It’s not enough to move low-fee mortgage rates below 6 percent, but the 10-year T-note flinched at 4.5 percent all of last week, and on Friday morning retraced to 4.38 percent.

No data showing economic weakness caused the rate decline: the newest information says the national economy came through Hurricanes Katrina and Rita unimpaired.

Two things have helped long-term rates to find a top: the painful understanding that if the Federal Reserve is not yet tight enough to hurt, it soon will be; and second, unstable weakness in the stock market.

In the perverse world of bonds, inflation-scare stories help. It goes this way: if inflation is really worse than we think — under-measured, misunderstood — then the Fed will have to play catch-up, tightening longer-higher-faster. If the Fed is behind, then catch-up raises the chance of a recession to probable, and in a recession those who own bonds make a ton of money.

For the time being, I wouldn’t pay much attention to the hobgoblin in ketchup on the front porch. People who should know better quarrel all the time with inflation-measurement methodology; this time the quibble is with the housing fraction of the core rate, measured near zero in a time of double-digit home-price increases. Housing inflation is measured by rental equivalence, and as rents everywhere are flat, housing cost is not inflating. This approach is correct, as changes in the capital cost of homes have little to do with consumption prices and the value of currency.

Authentic concern for inflation is flashing amber, not red. We are in an energy-cost-pushed moment, and energy costs are likely to reverse in well-established cyclical pattern. So long as the energy-cost pressure does not move into consumer prices in general, or into wages, then the Fed is on track.

That track, probably 4.5 percent by the Feb. 1 2006, meeting, is by itself enough to raise recession chances. Fed Gov. Donald Kohn (long-time Fed staffer, friend of Greenspan’s, and one very tough cookie who might just get the job) said: “We are not yet at a point where we can stop and watch the economy evolve for awhile.”

Historically, as the Fed proceeds upward in these cycles, there has been a race to handicap. Who breaks first? Housing? Stocks? Consumers, or inventory-holding merchants and manufacturers? Way back in the ’50s and ’60s it was the inventory holders dumping to escape high financing costs. Today, just-in-time management means that inventories hardly settle on pallets, and there’s not much to liquidate.

In the ’70s and ’80s, high rates chewed up housing first. Then, at the end of the ’99-’00 rate-hike, the stock market was the first to collapse (I admit to my considerable personal relief).

Stocks are fading now despite pretty good earnings, a still-strong economy, and actually paying dividends (only 2 percent across the S&P 500, but better than the sub-1 percent prior to 2000). The Fed is part of the reason: the cost of buying on margin has more than doubled in a year; the rate of discount of future earnings has tripled, and the Fed is going to slow the economy sooner or later. Stocks are also heavy at the sight of GM and Ford slowly going out of business, and by the newest episode of Wall Street piracy. (They go on and on, I know, but half a billion dollars in fraud bankrupting Refco 90 days after it went public… really quite an achievement. Our national moral leadership is, of course, silent on the matter.)

Aggregate housing stats are still strong, but good testimony has some hot markets flipping from seller to buyer, and more poised to do so. Except for long interest-only loans, the whole universe of adjustable-rate mortgages is now useless; construction money has doubled; and a trillion-worth of home equity lines has gone from 4 percent in 2002-2004 to 7 percent, and going higher. We’ll see the impact soon.

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


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