There’s been a lot of chatter since yesterday afternoon about treasury rates, mortgage rates, the yield curve, and so forth—and for good reason. Here’s a good write-up from Mish’s Global Economic Trend Analysis on what’s going on: Mortgage Market Locks Up
Yesterday 10 year treasury yields went soaring and the mortgage market literally seized up. Mark Hanson at the Field Check Group has this report that I can share.
As Bad As You Can Imagine
With respect to yesterday’s episode in the mortgage market — yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day.
A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle…pretty obvious from the start but kind of scary to live through it … today felt like LTCM with respect to liquidity”.
For a local insider’s perspective, check Rhonda Porter’s post over at Rain City Guide: Mortgage Rates on the Move Up Today…way up.
And finally, here’s a post that goes into some of the mess going on behind the scenes that has led to this interesting development: It Is Failing: ALL OF IT
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Could someone please translate Denninger for those of us who don’t play poker?
Thank you.
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I think it was Scotsman who predicted this sometime last week. It’s very interesting to watch and learn about. I kept a mental note of what he wrote last week and was intrigued to watch it all come together. Thanks to Scotsman and many others here who are providing quite an education.
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Rates are continuing to climb…I’ve received 3 rate sheets as of noon today from one of the lenders we work with…yesterday was a “five rate sheet day” all with increases. Rates go up much faster than they go down.
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Posted by Sniglet in the current open thread, worth reposting here:
My response:
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Also, this seems like a good time to point some more recent readers to a relevant post I wrote here in 2006: The Monthly Payment Buyer
The reality is that most people are still monthly payment buyers, so there’s only one likely result of increasing interest rates like this…
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It is remarkable that a rising interest rate environment (at least yesterday and today) that places rates in the 5′s, (maybe we’ll hit 6) would not be good for the housing markets. It is quite a testimony about the state of things.
Sure makes the Paramount Mortgage ad I heard in this morning’s commute moot.
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Actually, rising rates are a good thing. Extremely low interest rates make it difficult for anyone to make money through lending, and can even share some of the blame for the reckless investments that have been made over the last 20 years (i.e. encouraging both borrowers and lenders to take increasing amounts of risk inj the persuit of yield).
Sure, high interest rates will hurt asset prices in the short term, but in the long run they are essential to help build a healthy financial system, and encourage people to take less risk.
I’ve always said that the best thing the Fed could do is RAISE rates. This just might happen whether the policy makers like it or not.
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RE: Sniglet @ 7 –
Agreed….I’m seeing alot of buyers who are trying to buy now just because of these sub 5% rates. This is causing prices to be artificially inflated..BIG problem down the road. I just sold in Gig Harbor yesterday where my Buyer paid FULL PRICE on new construction due to all these other Buyers gobbling up the standing inventory. 3 months ago the property would have been 25k less expensive.
Another property I wrote an offer for in Kenmore on Monday, two other offers came in the same day. My Buyer offered 380k on a home listed at 430k thats been on the market 5 months. Now all of a sudden 3 offers on the same day??
I mean come on. The harm being caused by these 4% rates just add to more problems. Please Buyers don’t get into bidding wars! Please!! Your GEMS will come but you MUST BE PATIENT!
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And it just got sunny too!
What has a bigger effect on home purchase decisions, warm weather or mortgage rates?
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It does seem for a while now the government has been kinda playing a game of chicken with the people it sells debt to: they know they are going to demand higher rates if the government is devaluing its currency (to compensate), but Treasuries have been the safe haven everyone wanted, which kept rates unsustainably low. It looks like that house of cards might be starting to come down, which would mean bad times for the “just print more money” approach to fixing all the systemic problems. Then again, maybe the Fed knows exactly what it’s doing, and this is all part of its plan to fix the US economy; they have such a stellar record of preventing disruptions and imbalances that now they want to oversee the entire US financial system. Which is it? Find out next episode of The Government Plays Russian Roulette with the Country!
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Does anyone know whether the Zillow Zestimate algorithm takes current interest rates into account (as I think it should)?
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By Jillayne @ 1:
I think this (“The market calls all bets, Bernanke went all-in with 2-7 off suit, the flop came up A-A-K and the bond market is grinning.
Anyone care to bet what the bond market has for hole cards?”) is the quote you’re talking about.
If so, 2-7 off suit is the worst possible starting hand in a game of poker. If the market is calling all bets, the implication is that Bernanke bet everything on the worst hand and the first three of 5 common cards came out big.
Basically, he’s saying that Bernanke made a horribly stupid, unconscionable bet on how this would play out.
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RE: Civil Servant @ 11 –
Zillow uses a similar methodology as the Case Shiller, but applies it to the market in a more detailed way. It also accounts for the difference between median sale and median value.
http://www.zillow.com/wikipages/Zillow-Home-Value-Index-vs-OFHEO-and-Case-Shiller/
Case Shiller is completely backward looking, and for that you don’t need interest rates. It appears that Zillow is the same. Zestimates won’t be impacted by a change in rates until those rates begin to affect closed sales.
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If I remember right Eleua gave it to about November until the bond market would come crashing down due to the FEDs and treasuries actions. Seems like this could be a fore warning of yet another correct prediciton of the oracle from Bainbridge.
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I think the “spring bounce” just died…
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Hey thanks, Chris. I can visualize that.
I’m wondering if the bump up in rates will actually have a temporary effect of pushing people to buy or refi NOW before rates go up even more.
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RE: Nick @ 10 –
“Then again, maybe the Fed knows exactly what it’s doing, and this is all part of its plan to fix the US economy.”
Yeah, that’s it- and monkeys fly out of my butt. (yes, I know you’re joking…)
In all seriousness I don’t think there is a coherent plan. What we have instead are three separate interests that give the appearance of working together when in fact they all have different agendas.
Bernanke, essentially an academic with a life’s work focused on nullifying business cycles (and especially depressions) has at last found an opportunity to test his outdated Keynesian theories. He’s all about pumping cash into the system through lower interest rates and transfers, totally focused on the supply side without giving a thought to anything that might limit demand. The fact that consumers and all levels of government are totally tapped out and unable to service any more debt somehow completely escapes him. A one trick pony who’s time has finally come. It’s show time!
Geithner is the Goldman Sachs mole, one of a long line, a corporate insider and loyalist who’s time in the public sector allows him to prove his loyalty to those interests to which he will in time return. He walks a thin line between working to keep the economy going and making sure that his eventual corporate interests and banking sector buddies suffer as little as possible. Remember, he a had a hand in creating the MBS soup that facilitated this whole mess. His appointment is more than a bit of the fox guarding the hen house.
Obama is the third factor. Economically ignorant, he and his staff originally saw in this crisis an opportunity to push
their priorities for social change, not fully understanding the longer term economic consequences of the choices they made. Initially Bernanke and Geithner were given full rein. But as Obama’s understanding of the situation grows and other dissenting voices are listened to and heard he seems to be coming to an understanding of just how big this mess truly is. To his credit, there are some indications he’s working to put on the brakes. At least now he isn’t willing to bail out every entity that comes knocking on his door.
Now I think all three understand they’ve gone too far, too fast, too selfishly. The world and U.S. economies sit like a room filled with loaded mouse traps, ready to explode into a world of havoc and disaster at the slightest provocation. Those who know sit and wait in a state of horror while the unknowing open the door and walk in.
As I’ve said before, it all ends when the government’s checks bounce. Until then, it’s just one wild ride.
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Thanks, Jon. I like your phrase “completely backward looking” and will be borrowing it, in particular to help point out the accuracy value of Zestimates.
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RE: Scotsman @ 17 – Good points. When you are broke and in deep debt like the US you no longer call the shots. Everything that used to be robust is now extremely fragile and in many ways in the hands of the countries that provides the cash. They are only your friend as long as it serves them, it can turn by a whim, discovery of greener pastures or fear as examples and it can be used against you in political discussions. It makes the situation highly fragile and you can soon find yourselves painted into a corner. I wish we would have taken our losses as men and not begun to cry and look for a mommy to save us. Mommies have rules.
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If rates settle in a 5.5% or more, it will be a market game changer. We could see additional current pendings fall out as the buyer may no longer qualify if they didn’t lock.
Here are the weekly numbers (7 days ending on 5/27)
We had the first down week in over 9 weeks in pending counts.
King County :
Pending = 498 Last week = 590 Holiday week? Or a shift?
Closed 189 Last week = 217 I predicted this as we had 2 county closing dates (Friday and Monday) blocked due to holiday.
Eastside
Pending = 155 Last week = 166 The Eastside was close. 40% (L/W 50%)of all pending sales were under $500k
Metro Seattle
Pending = 169 Last week =220 Big drop in Metro Seattle pending sales. 64% (L/W 75%) of all pending sales were under $500k.
FROM NWMLS, BUT NOT VERIFIED OR PUBLISHED BY NWMLS.
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RE: patient @ 19 – As to the analogy, I see the spike in treasury yields as disciplinary action from Mommy.
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RE: Scotsman @ 17 –
RE: patient @ 21 –
So you guys both assume that people who have been working in the system, have no idea what they are doing?
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RE: patient @ 14 –
Do you have link to Eleua’s comments?
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RE: mukoh @ 22 – Well, if they did why are we were we are now? It was preventable and many highly regarded economists knew it and talked about it. I think at this stage they know they were wrong in many actions but people like Bernanke will rather eat doog poop than admit he has ever been wrong. Arrogant and incompetent are two words that comes to mind. The same goes for bankers btw.
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RE: test @ 23 – No, but as I recall, he has commented on it a couple of times. I think the last time was when the news of the FED buying treasuries broke but I think he has mentioned it before as well. I don’t know how to search this site and I don’t want to spend much time on it, sorry.
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RE: Scotsman @ 17 –
Let’s put the Bernanke, Geitner, Obama dream team over in the corner for a few minutes. We can pretend they have something to say about the global economy again in a few minutes.
China has unlimited resources. They are a communist country who answers to no one. They take money from every corner of their economy then spend it on what they see is for the benefit of the People. They have an army who invades no one. They have mouths to feed and health care to provide, but they also have a billion people as a tax base, for lack of a better term. They have money.
Then you have the European Union with a manufacturing base that is looking for real returns. In my opinion they are looking for something that resembles value.
Last you have emerging markets that were paying off foreign debt at a pretty good clip during the economic boom years of interest income.
I know I left out Russia and the Middle East. They are the oil producers. They have a separate agenda here.
The question is what the foreign investor pool wants, rate of return or existing asset value. In my opinion they would be dollars, pun intended, ahead if they put off the higher return rate until the assets had a chance to stabilize before a further decline. Maybe they feel values are stable enough to take this kind of hit.
For that matter banking in general will be the ones taking the hit if interest rates continue to go up. Aren’t the resets due typically in June of July? Won’t the foreclosure rate continue?
Now really seems like an odd time for interest rate volitility. The benefit to any one is escaping me.
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RE: patient @ 24 – Patient, I am with you all the way, on preventing the crisis was possible or at least reducing the amount of exposure to it. However all I am trying to tune into is not so much you, is how the majority of the bloggers on here and majorly Scotsman have this assumption that he for example thinks everything being done is wrong vs. people who have combined hundreds of years in experience, and have access to statistics and values that none of us do.
I mean maybe Scotsman is highly educated economist that has a new approach to this or just a blantering union carpenter who knows.
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who is Denninger? what’s his background?
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RE: mukoh @ 27 – Mukoh, a couple of points. If you go back and read my post I didn’t say they were incompetent, or unknowing. I said their objectives and goals were different, and that saving the economy wasn’t necessarily #1 on their list of priorities. As one example, take the original stimulus bill. If implemented as written only 40% gets spent in the first 2 years, and only a very small portion of that will actually stimulate the economy by going directly to consumers wallets. That’s too little, too late. The game will be over before more than 60% of that money hits the economy. Immediately eliminating all taxes, income and FICA, for those earning less than say $150,000 for the rest of the year would have cost less, and would be the economic equivalent of smoking meth. But it didn’t play into any of the three main players true objectives, so it didn’t happen. There’s a lot of economics that’s open for debate, but whether the stimulus as played was the optimum approach isn’t even up for discussion. It’s an expensive failure. That will be obvious to all within the year.
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RE: sbr @ 28 –
Karl Denninger owns http://www.tickerforum.org , a site devoted to trading and economic theory. He’s a retired IT guy and business owner who now trades for a living.
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RE: Scotsman @ 17 – Nailed it.
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You see Treasuries sold today. All is well with the world once again. September will be another chapter.
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RE: David Losh @ 32 –
Haha, yeah, I was reading this post at the same time as reading news stories about treasuries bouncing back, and I was confused… :)
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RE: Scotsman @ 30 – Nice site. Haven’t seen that one.
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RE: Scotsman @ 29 – “Immediately eliminating all taxes, income and FICA, for those earning less than say $150,000 for the rest of the year would have cost less”
The problem with that approach is that the money would get spent on vacations and imported goods and we would be left with the long term debt. Being a quick hit it would not incentivize people to invest for future productivity gains. By spending it more slowly, a little bit of it hopefully will end up as infrastructure. Of course the main reason for the delay is so that the spending will be concentrated in the period of time just before the election.
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Correct me if I’m mistaken, but the situation pointed out in this thread has been a forecasted meme for at least the last month (a plethora of articles about this on reuters and google news written by the bears). I hate to be the bearer of bad news, but aliens have landed! What’s going to happen to the loans represented in the following chart when mortgage rates go up? Calling all bottom callers, be sure to look at the cumulative reset total on the right of the chart:
http://mortgage.freedomblogging.com/files/2009/05/reset-chart-for-blog-april.jpg
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IMO, one of the worst things that can happen is the cap gains gets repealed and we are back to flat 30% taken off the top. Which hampers investment or makes investment only attractive at killer returns.
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“So you guys both assume that people who have been working in the system, have no idea what they are doing?”
If they knew what they were doing, would we have wound up in this mess in the first place?
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RE: jon @ 35 –
“the main reason for the delay is so that the spending will be concentrated in the period of time just before the election”
Bingo! It was never really about fixing the economy- it was about buying the most votes, both for the midterms and Obama’s second term. Unfortunately, I really believe we’ll be over the precipice by the time elections roll around, and their plan will have backfired. At great cost, I might add.
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RE: mukoh @ 37 – Agreed, but it’s a hard sell to the general public in an era of populist posturing and heightened class warfare, even though the evidence seems to suggest lower capital gains taxes benefit all. With reduced taxes capital moves more freely to productive asset classes instead of stagnating (in order to avoid paying the tax). A higher velocity in capital flows not only leads to more efficient production, but ironically increases the gross tax receipts. But reality only puts in sporadic appearances these days.
Speaking of reality, I heard on another thread that a Martian crawled out of one of “One Eye’s” can lights this morning and peed in his cheerios. Dang……! I wonder what’s happening to home values in that neighborhood?
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We have a cultural problem. We’ve been the top dogs for a few generations now. There are new players in the global economy that want a piece of the action; and nobody alive today (certainly not the 50 plus year old financiers and bankers on top) in this country, knows what the world looks like when the US is not in control.
No politician of any party will tell the people the truth, because they know people don’t want to hear it. Just don’t screw with their Dancing with the Stars or American Idol. But they know the party is over.
Times are very uncertain.
Crap! What a mood? What did I have for breakfast?
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I’m not sure what quarter we’re in but the scoreboard says we’re down 13 trillion to nothing and everybody wants to quit and go home. But we’re American’s right? Did we give up after Pearl Harbor? No! Did we give up in 1812 after the British burned Washington? No! We’re Americans and we don’t quit! I say we’ve got to do something really vain and futile to show them we’re not beaten. Whose with me?
Are Obama, Ben and Tiny Tim (as opposed to The Tim) starting to sounds more like John Belushi giving his speach at the end of Animal House than like the architects of the economic solutions for the free world? Are all the government programs just postponing the inevitable or perhaps making things worse? If you didn’t think we where on the verge of systemic collapse of the financial system last fall then there’s no question that all they’ve done is f__k things up. Sure, nothings fixed yet, but things are a lot different than they were last fall. The banks just raised tens of billions in private capital. Do you think they could have done that last October? And there are corporate debt offerings that are selling, all be it at high rates.
So maybe they can’t keep mortgage rates at 5% or below, but that’s not necessarily the end. The game is to save the financial system first by letting it earn it’s way out of the real estate losses over a few years. Rising mortgage rates certainly don’t help, but even if they only save part of the financial system, I think it’s probably better than where we would have ended up if they had let the whole sector freeze up and fail last fall.
Yeah, I smell urine and I’m not happy about it. But it could be worse. As long as you don’t have a bladder infection, urine is sterile. If you can get over the psychological impact, and don’t have to depend on it as a clean water supply, you can survive it.
I’m not sure if the plan plan to save the financial sector will work or how low they have to keep mortgage rates to make it work. Are they going to stop the fall in the real estate sector? I don’t think that that’s ever been the true goal. I think the goal is to slow the fall so that banking sector earnings can offset the losses over time. Are the power’s that be creating a “softer landing” than we would have had otherwise. If they save substantially more of the financial sector than would have survived if they hadn’t done anything, I think the answer is probably yes.
But don’t get me wrong. My ass isn’t hanging out too far. By way of full disclosure, my wife and I are pretty well hedged. Our net worth is 1/3 in cash and our debt is less than 10% of net worth. We bought our current house in 2003 and I thought we were buying close to the top then. Hey, I never said my timing was good. But then again, I never imagined the existence, much less the effect, of the shadow banking system either. I was only four years off. Although I don’t want Sniglet’s 80% drop to be right, if Sniglet is right I might be able to retire on Mercer Island water front when a 4 million place is 500K. A friend of mine just bought a 2400 sq ft water front log home on Pender Island for $430K US fully furnished.
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http://www.nytimes.com/2009/05/29/opinion/29krugman.html
“But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy.”
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I mean maybe Scotsman is highly educated economist that has a new approach to this or just a blantering union carpenter who knows.
Blantering union carpenter…does anyone tire of class/trash posturing on this or any other information-related forum? How boring to maintain such a keenly narrow view – it actually was a union carpenter who first spoke with me about rents vs. price and indication of bubble…in 2003. Counter to that era of buy now cheerleading, this guy voiced concern regarding flat rents, skyrocketing home values and deteriorating wage for construction labor. I did listen to this guy and many, many others whose agenda did not involve profit but rather just the factual condition; these prices are not supportable…trouble ahead.
I am discouraged by schmecksperts (but never by your posts, Scottsman). Listen and censure all views…even the supposed blanter-er with a household and minimal math skills can flash a smart, urgent warning.
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RE: truthtold @ 44 –
I agree completely Truthtold. But just because he might be a carpenter doesn’t mean he can walk on water. Unless maybe it’s as frozen as the credit markets.
Mukoh, I know you’re just presenting a challenge to people getting too complacent and who want to anoint as sages the promoters of bear theories popular on Seattle Bubble and I like that. I think presenting some challenge to the accepted conclusions helps to promote further examination and better understanding.
As to Scottsman it’s also my recollection he has said before that in addition to being a carpenter he went to a top 5? school in Economics and I think he’s got a graduate degree. I think he also said he has worked modeling credit markets or something similar. I tend to be more of a critic than a cheerleader, even for my friends, but I tend to think Scottsmans a pretty straight shooter. And unlike the seat of the pants stuff I post, as you know, a lot of what he posts consists of links to sophisticated articles on business and economics as well as statistical data that only someone with a significant interest in the subject matter would normally follow. If something bad happened to him like burning up in the hallogen bulbs I just installed in my family room can lights I’d really feel bad.
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I think we also have a bit of a republican vs.democrat tension from time to time and if I recall correctly Scotsman and mukoh are on different sides of the fence. Scotsman makes no secret of his R stance and for disclosure I pride myself with having democratic values, this does not prevent me from almost exclusively agree with Scotsman’s comments other when it becomes blatant democrat bashing which is fairly rare and easy to filter out. I might have predominantly democratic values but it does not mean that I agree with all democrats, I find myself mostly disagree with Pelosi, Reid and Franks but so far I have a mainly positive view of the new commander in chief. Paulson, Bernanke and Chris Dodd are on the bottom on my list but not from their political stance rather from their actions and attitude.
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By patient @ 46:
So you’re saying that although they’re arguing different sides, they are effectively the same, and only pretending to be different in order to get our votes? ;-)
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What happened? There was a rally in Treasuries and no one is mentioning it. I found an MBS trader with a very interesting take on why mortgage rates sky-rocketed this week.
http://www.mortgagenewsdaily.com/mortgage_rates/blog/78122.aspx
He explains that the Fed was doing too good of a job of keeping MBS rates low, causing an opportunity to sell off MBS’s this week. Even if you disagree with his assessment i think most of us here has to agree with him that once investors realize that we aren’t really in a recovery mortgage rates should come back down.
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“Are the power’s that be creating a “softer landing” than we would have had otherwise. If they save substantially more of the financial sector than would have survived if they hadn’t done anything, I think the answer is probably yes.”
But is yes a good or bad thing for those who value their freedom?
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RE: Jonness @ 48 –
You may be right Jonness, but I’ve got more faith in the American public to take back their freedom than to make smart long term economic choices. Even if the administration saves a lot of jobs and a good portion of the financial system, my “yes” answer could still be wrong. If they spend hundreds of thousands of unrecouped dollars for each job they save, the plan or at least it’s execution is probably a failure due to the increased national debt over the long term. But don’t tell Scottsman I said that. In any event, If it were my personal decision, I don’t think I could have just left it to the markets to work out the problems of the financial system over the last 9 months.
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RE: Jonness @ 48 – Freedom? I don’t like the fact that Congress got the government into the business of owning businesses. But I don’t see it as a freedom issue. I see it as a government hindering the efficiency of business thing. Even most failed businesses were probably more efficient than much of anything done by government.
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god bless yee Tim but Karl Denninger is an idealogue of the most transparent sort.
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Kary the businesses you talk about were real efficient so much so they either were about to fail or are now heading to bankruptcy — I real don’t think the terms efficient and failure belong together — unless of course that is the goal and if it is those businesses you mention were golden.
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RE: Kary L. Krismer @ 50 –
I see it as a greater good issue. Like AT&T and Microsoft monopoly issues.
Our goverment and the people allowed something like Chase Bank to operate openly in this country. They are nothing but a bunch of thugs. You should be able to see that by now.
Our government fought to keep the Big Three Automakers in business, Remember Lee Iacoca? the Statue of Liberty, and all the great Americana that went on to save the auto industry in a time of crisis?
We got the Hummer.
I’m confused by how our governemt is so bad and corporate business interests are so good.
Our government did something. It can work if the business models adapt. If they do great if not let them fail. There are more important issues on the table than banks and autos.
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RE: David Losh @ 52 – I’m not talking about morally good, I’m merely talking about efficiency. The ability to achieve goal X with the minimum of resources. Government is really bad at that even compared to business entities that fail. The only exception might be some of the old dot-com startups.
If you want to talk morals, just what the banks have done to corrupt the political system would put them at the bottom of the barrel.
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By what goes up must come down @ 51:
Again, I’m talking relative to government. But I’d also add that when it does come to banks most of them failed not due to being inefficient, but due to poor or non-existent risk control. Although mainly an insurance company, AIG is probably the best example of that. Even accepting the claim that their junkets were wasteful, that isn’t what drove them under. In actuality, those things probably made them money, and ironically it was one particular thing that generated a lot of revenue that drove them under.
If you want to talk inefficient business entities, I’d say compare GM to what the Air Force has done getting new GPS satellites up in the air. Yes GM has problems, but the government isn’t any better.
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Kary, I thought your hypothesis was Govt was worse not equally bad —
“Even most failed businesses were probably more efficient than much of anything done by government.”
“I’d say compare GM to what the Air Force has done getting new GPS satellites up in the air. Yes GM has problems, but the government isn’t any better.”
So you compare satellite launches etc…. with building a car?
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I have never been a big fan of GM, so perhaps that shows in my language.
It would perhaps be better to compare the Air Force’s GM mess to other satellite companies, such as DirecTV, etc. DirecTV did have some delays getting new technology (HD) equipment into orbit, but I don’t think they were anywhere near as bad as what’s being reported on as to GPS. And I really doubt they had cost issues like the GPS cost issues, but I’ve not seen any reporting of that.
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