Long-term mortgage rates this week stayed about where they were last week, close to post-January highs: 30-year-fixed mortgages were just above 6 percent, and the 10-year T-note was at 3.82 percent.

However, the situation is changing and thick with propaganda. The keys: the difference between a retreat from panic and return to health, and rising global inflation.

New claims for unemployment insurance topped again at 375,000 last week and this week fell back again to 342,000 — on edge, but on the right side of it. Stock market types were pleased at the stability in March orders for durable goods, and downright thrilled that Ford made a profit last quarter (silly: made $100 million, lost $15.3 billion in ’07).

The media are having a wonderful time mis-reporting housing conditions, ooing and ahhing every time Robert Shiller shouts "Fire!" in the theater. This week he predicted (again) a "30 percent decline in housing prices." All of them, Robert? Uniformly? Average?

Do the math: if half the nation’s homes stay price-flat, the other half must fall 60 percent. Is that it? Or did you mean to say, "decline 30 percent in a few places?" Some individual projects are off more than 60 percent right now (a Florida condo or two, spots in Arizona and California), but the worst dozen mini-metro areas have yet to decline as much as 20 percent.

In authentic data, the Office of Federal Housing Enterprise Oversight found that home prices measured by appraisal and weighted by location (California more than North Dakota; New York more than Arizona and Nevada combined, for example) rose 0.6 percent from January to February. Sales of existing homes are sliding gently, but still moving at a 5 million annual clip rate. Sales of new homes are off 37 percent in the last year, down to a half-million, but that is good news — the less new inventory, the better.

Yelling "Fire!" is a bad idea, but so is telling the audience to stay seated when smoke is pouring from the ventilator. Headline stories all week long proclaiming the credit crunch is over or credit markets are improving is just irresponsible nonsense.

Distress is measured by interest-rate spreads between safe stuff and not, and availability of credit. We have seen nothing more than a pullback from panic: the 2-year T-note has run up from 1.7 percent to 2.36 percent, sensible as the Fed at 2.25 percent is about to pause its rate cuts (keep some dry powder, guys).

The Treasury/junk spread has contracted from no-market 8.6 percent to a merely disastrous 7 percent. Retail mortgages are still 2.5 percent above Treasuries, almost a point out of line, and there’s no real market for jumbos or any other securitized credit. Tax-exempt munis paid 1 percent over taxable Treasuries last month, and now pay the same — improving from schizophrenia to clinical depression. The international bank-to-bank Libor spreads are still widening.

All now hangs on the real economy. The financial fire is contained, but the system is terribly vulnerable if a real recession develops, and it has not yet: GDP growth here is probably still above zero. The consumer is in real trouble (the Reuters/University of Michigan confidence measure today fell to a 1982 low), but the big end of business feels no pain, pulled along by trash-dollar exports and wildly overheated Asian and emerging economies.

Lost in housing, "subprime" myopia and domestic navel-gazing is the global rise of terrible inflation, nothing like it since the 1970s. The $120 a barrel oil price will have its consequences. Here, wages capped by foreign competition, food and energy inflation are slowing the economy. But Asia and emerging economies are in a runaway spiral. Recent annualized figures show: China 9 percent, India 7 percent (doubled in six months), Philippines 6.9 percent, Vietnam 19.4 percent, Singapore 6.5 percent, Russia 12.7 percent, South Africa 9 percent, Saudi Arabia 8.7 percent (highest since the ’82 oil spike).   

There are only three antidotes: the mad good fortune of a commodity collapse, a central bank-induced slowdown, or the ultimate violence of a market-induced slowdown.

Global central bankers are cornered, best shown by the Bank of England’s meeting this week. United Kingdom GDP in the first quarter "grew" by 0.4 percent, mortgage approvals are down 50 percent in a year (reduced demand unmet by broken financial markets), but inflation is out of 3 percent bounds. What to do?  The Bank of England voted 1-6-2 to cut its rate from 5.25 percent by 0.25 percent: one for deeper, six were in favor, and two opposed any cut.

The U.S. Federal Reserve meeting next week may look a lot like that.  

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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