The slow drift downward in long-term rates stopped this week, the 10-year T-note at 4.69 percent, mortgages settling just above 6.25 percent.
Once again, good economic news dampened recession hopes in the bond market: orders for durable goods were very strong in March, up 3.4 percent, double the forecast, and February’s orders were revised up half-again the initial report. Orders for durable goods trend along with capital spending by business, and weak business spending during the winter was thought to prove economic weakness spreading from housing and autos. But, not yet.
Today’s first-quarter Gross Domestic Product data confirmed the pattern: overall GDP growth was the poorest in four years, only 1.3 percent. However, consumer spending was up a solid 3.8 percent, and weak housing by itself sawed one full percentage point from GDP.
The immense hopes in the bond market that housing will pull the economy down are — so far — misplaced. Housing has slowed the economy, but not tipped it over. Hence, a four-year low for GDP growth failed to encourage bond buyers, and long-term rates are the same.
It is hard even for professionals to sort through housing stories. Actual economic weight is distorted by exuberance among pessimists, and gallows humor at the fall of the profiteering mighty. Far too many “experts” report the fate of home prices as though there were one, single, unified national market. A traditional forecasting error, projecting trend to straight-line infinity, is especially misleading when it comes to the marvelously adaptable American household.
There are three forces in play: damage done to the economy by the current state of housing; how much worse housing may get; and effects of mortgage defaults on the credit markets. Keep these separate! The daily alarmism has all three in a self-reinforcing spiral to doom, but they are not so closely linked.
One at a time. Home prices on national average are flat, OFHEO and Case-Shiller studies giving the lie to all the “prices-are-falling” howling. Prices are falling in several micro markets; however, except for the auto-belt, the falling-price zones are the ones that enjoyed the greatest gains. If you were the last lucky buyer to the party, you’re in pain; but the earlier buyers are thoroughly protected by 100 percent-plus appreciation, feeling nothing more than a missed opportunity to cash out at the top.
Housing went flat at least a year ago, and the Fed’s numbers show that equity-extraction dropped sharply way back then. Not “going to drop,” but already has.
How bad will it get? Blue sky. Pick your pessimist, or pick history. History says that markets that outran supporting purchasing power will stay flat for years; the bigger the “outran” margin, the more likely prices will drop for a year or so after the peak — but then, just flat. Grinding, millstone flat.
The best black comedy and hysteria says that default shock to Wall Street and friends will cause a sudden withdrawal of mortgage credit, which will make all of this worse. We will know shortly, because that shock is also in the past: most mortgage underwriting has rolled back to old standards, yet new loan applications are steady.
I think the most probable outcome is a multiyear limit on consumer spending imposed by a near-stop to equity extraction. Already countering the damage: adaptability (co-signers, gifts, reduced expectations, new jobs, and revolutionary concepts like “saving”), and fantastic strength in the global economy.
Last month it looked as though the U.S. economy was finally caving in; now the corporate sector looks OK. If inflation will behave, slide back under 2 percent, pulled down by wage competition with Asia and not by unemployment here … then we get one of the all-time sweet spots. No recession, moderate growth — a scenario more probable than doom by housing. Doom will need reinforcement from elsewhere.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.