Long-term rates are rising quickly, with the 10-year T-note to 4.6 percent from sub-4.5 percent one week ago, and mortgages to 6.25 percent. Both are headed higher.
The immediate cause of retreat: February payrolls did just fine in today’s dawn release. The economy produced 97,000 new jobs, and January and December were revised up another 55,000; unemployment fell a tick to 4.5 percent, and wages are up 4.1 percent year-over-year. No way the Fed’s going to ease on numbers like that, not with inflation still in the hazard zone.
The last two weeks’ stock market trading has been instructive. After a long straight-line rise and record-low volatility, equity markets around the world broke badly two weeks ago. In normal circumstances, both weakness and high volatility would have persisted — months at least. Instead, it took only 10 days for markets to steady; prices are still off, but that horrible airliner-airpocket sensation is gone.
“So, it’s different this time?” You bet. It’s not every decade (or century) that a couple of billion new people come into the global workforce, determined to produce more than they buy, and equally determined to reinvest the excess in their buyers’ markets. The ocean of cash looking for a home can dampen any market panic, and oh-by-the-way can bid the benchmark 10-year T-note yield below the Fed’s 5.25 percent cost of money.
That underneath phenomenon has had the 10-year centerline a half-percent under the Fed. When the economy has looked hot, as it did in January, and last summer, bond yields headed up toward the Fed’s rate; when the economy appeared to cool, or a bolt of market lightning spooked the herd, down we went, but never more than .75 percent below the Fed. The resulting mortgage range: 6 percent-6.75 percent.
At some point this calculus will break down, but that point could be a long way off, even years — hell, it’s been almost a year-and-a-half already. The bond market is doing the Fed’s work, especially in housing. This inverted yield curve is NOT a recession sign; the reinvesting exporters to us are providing cheap fixed-rate loans, a safe harbor for ARM-resets that would otherwise be taking millions of consumers to 7.75 percent, and a prop to purchases during a credit-quality fright.
For fans of black humor, the housing/mortgage meltdown is a gas. A daily visit to www.ml-implode.com will make you feel better about any pain you’re in. And if you’re not in any housing pain, this is one of the few situations in which you get to smile at others’ distress … rarely have so many people done such dumb things.
Yesterday, a Federal Reserve advisory panel announced that “Foreclosures are at a record level” [not], and would “get higher [duh].” Old CIA guys, maybe?
The day before, Federal Reserve Chairman Ben Bernanke said that Fannie and Freddie portfolios should shrink, and be limited to affordable mortgages. Shrinkage has been an Obviousman! idea for 10 years (there’s plenty of money chasing mortgages without F&F), but Bernanke is just as lost as politicians on this “affordable loan” business. At 103 percent of market value and absurd nonrequirements for income, savings, debt-ratio and credit, most affordables are indistinguishable from a lot of the shoehorn subprimes.
A trader at a big wholesaler, asked why his firm suddenly pulled back from high-quality no-doc (quality = high FICOs, 25 percent down, fixed-rate … ), said, “Bear and Goldman won’t buy anymore.” If they won’t buy, it means they can’t re-sell, which means things ain’t so hot among the lucky buyers of derivative junk last year and the year before. The public silence from the dealers and rating agencies is deafening.
Realtor alert: any deal going Alt-A, dependent on a certain loan-to-value to make the underwriting work, even a dead-low 65 percent ratio, expect a demand for an appraisal review at an inconvenient moment (as an add-on condition after loan approval, for example), to be conducted by a hack who couldn’t find your state on MapQuest.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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