Rates fall, home sales soar, bubble talk explodes

Mortgage market commentary: What's behind this?
By: Lou Barnes: Inman News
Mortgages are back down to 5.5 percent, taken down by the 10-year T-note's return to 3.93 percent, that dive in turn caused by events overseas.

As of Friday, the mortgage market is in a pattern not seen since 1995: on a fee-equivalent basis (no points, no origination), 5/1, 7/1 and 10/1 hybrid ARM rates are about the same as fixed-Fannie. As the Fed pushed the cost of money from 1 percent to 3 percent in the last year (going to 3.25 percent this Thursday, 3.5 percent in August...), the ARM-to-fixed spread has narrowed and now closed. 3/1s can be had under 5.5 percent (for another month or two), and one-month COFI and MTA teasers are sub-3 percent, but both will index to the mid-fives, and then rise monthly as lagging indices catch up with the Fed. Figure a tenth a percent a month for a year or more. Cheers.

This ARM-to-fixed spread may go ARMs-on-top, and will persist until the Fed overshoots neutral and has to cut its rate; or the Fed turns out to be right about economic heat and inflation risk, and long-term rates blow out of a colossal mistake.

Domestic economic data were strong, but a European recession threatens to spread worldwide, except for the United States and non-Japan Asia. If the slowdown happens, even the exceptions will falter, and the prospect creates a lot of buyers for bonds.

Europe's problem (aside from rigidity, ruinous entitlement promises, demographics, and oil) is an overvalued euro. Last year, a ton of money tried to get out of the dollar, and the only "safe" alternative was the euro; safe-haven buying drove the euro to $1.35 and put Europe out of business.

U.S. mortgages and bonds broke lower this week when Sweden cut its Fed-funds equivalent a half-point to a record 1.5 percent, and the European Central Bank may have to do the same with the euro rate. The Fed-ECB yield differential has pulled the euro down to $1.21, but not enough; recession bets have the German 10-year at 3.13 percent, an all-time low.

The rest of the non-Asian world is in trouble, and Japan, as its labor and production prices are undercut. Only the extraordinary productivity (and borrowing) of the United States can withstand Asian competition and a tightening Fed.

There is neither end nor solution in prospect. It is in China's interest to sell us everything it can, and take paper back; the excess paper should do great harm to the U.S. issuer, but the harm is for now displaced to Europe. China is running out of things to do with the paper (currency reserves, U.S. bonds to buy), and caused consternation this week with its offer to buy a strategic asset – Unocal and its oil – not a golf course or Rockefeller Center, in the style of Japan Inc. when we feared that it would buy the world with our paper.

In the very best American political theater, Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow testified on China trade to the Senate on Thursday. Snow brought the administration's tough-on-China message, and looked as planted too deep in the pot as he is. The Chairman has six months to go on the job, and no longer has to pretend respect for Senatorial preening. The Chairman...visualize Yoda in suit and necktie on a cranky, short-fuse, suffer-no-fools day.

How about the renminbi revaluation or tariffs demanded from either side of the aisle? "I am aware of no credible evidence that supports such a conclusion."

Later, the Chairman tried to help the panel to understand: beyond inevitable adjustment discomfort, China's embrace of market economics is a great benefit to the United States and the world. Interrupting the Chairman in mid-paragraph, one anti-Commie Senator blustered, "They had to, to feed their people!"

The Chairman then interrupted him (I don't think I've seen a Fed Chair do that before), snapping, "Senator, it doesn't matter why they have, they have."

Get your fiscal house in order, get your entitlement promises in scale, try no tricks or fibs, and hang on tight, because, "...they have." And they have just begun.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.