Inflation + Credit Crunch Means Higher Mortgage Rates
A: A hot CPI number wakes everybody up to the FACT that commodity inflation is hitting consumer prices! Even those that say inflation is under control won't be able to continue that argument with a straight face. This inflation trend will continue as long as commodity prices remain at these elevate levels; and that will last as long as our fed attempts to re-inflate our economy out of this credit mess. Meanwhile, this credit storm is now a full blown category 5 hurricane on so many levels and is hitting land at numerous points; analogy --> credit crisis is spreading! Put both these FACTS together and you will understand why lending rates are rising.
First, the inflation news. According to the WSJ.com:
U.S. consumer prices accelerated across the board last month, a worrisome sign for Federal Reserve officials who must balance a sharp slowdown in economic activity with stubbornly elevated price pressures. Still, the inflation data likely won't deter Fed officials from lowering official interest rates again next month, as guarding against recessionary risks remains their top priority.As far as the credit crisis, things are just bubbling under the surface; I feel like a big event is brewing. Here is what is going on as a result of the dysfunctional credit markets and the effect it is having on willingness to lend:
a) Corporate Bond Risk Soars To Record On CDO Losses Speculation
b) California City Nears Bankruptcy
c) Credit Suisse Write-Downs + Lehman Brothers Commerical MBS Exposure
d) Auction Yield Chaos For Bonds & Auction Rate Turmoil Hits Pittsburgh Medical Center
e) Capital Sparse In Some US Student Loan Markets
f) Massachusetts May Raise Road Tolls Amid Auction Rate Woes
g) Corporate Spreads: Credit Market Bottom Nowhere In Sight
h) Those With Money In Short-Term Securities Can't Get It Out (CNBC Video)
...and on and on. It is sickening, its nauseating, its real, and it trickles down to the consumer as banks tighten lending standards and raise rates for mortgage loans that are considered riskier in times like this! You guys MUST understand something. I don't want all of this to happen! It makes me sick to see this credit cycle unravel & spread the way it has, but I don't control that. I will continue to discuss this because it eventually hits the consumer and real estate investments. Trust me, I cant wait for the day when the credit markets return to normal and will publicly discuss this when it happens. But mark my words, even when the leading credit market indicators normalize, we will have to deal with the pain that was inflicted for a while longer. For now, credit markets are still in pain and this cycle is not close to done.
As a result of everything that was mention above, lenders are forced to raise interest rates even as the 10-YR bond yield falls and the fed cuts rates to counter the looming economic slowdown. I discussed the disconnect between the bond market and mortgages rates back in December in my post, "Bond Yields & Mortgage Rates No Longer Related", once I disclosed to you guys back in August 2007 that "Its A Risky New World: Credit Spreads". In this new world, credit quality means a lot and underwriting standards have tightened significantly as the environment that produced a 5 year housing boom is long gone! The chart to the right shows you 30-YR Jumbo Fixed + 5/1 Jumbo ARM rates for New York over the past 3 months; NOTE THE TREND OVER THE PAST 1-3 WEEKS! It should be clear that as bond yields fell (red line), both lending rates have risen! A sign of the riskier world we live in.
One thing is for sure, as the credit markets lead the equity markets, and we see how bad it really is to balance sheets and how far it spreads, the availability of capital will get tighter & tighter!! That means higher rates for you guys until this credit storm passes. And when it does, the fed will have to hike rates to curb inflation that they helped fuel as they focused on slowing growth due to falling housing prices and the credit turmoil that resulted.