Thursday, June 4, 2009

Low Interest Rates May Not Be Coming Back

The Wall Street Journal reports Low Mortgage Rates Are Going, Going… Looking to refinance? If you haven't locked in, you may already be too late.

If you're looking for a new 30-year mortgage, last week's events from the financial markets carry a very simple message: Get 'em cheap while you still can.

Rates on conforming 30-year loans jumped dramatically in just a few days, ending the week at an average of 5.27% according to That's still OK by historic standards, but it's a jump from the levels seen just a few weeks ago, when you could get loans at 4.75% or below.

The underlying cause isn't hard to find. Rising government debts, and burgeoning hopes of an economic recovery, are pushing up long-term interest rates on government debt. The yield on the 10-Year Treasury, which was barely 2% near the end of last year, surged to 3.67% late last week before settling back slightly. And that, in turn, pushes up rates on other long-term loans.

What does this mean for you?

This surge in mortgage rates, if it continues, is ominous news all around. It's bad for those trying to refinance an existing mortgage, those looking to buy a new home, and those looking to sell their home. It may also be bad for the stock market, and maybe even for the dollar, too. More on that later.

For those trying to refinance: If you hadn't locked in the rate already, you are probably out of luck. You may be stuck with higher rates.

Why is this dangerous for the stock market? The rally in recent months depends on the economy stabilizing, and then recovering. There have been some hopeful signs in recent months. But of course the consumer has benefited from at least two big doses of financial adrenaline this winter: Refinancing gains and cheaper fuel. Both put extra money in their pockets. Both now appear to be over.

It is two months since Federal Reserve chairman Ben Bernanke unveiled plans to print money to buy up Treasury bonds. The aim was to keep long-term rates down. He will have to step up the process. The federal government may also wade back into the market for mortgage backed securities with a similar strategy. The U.S. Mint will have to move to a triple shift to print all the money.

Alas, there is only so far this can succeed. Treasury bonds are IOUs of the federal government. But so are dollar bills. Ultimately the bond market may notice that Uncle Sam is only paying off his IOUs with more IOUs. Gamblers who do this tend to find their markers start trading at a discount. When it does, neither is likely to command a premium.

Andrew Jeffrey writes for Minyanville Keepin' It Real Estate: The Fed Loses the Mortgage-Rate Battle?

…And this at a time when pundits and performance-chasing portfolio managers are latching onto the absurd notion that the nation's housing market is making some sort of fundamentally sound turnaround. A contributor to CNBC actually said with a straight face that our economy can't grow with mortgage rates this "high," and that the Fed is derailing the recovery by letting rates move up.

To say that our economy is undergoing some sort of legitimate recovery, and at the same time assert mortgage rates a hair above 5% are too high is to confirm that those declaring the recession in our rear view mirror are delusional at best, talking their book at worst.

As renewed fears of inflation percolate and investors begin to snatch up commodities in expectation of future prices, pressure will mount on the Fed to keep rates of all kinds low to ensure the economy doesn't remain mired in its current malaise. This means more printing press activity, more "quantitative" easing, and more social-welfare programs packaged as "progressive" economic policy.

Battle lines are being drawn: Washington bureaucrats on one side, advancing the theory that money can be printed seemingly without limit to generate legitimate economic growth - and the market on the other. And each time the Fed takes its foot off the dollar-debasement accelerator, we get a peek into what will happen when the printing presses finally run out of ink.