Wow. The basics: mortgages were at 5.75 percent last week, Monday a holiday, Tuesday markets stunned by the Fed’s 0.75 percent cut; mortgages early Wednesday morning fell to 5.375 percent(!), wholesale rate-locking Web sites crashed in an hour, mortgages back up to 6 percent(!!) by Thursday noon. Citibank wholesale raised its rates nine separate times in 24 hours.
Summary: The economy — including housing — is probably better than feared, and we’ll all be OK. However, this was the worst week for economic public policy in my memory. We’ll survive it, too.
The details center on the Fed chairman and are not pretty.
First, a crucial concept: Bond buyers love recessions and hate rescues. As the economy faints, bond players join a frightened scramble into bonds for safety, and make a great deal of money if they can sell the bonds before the Fed rescue. If the Fed looks too easy too quickly, bonds reverse in self-protection.
A properly conducted Fed rescue must be delicate because rescue depends on lower long-term rates, not just the short-term ones that the Fed controls. Precedent is more important to the Fed than to the Supreme Court. If the Fed moves in stately, predictable and dignified fashion, long-term rates will follow, even though reversal one day is inevitable. This economy needs lower long-term rates than any in modern times.
Last Thursday, Fed Chairman Ben Bernanke went to Congress to ask for a stimulus package “quickly.” A chairman without confidence in his own resources immediately destabilized markets all over the world (Dow down 400 that day). The Fed chairman never, ever goes to Congress to ask for stimulus: that’s the administration’s job. The chairman must stay in his tower, appearing confident, in charge, able to respond to any emergency, any and all doubts a state secret.
The destabilization worsened worldwide on our Monday holiday, futures indicating a down-500 Dow open on Tuesday. When the Fed cut 0.75 (to 3.5 percent), the first assumption was that it knew of some new credit disaster. Like a man after a car accident patting himself, looking for injury or blood, markets took inventory. Nothing. The only reason for the timing of the ease was to support the stock market — as Bernanke had done in August on purpose, and by accident in December. His extreme action, unprecedented in the entire history of the Fed, was notably not joined by any other central bank.
After that injury inventory, I thought maybe Bernanke had panicked — soiled his skivvies as no chairman before. Now … I think he was oblivious, or maybe a combination of the two. He has shown political ineptitude from the first months in office (blabbing intentions to a pretty reporter at a party), and does not appear to have learned a thing.
The consequence of random, academic-in-a-china-shop behavior: An already fragile and illiquid bond market raised rates and slowed trading.
The stimulus package has had similarly destabilizing results. At best it will be harmless. More likely, late, adding stimulus after the need has passed. The new mortgage limits, $625,000 for Fannie and $750,000 for FHA, will be intercepted by a 125 percent-of-median-prices lid in each Metropolitan Statistical Area. Out of 156 MSAs in NAR’s database, only 20 will benefit. In my home MSA, Boulder, Colo., the city has a home-price median near $550,000, but the whole MSA is $367,000, hence a new Fannie/FHA limit (maybe — not final) of $460,000 is an undetectably minor help.
Good news: Short-term rates are so low that ARMs are adjusting down, into the 5s. Prime-based HELOCS are adjusting down from the mid-8s to low 6s. The whole of Wall Street thinks that home prices will fall to a clearing price, and they won’t — foreclosures will rise for years, but Bubble Zone prices may well bottom this year.
Pending news: The Fed meets next week (Saints preserve us …), and mortgage-defining jobs data is out next Friday. Ultimately the economy drives rates, loopy Fed or no.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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