Mortgage

Why mortgage rates are defying expectations and falling as recovery strengthens

Any refi that recaptures costs in 18 months or less is worth doing

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OK, make sense of this: The U.S. economy in a strengthening recovery, the Fed is in hold-me-back mode, jobs-jobs-jobs everywhere … and long-term interest rates, including mortgages, have dropped as they would in a depression.

Right. Begin by stripping away three sources of confusion.

First the confetti cloud from Wall Street “analysts.” Assume that any commentary from a Street house or an investment fund is a sales pitch. Maybe useful, maybe not, but frequently designed to induce fear — fear which can only be quenched by handing your money to the firm. These pitches include attractive but indefensible criticism of the Fed, or advocate alternate universes (the gold brigade, Jim Grant marching naked in front), or government haters.

Second, hold at a distance all commentary relying on a traditional business cycle, like all the ones after World War II. A lot of good people are caught in this one — shoot, our only guide is history and recognition of prior patterns. But, in the last 20 years we’ve been moving farther away from prior pattern, less and less retracing. The cyclical allure is powerful: If more and more people are going to work, sooner or later wages will grow, and then too fast, and then we’ll have an inflation problem — unless the Fed pre-empts by raising the cost of money.

Third, certainly including this author, nobody knows with any precision what happens next, not in a situation without modern precedent. However, some wisdom is available from studying the specific departures today from prior cycles.

Housing is MIA, flat. Traditional measures of affordability are off-chart high-side. Mortgages never got above 4.5 percent and are now under 4 percent again. Foreclosures new and old are way down. Absolutely inescapable: Something(s) is missing from purchasing power. Credit is too tight, but more important …

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Rates on mortgage loans eligible for purchase by Fannie Mae and Freddie Mac

Freddie_Mac_pmms_1_8_15

The shocker in today’s job data was not another 252,000 jobs in December, or unemployment down to 5.6 percent, but the drop in hourly wages, which canceled the gain in November, the net year over year a pathetic 1.7 percent gain, minimized by …

The cost of health insurance, including deductibles, is killing the average household. It is not the fault of “Obamacare” except by omission (cost reduction was/is every bit as important as more coverage), but the annual premium for a family (employer/family combined) reached $16,000 in 2013, and new subsidies fall off for family incomes above $75,000 per year.

There is a lot of good stuff going on in the U.S., but those three are the cement Frankensteins in the parking lot. Then there is the drag from overseas. The Fed’s most recent meeting minutes contain more musing about foreign weakness than any I’ve ever read.

The German 10-year is now 0.49 percent, and Japan’s 0.28 percent. Many claim that European yields are pushed down by anticipation of ECB QE, but rates here moved up at the onset of each round of Fed QE, hopeful that QE would work. Alternate explanations for Europe and Japan: too late for QE, debt is growing faster than economies, default in the air. Europe has a good chance to recover if it repairs euro-errors, Japan maybe not. U.S. bond yields are pulled down by these two, yet …

Europe is not in deflation — falling oil has pulled its overall CPI to negative 0.2 percent — but its core is still positive 0.6 percent. Japan is closer to zero, but the real problem in both places is American Disease: incomes compressed by global wage competition.

Wild cards are scattered all over the place. The collapse of oil should help, but there may be too many zero-sum effects. Everyone in that market assumes that prices will rebound to the $70-a-barrel level. China is slowing, trying to rebalance its economy, but even they can’t know the pace or effects inside or out.

Nobody believes the Fed. Short-term Treasurys have priced in one 0.25 percent hike this year, a Wright brothers liftoff. If considering a refi in this murk, take any deal that recaptures costs in 18 months or less, and don’t wait for lower.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.