Declining Home Prices, Rising Mortgage Rates

House_20080226013

courtesy of WSJ

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The Fed’s effort to bail out the credit crisis and Housing crash has run into an odd problem: Despite cutting rates 225 basis points since September, mortgage rates have actually gone up:

"The Fed’s efforts so far to soften the blow of the housing slump with lower interest rates appear to be having a muted effect. Since September, the Fed has reduced its target for short-term interest rates by 2.25 percentage points to 3%. But some mortgage rates are actually rising, and those that are falling haven’t fallen that much.

The average interest rate on a standard 30-year fixed-rate mortgage was 6.38% yesterday, little changed from September but up from 5.61% in late January, according to HSH Associates, a mortgage-data publisher in Pompton Plains, N.J. Interest rates on so-called jumbo mortgages — those larger than $417,000 — were at 7.35%, also close to their September levels.

Rates on adjustable mortgages have come down, but not by as much as the Fed has cut the rates it influences. A three-year ARM, for instance, carried a 5.43% interest rate yesterday, down from 6.29% in mid-September. Still, lower short-term rates should help millions of homeowners who took out ARMs with low teaser rates that are set to jump higher.

There are two reasons mortgage rates haven’t responded more to the Fed’s rate cuts. One is that long-term Treasury yields, which are the benchmark for most mortgage rates, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar. The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans."

We closed on our current home March 2007. 30 year, prime, conforming mortgage. Rate: 6.125%. And, we keep getting refi offers from Chase and Citibank — for 6.25 – 6.50%. (No thanks!)

Well, the Fed may not have impacted the mortgage arena much, but at least (as forewarned), they have had a significant impact on prices: rampant inflation . . .

UPDATE: February 28, 2008 9:42am

Bank Rate notes:

Bankrate: Fixed Mortgage Rates at 4-Month High

With the Federal Reserve expected to cut interest rates again at their
meeting in March, rates for things like adjustable rate mortgages that
are tied to short- term benchmarks have been moving lower. But concerns
about inflation and continued turmoil in credit markets has pushed
long-term interest rates, and especially fixed mortgage rates, higher.

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Previously:
Screaming Hot Producer Prices   http://bigpicture.typepad.com/comments/2008/02/screaming-hot-p.html
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Source:
Decline in Home Prices Accelerates
Fed’s Efforts Have Only Muted Effect On Mortgage Rates
KELLY EVANS, SERENA NG and RUTH SIMON
WSJ, February 27, 2008; Page A1
http://online.wsj.com/article/SB120403496764693703.html

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What's been said:

Discussions found on the web:
  1. ross commented on Feb 27

    This isn’t odd as far as recent history goes. Long rates didn’t rise after the Greenspan Fed started raising overnight rates in 2004, why should one think they should fall now? Especially given that slowdowns in housing, CRE and retail etc. are driving credit risk up.

    One reason for this is that other countries that have targeted their monetary policies at currency “pegs” (moving or otherwise) have not only imported US monetary policy but exported some effects of that policy right back to the US.

  2. Ironman commented on Feb 27

    There are, of course, perfectly rational reasons why the Fed might choose inflation.

    James Bednar’s comment “Bernanke’s Conundrum” sums it up nicely – I considered “Ben Bernanke’s Hobson’s Choice” as an alternative title for the post linked above, but that certainly would have worked well….

  3. JustinTheSkeptic commented on Feb 27

    May I quote Schumpeter? Describing Depressions: “there are generally masses of unemployed, accumulated stocks of raw materials, machines, buildings, and so forth offered below cost of production, and there is as a rule an abnormally low rate of interest.”

    It might give some form of solace to the Bulls, but I suspect we are heading in this direction, given another 12 to 18 months. jmho

  4. wally commented on Feb 27

    No surprise here… I don’t think anybody really thought the Fed had any thought of – or chance of – affecting housing problems. They aimed to help bankers and big investment houses, openly and directly, knowing full well that increased inflation would be a by-product. They made their choice; we pay the price.

  5. Dale commented on Feb 27

    Well along with falling home prices and rising mortgage rates we can add real estate assessments that suspend reality. I live in Fairfax County outside of DC. We just received our 2008 assessment. It went from $533,000 in 2007 to $531,000 for 2008. It seems that while the value of my Building (house) fell by $102,000 the value of my Land (less than a 1/4 acre) rose by $100,000. So I guess our worries about falling real estate values are misplaced as the value of our land will keep rising since they aren’t making any more land…

  6. edhopper commented on Feb 27

    Why did you buy a home in the midst of the largest real estate bubble in US history?

    You might want to read some blogs to get a better idea of the falling home prices. I suggest Calculated Risk and Nouriel Roubini as well as Paul Krugman have been quite good. Also Robert Shiller is the expert in this field. Oh yes, another blog, The Big Picture has warned been on top of this.

    ~~~

    BR: heh — I’ll look into those . . .

    Actually, I sold one overpriced house, and bought another. Better location — quiet, 100 yards from the LI Sound, near a park. The spread between the two was less than $100k, and the old neighborhood was becoming increasingly commercialized.

    We actually found a house we fell in love with — seriously down 30+% from its $1m+ asking price — and were set to buy that. But once we were in contract on our sell, the buy fell apart. So the lateral move was the result . . .

  7. Neal commented on Feb 27

    So how will a new ARM or conventional mortgage at the rates quoted above help those with a mortgage they can’t afford now?

    The only people who benefit from low rates now are people with good credit, cash for a downpayment and no existing house that they have to sell. Pretty small market.

  8. Dale commented on Feb 27

    ed – We bought in 94. Info. was to demonstrate how local government is still trying to hold up the assessments in spite of declining home values.

  9. Avi Belinsky commented on Feb 27

    “The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans.”

    Having just refied into a 5yr ARM I’ve been following the 5yr part of the curve for a while.

    The spread between a 5yr Mtge and the 5 yr treasury actually consists of two spreads. Treas vs AAA, and AAA vs Mtge. The later remains ~100bp, but the former has increased from 50bp to 150bp. Similarly the TED spread has widened by about 100 bp.

    From my perspective (a prime borrower) the problem is not that the banks aren’t lending, but that no one wants to lend to the banks…

  10. zero529 commented on Feb 27

    How does a lender make loans with a respectable LTV when V keeps falling? Conversely, how does a weak borrower find a high LTV lender when V keeps falling?

    We have a ways to go.

    @Dale:
    I think Edhopper was talking about Barry’s decision to buy last year.

  11. Lyon commented on Feb 27

    “How does a lender make loans with a respectable LTV when V keeps falling?”

    Lenders now have a declining market index. If your house is in it, they take 5% off the LTV they will lend.

  12. Tom Bergman commented on Feb 27

    ShadowStats.com has inflation above 8%. Just because the government is reporting inflation around 4% doesn’t mean banks are stupid enough to lend on that erroneous number

    The fed isn’t pushing on a string, its actually pulling it the wrong way.

  13. dan in michigan commented on Feb 27

    How about Hillary’s plan to freeze mortgage rates? Apparently contracts don’t mean anything anymore. I am pissed. I was going to roll to a fixed rate 15 year and that rate has gone up 62.5 bps in a month.

  14. albrt commented on Feb 27

    Umm, I’m sorry, did somebody think the Fed was talking about softening the blow for the consumer? No, there has been a misunderstanding. They softened the blow for the banks by increasing the spread they could charge. Mission accomplished.

  15. Don commented on Feb 27

    Real interest rates are negative, which is precisely what you would expect if there is more money than there is demand for it. Which explains the mortgage rates. That and the fact that dollar demand internationally has declined precipitously. Foreigners don’t want to buy any more toxic-waste from the financial alchemists of the US, thereby decreasing demand for dollar assets and prices for dollars, bringing inflation home, along w/ higher mortgage rates. It takes $1.50 to buy a Euro now.

    But back to rates–real rates were seriously negative during the dawn of disco. I expect mortgage rates for 30yr fixed to be about 8% by year’s end (will disco return also?), which will still be a negative real rate, perhaps even more negative than now.

    To make real rates turn positive again will require something at least as drastic as Volker’s medicine of the late 70’s, early 80’s, when he flushed the excess cash out of the system. John Travolta notwithstanding, Volker, with the Reagan Administration’s blessing, was the real Urban Cowboy of the day, imposing the pain necessary to set the foundation for two decades plus of more or less steady, inflation-minimized real growth. Those days are behind us.

  16. NotAPro commented on Feb 27

    Yeah this situation sucks. I’m in the RTP area in NC and we need to sell our house before we move to the DC area (new job). Thankfully we will have cash for 20%+ down, but these rising rates coupled with rising inflation are not very helpful.

  17. Shane commented on Feb 27

    The interesting thing about interest rates is that at least over the past 5-6 years they are very cyclical. They go down ~october time frame and spike up in the spring. This doesn’t mean they aren’t headed up, b/c they are but IMHO the best time to buy a house is Dec-Jan time-frame you generally get the lowest rates, and the lowest prices. The only downside is that inventory is also lower, however with the crash I would imagine that inventory will be just fine. I will be looking at really scoping out buying a house this winter.

  18. zot23 commented on Feb 27

    If I didn’t own our place outright and was moving, I’d just rent for a year or two. As they say why try to catch a falling knife? Sit on your cash or better yet buy some gold as an inflation hedge and kick back while the meltdown does the work for you.

  19. NoFate commented on Feb 27

    Here is the rub: The more the Fed lowers rates, the more the US$ drops (adding to inflation).

    Here is the irony: The Fed is obviously propping up the stock market …which reduces the flight to safety …which keeps rates higher than they would otherwise be. The best way to improve mortgage rates is to let the stock market tank!

    And a final irony: I doubt anything will really help though until housing prices bottom. If you got a mortgage on a house at 0%, but the house will drop 20% over the next 2 years, then your real rate of return is still NEGATIVE 10%! Why would anyone do this?

    The party is over and the Fed is pushing on a string.

  20. bold’un commented on Feb 27

    It seems that those lenders that agreed a LIBOR+ formula on ARMs are receiving less than they had a right to expect whereas new and freely contracted mortgages are still expensive. This is because the Term Auction Facilities are ex-post changing the terms of this lending (i.e. LIBOR used to be a MARKET rate but has now become an administered rate). It may seem pragmatic to do this to save borrowers, but the bond market has ways of getting its own backā€¦

  21. PFT commented on Feb 27

    Talk about Mr “Squeeze the inflation out of the economy” Volcker gives me palpitations. Incidentally, he has just endorsed Obama.

    Volcker was instrumental in getting us off Bretton Woods in the Nixon years and giving us a worthless currency with floating exchange rates. We could have just devalued the dollar by increasing the price of gold, which would have benefited our manufacturers at a time when they were under increasing competition from Europe and Japan.

    Inflation when Volcker took over the Fed, was due to the high oil prices at the time and lack of confidence in the dollar not backed by gold, and not an overheated economy with excess cash. Same as today.

    His interest rate increases bankrupted 3rd world nations and put us into position to control their economies. It fueled wage inflation since CPI was not a lie then and unions were still strong, and it increased the value of the dollar at a time when a devalued dollar would have been beneficial to our domestic economy (unlike today since we have too little manufacturing left to benefit much and import much mre than we used to). Combined, they destroyed the competitiveness of our manufacturing base by making our goods too expensive to compete with the Japanese and Asian Tigers.

    And who can forget the Depository Institutions Deregulation and Monetary Control Act of 1980 that was supported by Volcker. This allowed the Fed to impose reserve requirements on banks not in the Federal Reserve System including the S&L’s (can’t have competition or state regulation in the banking sector) and indirectly monetize foreign debt and corporate securities by accepting it as collateral for loans to banks (convenient for banks holding bad 3rd world loans then, as well as those holding bad sub-prime securities today). It also repealed state anti-usury laws.

    The deregulation of the S&L’s in 1982 under Reagan was supported and pushed for by Volcker, and paved the way for the S&L crisis in the late 80’s, and another bailout for the banks after Volcker bailed out, leaving Greenspan to clean up his mess (and Greenspan has done the same to Bernanke).

    So when I hear people begging for Volcker to come back and rescue us, I shudder.

  22. Grodge commented on Feb 28

    30 year mortgage?

    Really?

  23. AM commented on Feb 28

    Can you provide some insight into the affect of inflation on real estate? Some people think that rather than holding cash in money market or CDs, investing in real estate is a better way of protecting your money against inflation.

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