San Diego Housing Bubble News and Analysis

according to bankrate they went up .3 in a week, if they hit 7 it will make news, 8 and R/E melts down, gov't will do everything it can to keep them away from 8, question is, can they?

Yes, it is called risk reward.

There is a lot of risk in mortgage loans. Look at all the defaults, and the falling Dollar. Remember half the money risked on US mortgages is from over seas, and the Dollar has been like the Peso of the 70's over the last year.

TG, what can the gov do to keep down interest rates? They can bail out the GSE's, but how do they force rates down in a high (relatively) inflation environment?

Also, we are nearing the end of July, the elections will start gearing up soon, officially, and Washington will empty so people can raise money or votes. How are they gonna run things between early October and January?

for a currency to be worth something interest rates must be greater than inflation (at least a point or so)

this is from my basic understanding of economics and from common sense. anyone with a better understanding of economics care to correct me !!!

Huh? What we're seeing here is rising long bond rates perfectly correlated to when Hank (Skeletor) Paulson began demanding a blank check to backstop the GSEs. Bailing them out is going to help US Gov't borrowing costs skyrocket. Get ready for more as he dips into the $800 billion line if this bill passes the Senate!

At this point, there is only one thing the government can do to keep mortgage interest rates down. They have to shore up the dollar. The only way to do that is to shrink the money supply (or at least reduce the growth rate of the money supply.) The only way to do that is to stop running a deficit. Not likely.

As is well known, the Fed, not the government, controls the Fed rate. This has precious little to do with mortgage rates. Yes, historically they track with some correlation, but they dont have to.

30 year mortgage rates are based on the perceived future value of the dollar i.e. inflation. The willingness of foreigners to buy MBS with all those extra dollars the FED keeps printing for the US Budget deficit and which are then sent overseas to buy stuff through the trade deficit.

If there were no trade deficit, those dollars would just have to come from Americans to buy MBS and keep 30 year interest rates low. The fact that the Chinese, Japanese, and Arabs end up with the extra money supply $$ is just because of the trade deficit.

No investor wants to buy a US mortgage, a bond, in todays $$ then have that worth 50% less against their home currency in 3 years. Our reckless spending will continue to push up rates as investors demand a premium to trade in the US $$. The analogy to the Mexican Peso is pretty darn accurate.

In conclusion, the only way the government can keep 30 year mortgage interest rates down is to stop spending so much damn money.....and/or the FED to stop printing so much money (which in effect accomplishes the first item). That's about it. Nothing else will work.

Rates will continue to rise until inflation (the money supply) is under control.

huge cuts in government spending - defense, Iraq, social security, Medicare will slow the economy a lot in the short run. interest rates will go down but a lot of people will have reduced incomes

I agree but that is not going to happen anytime soon. And if Obama wins, the spending will get even worse. I've read that if you add up all his campaign spending proposals, it totals to around $1 trillion in new spending. Can you say double-digit interest rates?

This is a critical question for the RE market. Becuase if they do go up over 7%, the RE market will have huge pressure to reduce prices even more than they are already. The trends we know are now in action...rising unemployment,recession, tightening credit, rising real inflation,etc... are providing downward pricing pressure. But I've always thought that mortgage rates followed T Bills pretty closely. But the risk-reward model makes more sense to me. I've heard believable arguements on both sides for it going up and down. Can anyone with more in-depth insight chime in on this?????

There should be some notion of capitalism left to consider with mortgage rates. Demand for mortgages is dismal even at current rates.It would be hard for them to go up too fast unless the lenders want to go out of business. With all these new assurances and those coming, I doubt they do, especially considering available returns to be had otherwise.

I'm no expert but I have to believe they are going up. Inflation is raging, risk is higher (so a larger risk premium will be priced in), the dollar is losing value, the debt and deficit are out of control with no short or long-term outlook for cutting gov't spending, and there is now, however soft, whisper about the U.S. eventually losing its AAA rating within the next decade. All of this screams higher interest rates and significantly higher interest rates. Maybe not next year but its the track we are on. The only way out is a severe belt tightening and paying down of debt by everyone including the U.S. gov't.

U.S. eventually losing its AAA rating

I think it is meaningless to attach a rating to paper issued by treasury. Treasury can always exchange it for $ at Fed and pay back the creditor. It is better to think in terms of value of currency when rating national debt. Going by the value of $ as measured by oil (or grain or steel etc.,), global markets are already rating it less than "AAA".

Very well put, bsrsharma!

I was curious what people's thoughts on the implications of Paulson's push today for covered bonds. My intuition is that this doesn't seem like much of a solution. It sounds like it requires banks to be more on the hook for the quality of the loans. Not a bad thing, but will it make them any more eager to lend? They were only happy to lend money at silly interest rates when they could dump the risk on someone else. Now, I would think they, like anyone else, would demand a higher interest rate to compensate them for assuming a higher risk. Won't this add to upward pressure on mortgage rates? Will, as usual, Paulson's plan have unintended consequences? Or is there some wrinkle here I'm missing?

Peterb,

Yeah, historically the 30 year mortage rate correlates rather well to the 10 year T-bill. It is more than coincidence but the point is, it doesn't have to. They arent pegged in any way.

T-Bills sort of represent a floor to the 30 year mortgage since T bills as sovereign debt are widely viewed as least risky. It follows that mortgage debt must be more risky i.e. higher interest rates. So although not pegged, it is a sensible progression.

The spread between the two is up for grabs, as has been seen in the past 18 months. Also, the willingness of investors to purchase T-Bills is a wildcard. Regardless of the economy heading south the reckless spending of the US Government simply cant be sustained. Eventually the debt will be seen as inherently risky....not risky in terms of payment but risky in terms of what that payment will be worth.

The Fed can ALWAYS pay back the debt....just hit the big red button and print more money. The problem is what are those $$ worth....less and less...i.e. inflation. No one wants to be paid back in 10 years in $$ worth half as much.

The government has been spending and printing too much money for too long. If it continues, which it will, Tbill rates have no choice but to move upwards. Inflation will continue upwards. And the 30 year mortgage rate will be 8-9% (me thinks) in the next 24 months.

The only way for the FED to combat inflation is what Volker did. Increase FED rates (not Tbill rates). This in turn also pushes up 30 year mortgage rates. The money supply contracts and credit becomes expensive. Savings accounts pay rediculious % rates and 30 year mortgage rates pop up to 10%.

It's a lose / lose. There is nothing the FED or the goverment can do short of curbing spending. It is the ONLY solution and the only thing they can't ever do.

30 year mortgage rates are going up. Period. Housing prices will continue to collapse. It's baked in the cake.

increasing interest rates will kill the california market. I just spoke to an co-worker who has a 5 year ARM which will reset in 2008.

Funny but they said 50$ a barrel of oil would break the economy and it didn't. Next came $100 and again we survived. $150 and we are still moving along. I don't like it but it seems the economy is more resilient than it is given credit for.

give it a little time.

I agree with Ray. The US economy is a tremendous piece of work. We still have what the world wants / needs.

We have more surplus food in the USA than any other country. 3rd largest exporter of rice? USA. Pork, wheat, corn, soybean...you name it, we have it.

The US workforce is right up there with Japan and Germany. Yes, i know, i'll be slaughtered for saying that, but i believe in it. After working in the Phillpines, Thailand, China, Europe etc. The education level and the 'can do' attitude is top notch, when coupled with the individual problem sovling and responsibility to duty the USA is second to none.

The economy will hit some bumps, possible recession, but it wont die. Not a chance.

However, interest rates are headed higher, and, housing prices will continue to drop.