From Inman News:
Long-term rates are clinging to their highs (6.25 percent for mortgages, 4.77 percent for the 10-year T-note), but the bond market looks lousy, poised for another rise.
The straight-line, quarter-percent rise in rates began in the second week of December, as data began to arrive too strong to support sweet dreams of a Fed rate cut, especially strength in the job market. Unemployment is a dead-low 4.5 percent, and a sustained decline in new claims for unemployment insurance says that conditions are, if anything, improving.
The Fed’s January “beige book” describes the labor market as “tight,” competition developing for scarce types of training and talent, and in the stage historically leading to wage pressure in excess of productivity. Wage-induced inflation is the worst form, quenchable only by racking up the unemployment rate — which is not difficult to do, except that politicians will then filet and fricassee the perpetrator at the Fed.
Down another road, the housing bubble is no more hazard than Y2K, and the economy has rapidly adjusted to 5.25 percent — after all, about the same Fed funds rate prevailing from 1995 to 1999, one of the hottest, most productive and inflation-free intervals ever.
At this instant the bond market is leaning to road two, but my hunch is that there is no single fork ahead, but successive bouts of indecision. Reasons as follows:
1. Any big rise in mortgage rates from here is going to be self-correcting. Adjustable-mortgage rate re-sets could be doing real harm (they’re all headed for 7.5 percent or more right now), but cheap fixed-rate loans are an easy and attractive escape hatch. There is no question that the drop in fixed rates from 7 percent to 6 percent from July to December softened the housing blow, and a re-trace upward would hit hard.
2. I do not now, nor have I ever believed in a housing bubble — not in the sense of a widespread collapse in prices by 20 percent or more. However, announcements that the corner has been turned are unfounded optimism. The worst is not over when the market reaches a flat-price bottom, the worst begins then: flat prices over time expose more and more mistakes and bad luck, numbers often rising for years. The corner is restored appreciation of prices, and many coastal areas and the Desert Southwest are many years away.
3. PMI publishes its estimate of risk of falling prices, and is a serious and skilled observer (note that mortgage insurance providers have chosen to lose market share rather than join in the piggyback and subprime foolishness). Of 50 MSAs, PMI forecasts a 50 percent-plus probability of falling prices in 18, and a 30 percent-plus probability in another eight. Housing risk ain’t over; it’s hardly begun.