Housing reality: neither bubble nor bottom

Mortgage market commentary
By: Lou Barnes: Inman News
Mortgage rates have risen again, sharply, beginning to push 6.5 percent for low-fee, 30-year loans, and big-media "news" won't discover the jump until late next week because of lags in national surveys. It's real, though, right now.

The definitive 10-year T-note has blown up to 4.88 percent from 4.45 percent only six weeks ago, the damage caused by a colossal bond-market error in economic forecasting. It was just certain last summer and fall that a slowing housing market would tip over the economy, and the Fed would begin to cut its 5.25 percent overnight rate in 2007.

As completely mistaken as mistaken can be.

The effects of this error are going to ripple for months, mortgage rates continuously vulnerable unless we are saved by a delayed appearance of general economic slowdown. Here's a great thing for the housing sector: if you want lower mortgage rates, you've got to hope for a deeper housing crater. Fire or ice. The same is true for fans of the stock market, which has had an ugly week as a voyeur at the bond-market wreck.

Mortgages could quickly run close to last year's highs, just below 7 percent, in high-volatility trading. It's been a long time since we've had quarter-point, over-the-weekend moves, wockety-tong up and down the stairs, but the correction following a mistake as big as this tends to break all the technical rules of trading. Support, resistance, oversold ... do not apply.

From the straightforward (UP!) to the economics of a new forecast and bond market adaptation, there is a lot in play. First, the health of the economy is unequivocal: today's news of a 2.3 percent jump in December orders for durable goods is too strong for argument. Everyone knew that job data was running above expectation, but many dismissed that strength as a lagging indicator, convinced that weakness would ultimately appear, and the Fed would ease. They were wrong.

The newest housing market data has the Street completely confused. The Wizards of Wall bought bonds and mortgages last year on housing weakness, and this week dumped them in belief that housing has bottomed -- huge sales on thin and ambiguous data. Inventories of homes for sale fell by a half-month supply in December, interpreted as bottoming, even though resales dropped again. The Wizards don't know what every Realtor does: a decline in listings in the winter doesn't mean anything. A December gain in sales of new homes had traders hitting "sell" again today, but thin markets in a weird-warm winter ... meaningless.

The housing reality: neither a blowing bubble nor a bottom. Housing and its effects on the whole economy are going to take years to resolve. A jump in long-term rates is a shove from behind that will certainly worsen conditions in the bubble zones, and will also begin to close the escape hatch for ARM-reset procrastinators.

The big shoe whistling down: mortgage credit quality is deteriorating rapidly. The Wizards think that rising loan defaults will be limited to 2006 originations, and they are mistaken about that, too: older paper will soon begin to tank. As it does, credit standards for new loans will begin their inevitable tightening, and diminish the supply of buyers. Nobody knows how that spiral will play out; it's just beginning.

The Fed on pause at 5.25 percent must feel like the audience at a Keystone Cops flicker during one of the side-to-side chase scenes. Last year, low and falling long-term rates stimulated the economy while the Fed was trying to slow it. Now, rising long-term rates will brake the economy, just as the Fed began to think it had to tighten some more.

Fed Chairman Ben Bernanke's pause is either a sign of trans-Greenspanic wisdom, or he's the luckiest man since Ringo Starr.

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