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.
Posted by Price Stout
Wed Feb 20th, 2008 01:29 PM
Great post, especially the chart of jumbo rates vs. treasuries.
OT but I don't see where else to discuss this, I've been reading your blog for a month or two now and one thing I think I've observed is in the 30 day lookback Street Easy data. I haven't been actually tracking this data, but my impression is that the Price Cuts line is about to cross the Contracts Signed line. I wouldn't have ever thought to plot those two together like that, but that's what's been jumping off that table to me for a few weeks now. Do you have the 30 day data going back historically? I'd love to see even the 2008 data alone and plot it (50 days of 30-day-lookbacks).
Posted by anonymous
Wed Feb 20th, 2008 02:47 PM
hey price! We will offer more time ranges for all datasets once we have 6 months collected. Still tweaking system now to enhance accuracy.
in time!
Posted by Ganonymous
Wed Feb 20th, 2008 10:41 PM
Hey there -- long time reader, first time poster. What about the long view? I'm in my apartment for the next 5 to 10 years, god willing. What do I have to expect 5, 10 years down the road? I am interested in the current trends re credit, mortgage rates, prices, etc., but would love to know more about the long view. Where should I look?
Posted by Noah
Wed Feb 20th, 2008 10:48 PM
long view its hard not to be bullish on re here in manhattanl given inflation trends.
credit issues will be around for a while; quarters if not years. Rates will be trending higher in my opinion over time. Prices will be pressured short term, but will of most likely bounce back in longer term as usual. How sever pressure will be depends on credit woes and effect on economy/jobs/stocks
Posted by Price Stout
Thu Feb 21st, 2008 11:54 AM
Long view? The right long view is that if you live in a place you plan to be in for 10 years, you shouldn't really care about what happens to it's "value." Is it providing you with shelter that you can afford? Congrats, that's the purpose of housing. It's not an "investment."
Shiller's data is pretty clear. In the long run, housing beats inflation by about 1% nationally -- that's simply based on home price appreciation and does not take into account the maintenance required to keep those values. I'd be surprised if it were really any different in NYC at large or Manhattan in particular.
Not to be morbid, but the one risk you have in Manhattan that frankly you don't have to the same extent anywhere else in the country is terrorism risk, which could dramatically lower demand for housing should repeated events happen. For better or worse, we are not the stiff-upper-lip Brits who took IRA bombing basically in stride. I don't mean to derail this discussion, but living in NY, you have to be honest with yourself (and your family) that NY is the highest profile target for a bunch of reasons.
Posted by Price Stout
Thu Feb 21st, 2008 12:37 PM
Meanwhile, back to my original comment, today in the 30 day look back Price Cuts surpassed New Listings.
Posted by Price Stout
Thu Feb 21st, 2008 12:38 PM
Oops, I mean Price Cuts exceed Contracts!
Posted by Noah
Thu Feb 21st, 2008 01:20 PM
hey price - long view I said its hard not to be bullish. However, dont underestimate the power of the current situation AFTER 5 years of lax lending that is now gone, and a national unsustainable housing boom that has deflated. This is engrained in peoples mind and may have some longer term buyers sit & wait for more clarity.
This is my opinion. When you say: "Is it providing you with shelter that you can afford? Congrats, that's the purpose of housing. It's not an "investment.""
I must respectfully disagree. When you hear people say real estate is the path towards building wealth, wouldnt you interpret that to equate real estate to investing?
I certainly view it is a major long term investment (at least 5 years holding)...some dont, and view it as a speculative trade. That contributed to our problem on one level
Posted by Noah
Thu Feb 21st, 2008 01:20 PM
and yes, that is interesting about 30-day!
Posted by Price Stout
Thu Feb 21st, 2008 01:49 PM
When you hear people say real estate is the path towards building wealth, wouldnt you interpret that to equate real estate to investing?
Noah, I sure do hear people say that a lot. Usually they're in the mortgage/RE business.
The way toward building wealth is pretty simple: save money. That is, spend less than you earn.
There is a paper by some fed economists floating around somewhere that shows a high correlation of homeownership to wealth, but you and I are smart enough to recognize that correlation does not equal causation. Heck, maybe causation flows the other way: not homeownership leads to wealth but wealth leads to homeownership. Intuitively that makes just as much, if not more, sense.
Anyway, shelter, like food, is a perpetual "opex" issue we all have to find a way to pay for. You can capitalize the expense all you want, but expense is expense no matter how you slice it.
Investments produce returns. I've never seen a well constructed study that actually proved that homeownership provides any return above inflation once all carrying costs are accounted for (and you also need to correct for some onetime gains that resulted from things like the change in tax policy exempting capital gains on primary residences -- those tax changes did in fact represent a transfer of wealth to homeowners in certain locations).
A lot of consumers would be a lot better off if the language of "this is the biggest investment in your life" was more correctly stated as "this is the biggest expense you will take on in your life."
None of which is to say the buying a house/apartment is "wrong" or "irrational" or an "unwise" use of your money.
Posted by Price Stout
Thu Feb 21st, 2008 01:50 PM
I guess these comments don't support HTML tags. I tried to italicize your comment Noah in the first line of mine.
Posted by London Estate Agent
Fri Feb 22nd, 2008 09:40 AM
The big event is brewing?
Oh No !!!!
Posted by Noah
Fri Feb 22nd, 2008 09:53 AM
PS - no worries, yea html tags dont work but your point was made. Thanks.
couldnt agree more with "The way toward building wealth is pretty simple: save money. That is, spend less than you earn."...however, most Americans have not worshipped this mantra in past decades and now our debt problem is coming home to roost.
Posted by Noah
Fri Feb 22nd, 2008 09:55 AM
London - honestly, something will happen soon I just dont know if it will be UP or DOWN. Although I would say DOWN has a better chance given deteriorating market conditions. Even or fed is saying unemployment will rise and inflation too; how could that be good?
Give us some bad economic data reports showing this, or a bad ending to the bond insurance saga and you should see another re-adjustment.
Did you see what Merrill said today about Fannie & Freddie, and that stocks have NOT discounted fully the duration or severity of the problems! Ugh
Posted by Mike
Fri Feb 22nd, 2008 10:32 AM
you mean the same Merrill that wrote down a quarter of their market cap 4 months ago? Or the merrill that pretty much stopped all capital markets activity completely?
ML, GS, DB are in the business of making money. Right now the only clear way to make money is to throw down a ton of shorts and then publish reports designed to drive market volatility.
Posted by Noah
Fri Feb 22nd, 2008 10:42 AM
hard to argue. When credit markets started collapsing 8 months ago, very few went out on a limb and discussed the potential severity of this problem. Everyone keeps calling the bottom and did you see HOV's CEO yesterday attempt to call a bottom in housing at END of 2008!
Unreal. Obviously his data doesnt support that and he sees rough times ahead, yet he makes a statement totally based on hope. Why anyone would listen to the heads of some of these firms, CFC CEO saying they will be profitable in past quarter is great example, is beyond me.
Hey, fine with me. Ive been short financials, and long gold for a while now. I hate to see us get killed, but its pretty hairy out there
Posted by Aventura Condo
Thu May 20th, 2010 04:01 AM
Real Estate Professionals will benefit greatly by building their business in 2010… I appreciate this post. Thanks
Posted by firsttimehomebuyers
Fri Sep 17th, 2010 01:46 AM
Recession has been the big fear as the fallout from defaulting US mortgages drives a global credit crunch and threatens to undermine the world's largest economy.