The latest mortgage run toward 7 percent has stalled (“retreat” is too strong) because of yesterday’s shift in one Federal Reserve phrase: on May 10 economic growth was “likely to moderate”; but as of yesterday, “growth is moderating.”

If so, then the inflation threat will also moderate, though with a lag of several uneasy months. The bond market will lurch in response to each new report: next Friday’s June payroll numbers could as easily contradict the Fed as confirm a slowdown, or surprise everyone by showing deep weakness that no one expects.

The core personal income deflator this morning was up 2.1 percent year-over year, out of bounds but not accelerating. Not one bit reassuring that the Fed has it right: since the meeting oil has run to $74, and gold blew up $25 to $614. Stocks soared (silly: the Fed just told you the economy is slowing) and the dollar fell (mechanical: topping U.S. rates versus foreign ones still likely to rise).

Federal Reserve Chair Ben Bernanke, widely regarded among bond traders as a pantywaist, is not. He is plenty tough (if short of the leadership standard of Volcker and Greenspan), and he has one serious reason to worry about overshooting: housing.

To date, economic damage from a slowing housing market is limited to mortgage lenders: the industry is running at about half of capacity (closures and layoffs bringing that down), loan applications still falling. However, we are the serial bleeders of interest-rate cycles, and there are too few of us to matter to the economy.

Housing itself is a slow roller, and there is not yet evidence of economic drag (stimulus from hot housing has cooled, but that’s a different deal). Inventories of unsold homes are piling up, but current estimates of 6.5 months’ supply are not bad. Trouble lies close to a year’s supply, and inventories tend to stop growing before that as sellers give up on cashing in before markets slow.

Bubbleologists have created the impression that the entire housing market consists of rental-property, second-home, flip, fix-and-flip, and buyer-panic-above-list speculation. The reality is the reverse: people buy homes to live in them. An overdue housing slowdown is not going to cause pain until involuntary sales cause prices to fall, and in more than a handful of markets. Involuntary sales are caused first by economic distress and job loss. We have none of that outside the auto belt.

The bubbleologists are screeching about adjustable-rate mortgage (ARM) loans adjusting upward, but that isn’t doing any real harm either. Home equity lines have gone from 4 percent to 8 percent-plus, but the balances tend to be small and are diffuse across the economy. The only ARMs in current adjustment are monthly floaters tied to COFI and MTA, both lagging indices one year to six months behind the Fed, yet to hit consumer wallets.

The most exposed are the hybrid adjustables, predominately 5-year stuff closed from ’02 to ’04 at rates near 4 percent. Only the very first of those bombs are going off now, and they are easily refinanced. Conversations at my desk make plain more annoyance than discomfort and disinterest in giving up a 3 percent-per-year advantage by refinancing now — the nearly unanimous choice is to wait to refi.

If there’s no problem in any of the above, what’s Bernanke got to worry about? Home prices. The weakness during the wild run has been low- or no-down-payment lending. Huge appreciation has built equity quickly in hot markets, but any widespread decline in price — even a few percentage points — and foreclosure trouble can become self-feeding. If you have little or no equity, and have to sell your home, you wind up in foreclosure because you can’t pay the costs of sale.

Magnifying the price risk is the suicidal need of large production builders to keep building, selling at incentive-laden break-even or loss — just like pathetic GM and Ford. This week we saw an increase in new-home sales and a decline in existing ones; I would feel better about overall price prospects if the new-builds fell off a cliff.

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

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