political spin, Z-1 is straight poop.

First for our audience: Home mortgage credit outstanding rose for the first time in five years, by $12 billion out of not quite $10 trillion. Looking back over those same five years, mortgage credit has contracted by $1.5 trillion, as second mortgages of all types have shrunk by one-third. Banks now hold $606 billion in seconds.

The toxic stuff — as reflected by the balance sheets of “ABS Issuers” (private-market asset-backed securities having nothing to do with Fannie and Freddie) — has collapsed by 63 percent, from $2.2 trillion to $819 billion and falling, and right-wing wizards of finance want to fold Fannie and privatize mortgages.

Commercial mortgage credit is about as it was in 2006, $2.2 trillion, negligible growth. Multifamily credit stalled at about $850 billion in 2009, but in the last year has crested $900 billion. One would hope so, as rental demand is rising as owner-occupancy falls, and rents are rising at a punishing rate nationwide.

After five years of stagnation, total U.S. commercial bank loans and leases have begun some growth in the last year, from $11.8 trillion to $12.4 trillion. But that figure double-counts the $5.7 trillion in bank-held mortgages and MBS, above.

The one category of substantial credit growth besides cars and student loans: corporate bonds, up $600 billion in the last year. I cannot find exact data, but the lion’s share of proceeds went not to business expansion but companies buying back their own stock.

Which leads to the last story, and the toughest public-policy question.

Ballyhooed in a lot of places: Z-1′s jump in household net worth by $1.5 trillion in the last 90 days, with rising home prices accounting for $400 billion of that gain. If you don’t own a home (35 percent of households and rising), you didn’t gain a dime.

Another $700 billion came from the rise in the stock market. Cool if you have some stocks, even if puffed in buy-backs. Not so cool if you don’t. More than half of U.S. households have no retirement savings at all.

Then there’s the $300 billion gain in “pension entitlements.” Given the pandemic of pension write-downs underway, a dubious gain.

How are we going to open opportunity to those in the wrong two-thirds of our bifurcated society without dragging down the most productive remainder?

Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

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