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RIP Housing? The Trade Off To Rising Rates
It is no surprise, given the baying for blood from bond bears, that mortgage rates will come under close scrutiny - especially given the supposed reasoning for much of the various LSAPs has been to keep rates low to 'aid' homeowners (as opposed to flush nominal prices to the moon in every risk asset based on the risk premia-reducing duration-crushing portfolio-rebalancing effect). The effects on various asset classes from the announcement and inception of Operation Twist have been varied with Equities (and until the last month high-yield credit) benefiting the most (nominally). What few have noticed was that mortgage spreads actually raced to record tights and were outperforming (on a beta-adjusted basis) stocks and bonds into the end of January. Since then, Treasury yields have crept higher and mortgage spreads have leaked wider. The last week or so of dramatic decompression in Treasury yields has seen only a small compression in mortgage spreads leading the all-important (apparently) mortgage rates to rise significantly (now at almost 5-month highs). While the relationship between mortgage applications and rates has become tenuous at best, we suspect the velocity of the rise in the mortgage rate will conversely see a rise in applications in the short-term but obviously over time will only prove to stunt any nascent recovery that the NAHB/NAR believes is in place (and perhaps the weaker than expected Fed data is already showing that). For now, it seems evident that mortgage spreads remain a major outperformer - still relatively narrow on expectations of future QE and being short mortgage rates and long Treasuries (generically) seems as low cost a way to play disappointment for QE3 as any here.
Cross-Asset Class moves post Operation Twist Announcement...
The 30Y current coupon mortgage rate (blue line) is rising dramatically but mortgage spreads (pink line) are still relatively tight - remaining second only in future expectations (given their performance) to nominal equity prices. The Treasury curve has steepened, humped, and risen in yield in the last week or so back up to unchanged from the action dates of Operation Twist and significantly higher in yield from the announcement date (far left of the screen).
Of course the various pre-payment interactions as rates rise will have an impact but it seems to us that mortgage spreads remain significantly full of hope for more LSAPs than the rest of the bond market does.
Chart: Bloomberg
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Last few trading days...dollar way down, treasuries way up, SP500 basically flat. Where is money going?
From your back pocket to Bens front one....he told me so.
Your welcome.
Close to his freedom bell
Last few days viewership and comments volume on ZH way down.
Where have the people gone?
C'mon guys this is NOT the time to stick the head in the sand and declare the battle lost!
Do not let the establishment get away with their scams and theft! We are still oppressed by a fiat banking cabal who owns all government and media interests in this country. Therefore if we slow down or become complacent, they will crank it up a notch. Their ducks are all in a row and lining up to suck us dry.
You ever wonder how stupid people must have been in the last centuries to put up with the oppression, corruption and exploitation by the elites then? It took very long before the boat got rocked and change happened and heads were literally rolling.
This time is NO different! We are their peons and THEY are our kings and queens. THEY control currency, money supply and how much wealth they want to hold. THAT HAS TO CHANGE.
It was the weekend....It is that simple...
battle axe
And warm weather. No need for their pasty asses to be inside beating off to free porn. Now they can walk the streets and toss bread crumbs to the OWS crowd still left.
They won't find the OWS crowd unless they happen by an Apple Store.
Zero down + $50k poker dealer job + $1.5mm home = Are you fuckin' kidding me?
It was a St Patricks weekend. People had things to do.
Si if Bill Gross borrowed like 80 billion or something to purchase MBB how does this work out for him? He was frontrunning QE right?
Higher natural mortgage rates demand and MBS QE. (Sterilized, of course) All part of the plan, fonz. They MUST do QE to keep mortgage rates down and in order to sustain the affordability of housing. What will be interesting is when the curve bubbles in the center. artificially low short and long, but how will they control the center? I guess the market will take care of that (push down the center) until we have a virtual flat line across maturities....
a flat-lining economy can't be good, though....
The housing "recovery" that never seems to happen is at least a 2 decade problem. Not only will the python take that long to digest the subprime and shadow inventory elephant, but the banks will have to resist true price discovery in order to survive. That is, of course, until justice is served in some fashion.
What's 'justice'?
bingo. +100
Justice is nooses, guillotines, or the mafia way: cut balls off, shove in mouth.
Oh do tell, precisely how does one serve justice when there is no rule of law? Show me the fucking note, paging Mr. Corzine and all the TBTF...
Wait, what is this? People are paying their mortgages? I'm confused.
The new Ipad just doesn't do it for them anymore....
Benny is going to have to write a larger interest check. He is going to need a bigger bank.
When mortgage rates return to their norm (7.5%) and houses drop another 40%, I'll consider telling my son to buy one.
Until then he is happily renting and can move anywhere in the world for a job on a moments notice without having a house to sell (at a loss).
Make sure he has a permanent job before buying it, in the same neighborhood, with public transportation. Just in case. Don't forget to demand the seller provide quiet title by court order so you don't have to give it back right away after your money disappears.
"permanent job"
haha that's a good one
With good benefits and a nice reliable pension plan
John, exactly, my daughter has a decent job at AAPL but I keep advising her to rent. Young people need flexibility and cash when possible. Plenty of time to buy a house when the average American can afford one by putting 20% down and have the mortgage payment no higher than 28% of net income. Like, back in the day.
You are nuts!
Back in the day when oil was $10 a barrel?
The Dollar is done. At 28% of net income (depending on level of income of course!) your son, daugher can't afford to buy the drywall inside their house!
Depends on where you live. I just bought a 2500 sq ft house built in June of last year in Western New York - even after figuring in outrageous real estate taxes up here, the mortgage is about 20% of our (wife and I) net income.
We're not super high earners either - we're both corporate wage slave cubicle dwellers.
Point is, there are still pockets around the country where the cost of living is low and quality of life high.
It costs anywhere from $85 to $125 per sq foot to build a house including finished walls, floors, appliances etc. Lot values vary of course depending on community. Sure, you could afford to buy that house. Are you able to afford the repairs or replacements when they come due?
Eventually there is a bottom to the housing market. The Fed is boxed into a corner from which it cannot move as it has been in previous cycles. If they raise rates, they have to print more. If they print more, the cost of all building materials goes up.
I've done a few reno jobs in my life with help from friends and family. You save the cost of labor, that's it. You need labor for bigger jobs or you're friends and family will stop returning your phone calls.
If you are going to build a house that lasts, figure 185-200/sf. At least in my experience. I can't build a barn/garage/shop for what you are quoting. And if it is a quote, can you come build for me in SW Mass?
The Fed will have to do MBS QE for the reasons you espouse. Let the inflation commence! (or continue) This is what they want. Obummer at the SOTU speech said we would "double our exports"... how else but through 1/2 the value of the dollar?
wow, that's rich! no wonder the banks are holding all that shadow inventory. let't not give them any ideas or else they start marking the assets to inflated value and their balance sheets would look stronger than ever! doesn't matter that nobody can afford to buy the properties. what's good for China can be good for the US?
It depends on your skill level and the type of construction you use.
My husband and I have built two timber frame homes using local green timbers, the last one was a 4000 sq ft house with all the bells and whistles (including extensive stain glass, carved front doors etc) for about $290,000 in 1996. Of course it took us two years to build, we did most of the work ourselves except the concrete and we hired two talented finished carpenters that worked by the hour to help us. I also hired a few teenagers to come in and help with the sanding and varnishing.
Sweat Equity Captain......
I was looking into building another home up in Ontario, I just finished pricing out a yurt about 2800 sq ft (main room plus three connecting bedroom yurts) see Colorado Yurt Co. came in around $95,000 all in (foundation, "platform, yurts, septic well, electrical entrance, flooring, bathroom, kitchen) and built for the north country, snow , wind loads and insulation. I am getting a little to old to be moving large green timbers around to work on......(think 27'long, by 8"x12" "stick" of green/wet cypress in the case of the last home we built).
If you want more info on timber frame construction see the Timber Framers Guild http://www.tfguild.org/
I keep telling my wife that. She works in real estate and keeps waiting for the market to come back. I tell her over and over it won't until it's allowed to clear and hit's a level where new young buyers can afford to buy. She doesn't want to hear that though. Every time I mention that house prices have a long way to fall I get the look.
its prob better if you just reinforce her (mistaken) belief that now is the best time to buy so she gets amped up about selling houses. the more optimistic she is, the more deals she will close.
Problem is lying,especially to her ,runs against my nature. I'd rather prepare her for reality than have her close a few more deals.
Good luck. You're fighting a tidal wave of PR and "education" of agents from the NAR plus entrenched group-think that pervades virtually every real estate office. "It just has to get better." When people need something, they focus so much on it that they can't imagine alternatives.
Gotta go, the deck chairs on the Titanic need rearranging. That sure is a pretty song the band is playing.
"Problem is lying,especially to her ,runs against my nature. I'd rather prepare her for reality than have her close a few more deals."
How is lying in 2012 about home prices any different than lying in 2005 about home prices? If both are done out of ignorance, is it a moral question or more of an industry standards issue? I ask this because I have realtor friends in the San Diego area who are pretty good people, but they spend their 40+ hours a week convincing others that "real estate is a great deal" and it "has hit bottom" and "affordability is at record levels"......they actually believe this stuff, and their industry continues to shove supporting statistics down their throats. I don't question their morals, just intellectual curiosity and ability to think for themselves.
They are all like that. My wife wouldn't lie to save her life. But she actually believes that there are some great deals out there right now.
Understood, Doc. Didn't mean any disrespect. And there are some great deals out there, you just need to have capital to take advantage of them, and a great deal means someone else is losing their shirt because they made a bad deal. What sucks is that if a bank made the bad deal, they get tax breaks and other considerations to make them whole.
It still comes down to location and circumstance.
If the beachfront condo I rent were to drop by 20% in asking price, some would say I should buy it as a great deal. I laugh, because, by renting it, I now save $3k a month compared to what the mortgage would cost. I'm ok with hypothetical savings of $2400 a month (and that includes tax considerations). It makes ZERO sense to buy where I live, and won't for a long long time. So I'll continue to pay $3k/month to live on the ocean for a bit longer......
San Diego is a great place to live, not to buy.
When that happens, and your son has the cash to do so he may want to buy a fortified castle instead.
This time IS different. The US cannot service debt at higher levels without asking for massive haircuts first, ie Greece. Sure, the Fed could print and all pretend the "funny money" is actually worth something .. but how much longer?
Their exessive spending and printing will bring back regional or local currencies that actually reflect some form of value. Seriously, if the Fed had to monetize debt in order to pay 7% on 17 trillion (and counting), the gig would be up. Only war can change that. But against whom and how do they rebuild leverage to that degree? Europe's destruction during WW2 was a one-off credit event and subsequent opportunity to reset.
It's all faltering around us. Rome has been discovered to engage in the dilution of their currency. Think about it. We're not able to conquer anywhere else and plunder. Mars has no life.
"The US cannot service debt at higher levels without asking for massive haircuts first, ie Greece."
Agreed. The question is, what can anyone do about it if the US decides to haircut debt by 50%? Serious question?
(The answer is nothing, because the Bernanke is doing exactly that through inflation and nobody is doing a damn thing, besides maybe buying less of our paper, because they can't).
Greece was the precedent imo. Haircuts would only be negotiated with real measures of austerity and reducing government spending drastically.
You're probably thinking that the US is still in the driver's seat. She is not. The US no longer has the ability to force her currency and her paper onto everyone else.
Walk,
I think the US is in an even better position right now to force their currencry and paper than it ever has been. Every major player counts on the US to come through on our obligations. China can't walk away. Euro can't walk away. Russia might be able to, but nobody will ever trust them. And Nobody can force the US to pay a dime.
They all need our consumers to fuel their economies, and when we buy their #$%^ with dollars, what are they going to do with those dollars? They have to convert them to something at some time. Since Nixon, those US$ only can only be converted into one or two things.
US will always be in the drivers seat as long as the US military remains too strong to be tested openly.
I'm not saying I like it, but this site has about 10,000 references to the fact that my guns are better than your gold.
"Sure, the Fed could print and all pretend the "funny money" is actually worth something .. but how much longer?"
They can print as long as people keep accepting dollars in exchange for usable goods. Competitive devaluation has significantly extended that timeline. It is finite, just not sure where that finite point is on the timeline.
IF the Fed comes out later this Spring and offers to monetize $3.6 trillion of US debt, the show will go from bizarre to crazy. It's an admission of complete defeat.
Competitive devaluation has significantly extended that timeline. It is finite, just not sure where that finite point is on the timeline.
**************
You're right and it can go until one of the major bond market pukes and then there will be a rush into gold by central bankers-but like you say-when currencies are being devalued in sync-it can go for a long time before it happens-provided something else doesn't come out of left field-
Have your son save his money in gold, while waiting to buy a house. At some point the lines will cross and houses will become a better investment and then he can trade.
Bill Gross is pounding the Mylanta...
Maybe, but his funds are all up over 15% so far this year. I wouldn't worry about guys like Gross.
Are you smoking crack?!? Debt is getting crucified by equity returns this year... Total Return is up 2.28% YTD as of Friday.
Sorry that should have been YoY. I bought in last may, just took some profits. Now, he may be backed into a corner, but I am sure he lives better than you or I.
How he lives isn't even a question... with over half of the total portfolio in mortgages you can bet he's sweating. He can't afford a second year in a row of poor performance.
Gross is saying today that Portugal will follow in Greece's footsteps by end of 2012.
He is not saying (yet) when Spain, Italy, France and subsequently the rest of Europe (and the world) will go broke.
At what point becomes the balance sheet shuffle so obvious even to the last person and all will realize that it's all a house of cards?
I would say most already know it's a house of cards... folks are trying to game what happens to asset prices in a world where fundamentals no longer exist and computer programs walk the PRICE of assets higher and higher based on irrelevant data (Social media buzzwords) versus REAL data such as cash flows, liabilities and liquidation valuations.
Items manipulated by Fed direct action; Stocks, check. Bonds, check. MBS securities, check. Housing prices? We're working on that. If you think about it, the interest on home loans is all they have left. The loans are pledged to numerous investment pools, Fat Freddie and Fat Fannie put themselves in the borrower's place years ago when the loans were first paid off. They just neglected to send back the voided promissory note to the homeowner.
It really is that simple. the existing 4 to 15% coming in for home loans is most of what passes for GDP. Too bad it was already "priced in" long ago. Housing Hypothecation Tour 2012. It's what the attorney generals are having for breakfast.
I would guess The Squid has completed all its sales by now. Great company.
Raise rates predictably over the next 10 years (telegraph them) and people will buy houses because it will 'never be cheaper to borrow the money than today". 10 years from now housing can stabilize (in terms of prices).
IF you raise taxes (lower them first) over a telegraphed 10 year period that could spur economic activity since it will "never"be cheaper to earn income than today".
People will deploy capital to earn as much income today with the backstop of higher rates (savings) tomorrow. We could actually spur economic growth (contrarian to todays economists) with higher rates and higher taxes as people will feel the urge to "DO IT NOW". IT might also bring a sense of normalcy back to an economic backdrop that today quite frankly is a freakish distortion of loose, knee jerk monetary suicide.
The key would be to stick to the plan and it has to be a long term one not some that changes every 4 years or every 2.
It's the banks vs. the rest of us.
http://www.youtube.com/watch?v=NivKNVphSj4
What we have seen over the past 15 years is a 30 year rise in house values. We have a long way to go before house values go up again.
the mortgage data will turn bad very soon.
http://www.cnhedge.com/
http://www.jinrongbaike.com/