Inman

Mortgage rates fall, economy slows

Mortgage rates are falling this morning, approaching the lows of the year; even the lowest-fee 30-year loans are down to 6 percent right now. The 10-year T-note’s decisive break below 4.53 percent — the floor since September — to 4.41 percent this morning could easily pull mortgages into the high fives.

The drop in rates began in an odd way over Thanksgiving, simultaneous with a decline in the value of the dollar versus the euro. Peculiar in three ways: American markets were holiday-quiet; there were no new economic data; and dollar declines often result in foreign sales of bonds and higher interest rates here. Then the pattern came clear: the currency market is betting on a rather harder than softer landing for the American economy versus European strength, Fed easing ahead, and those lower rates here making the dollar less attractive versus the euro.

This week’s economic data fit the classic slowdown sequence: the economy is slowing, slowing broadly now, but the Fed still has an inflation problem on its hands and does not dare to cut rates with the unemployment rate under 4.5 percent — nor under 5 percent, for that matter. Federal Reserve Chairman Ben Bernanke appears to have hit the timing and extent of rate increases on the nose (despite protestations of too soon, too easy among old-timers here and elsewhere), but the harder part is how long to stay inflation-tight, risking the economy. The longer the Fed has to stay put in fear of inflation, the more deeply the economy can slow in the meantime, which is your average bond trader’s dream for Christmas.

The biggest push to lower rates came this morning with the drop in the purchasing managers’ index into contraction territory at 49.5 (a reading below 50 reflects contraction, 45 is the recession level). The internal, future-looking aspects were even weaker, except for a rise in the prices-paid component, which confirmed the Fed’s inflation box. Other data were similarly weak: orders for durable goods crashed in October, and home sales continued their gentle decline, unsold inventory rising to the seven-month-supply mark.

The third-quarter OFHEO home-price numbers describe price appreciation going flat in most markets, and very modest declines (less than 1 percent annualized) in “bubble zones.” Fifteen of 25 California cities went negative in the third quarter. However, real pain is confined to regions with economic distress, Michigan in the unfortunate lead with the first statewide price decline in any state in a half-dozen years.

I continue to believe that a worsening economy might take housing from flat to trouble, but housing will not deteriorate on its own into a blown-“bubble” unless mortgage defaults cause a withdrawal of credit. Delinquencies on subprime loans have roughly doubled in the last year, and that deterioration is the thing to study, not all the “bubble” screeching from nouveau housing experts (otherwise fine economists Robert Schiller and Gary Schilling at the top of the shill list).

The key to a deeper decline in rates: next Friday’s report of November payrolls. In any economic slowdown the job market is the last element to crack, and this week brought signs of both its 2006 strength and possible cracking. The Fed’s “beige book” mentioned outsize growth in wages in very tight parts of the skilled-labor workforce just before news of an over-Thanksgiving surge in new applicants for unemployment insurance.

Financial markets have not reacted to the slow deterioration of Iraq into civil war, and understandably. Drivers will slow to stare at a car accident, but nobody wants to watch this. Got to pay attention, now. Events are moving faster than policy can, and if/when the regional lid comes off, market consequences will follow, oil first, rates and economy in train.

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