Monday, December 21, 2009

Last chance for a 5% mortgage

According to BanxQuote, the nationwide average for 30-year fixed-rate conforming mortgages yesterday was 5.03%. Call it 5%. I seriously doubt whether we'll see this rate go much lower, and I think there is a very good chance it will be moving higher next year. If you're in the market for a home, this is most likely your last chance to lock in what are essentially the lowest fixed rates on mortgages in history.

The Fed has been buying hundreds of billions of mortgages since last March, and will continue to do so for the next few months. But it's not clear that this has produced a significant decline in mortgage rates (see my earlier post on this subject), and it's questionable whether the Fed can keep rates from rising going forward. As the second chart shows, the spread between wholesale mortgage rates and 10-year Treasuries is about as low as it has ever been. And as the next chart shows, 10-year Treasury yields are creeping higher. They have been unusually low this year mainly because the market has worried that the U.S. economy was very weak. With every day that passes, we see more evidence that the economy is getting stronger.

As the next chart shows, the spread between 2- and 10-year Treasury yields is now as wide as it has ever been, driven largely by rising yields on 10-year Treasury bonds. This unprecedented (to use one of Obama's favorite words) steepness of the yield curve is a powerful signal of recovery, and it also reflects rising inflation pressures. As a confirmation of that, I note that the 5-year, 5-year forward breakeven spread on TIPS reached 2.8% today, its highest level since early last year. 

The Fed has awesome power, but it can't keep bond yields from rising. The more the Fed insists on keeping short-term rates low, the more this fuels inflation concerns, and that in turn pushes long-term yields higher. The harder the Fed tries to keep rates low, the more likely it becomes that rates will move higher.

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