Long term rates stabilized this week, near 4.8 percent for the 10-year T-note holding low-fee fixed-rate mortgages at 6.375 percent.

Stability is likely to persist for another week. The Fed meets next Tuesday, but two weeks before election day will keep the lowest-possible profile, and there is no significant economic data due until the first days of November.

Last week and this, rates have been a bit higher than at the end of September on the theory that the economy is in pretty good shape, the Fed focused on inflation worry and not thinking at all about a rate reduction.

The all-OK thinking is brought to you by the same guys who have been howling, “Housing Bubble!” They have now decided that the worst is over for housing, and a soft landing is in process. This switch in outlook is a perfect example of the error in the bubble theory in the first place, and illustrates crucial differences between financial markets and real estate.

The all-OK discovery began by misunderstanding confusing news: starts of new homes increased 5.9 percent in September, but new building permits fell 6.3 percent. This counter-move is merely builders working at cross-purposes with the real situation, and wandering data in a huge market. Many big builders are desperate to build-out their inventory of lots to get rid of dead weight. Some are building faster than they would in a healthy market; that perversity further undercutting resale markets, especially by offering huge “incentives” to unload the market-flooding construction.

Optimists then seized on a pause in the accumulation of unsold inventory nationwide, but it is still almost 40 percent above a year ago. The sudden rise of loan delinquencies in Bubble Zones, now double rates of a year ago, is just a beginning.

This week’s Wall Street classic: a rebound in the index of prices of home builder stocks must mean that housing has hit bottom. This index has been in free-fall, down by half from a peak resembling the tech top in 2000; the home builders’ recent frozen-turkey bounce leaves it still at triple its 2002 value. Leave it to the Street to identify its own premature bottom-fishing as a sign of health in the real world.

On the Street, markets tend to resolve quickly: if there are no buyers, prices fall until buyers are found. The stock market bubble from top to bottom (with an assist from 9/11) took only 18 months. The Street was certain that housing’s bubble blew last year, and by now should have hit bottom.

Real estate is different: it has utility beyond price. You can live in the damn thing or rent it until buyers reappear. That phenomenon tends to prevent a housing bubble from dangerous implosion, and will also delay — long delay — resolution of the 2002-2005 price eruption. It is going to take time for income growth and migration to restore purchasing power under stratospheric prices. We will see panicked sales and distress in a few places, but most bubble markets should expect flat to slightly slipping prices for several years.

Meanwhile, the Fed has a problem. We are beginning to see the inflation downside from the drop in energy prices (September CPI down .5 percent), but the core rate is high, 2.9 percent year-over-year, almost double the Fed’s target and not at all guaranteed to fall politely. The Fed knows its long, painful history: inflation never falls without economic sacrifice.

The end of all that gorgeous home-equity liquidation that so greased the hip pockets and purses of consumers will suppress GDP growth by perhaps a percentage point, but by itself not enough to get core inflation back into the 1 percent-2 percent box.

I think the best interpretation of data and rates at the moment is a pause on the way to a slower economy, either baked into the policy cake now, or to be enforced by a tougher Fed later. Then we might get a further break in mortgage rates.

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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