Mortgages are stuck in a happy place, near 6.5 percent for the low-fee deals, the 10-year T-note’s decline to 4.79 percent not enough to move the mortgage market.

At the moment, this whole six-week decline in rates rests on the assumption that the housing market is in a progressive collapse that will soon take the whole economy with it. The bond-betting housing bubblers have one big risk: the only bubble may be in the froth on their own Kool-Aid.

Mortgages are stuck in a happy place, near 6.5 percent for the low-fee deals, the 10-year T-note’s decline to 4.79 percent not enough to move the mortgage market.

At the moment, this whole six-week decline in rates rests on the assumption that the housing market is in a progressive collapse that will soon take the whole economy with it. The bond-betting housing bubblers have one big risk: the only bubble may be in the froth on their own Kool-Aid. Housing is slowing, steadily and a lot (sales of existing homes down another 4.1 percent in July, unsold inventories to a 7.3-month supply, last seen in 1993), but slowing in the real economy is undetectable.

July orders for durable goods rose a modest .5 percent, but on the heels of a big upward revision to June — so strong that second-quarter GDP growth may be revised from mid-2 percent to 3 percent. The leading indicator for employment is new claims for unemployment insurance, and there is not the slightest upward flicker.

Yes, we’re 17 Fed rate hikes deep, but from an emergency low, and now at a rate level at which the economy thrived in the 1990s. The big growth engine is global trade, growing so fast and in so many new ways (electrons!) that economic models and measurement can’t keep up, let alone predict.

So, all chips on a housing take-down…How’s it supposed to happen?

The first scenario is the only one with good empirical support: the Fed thinks that it knows with some precision the net increase in consumer spending resulting from net extraction and spending of home equity. Absent outsized extraction spending, GDP growth in the last five years might have been suppressed by a percent or two, or perhaps enough to have kept the economy from crawling out of the 2002-2003 incipiently deflationary hole.

However, the economy is now out of that hole, growing nicely on its own momentum…maybe. Turns out that despite higher fixed mortgage rates and ARM rates, equity extraction continues, and nobody really knows why, or how stimulative the ongoing extraction is. My hunch is that extraction to date is only a small fraction of overall equity gain, 2001-2006, and may run for a long while after prices stabilize.

Credible but immeasurable theories involve the wealth effect: if my home stops rising in value, it will stop saving money for me, and then I must cut consumption in order to save. Americans have been such poor savers but superb accumulators of wealth that there may be something here, or nothing. Alternately, if I think the value of my home is going down, I may choke off spending. Maybe.

From there, housing bubble “analysis” is just a bunch of campfire horror stories, all involving abrupt and substantial declines in home prices, abetted by waves of foreclosures due to bad underwriting and aggressive lending. We will get some declines in price, no doubt; the last arrivals to a regional or local housing party always have a hard time re-selling at the prices paid in the last year of a big run. However, a big run generates so much equity for earlier buyers that a price “decline” is just a give-back of a little inauthentic appreciation.

Pain, economic and otherwise, comes when large numbers of people can’t get back the money that they paid into a house; severe pain sets in when large numbers of people can’t get any money out; deep trouble arrives when the mortgage balances are larger than the sales prices.

Can that last happen to large numbers of Americans? Sure — but it has not except in times of job loss and general economic distress. Keep the cart and horse straight, here: without economic distress from some other sector, housing in the used-to-be red-hot coastal zones and Southwestern desert is likely to enter a long, long flat spot, but not a crater. A drag on the economy, but not a killer.

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

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