Mortgage rates are still close to 5.75 percent, but could not hold their lows.

Eight days ago the 10-year T-note was 4.42 percent and about to blow out the top. Then, by early this week shaky job news, currency manipulation by central banks, and an immense wave of short-covering conspired to take the 10-year to 4.08 percent. As of today, one extreme has cancelled another: the 10-year is trading 4.21 percent, it and mortgages likely to stay close to current levels through the holidays.

Useful economic data showed November retail sales running well above expectation, and CPI under control at plus .2 percent last month, the year-over-year increase fading back toward 2 percent as energy costs abate. Other reports were so wacky that markets withheld judgment: a 13 percent plunge in new-home starts seemed as improbable as the 43,000 drop in claims for unemployment insurance.

The Fed tightened another quarter-point to 2.25 percent Fed funds, making a 1.25 percent total rise in the overnight cost of money during 2004. The post-meeting announcement had a new date, but the text was right off the old mimeograph stencil (take that, young tekkies): “…Even after this action, the stance of monetary policy remains accommodative…accommodation can be removed at a pace that is likely to be measured.” Everyone assumes that the Fed will tack on the next quarter after its next meeting, Feb. 1-2; after that…everybody is guessing.

So far, the Fed is only removing excessive ease, bringing rates up from a too-low setting to “neutral,” somewhere between 3 percent and 5 percent. Where exactly within that range in this circumstance, Federal Reserve Chairman Alan Greenspan refuses to say except for this cute line: “We will know neutral when we see it.”

The nation’s most senior Fed-watcher, David Jones, says the Fed will grow much more cautious from here, depart from automatic hikes and react to economic data as it arrives. Many others say the Fed will cruise directly to 4 percent, leaning against incipient inflation and a budget deficit completely out of control (a new request for $90 billion for Iraq in ’05 will take the deficit close to a half-trillion).

I suspect that one measure of neutral will lie close to home…very close: the pace of increase in home prices. Post-Bubble, the Fed was delighted to see home prices explode upward, restoring (and then some) the household net worth lost in the stock market. The Fed worked hard to keep long-term rates down to sustain the price rise, and to assist the liquefaction of more than a trillion dollars of home equity by cash-out refinance.

The last thing the Fed needs is another bubble, this time in housing. I can make a good demographic and scarcity case for the national home-price boom thus far, but double-digit compounding from here is not sustainable, not with the inflation rate at 2 percent. I assume the Fed will accept a lower neutral – 3 percent-3.5 percent – if the housing market cools of its own accord; if not, I expect the Fed will take the overnight rate as high as necessary to push mortgage rates up enough to slow housing. The financial markets watch the monthly payroll numbers in a kind of demented mania; an over-the-top housing market may be a more meaningful indicator at the Fed.

Don’t worry about the Fannie Mae news this week: earnings to be restated to loss, increased regulation, senior executives handed their last cigarettes. The securitized mortgage market is so wide and deep (China’s central bank is a big buyer) that Fannie could disappear altogether without doing much harm to us.

The Fannie story is merely another tale of greed and corruption among stewards of our society: earnings manipulated to look safe and steady, not to show the true volatility of mortgage investing, and so that top dogs would hit their bonus targets. 

No major politician in either party has had a word to say about it.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


What’s your opinion? Send your Letter to the Editor to

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription