Thursday, April 8, 2010

The Fed's absence hasn't affected mortgage rates

The Fed stopped buying mortgage-backed securities over a week ago, but the impact so far on the housing market has been negligible, as seen in this chart. Yes, yields on Treasury bonds have ticked up, but as of today the 10-yr Treasury yield is only 4 bps higher than it was at the end of March, which marked the end of the MBS purchase program. It's still possible that mortgage rates will edge higher, but at least now we know that this event was not a ticking time bomb for the housing market.

I and others had estimated that the end of the MBS purchase program might result in a 30-50 bps rise in mortgage rates relative to Treasury yields, but so far there is no sign of this occurring. The preliminary conclusion is that markets are and were operating in an efficient and rational manner. The end of the program was foreseen, and the market built that into prices, effectively discounting the event well in advance. In fact, 30-yr fixed rate jumbo mortgage rates today are only 4 bps higher than their all-time low (5.51%), which occurred in early 2004.


Benjamin Cole said...

Okay I gotta say it: What inflationary expectations are revealed by this chart?

Scott Grannis said...

None. I have taken pains to point out repeatedly that the bond market shows very little if any concern about the risk of higher inflation. Inflation expectations embedded in the bond market are just about where the Fed wants them to be: 2-2.5% or so.

But that doesn't mean there is no inflation risk. The bond market has a very poor track record over the long haul of predicting inflation (and not coincidentally, so does the Fed). The market under-predicted inflation throughout the 1970s and over-predicted inflation throughout the 1980s and 1990s.

The bond market takes its cues from the Fed, and the Fed takes its cues from its Phillips Curve view of the world. That's the problem.

Jeff said...

What is your current opinion on the housing market. The recent week's Business Week has an ariticle by Robert Shiller. His belief is that we have a great chance of a double dip in housing pricing due to the fact the government is artificially "propping" up the market (and thus prices) and once they get out of the way we will have more correction in pricing. I just recently jumped back in as I thought housing (and thus the economy) was stabilizing and starting to grow again (something you agree with)...just curious as to your thoughts on this and whether or not you read the article.

John said...


I realize you did not address this to me but this is one of my little pet peeves.

I am sure Dr. Schiller is a very bright man. My problem with his prognostications is that he is a tenured professor at a large university who has never (to my knowledge) had any 'skin in the game'. He feels no pain if he is wrong and suffers no consequences. When he is right he takes his bows and when he is wrong he makes a new forcast. I am aware that a lot of people listen to him. I am not among them. Its just me.

Benjamin Cole said...


Of course, markets can be wrong. I think I was wrong once, back in 1975.

A thought: Commodities have become a smaller fraction of total spending. Therefore, commodities can shoot up, due to less elasticity of demand.

In other words, gasoline may go to $4 a gallon, but even so, it is a smaller fraction of your outlays than in 1960. You have far more income (so does the economy as a whole). You don't care that much.

Eventually, competitive forces push commodities back down, as they have through history.

Commodities are a false leading indicator, especially when speculative forces are brought into the mix.

Look at wages, factory utilization, house prices, office and warehouse rents etc. Not sure anymore what is a leading indicator.

Unknown said...

So far HAMP was a failure, but it looks that new proposals (26 of March) give a chance to diminish by a lot number of those who intends to walk away their homes.
It is expected to work via new rule of "earned principial forgivness".
If the engine starts that may be a swing factor for home market.

Scott Grannis said...

Benjamin: your point about how commodities are a smaller fraction of total spending, and thus have a smaller impact on the overall economy is reasonable. But that doesn't render commodities useless as a leading indicator of economic and monetary trends. Plus, I you continue to assume that the rise in commodity prices is mostly due to speculative activity, but I think that is a pretty bold assumption on your part. Wages, utilization rates, home prices are all lagging indicators. Those are huge markets with tons of inertia and so they don't react very fast. Commodities move in real-time, wages don't.

Jeff said...

There goes Meredith Whitney today stating that housing is going to fall again. Who to believe with this? I agree that the economy is getting better (very much in line with your thinking Scott), but can't get over the fact that the government has their hand so involved with real estate (both with keeping rates low, trying to prop up pricing and slowing the rate of foreclosures onto the market) that maybe it is in store for another leg down. More thoughts/comments appreciated.

John said...


I have a lot of respect for Meridith Whitney. I don't always agree with her but she is held accountable more strictly than Dr. Shiller. When she is bearish on something at least you know she has clients who are betting real money on her call even if she isn't.

I am always interested on Scott's perspective on these things. Count me in.

John said...


You say commodities are a 'false leading indicator' for inflation. Have you considered the possibility that rising commodity prices are a necessary prerequisite for rising inflation? And if not, what, in your view, would be?

Not arguing, just curious.

Scott Grannis said...

Jeff: my opinion on the housing market is based on several observations: a) several years have passed, during which the market has had ample time to adjust to new realities, b) housing construction has collapsed to levels that are far below what is needed to accommodate new family formations, thus reducing significantly the excess inventory of new homes, c) interest rates on home mortgages have fallen to very close to all-time lows, thus greatly enhancing the purchasing power of most households, d) housing prices have fallen, on average, by about one-third in real terms, which seems to me to be enough to erase whatever bubble there might have been in prices, and e) home sales in those regions of the country that have been hardest hit have increased measurably, and prices have actually risen over the past year in those markets. Finally, I would note that pessimism on the prospects for the housing market is so widespread that I can't imagine there are any rational investors left who haven't fully realized the supposed downside risks in the market. In short, I continue to believe we have seen the bottom.