The 10-year T-note has been unable to break 4.5 percent in a half-dozen tries over three weeks, the same stopping point as last fall, which in turn has mortgages stuck above 6 percent. Without weak economic data, soon, long-term rates will rise.
The data is OK — lukewarm, but not falling apart. Retail sales were shaky in February, but the bad-weather excuse was legitimate. New claims for unemployment insurance have fallen below winter highs. The twin producer- and consumer-price indices are not improving as fast as the Fed would like, but were no cause for alarm.
The only thing keeping rates as low as they are: mortgage/housing hysterics. Estimating economic drag is sensible; the Dow’s 200-point case of the vapors on Tuesday’s news of rising delinquencies and foreclosures … silly.
If you think that report was tough, you weren’t around for the ’73-’74 recession or ’80-’82 (builders mailed 2X4s to Ron Reagan), or the oil patch crater in ’86, or the submerging Atlantic seaboard in ’87. Each of these housing fades was an effect of a larger economic problem; not even the S&L meltdown ’85-’90 was enough to cause a larger economic problem.
Every business blog in the country and too many professional reporters are now in Gotcha! leapfrog. A site mentioned here (www.ml-implode.com) was funny and a useful news ticker; now it’s a trash heap including Google ads for subprime loans.
The only issue that matters: will the housing correction do serious harm to the overall economy? The three possible mechanisms: consumer spending could be starved by a decline in equity withdrawal; consumer confidence could crack under the weight of falling home prices; or a mortgage-credit contraction could precipitate a buyer-shortage catastrophe. The fourth element, a Wall Street crisis involving the mortgage-derivative sausage machine is more entertainment than threat to the economy (OK, it is a threat to Ferrari and the Hamptons).
Equity withdrawal is down, but at $82 billion in the last quarter of 2006 is still real money. Consumer confidence surveys are sliding, but there is no general retreat in consumer spending.
A mortgage-credit shortage? Even the serious analysts are making a substantial error: they treat the supply of buyers as a closed system. If a loan type disappears, then the sum of buyers who used the vehicle last year will be shut out of the pool this year. Right? If the supply of homes increases through foreclosure, then it will overwhelm available buyers. Right?
Not right. A large fraction of buyers who used 100 percent and no-doc financing did so because it was available and easy. Countrywide’s Mazillo makes me queasy with his look-at-the-doughnut “81 percent of subprimes are performing” (most of Iraq is peaceful … ), but it’s true that these borrowers are better quality than their loans’ minimum requirements. This performing fraction could have found loans with any of several FHA, Fannie or Freddie programs — more bureaucratic hassle, a need for a co-signer there, a little more saving here, but no big deal. The underwriting of many state and local assistance programs is indistinguishable from mid-range subprime.
If 100 percent no-doc loans disappear permanently, I think the nation will survive.
Further, the pool of buyers is not fixed. It grows every day in two ways: the population of the country is growing by 2.5 million people each year, heavy with immigrant adults needing housing right now. Second, incomes are rising; houses that were not affordable two years ago, prices flat since, today are affordable to millions of “new” buyers.
As much fun as it is to contemplate disaster for profiteers, owners and enablers from Main to Wall and beyond, stick with the high-probability case: housing is likely to be a multiyear economic drag, but not even enough to cause a recession.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
