Bob
As has been pointed out here, the depth, size, and timing of the housing price decline will depend heavily upon mortgage rates. Accordingly, credit market developments of recent days are most alarming.
While the news media are naively convinced that the Fed’s recently lowering of interest rates will rescue housing, the mortgage rates have moved in the opposite direction. This is because the Fed can only influence SHORT TERM rates, such as Fed funds, the discount rate, and short term treasuries. But the MARKET determines long term rates such as 10 year bonds and mortgage rates. This is because supply and demand involving long term investors are buying such instruments, and they are concerned with future inflation and the strength of the dollar. If they have bleak expectations, they will naturally demand higher interest rates before committing their money for so long.
In recent days, long term treasuries have marched up about a half percent, and mortgage rates have climbed even more. I suggest this is because of worsening inflationary expectations and a declining dollar. As to why mortgage rates have climbed even more than government bonds, let’s thank our congress, which is considering bills to change mortgage contracts to the disadvantage of mortgage holders. When our politicians mess with the sanctity of contracts, the investors world-wide will run away from U.S. mortgages, and who can blame them. Thank you Chris Dodd and Barney Frank.
All this will serve to worsen the housing decline, proving once again that our politicians’ failure to understand how free markets work is truly destructive.
