Houston Update on Mortgages

Here is a quick update on where mortgages are now and likely headed over the near-term. Lots of great information as always by Lou Barnes of ratewatch.com

Long-term Treasurys and mortgage rates at last broke out of a half-year-long trading range centered on 2.00% for the 10-year T-note, and 4.00% for mortgages. Upward: 10s to 2.33% today, lowest-fee mortgages pushing 4.25%. Verdict first, then evidence: this move is not the start of a bigger one, and is likely to reverse.

Silly things have pushed this rate run to extreme: markets oooo’ed and ahhhh’ed at successful stress tests of 15 of 19 too-big-to-fail banks (the failure of four would crater our system, again); and inflation knee-jerks flipped at today’s 0.4% February CPI reading (the core at 0.1% is fine, gas prices compressing other spending and prices).

10-year Ts had for six months stayed tight to 2.00% because the Fed began to buy long Treasurys in Operation Twist, because Europe was on the edge of its own Lehman moment, and last fall the US appeared near new recession. Twist is still underway (and you can bet the Fed hates this mortgage rate rise), but a European banking collapse and new US recession are off the table.

One year ago the 10-year paid 3.75%, and mortgages cost just over 5.00%. The magnitude of European futility and risk came clear last August, 10s in one swell foop to 2.00%. We will have to wait for memoirs, but in early December the European banking system was only days away from failure, intercepted by the ECB’s December 8 Long Term Refinancing Operation, then insurance taken by LTRO2
last month.

Those last fall predicting US recession, the respected ECRI, especially, were dead wrong. But, have we now entered the even-longer-predicted self-sustaining recovery? No, but closer. There is a Churchill quote for every occasion, this in November 1942 after Britain’s first victory of WW II, El Alamein: “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Several signals say that we are not yet in self-sustenance, the most important at the Fed. Many over-read a word in Wednesday’s post-meeting minutes: the substitution of “moderate” for “modest” as the modifier for economic growth. The replacement is accurate, but… modest. More important, the Fed stuck verbatim to its commitment to “exceptionally low levels for the federal funds rate at least through late 2014.”

Another marker: the small-business surveyor, NFIB, found another small improvement in its index of optimism. Although rising to the second-best level since 2007, it is no better than one year ago, and still below the bottom of every business downturn since 1982. The NFIB did confirm some small-biz participation in hiring.

And Europe is anything but over. Its banks protected, it has become a slow-roller, waiting to see what Club Med depressions do to local political stability and overall unity. The best long-term hope: an orderly demise of the euro, then short global recession.

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