Since the US is heading into or already in recession, the bond market is responding accordingly with long term rates dropping and the yield curve firmly inverted.
So will cheap rates and a crashing dollar stop the housing hemorrhaging? Or will the massive job losses, foreclosures, oversupply and economic meltdown trump the cheap money?
And finally will the Fed keep cutting rates like Japan during their real estate meltdown, trying to avert deflation?
December 14, 2006
Long term rates are crashing as the market screams recession. Could cheap money slow down the housing collapse?
Subscribe to:
Post Comments (Atom)
40 comments:
Cheap money only if you qualify for it.
With narrowing yield spreads and risky collateralized mortgage obligations are banks willing to lend money with the chance of running into negative returns?
Cheap money will absolutely NOT stop the housing collapse. The reason is simple, really. The Greatest Ponzi Scheme of All Time was initially fostered by an unhealthy dose of no-standards lending, ultra-low real rates, and a derivatives/MBS system gone haywire.
But like all other manias before, this mania lived and will die on one thing: psychology. The insane belief that any price paid for a property was a good price because tomorrow the price would be even higher. Now that psychology has finally been broken and people realize that the price tomorrow may in fact be lower than the price paid today; the insanely high price of admission becomes a trap to be avoided at all costs. Spring will bring an unbelievable amount of shadow inventory online and the Fed could drop rates to 0% and it would have no effect.
Besides, long rates have hovered around historic lows for years now and housing has moved sharply up and now sharply down during this time without regard to interest rates. Yes ARM’s have gone up a lot, but fixed rates have remained so low that anybody that needed to refi to a fixed should have been able to (unless they were in a neg-am/io or something.) Also, with the dollar misbehaving recently the Fed won’t be able to monkey with short rates at all.
Not only will the crash continue - it will actually accelerate in 2007.
Mortgage rates move with Treasuries and Treasuries are UP ( in yield{interest rate}) today. The 10 year is at 4.577% today, a month ago it was at 4.568%. Sure it went down all the way to 4.4 10 days ago and also dropped sharply after the Fed meeting on Tue; but still TODAY its up.
So this rise suggests mortgage rates are on the way up again.
Nope, I have no belief in the conventional view of the long term direction of Treasuries( down down down in yield). There's Bill Gross' (Pimco) infamous "2-handle" calculation - but then he's got skin in the game and he would say that wouldn't he. On the other hand there's perhaps going to be the need to finance the debt with ever more sceptical buyers;will they also need to prevent a run on the dollar. I've seen it in so many other countries in past decades. Why should the USofA be different, this time ?
Luckily we won't have to wait around too much pontificating. This looks like its all going to pan out in the next year. Should be interesting.
-K
Houseing is dead. Raise interest rates or not, the writing is on the wall. People are simply NOT buying, and why should they ?
If the dollar keeps on plummeting, the FED may raise rates to 6-700bps. I wouldn't mind a bit.
Lending standards will tighten and mortgage rates will go up only after collateral losses increase, and trust me, they will. 2006 was only the first chime in the housing bubble death knell.
Most of the ARMs are tied to LIBOR:
Libor is short for the London InterBank Offered Rate, the interest rate offered for U.S. dollar deposits by a group of large London banks. There are actually several Libors corresponding to different deposit maturities. Rates are quoted for 1-month, 3-month, 6-month and 12-month deposits.
About libor:
http://www.fanniemae.com/tools/libor/index.jhtml
This country is an old Chevy, being sold off for parts. Next up, slave labor.
anon 1111
The payments on a 200,000 loan 6% fixed for 30 years is approx $1,193 per month. The payment at 0% interest is $555. per month. I could forsee the housing market climbing noticably if interest rates dropped to zero. Rents would carry many properties with nothing down. I,d borrow as much as I could if the income justified it.
Say hello to my little friend the Amero and the new world order.
There is no way they will allow the dollar to crash.......
I mean you would have to be stupid to allow such a powerfull tool (reserve currency) to go down the drain.
Bernanke knows what he must do, however he is just trying to do it 'slower' than most.
They will protect the USD no matter what.
Regardless of what flavor interest rates you put out there, you still have the affordability issue, because you've already ran the asset price into the ground from the point where the cheap rates of past days made it attractive...
"The payment at 0% interest is $555. per month. I could forsee the housing market climbing noticably if interest rates dropped to zero"
The Fed dropping the overnight rate to 0% doesn't mean you would pay 0% on your mortgage. It would have SOME effect on ARM's only, not fixed rates. For example, the Fed has raised short rates 17 straight times over the last couple of years and it had basically no effect on fixed mortgages at all.
And with renewed risk-premiums due to increased defaults, I doubt that it would have that much of an effect on adjustable mortgages either. Bottom line: mortgage rates are at lifetime lows right now so its hard to imagine them falling even further, especially with defaults rising.
It will keep those with adjustable rate mortgages from getting whacked as quickly or as badly.... That will help temper the crash a bit.
It will also make housing more affordable which means the baseline price can be higher than it otherwise would be which will also help a bit.
Finally, assuming the Fed does allow a bit higher inflation it means that housing can fall in REAL terms without ever falling in NOMINAL terms, saving all the poor saps from bankruptcy and foreclosure. I believe that this is actually the Fed's intention. In 10 years the nominal prices will be the same, but the real inflation adjusted value will have fallen by half or more.
Humans live in a nominal world and would welcome this outcome over the alternative
Cheap money is part of what got us into this problem@
The Bank of Japan controls our long term rates. M3 is going straight up now:
http://tinyurl.com/kh74j
No HP, just plenty of good-'ol fashioned inflation boys and girls.
anon1111
The fed raised rates 17 times over the last couple of years. Do you think that if they had not raised rates that long term rates would have remained the same? I highly doubt it. To support the dollar , shoot for a soft landing and keep a lid on inflation rates where raised over time. If they had not inflation would have taken off and the long term rates would have risen because of inflation in the future. The fed does influence long rates.
"Since the US is heading into or already in recession, the bond market is responding accordingly with long term rates dropping and the yield curve firmly inverted."
This is nonsense... the US is not in a recession and while one is possible in the future it is by no means certain. Regarding rates... the timing of this post is odd given that 10 year treasury prices FELL a full point yesterday and are down 1/2 point this morning because data reflects a strong economy.
"And finally will the Fed keep cutting rates like Japan during their real estate meltdown, trying to avert deflation?"
Keep cutting rates? Are you kidding me? The Fed has been raising rates for years to keep the economy from overheating and only paused earlier this year after 17 hikes in a row. The Fed hasn't CUT rates in years.
Good God man, get a clue...
"So will cheap rates and a crashing dollar stop the housing hemorrhaging?"
It might mask the problem but, really, it's a distraction to the more important things like improving the ability for the US to deliver healthcare, etc...
There will eventually be a hangover. In Japan, some of their elderly were forced out into the streets and live in the parks where they are beat up by the young.
If all we value is money, like Kofi Annan implied at the UN, our country's spiritual constitution is in trouble.
The Pope will claim that "going to church" will fix the problem, one of those big lies!
"If they had not inflation would have taken off and the long term rates would have risen because of inflation in the future. The fed does influence long rates."
Price inflation has taken off. Look at house prices, the DOW, food prices, medical care -- all prices have increased dramatically. The Fed is not fighting inflation, they are just talking about fighting it. The money supply is growing at over 10% and with no matching gains in productivity, that is the real "core" inflation rate.
The Bank of Japan is in charge of long term rates because every time they loosen up over there and allow the carry trade to fire up, our rates come down.
"If all we value is money, like Kofi Annan implied at the UN, our country's spiritual constitution is in trouble."
LOL! x 10!
That Kofi Annan, the man whose family benefited handsomely from $billions stolen in the "Oil for Food" program administered by the UN? Yes, he is surely one to lecture us about spituality and money grubbing. The prick belongs in a dark prison cell.
As the default rate soars, and we enter the deflationary head fake, the fed will simply create more money through default buy outs. Sure, its not leagal now, but that never stopped this admin. And of course, there will be the bail outs for freddie and fannie, lots of free money for the corporations, financed by the silent tax on the poor, as usual. Why is it so hard to get that history is just repeating itself, yet again??
Time will tell, regarding how the fed moves the interest rates. When all is said and done, it will be China that makes that call...this is being negotiated right now. If China continues to diversify out of the dollar and the US can't talk them out of it today...than maybe, just maybe interest rates will be heading up, not down....to defend the dollar. The dollar is toast in the long run, but I think their concern will be to make it happen as slowly as possible, to minimize panic and pain. My point, I think short term rates, will be going up, before they go down...or they won't move at all. It is not Bernanke's call anymore, he has to play the global game.
Confirm this: can't the feds keep the long term rates down by buying up their own US treasuries?
So perhaps we will see low long term rates, and high short term rates...to try and balance the global transition of currencies (fall of the dollar).
Even if rates lower (or stay low for years), people only make so much money and housing will drop for the next few years until the average person can afford the average house. This is simply not the case right now.
National median price going from $89,500 to $115,800 during '89-'96? Is this the kind of newspeak we're using now, where a 30% rise is refered to as a slide?
----------------------------------
----------------------------------
sixpercenter said...
Dont think so. During the '89-'96 rates fell and housing continued it's slide. Japans RE just turned positive after 14 yrs of negative yoy declines.
Thursday, December 14, 2006 2:36:07 PM
Using the DOW as an indicator of inlfation? L-O-L!!!! Do you realize how utterly ridiculous that sounds?
------------------------------------
Price inflation has taken off. Look at house prices, the DOW, food prices, medical care -- all prices have increased dramatically.
deflation is the go people. No matter what anybody tells you. Inflation has only hit items that depend on oil.
Sure the cost of transport has increased....but will it make a big difference when you go and shop for CD's, MP3 players....or even coffee ?
And being a gold bug, I will say this much. I would not be buying gold right now. Cash will be king soon enough.
The Fed will defend the dollar with all it's might. Who wouldn't ? Its Americas #1 export.
Cash up.
Anon 1111, I'd lean toward your thought process. People were posting what they pay for rent and most pay between $600-1000 for a 1 bdrm. So who wouldn't buy a 3/2 house for $200,000 with a tax deductable payment of $1200 for interest and principal which would make owning less than rent.
As long as people can pay the mortgage, even if higher than rent, most will. If you bought a house and had a payment of $1200 amonth but in reality could only afford to rent a 1 bdrm for $500, of course you are screwed same as in any other financial situaton, car payment you can't afford etc.
But most people, especially married with two incomes, can afford $1500-$1800 a month to own, especially if they are willing to forgo new cars, toys from China, recreational vehicles, boats, etc. A lot of reasons people go into foreclosure are their ancillary debts, not the mortgage.
And they will default on the boat or car loan before they default on the home loan. If anything this housing slowdown will hurt BMW Finance more than Counrywide.
-----------------------------------
-----------------------------------
foxwood said:
But most people, especially married with two incomes, can afford $1500-$1800 a month to own, especially if they are willing to forgo new cars, toys from China, recreational vehicles, boats, etc. A lot of reasons people go into foreclosure are their ancillary debts, not the mortgage.
Concerned,
That's what I thought, but it's not happening. The dollar is crashing...because Bernanke is scared frozen. Maybe they are just waiting to raise interest rates until after they lock-in all the tax profits for 2006...and then it's goodbye economy. I dunno... Bernanke is frozen up, for now.
You are wrong anon above. Bernanke can't save the dollar, noone can because the Bush crime cabal is crashing the dollar on purpose. Haven't you ever wondered why helicopter Ben has that "deer in the headlights" look about him all the time? Bush and Cheney have invested outside the U.S., the dollar is going down. Bush's final triumph over Amurka.
The fed may not change rates but they are sure printing money which has the same diluting affect on the dollar. I still suggest 15% portfilio of gold.
Yeah but:
http://today.reuters.com/news/articlenews.aspx?type=businessNews&storyID=2006-12-14T213642Z_01_N14241581_RTRUKOC_0_US-MARKETS-STOCKS.xml&src=121406_1638_TOPSTORY_dow_hits_record
So hey, what's the problem?
Come on now! Really, all you guys are just fear mongering!
Things are just hunky-dorry.
Anyone can see that.
Interesting article over at freebuck.com. Henry Paulson's visit to China, ostensibly to get China to float its yuan, is really a desperate attempt by U.S. to beg China to not diversify its trillion dollar reserves out of dollars.
Say goodbye to Taiwan. Good riddance.
http://www.freebuck.com/articles/jwillie/061213jwillie.htm
Big Ben won't do anything for awhile. Any change in the overnight rate might trigger the collapse of this house of cards called the U.S. economy and who wants to get blamed for that? As long as no one else does anything overt, Bush will get the blame for this upcoming next Greater Depression.
Inflation? Did you know that the copper and nickel in pennies and nickels is worth more than the face value of the coins now?
Oh my...
http://www.usatoday.com/money/2006-12-14-melting-ban-usat_x.htm
Why the U.S. doesn't care about its massive debt (of dollars). Maybe they are going to dump the dollar and go to the amero?
http://www.canadafreepress.com/2006/cover121406.htm
When that happens, all your dollars will be only worth what the government says they are worth in ameros.
At which point does the US government issue new currency? Maybe that law suit over the blind is a smoke screen to issue a new currency since the currency would have to look different, be different sizes etc.
In many countries with high inflation eventually they issue new currencies and just lop off a zero or two when the cost of printing worthless money exceeds the value of the currency...oh, like pennies and nickels?
But I think knocking off a zero would help Americans really see where we are economically. It would be an instant inflation adjuster. You know, the old car that use to sell for $200, then $2,000, then $20,000? Or the loaf of bread for $0.25 then $2.50 or a house that sold for $5,000, then $50,000 and then $500,000?
In those terms think of wages: an average working class guy in the 60s earned on the low end $6,000 would need today $60,000 and we know that aint so. The main reason there is such disparity between incomes and home values has more to do with the loss of wage growth than home inflation alone.
So we issue the Amero and then what, you lop off a zero on everything and the medium national price of a home drops to $22,000, a car drops to $2,000, a loaf of bread drops to $0.35, gas to $0.21, the average hourly wage to $1.61 (minimum in 1972 was $1.35) and the current minimum wage would be $0.51. Shows pretty clearly what has happened to wages.
Foxwood,
You are falling into the apples to oranges trap. What did the average earner get for his average wage in the 60s or 70s compared ot today?
The average home in the 60s was 1500 sq ft. Today it is 2300 sq ft. The average car as a POS American . Compare that to an average car today like a Camry or Accord with heated leather seats, cruise, NAV system, ABS, air bags, etc. A 1960s Chevy didn't have power windows.
How likely was the average worker in the 60s to fly somehwere for the weekend? Today people fly cross country to watch a football game.
I'm only 33 and I remember when making a long distance call was a big deal. Now I have unlinited long distance to anyhwere on the continent.
Did the average worker afford a computer in the 60s?
A could go on for page after page with examples.
Point is the standard of living for the average wage earner today is far beyond that of the average wage earner in the 60s, or 70s. You can't simply say people made more, you have to put it in context like what they were able to buy with it then vs. what they can buy with it now.
Chanucy, I agree with you. Always appreciate your imput. I did consider technology gains and realize that because of globalization many products today are less expensive than our parent's paid such as Tvs, airline flights, long distance phone calls, etc) and yes, I recognize that the homes wer smaller and cars didn't have all the bells and whistles but took that into account in averaging the costs for items. My parent's first house was 1100 sq ft, basic California ranch, stucco and chicken wire, aluminum windows, fireplace, oak floors, and they paid in todays dollars $170 a sq ft or today $187,000, which was three times their income, inflation adjusted.
Debt and gloablization is all that has kept most American's standard of living from falling (for now) and that was the point I as trying to make by dropping a zero off current prices.
Thanks.
Post a Comment