Reuters is running a funny headline: U.S. mortgage rate rise threatens housing recovery. What housing recovery? Blogger Calculated Risk points to the ratio of existing home sales to new home sales as a measure of the distress in the housing market. The ratio is still more than double its historical trend. Also, David Sokol, an executive at Berkshire Hathaway, sees no sign of "green shoots" in the housing market. He sees the same phenomenon as I've recently posted: the supply of unsold housing being held by banks is much larger than it looks.
However, there's a real important story behind this mortgage rate rise headline. 30 year mortgage rates in the US went from 4.875% last week to as high as 5.5% this week. That's certainly going to cut demand for housing. Plus, still rising unemployment is causing rising defaults on even higher rated mortgages.
The Federal Reserve might increase buying of US Treasury bonds in order to lower interest rates on longer term securities. But obviously the market thinks long term interest rates should be higher due to the threat of future inflation. Treasury interest rates have gone up substantially this year.
The 10-year Treasury note started this year yielding 2.2 percent, a rate that reflected an economy flat on its back. Today, investors who buy 10-year Treasuries can get 3.6 percent. In just the last two weeks, rates on those notes climbed by one-half of a percentage point.
Now look at the Treasury's 30-year bond, which offered 2.7 percent to investors at the beginning of the year. Interest rates on those bonds have climbed to nearly 4.5 percent, a very big move.
How many hundreds of billions of dollars will the Fed be willing to spend buying Treasuries in order to knock long term rates back down again? Will the spike in mortgage rates last long enough to speed the decline in housing prices? There's a big war going on out there in the debt markets. How's it going to turn out?
The difference in yields between 10 and 2 year Treasuries is the biggest on record. The Fed can hold down short term rates. But the market is putting up a big fight at longer maturity dates. I think the size of long term bond market is far too large for the Fed to lower rates in it. Longer term rates will only come down if the economy worsens.
|Share |||By Randall Parker at 2009 May 29 06:55 PM Economics Housing|