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What Happened, What Does it Mean, and Where Do We Go From Here?

Wow!  What a day in the mortgage and bond markets today.   I think it’s a good thing to say that while a lot of us saw this coming, very few of us expected that it would happen today.    Let’s walk through what happened, what it means and where we go from here.

What happened? A couple of things happened that caused the bond market to go into a free fall (okay more than a couple):

  • Several analysts and rating agencies have raised significant questions about whether both the United Kingdom and the United States will be able to continue to pay their debts as the staggering amounts that they are borrowing to keep their financial systems afloat are well, truly staggering.
  • As GM inches/races/inches (depending on the moment) towards bankruptcy, it is becoming obvious that the US Government is going to have to shell out a LOT more money to keep GM somewhat afloat (another approximately $50,000,000,000 – but who’s counting?)
  • Although the headline number looks good, as we discussed earlier, the existing home sales for April were less than spectacular.
  • Case Shiller came out with their housing price value reports and they showed a pretty nasty case of the housing price drops.   That means that the collateral for mortgage backed securities is dropping in value making them less desirable.
  • A number of reports have come out recently that showed that the performance of mortgage backed securities is continuing to suffer and mortgage delinquencies are continuing to rise.   We talked about one of those reports here, and another one of them here.
  • Oil prices have been going up and the people in OPEC who control a lot of that are talking $75 to $80 a barrel while we’re only at $63 right now.   Increasing the risk of inflation puts pressure on rates.
  • The Federal government, through their manipulation of the long term Treasury and mortgage backed securities markets (also known as buying the market), had been keeping mortgage rates artificially lower than what the economic, financial and mortgage portfolio conditions would typically warrant.
  • Oh and there’s this little thing called North Korea firing test missiles and Iran running ships in the Persian Gulf.  No political and military tension there.

When you combine all of these things, you have a slowly building pressure that “popped” today.   At noon today, the market was down a little but nothing like what we saw this afternoon.    We got rate increases at 1:30, 1:45 and 4:30 this afternoon.   By the time the day was done, 30 year fixed rates were up by .625%   It truly was one of the largest single day increases in rates that I can remember.

So what does it mean?  A couple of things:

  • The market is essentially saying that the fundamentals of the economic situation don’t allow the government’s buying of Treasuries and mortgage backed securities to keep rates lower than “justified.”
  • A rather weak and unstable housing market took a major body blow with the bump up in interest rates.
  • Our dear friends, Ben Bernanke, Tim Geithner and company, are probably having late night meetings tonight discussing what else they can do to keep the housing market from tanking even worse than it has so far.   What will they come up with?  I can’t really say, but I know that it’s going to involve spending $Billions and $Billions.  The very nature of proposing something that requires substantial government spending will increase the upward pressure due to increased government borrowings.

Where do we go from here? 

  • Remember, interest rates take the elevator up and the stairs down.   What?  They always go up faster than they go down.
  • In the past (even this morning), I’ve put the odds at 75/25 that rates would go up rather than down.   A couple of things about that:  1) I’d put the odds at approximately 90% that we won’t see rates drift back down to the numbers that we were at a week ago, without a massive government intervention (and that intervention could prove to be counterproductive).   2) I’d put the odds that we’ll “bounce” around in the range of 5.25 to 5.75% for the foreseeable future at 60% to 80%.  3) If you do the math right, that means that I can see a 20% to 30% chance that rates will continue to go up.

Are there people who are going to decide not to buy a house now because of the bump in rates?   Yep, I’m sure there probably are.    But, if they needed another .5% drop to make their new house affordable, maybe they are pushing too hard any way?

Let’s keep things in perspective. 
  
Stay tuned, it could get interesting…..

Tom Vanderwell

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  • 8 comments

    8 Comments so far

    1. [...] If you’re asking ‘what caused rates to jump up,’ you should check out this great little summary over on the BloodhoundBlog, so take a look [...]

    2. [...] Vanderwell over at Bloodhound Blog has a great post on how this might impact housing [...]

    3. [...] What happened, what does it mean, and where do we go from here? – Tom Vanderwell takes a good look at the current news headlines and how they effect mortgage [...]

    4. Al Lorenz May 28th, 2009 8:56 am

      Tom, it sounds like it is pretty clear where things go from here. The question is when they go and how high they go. I’m curious over a longer term how high you think rates might go. What value should we be placing on assumable loans and methods to trade equity? Thanks for the well presented, written and though provoking post.

    5. [...] Tom Vanderwell thinks mortgage rates could bounce as high as 5.75%, in the next 30 days unless there is MASSIVE intervention by the Fed. [...]

    6. Greg Dallaire May 30th, 2009 5:25 pm

      Tom,

      You tackle a very real subject in a way that makes it very easy to understand. Impressive feat in itself.

      There is an extremely huge bubble that is being created by our own government. Not to long before it pops and create’s more distress to the economy.

      Your ability to simplify a difficult subject will hopefully get more people to take arms!

    7. Tom Vanderwell May 30th, 2009 6:47 pm

      Al, Thank you for your kind words. How high do I think rates could go? I’m scared to venture a guess, but I am a Bloodhound, so here goes:
      1. If the government wakes up and takes steps to curb government borrowings, we could see rates in a range that would be described as historically quite reasonable (still in single digits).
      2. If we continue down the track that we’re currently on, let’s just put it this way, “Where were you in the early ’80′s?” (Disclaimer – I was in high school then.

      Greg – thank you for your kind words. I think my English professors in college would be pleased to know that I’m putting my English degree to use…..

      You’ve actually picked up on the main reason that I write on here, on my mortgage blog, and on Zillow’s mortgage blog. There are many dangerous things happening in today’s markets and many people are experiencing a huge amount of financial pain due to, in many cases, a lack of understanding of what options are available and what is really happening in today’s market.

      If I can help people understand things better so that they can make better decisions, it’s a beautiful thing.

      Tom

    8. [...] rules, FHA fico score requirements, Loan Level Price Adjustments, new FHA appraisal guidelines, adjusting interest rates in an unstable market, and a constant stream of mortgage Twitter chatter that only adds to the [...]