Thursday, July 1, 2010

Economic gloom and doom is good for homebuyers

30-yr fixed rate mortgages—whether for conforming loans or jumbos—have now fallen to their lowest levels ever. One of the main drivers of lower mortgage rates is the flattening of the yield curve (the 2-10 spread is down to 230 bps from a recent high of 290), that in turn is being driven mostly by declining bond yields. Lower bond yields are apparently the result of the market's recent conviction that a weakening economy will keep the Fed on hold for a very long time; the prospect of an extended period of very low short-term interest rates creates a very painful situation for anyone who has been betting on higher bond yields and a steeper yield curve because that trade has a significant cost of carry (i.e., the difference between short and long rates). So we have the perception of a weak economy to thank for giving us lower bond yields.

This presents a real opportunity for millions of homeowners to lock in some very attractive long-term financing. Not surprisingly, record-low mortgage rates have caused refinancing activity to surge, and refis are likely to be quite strong in coming weeks. (Even I am looking to refinance.) Locking in historically low rates of interest is surely a good thing, but it is also important to see that homeowners continue to respond to the incentive of price signals. Cheap mortgages coupled with the one-third drop in inflation-adjusted housing prices over the past several years (according to the Case-Shiller data) have made the average house a lot more affordable than it has been in decades. This is a powerful incentive for new buyers to bid for all of the foreclosed houses that are supposedly going to be dumped on the market over the course of the next year. I think it's premature to expect that there will be another big drop in prices, as so many seem to be predicting.


thomasadair said...
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Benjamin Cole said...

"Lower bond yields are apparently the result of the market's recent conviction that a weakening economy will keep the Fed on hold for a very long time."

Or, the market could be figuring out inflation is dead, ergo interest rates are in the toilet for several more years and maybe even longer. I suspect we will see negative real interest prevail for along, long time. We have global capital gluts.

BTW, back in the early 1960s, my father was offered a home re-fi loan at 3 and change for his Pasadena Ca home.

So, mortgage rates have been lower than now--and I suspect we will see 3 and change again on mortgages.

Why? People forget, there have been long, long period of price stability too in American history.
Of course, it helped that we had serious stewardship in DC in those days, and we were paying down public debt as a fraction of GDP, instead of "deficits don't matter."

We are debt-pigs now, but now we have global capital markets, and global trade. Who has price leverage anymore? And unions, as a fraction of the private labor force, at shriveling up.

Get ready for a new era: Low inflation and interest rates, for maybe a generation. My crystal ball only goes out 20 years, so you are on your own after that.

Public Library said...
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Public Library said...

Mortgage rates at these levels and in this environment are a symptom of a disease...

Benjamin Cole said...

BTW, for those of you interested in the commercial mortgage backed security default rate, a service named Trepp tracks that. The news is bad, but not getting worse, at this point. An inflection point, we can hope.

From Trepp:

Commentary: The delinquency rate for commercial real estate loans in CMBS showed
signs of moderating in June. While the rate was up 17 basis points, that was the best
reading )smallest increase) since July 2009.
For the nine months prior to June, the rate of increase in delinquencies averaged 39 basis
points per month (after backing out the Stuyvesant Town impact in March). The lowest
increase prior to June was February's 23 basis point jump.

Overall in June, the percentage of loans 30 or more days delinquent, in foreclosure or REO--

% 30+ Days past due or worse
Jun-10 8.59
May-10 8.42
Apr-10 8.02
Mar-10 7.61
Dec-09 6.07
Jun-09 4.07

The report notes if you add in defeased loans, you get over 9 percent sour loans--one in 11 commercial mortgages in the USA is not performing, as we speak.

This is stunning, all the more so as usually commercial loans are larger, and underwritten (we hope) with some seriousness.

Yet this market collapsed just as the government-riddled home mortgage market did.

You never hear "conservative" commentators talking about the commercial mortgage picture-doesn't fit into their preconceived ideas of what is going on.

I still we think need to phase out Fannie and Freddie, and the home mortgage interest tax deduction (probably the biggest evil, and yes, I benefit from it).

Still, global real estate markets failed--this fits more in with the idea that we have global capital gluts leading to excessive eager lending rather than some analysis that finds domestic and special institutional ills led t the real estate dump.

The Trepp release:

Paul said...

"My crystal ball only goes out 20 years, so you are on your own after that."

Ahahahaha, your crystal ball told you to vote for Obama. I'd be wiser to get my advice off a men's room wall at a truck stop.

Scott Grannis said...

Benjamin: I doubt very much that your father got a 3% mortgage in the 1960s, and whatever mortgage he did get was unlikely of the 30-yr fixed variety. 30-yr Treasury bonds did not exist until the late 1970s, and 10-yr Treasuries traded between 3.7% and 6% in the 1960s. No one would have lent long-term money to an individual back then for 3% when they could get a lot more by lending to the Treasury.

The early 1960s were indeed a period of very low and stable inflation and low interest rates, but today's 10-yr T-bond yields are much lower than they were then while inflation has been quite volatile in recent years and the Fed is embarked on a massive quantitative easing program without precedent. This may turn out fine, but the potential for huge mistakes is not insignificant. I think it takes heroic assumptions to justify buying a 10-yr T-bond today for a 2.9% yield. Those were the types of yields we last saw during the 1930s.

Benjamin Cole said...

Well, perhaps memory has played a trick.