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Mortgage Rates Go Parabolic
It seems it was just yesterday that the Chairman penned the following famous last words in his Washington Post Op-Ed: "The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August. This approach eased financial conditions in the past and, so far, looks
to be effective again. Stock prices rose and long-term interest rates
fell when investors began to anticipate the most recent action. Easier
financial conditions will promote economic growth. For example, lower
mortgage rates will make housing more affordable and allow more
homeowners to refinance." Um, Chairman, so what happens now, a month after your Op-Ed justifying QE2, when the prevailing mortgage rate is about 1% higher, and is resulting in about a 10% decline in home prices to maintain the same level of affordability?
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Whoops!
As if Bernanke and company really did believe they could control the world with their printing press. Sooner or later, if for no other reason than self survival, people were going to wake up to the realization that buying 10 year sub 3% government paper was insane.
The 30 year bond rally is soooo over.
The only way to effectively be rid of consumer/ housing debt is to default and negotiate a settlement. there is simply no alternative, the rest is denial.
I expect this will be what US does, eventually.
FICO scores tanking and wages not going up during the deleveraging process, along with inflation means qualified buyers are quickly becoming an endangered species.
There is simply no motivation to buy a home today. With clouds on titles on every forclosed residential real estate transaction since 2004, and the need for annual equitable appreciation in the home just to break even, housing will be dead money for a long, long time.
There is another way. Massive inflation.
But yours is the correct and shortest way to deal with the problem.
Default would need honesty and sacrifice from the government.
Massive inflation is a powerful and quick shadow tax levied on the population by governments and banks (those who should have defaulted).
I think I know what they will choose.
You are right in the sense inflation is the easiest way to get out of this mess without hurting the elite. Therein lies the problem, we are in a deflationary environment and it is going to take Helicopter Ben to print tens of trillions of Benniebucks if he is ever going to get enough inflation going to achieve the goal.
The only way out is default and debt amnesty for the masses. Default will occur, but debt amnesty probably won't.
Argentina too was in a deflationary environment, because it finally defaulted. In the end that was hyperinflation, and the fiat paper was worth nothing.
I don't think you need tens of trillions of dollars to overcome the deflation. The deflation is happening in asset prices, and notably homes, not in food or cigars. The hundreds of billions created by Bernanke don't go in their totality to asset prices. Some of them went to food and cigars. Which is sufficient to trigger the loss of confidence in paper money, and hyperinflation.
Again, I may be wrong, and I'm not a monetary specialist. I like hearing alternate forecasts. If deflation really happens, what hedge would you suggest to keep your purchasing power? The natural answer would be cash. But I really find hard to believe that fiat paper will survive trillions of defaults, including government defaults.
I keep thinking it will have to be a currency devaluation. It would be a default of sorts. I live near the US/Mexico border and have witnessed several devaluations in the Peso first hand. That is what happened in Argentina, N. Korea, Venezuela, etc. etc. Everything gets repriced and TPTB stay in power. Those little cockroaches.
So do I. If money printing doesn't do the job, artificial devaluation, by decree, will do it.
In France too, we lived this, during the 'Front Populaire' government. Instead of accepting deflation, the government made a decree devaluating the currency by 10.
That's why even in a deflation, precious metals will still be better than cash.
I personally think hyperinflation is inevitable, if only because Bernie and company are so deathly afraid of deflation, that they will very likely overshoot their goal.
It's the exact same thing that happened with Greenspan. After the dotcom bust (which really was limited in scope and not nearly as bad as everyone was fearing), Greenie kept rates far too low for too long. We all know how that played out.
Bernie will make a similar mistake. He will keep pumping past breakeven, and like stretching a rubberband as far as it'll go, the snapback will be quick and vicious. Bonds are just the start.
Only when Uncle Ben realizes that he is powerless will he then do the right thing. When he knows that his name will not go down in the economic history books as the genius that averted a record depression. Then he will do what would have been the right thing -- 3 years ago. Too little, too late. Sad.
repeated theft and dishonesty eventually backs you into a corner
As usual.
I don't think it will be a massive inflation.
A modest inflation of +500% might work to.
Totally agree with you. The only problem is that the banks are not interested in negotiating a settlement. I've been attempting a workout for 2 years both on my own and with an attorney. The government needs to do its supposed job which is protect the welfare of the people and step in with a drastic and global solution. Giving every homeowner whether distressed or not the option to a rate cut to less than 3% along with a principal reset based on local market valuations, and making the process easy, would solve the problem. It would then spike the economy freeing up money and lowering uncertainty.
Say what? If the gov't had stayed out of the housing market there wouldn't be a place for them to protect anything.
I sympathize with your plight, but depending upon (or even imagining such a concept) will get you nowhere. Play hard ball -- default.
Agreed. It's amazing that it took the market two years to catch on to this con.
Tut, tut....I'm waiting for the Fed
diktat on what the 30 year yield will
be.....4%? 3.75%? Bubbles has a
countermove for every move.
It's game over for Ben & Co. The market will set rates now.
I agree its game over, money printing has lost all effectiveness. Thats the real curve that is widened like the grand canyon, the credibility gap.
he was 100% certain....
He's STILL 100% certain. He's getting advice from Baghdad Bob.
How come Bernanke can't get any substantive kickback from the questions?
Oh, never mind. It was a dog-n-pony show anyhow. Sorry I asked.
The markets are bigger than the Fed. "Don't fight the Fed" is a sucker's trap.
From the beginning of all this I was laughing at everyone saying 'Cant fight the FED'. Go ahead and print another $10 trillion Ben, wont do a bit of good.
It's Fight Club in its most elemental way.
The scene in the office of his boss. Beating himself senseless.
No need to fight the Fed when it's whipping its own ass.
Bwahahahahaha......housing dead for
the duration.
I don't like getting excited too easily, but there is something real happening on the bond markets since yesterday. Bernanke is losing the battle. That was predictable. You cannot go against reality in both directions without a force feedback.
Perhaps for once maybe the markets are looking ahead to a necessary rate hike and that this scenario of perpetual can kicking and accommodative policy must as all things come to an end.
What good is extended benefits to those who expended the 99 weeks. They are still cashless. Down the slope we go.
What's for sure is that Bernanke has destroyed my nerves during these 2 years. I'm really tired of waiting. But it comes to an end.
Kabuki. An opportuinity for all the pundits to say "See! I told you so!" so that the Fed and the other CBs can then overwhelm the bond vigilantees yet again, and steal money from TBT buyers while they're at it.
I am not fooled.
Bingo. I think any comments to the contrary are simply the boiling over of sick desperation...
Does it mean Bill Gross has got burnt?
Bill Gross is causing this. He is dumping all the bonds in the market along with many others. As the Chancellor (the bernank) said, we may need more than $600B or QE3. This is what he meant. Investors will be dumping treasuries and to keep rate lows we'll need to buy them.
Last chance to dump dollars and buy physical assets of your preference.
Man...are the wheels coming off the cart today?...I was thinking not until March at theearliest.
The Emperor wears no clothes. By 60 Minutes says his threads are simply marvelous.
The keepers of the public myth (in this case 60 Minutes) have one job and one job only. To maintain, and reinforce, the public lies.
+ 100%
we need new descriptive terms. parabolic and asymptotic need to be reserved for true black swan type days, a 200 bps single day move or an equity market drop above 500 points, perhaps? Or percentage moves outside certain parameters.
+100. I saw the title and then looked up the charts myself. Not exactly parabolic, more like a jagged, shallow bowl. On the other hand, hyperbole is a main ingredient of the ZH stew we enjoy every day!
This is part 2 of the RE crisis. Higher rates are needed to clear the backlog/create new backlog of unsold and foreclosed homes. understand?
Right O
Only lower housing prices cures this. Significantly lower housing prices. Ben may have kept the nominal prices up on the elites as best he could but there is simply not enough peasants left with jobs, good wages, savings or credit to service the massive debt out there.
Ben is trying to fill the gap but inflation is now hitting the morts at Pathmark and the pump.
Can you say, "impacted colon"?
Capiche?
No shit!
And the mortgage refinance spigot just ran dry . . .
Buy the fucking dip
can anybody explain to me why exactly mortgage rates are going higher because of fresh money printing?
Expectations. Pension managers, possibly the dumbest critters on god's green earth, finally see the danger of serious inflation from what Traitor Ben is doing.
For example:
You loan somebody 100 dollars for 1 year.
You charge a interest of 10%, thinking you make 10 dollars profit.
and after that year your capital is worth 110$.
But when you know somebody is printing money like a madman and your 100$ will be worth a lot less in 1 year.
1. Would you still loan it to somebody or invest it in a commdity.
2. Would you still charge 10% knowing your 100$ might become worthless?
Bagholders thought they had an extended period to get out, when yields start to rise.
The Bernank just told them that "extended period" = 15 minutes.
Just in case the other responses were over your head (no offense intended), and I'm no expert in the specific sytax, but here's an attempt to answer your question:
Mortgage rates are tied to the interest rate on the 30yr note.
Interest rates on the 30yr note are dictated by supply vs. demand. Notes are supposed to be a "safe" investment, so when things got bad back in 2008 everyone wanted to buy them = high demand. Since demand was so high, the interest rate the gov't pays on the note decreases as people look for a return OF capital and not just a return on use of capital. Low 30yr notes = lower mortgage rates.
Now, here's where the money printing comes in. As Bernake continues to print money and devalue the dollar, people realize that these 30yr notes are NOT so safe after all because you may get your money back, but it is worth less (worthless in my opinion). As such, demand for them plummets and the interest the gov't has to pay to get people to buy them increases. And since mortgage rates are tied to the 30yr, they go up as a result.
There are lots of other forces at play, for instance Ben has been using his freshly printed dollars to buy the treasury notes (all of them, not just the 30yr) in order to keep the "demand" artificially high and thus the interest rates low. This was the stated goal of QE2, and the reason is if the rates the gov't has to pay increase substantially, the system crashes because the debt levels are so high that they won't be able to pay the interest, let alone pay down the principal (national debt).
This is what has been happening systematically across the pond. First it was Greece. Now it is Ireland. The interest rates their governments were having to pay to borrow money from the market were too high. So the whole country gets a "bailout" from the IMF / EU Central Bank who loan them the money at a cheaper rate than they can afford from the market.
The problems with the whole system are endless and for another thread, but if you continue to follow this site, you will gain a lot of knowledge on how things are working at the macro level in global ponzinomics from both the authors and some of the commentators. I know I have and am every day.
Hope this helped.
Excellent post, thank you.
thanks all.....
Mortgage rates tend to track the 10-year Treasury (not the 30-year). This is mainly because 30-year mortgages are seldom paid over the full term, and instead are satisfied/refinanced early (around 10 years on average).
Thank you for your input. As I noted above, if you stick around here you can learn a lot......=)
Let's say you live in a small closed community. You have $100 out of the $1000 that's spread out among the other people. You loan money to people at a set rate (say 5%). Someone prints another $1000 and spreads it out. Now there is twice the money in the system, but the same amount of goods and services. People start competing to buy the available goods cause more people now have the money to spend. The guy selling the goods takes the highest bid. Everything begins go cost more because there is twice the money chasing the same goods. Your $100 is not worth as much, so to stay even with inflation (price rise) you need to charge more interest on the money you loan out. Rates go up.
Once again, like in the past....a LOW MORTGAGE RATE DOES NOT MAKE A MC MANSION AFFORDABLE!!!
You have to be able to handle a 30 year mortgage that Tyler gives you for free first and foremost. If Tyler is generous enough to give you a free loan, cut that $1,000,000 price tag into 360 equal payments WITHOUT INTEREST. Wait....your mortgage broker says you can afford it with a 3% loan? On 2k/mo income....sure.
I cant stand it when this shit hits the media...where you can afford that 750k house on 2k/mo income BECAUSE INTEREST RATES ARE SO LOW!!
"ACT NOW SUPPLIES ARE RUNNING OUT!"
But supersizing it is always cheaper!
at least that's what the waitor at Mcdonalds told me....
What swank town do you live in where the McDonald's has waiters?
I have no idea what swank means but here in Belgium you give your order and they bring it to your table.
I must admit it's been a few years since I actually ate junk food. :)
Higher mortgage rates means pressure on housing prices downward. Just what we need. Welcome to the recovery.
Be careful of the bait-and-switch methods. How many times have we heard, "Now it will finally fall apart!"?
Yup...watch Ben announce he will
buy all the 30 year above say, 3.75%
yield.
That could work out as well as QEII.. In other words, it could backfire..
I don't buy the '$ stronger on rising rates' argument at all. Yields backing up merely says that the insane amount of outstanding US debt is worth less and less on an ongoing basis. If you're a foreign holder of US debt you still want to get out of it, just even faster. This is hardly $ supportive, but rather PM supportive. Keep the faith.
What I can see though is an institutional switch into equities (and hopefully PMs) from bonds, given their relative valuation on a longer term basis. Sure, J6P will take a while to come back into equities since he's only just finished getting long Treasuries, but J6P does not drive the market anyway.
Bingo.
This just published as part of the bizzaro narrative at WSJ (http://online.wsj.com/article/BT-CO-20101208-706881.html)
"The dollar marched broadly higher Wednesday, gaining over the psychologically key Y84 mark, as investors looked to the short-term kick the U.S. economy could get from an extension of the Bush-era tax cuts. "
WTF?
Only in the mainstream media would a continuance of existing policy (i.e., completely unchanged tax rates) somehow lead to a short-term economic kick. I guess the media thinks Joe Blow is saying:
"Wow, I am so lucky that tax rates are remaining unchanged! The alternative would've been terrible. To celebrate I'm going out to Walmart right now to buy me some steaks and wine, then I'm heading over to Best Buy for a new 60in 3D TV."
This will drive people into ARMs at the margin. Of course, when they finally lose control of short-term rates, it will ignite a massive conflagration.
Who says anyone is being driven into real estate at any type of mortgage? With 25% value still to be shaved off real estate as any fool can see, I dont think anyones busting down the door for any type of mortgage.
What to do if you're a potential home buyer today?
Rates up = :(
Price down = :)
What's the decision algorithm here for a potential home buyer like me?
Rent. A house is a place to live, shelter, roof-over-head, and all that.
Don't get caught up in "The American Dream" of maintenance, taxes, insurance, and all that crap. Live as cheaply as possible, starting with the basic shelter concept.
TD...this might have an updated note next to it all day...
One thing to keep in mind as 10 year treasury yields rise: this will decrease the monthly prepayments the Fed was counting on to boost the monthly POMO $ from $75B to $100B. In a perverse way, as 10 year yields rise, mortgage originators have to sell more of them in order to hedge your duration exposure
+1000
"Convexity Problem" will be on everyone's lips by New Year's.
Thanks Aunty.
One thing to keep in mind as 10 year treasury yields rise: this will decrease the monthly prepayments the Fed was counting on to boost the monthly POMO $ from $75B to $100B. In a perverse way, as 10 year yields rise, mortgage originators have to sell more of them in order to hedge your duration exposure
No problem...CNBS reporting skying mortgage rates as 'GOOD NEWS'!!
That Taleb treasury short is starting to look REALLY good right about now...
Well fuck...so much for my refi...guess I will just have to wait until my house goes upside down, quit paying my mortgage and then try to renegotiate my principle....and then I woke up.
10 yr Jumbo ARM expires April 2014 so the end of the world 2012 shit will probably take care of this for me anyway.
Armeggeden Bitches
Put on your seatbelts, this is going to be a wild day. I thought they could run the SPY's to 126-127. Yesterday showed the opposite and today will be a continuation likely to 120.
can't see anyway this all ends peacefully.
The Bernank, Master of the Universe, has chosen to enrich his masters and sell us out. Sharpening the guillotine.
Had to happen sooner or later.
are we going to see PMs fall again today?
like a rock.....started at 9:45
where are the buyers
Right here! I'm bidding on some Silver Eagle rolls on eBay!
Hi Rocky... how's swinetown? Brush shoulders with any "pinkos" ;)
I understand the anger at Ben, me thinks he has no options but to kick the can down the road.
From now on, when your wife drags you to a baby-shower. You can say to that little baby:
YOU OW US YOU LITTLE BASTARD!! WHERE'S OUR MONEY!!!
My son's first words were "Show" "me" "the" "money" (in that order)
Indeed. Consider these two options: (1) kicking the can down the road and blowing more bubbles, versus (2) improving the real economy so that more people have decent wages, and therefore are able to afford home ownership. As between those two options, we know which option Ben has consistently chosen.
Only a fool would think Ben did this to benefit lower rates and homeownership. Its all about the banks stupid!
insane.. luckily i finished my refi at 4.25% a month or so ago cuz now the home prices are finally falling in my area.. and pretty fast.. estimates are all down close to 10% already
that's a nosedive and that's just estimates.. real money says lower in this climate, of course
Last chance to dump dollars and buy physical assets of your preference.
It's all contained.
For the sake of argument, let's say you were in the market to buy a McMansion. You're also sitting on a lot of cash. Higher mortgage rates are a housing negative, all things equal. But then you stop to think about why mortgage rates are rising... loss of faith in the Fed/dollar/etc., and about what the Fed/Treasury will have to do in response to prolong things. That's dollar negative in a big way, despite the higher rates. So, would you rather sit on a nice house, or on a pile of cash?
See my timing question above. I see two opposing forces as a buyer (rates up = bad, but that brings prices down = good).
To answer your question, I would rather have a house than cash. I hear that historically housing is a decent inflation hedge relative to paper.
Why would any sane person be in the market for a McMansion, even at a discounted price? The property taxes would still be a huge imposition, as would the upkeep, heating, and other utility costs. No thanks.
For the same reason I drive a Mercedes. The question was about home values going forward, in light of uncertainty. I see the possibility for things to either implode or explode, meaning either sitting on cash is a great idea or a terrible one. Ditto for housing. If the dollar crashes, why not be left holding a nice estate versus a shitty condo?
Real estate does tend to be a good inflation hedge, assuming prices are sound.
Personally I'm sitting on a nice pile of cash (from selling my home for a profit) and am actually looking to reenter the market soon. No, I don't think we're AT the bottom, but calling a bottom in RE is like calling a bottom in stocks. We're closer (depending on your area). And houses/sellers are such a one-off you could get a discount or pay a premium in any market.
The thing that gives me pause is food and gas prices. But the signals are mixed. If those stay stable, I think RE as a hedge is a good call. If they start increasing significantly, it will squeeze the monthly budget for would-be buyers. I don't think rates matter until they break 6% or so
I'm just glad that I refinanced at 4.25% a few months ago...rates have no-where to go but up and housing is starting the 2nd leg down...phuck the Fed.
be careful, if the mortgage finance market ever behaves the way the law is written, those rates will be renegotiated. As flexible as rates were while they were dropping, for you the consumer, they will be that flexible for the banks on the way back up. That is they will refinance you at more normal rates. Typically that happens when the bank sells the note to another bank, the new bank can call the note, or make the borrower accept new terms. It was only the invisible hand of government which prevented that for the last few years. I forsee the time when people lose their homes, who never had a mortgage, but took out a line of credit on their equity, are now forced to pay it off, or make a higher monthly payment, and who cannot come up with the money. As you go out in the market you find terms to ridiculously tight, as noted above, that maybe 5% qualify. This is how the mortgage market is supposed to react to distortions in the economy. Be careful.
that would be the last move to make before the monopoly board is thrown off the table - unless its all planned to let china move in enmass
anyway - who are these bond vigilantes ?? sound like terrorists!! need a war on these bogeymen bond vigilantes NOW!! :)
Where on earth are you getting this information? If a bank extends a fixed 30yr mortgage/note, how is it that selling the note (which carries the terms that were agreed to) allows the buyer of the note to change the terms at a whim?
Perhaps you mean that if you buy a property subject to a loan (that was in the seller's name, let's say), the bank has the right to call that loan.
the right of the new holder of the paper is to call or renegotiate. the flexiblity in the systme which worked in the consumers behalf, implies the same rules should apply on the lenders behalf. legally they do when the paper changes hands, and if you have a refi with a second or third level lender, you might want to consider moving to more secure bank even if you have pay another half a percent.
two houses, built the same time, one has no mortgage, the other has paper which was sliced and diced. which property is worth more? right now there are people who aren't sure who they should be paying their mortgage to.
in the end rates go up, and if you super shopped your rates with a shaky lender, don't be surprised if you have to go back and take a higher rate. worst case, you can't find anyone who will lend to you under any circumstances.
Sorry, but this is horse crap. Once your mortgage contract is signed, the bank and/or servicer does not have the authority to arbitrarily call you up and change your rate on a fixed-rate product. I'm not sure where you're getting your information, but it's wrong.
I believe that to be factually incorrect. The buyer of a note is entitled to payment under the terms of that note. Otherwise, where interest rates rise, a bank would set up a related entity and sell the paper to it, where the new entity would unilaterally change the terms. That violates every premise of contract law I can think of.
Please support your position with references.
Coming soon (thanks to the greatest 'mis-pricer' the world has ever known, also known as Ben 'I have never met a price I could not butcher & I don't believe in supply/demand equilibrium or market price discovery' Bernanke): The former $2,800,000 McMansion for the insane price of $89,999.99, and at an equally insane 17% mortgage rate, and with a mere 30% down and 720+ credit score (all factors together eliminate about 95% of potential buyers), but ya' gotta act fast.
But...but...but..my county tax assessor says my house is worth 15% more than last year!!?
YEA exactly, the county assessor is telling everyone here their property went up and more taxes are owed...along with the federal gooberment saying due to no inflation at all, there will be no COLA increase! Nevermind at least 10% rise in prices of food and fuel.
Don't overlook how those assholes manipulate gasoline prices so they can collect more tax, too.
Many States/Counties run a year or two lag in assessments. My County runs two years back. The current assessment on my house is based on its "value" 2 years ago. We are gonna have a real problem in real estate tax collections when those assessments come to the current year! Receipts will go straight into the shitter. Then some State/County workers will be looking at some benefit adjustments....
you should be able to challenge the assessment. Not sure what your circumstances are, perhaps your house was under valued for a long time, and they are just catching up. In SoCa the market is not DOA but close to it. The assessor can look at recent sales, but those are often distorted because the sample is small, but you can fight them on this. Also we Prop 13, which caps the amount they can raise taxes to 2% a year.
Can´t see how long rates can go anywhere but up. Fear of inflation or from default. Pick one. There is no way out of it than through some new system where the major nations cooperate to take the power back from the market.
Just on time for the ALT-A peak mid year 2011.
Bye bye QE Lite
Ben is an ass, but he is not stupid. He knew what would happen. It is all part of his plan to bankrupt the middle class. WE WILL BE FORCED to pay for the SINS of the bankers.
No, I think Ben really is that stupid. Just like Greenspan. Both believe their theoretical economic textbooks, even in the face of direct real-world experience. "Never attribute to malice that which is adequately explained by stupidity."