Mortgage market commentary
Thursday, December 28, 2006
By Lou Barnes
Inman News
We're a
day early because of a little local weather problem, but there's nothing in a
second 3-foot snowstorm in one week to compare with the trouble brewing in the
bond market.
The
10-year T-note blew above 4.7 percent this morning on generally healthy
economic data -- that's up from the 4.43 percent low three weeks ago, and will
shortly put mortgages at 6.25 percent and at risk for a sustained move upward.
The data
since mid-month have not been all that strong, but enough to change the
bond-market psychology from a debate about hard versus soft landing to soft
landing versus no landing at all. Even if the economy does stay a tad soft,
Gross Domestic Product growth in the 2 percent-something range, on current data
there is no reason to expect the Fed to cut its rate from 5.25 percent, and
that means that 10-year bond yields near 4.5 percent have been a tad silly.
As regular
readers know, the New Year ceremony at this rag is to recite Peter Drucker's
dictum: "Nobody can predict the future. The idea is to keep a firm grasp
of the present."
Three
items dominate the present -- housing, risk and Iraq -- and the word
"spillover" is the key to each.
Housing
has been the center of expectations for a deep economic slowdown and the
equally deep 2006 anticipatory decline in long-term rates. The financial
markets have made two large errors in these expectations: they have assumed
that housing behaves like financial markets, and that housing weakness would do
great harm to the rest of the economy.
Price
corrections in financial markets happen fast, but housing moves at the pace of
municipal snow removal. Expectations today that housing has bottomed are just
as poorly founded as the one six months ago that we would be buried in
foreclosures by now. The thing to watch for: the development of a loan-default
credit-crunch spiral -- that's the only means for housing to get ugly enough
for recession.
The second
error has been the spillover one: surely, the markets believed, the end of the
big price gains would shock homeowners out of consumption and into saving.
Surely all those ex-Realtors, ex-mortgage lenders, ex-construction workers,
ex-Home Depot employees, furniture, rug, and appliance makers ... surely those
job losses would tip over the economy. Uh-uh. Nope. Not enough people involved,
and the ones who have lost jobs have readily re-deployed.
The one
housing spillover at work: equity withdrawal is diminishing -- a certainty in a
flat-price environment -- and that will tend to dampen the economy.
Risk is an
easy thing to measure in money land: you get paid for risk by higher return.
Except ... not now. Returns for risk over time or for credit or for liquidity
are as low as they ever get, and all prior similar episodes have ended
unhappily. Although that painful back-look has 100 percent accuracy, there is
no way to know when risk premia might return to reasonable levels, or what
might trigger risk re-pricing.
Iraq's
spillover into financial markets has thus far been small. However, the cost of
the venture is going to begin to matter: in current operations, in deferred
spending on equipment and maintenance, in manpower expansion, and in the need
to cease starving other ventures (Afghanistan). Two choices: borrow, or raise
taxes.
The
feedback potential from Iraq into risk is now substantial. Never before in our
history have policy convictions been so deeply held and so scattered with
stakes so high, nor -- rather worse -- with so little probability of accurate
anticipation of future consequences of any line of action.
The riches
pouring into markets and paychecks today are the return from the millennial
expansion in global trade, and that trade depends on stability.
Lou
Barnes is a mortgage broker and nationally syndicated columnist based in
Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
***
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Copyright 2006 Lou Barnes
