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Mortgage rate blowout - a new bubble in the making?

Thursday, December 18, 2008, 10:45 PM

Between 2002 aand 2005, Alan Greenspan dropped interest rates too low for too long.  This created a property bubble which was really no surprise at all to anybody who follows such matters.

In fact, there are reams of papers written by PhD Fed staffers that explore the unusually tight correlation between real estate and mortgage interest rates. There's really not a lot of mystery as to why this is the case.

To make an extreme example of it (and leaving the principal payments out of it), if you can afford $12,000 per year towards mortgage payments, at 10% interest you'd be able to afford a $120,000 mortgage whereas at a 1% rate of interest you'd be able to afford a $1,200,000 mortgage.

As a rule of thumb, each 1% reduction in the rate of mortgage interest supports a 10% increase in the price of a house.

So if you're a government official in charge of cleaning up after the last bubble, what does one do?  Well, if one of the goals is to stem the losses arising from plummeting house prices then driving interest rates down has to be one of the more obvious policy plays.

Recently the Fed has been buying both GSE Agency debt and MBS products.  That is, both Fannie and Freddie debt (to supply them with more cash that they can lend) and their bundled mortgage products. 

This, coupled with the Fed's extreme support for the US government treasury market has served to push mortgage rates to their lowest levels in the entire data series. 

30-year fixed-rate mortgage at 37-year low
CHICAGO (MarketWatch) -- The benchmark 30-year fixed-rate mortgage tumbled to a national average 5.17% this week, the lowest level since Freddie Mac began its weekly rate survey in 1971.

Will these record-breaking low mortgage rates help?  That depends on your position.  Certainly anybody who has a mortgage and is in a position to refinance to these new lower levels will be helped.  And all the ARMs due to reset that are tied to LIBOR and Prime rates will be helped (by lower adjustment resets). 

But all the people who did not participate in the housing bubble and have been patiently waiting for better prices are now 'fighting the Fed' which is a lousy place to be.

But will house prices actually go up as a result?  Of that I am less sure.  House prices are a complicated affair relying on other factors besides mortgage interest rates such as jobs and consumer psychology.  I think these last two factors will more than counterbalance the Fed's attempt to reinflate the housing bubble for some time, probably another 12-18 months.

After that?  It seems extremely likely to me that the another bubble is in the offing because the Fed is determined to create one.  It's almost as if it's all they know how to create.

But you and I know that the real reason is that our monetary systems demands continual expansion and so the Fed, as the guardian of that system, will do everything it can to keep the expansion going.  

To some financial observers this is known as the "inflate or die" strategy.

At any rate, this is one example of how the Fed intends to get new credit money flowing back out to the people.   Now if they could just get the banks to play along....

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12 Comments

ytterbius's picture
ytterbius
Status: Member (Offline)
Joined: Jun 22 2008
Posts: 19
OT: On viewing of the "Crash Course" DVD.

Hi Chris, I ordered up some copies of the Crash Course, and have been passing them out with a jolly "Merry Recession!"

I watched (almost) all of it again the other night, and I remembered back to my original run-through on the web.  There was a point where you talked briefly about "default" as an option to avoid paying back debt, and I believe that you said that you'd get back to it.  I remember at the time thinking that I really wanted to see that, but in any case, I still want to see it. 

Just Sayin'.  :)

James Wandler's picture
James Wandler
Status: Martenson Brigade Member (Offline)
Joined: Aug 12 2008
Posts: 219
Re: Mortgage rate blowout - a new bubble in the making?

Maybe the only good thing about another bubble is that it might be a way for us, collectively, to have more time to prepare for what seems to be eventually inevitable. 

I'm taking action - I hope others are as well. 

(I'll be over in the Permaculture forum...Thanks Tom Loftus)

All the best,

James

bruin36's picture
bruin36
Status: Bronze Member (Offline)
Joined: Oct 4 2008
Posts: 48
Re: Mortgage rate blowout - a new bubble in the making?

I agree with James,

I hope that another bubble  created by the low interest rates will be the dead cat bounce that may, i mean may, pop up the prices of homes or at least get people buying real estate again.

But also the inevitable is at hand and I dont feel that there is anything the fed can do to stop the tsunami that is about to hit. If there is a bounce up in the housing market then I hope it gives everyone, myself included, a large enough and deep enough window to get their homes sold.

-Bruin

jerry_lee's picture
jerry_lee
Status: Martenson Brigade Member (Offline)
Joined: Sep 24 2008
Posts: 126
List of what to buy??

Didn't I see a list of items Chris has recommended a person purchase. I know he stated in a recent report that he was buying his clothes for 10 years during the after Christmas sales. Can someone help me find this list... or another helpful list. 

Goal Digger's picture
Goal Digger
Status: Bronze Member (Offline)
Joined: Nov 17 2008
Posts: 39
Re: Mortgage rate blowout - a new bubble in the making?

Chris,

 What do you mean when you say:

"But all the people who did not participate in the housing bubble and have been patiently waiting for better prices are now 'fighting the Fed' which is a lousy place to be."

I ask because for various personal reasons I've neither bought, nor owned real estate in the last 5 years.  In some ways, I've felt my personal circumstances (while overall unfortunate) were a bit fortuitous in this regard, but now I'm curious as to what you mean by this comment?

I tend to agree that "jobs and consumer psychology" will be more determinative on the real estate front.  Anecdotal support being that in my metropolitan area Chrysler just extended its annual holiday shut down by several weeks, which includes three local facilities.  While the current UAW contract requires Chrysler to pay furloughed employees 90% of their hourly wage, I truly wonder whether (with the exception of JEEP) Chrysler will reopen.  Ever.  If not, then I doubt our local real estate market will see any "bounce" with the lower rates.  More likely those who own will simply refinance and do their best to hold on to what they've got.  If there is a bit of a bounce, I hope and pray I'm able to convince my parents its time to get out while they still can!

suesullivan's picture
suesullivan
Status: Gold Member (Offline)
Joined: Oct 6 2008
Posts: 305
Re: Mortgage rate blowout - a new bubble in the making?
James705ca wrote:

(I'll be over in the Permaculture forum...Thanks Tom Loftus)

All the best,

James

 

Permaculture forum? I'd love to read through that. Where is it?

James Wandler's picture
James Wandler
Status: Martenson Brigade Member (Offline)
Joined: Aug 12 2008
Posts: 219
Re: Mortgage rate blowout - a new bubble in the making?
suesullivan wrote:

Permaculture forum? I'd love to read through that. Where is it?

Sue,

Here's the link:  http://www.peakprosperity.com/forum/permaculture/10112

All the best,

James

gyrogearloose's picture
gyrogearloose
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 545
Re: Mortgage rate blowout - a new bubble in the making?
bruin36 wrote:

I agree with James,

 If there is a bounce up in the housing market then I hope it gives everyone, myself included, a large enough and deep enough window to get their homes sold.

-Bruin

You must have missed the bit in the crash course where it is mentioned that not everyone can downsize !!

Who will by the houses if everyone sells...... Wink

 

gyrogearloose's picture
gyrogearloose
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 545
Re: List of what to buy??
jerry_lee wrote:

Didn't I see a list of items Chris has recommended a person purchase. I know he stated in a recent report that he was buying his clothes for 10 years during the after Christmas sales. Can someone help me find this list... or another helpful list. 

 http://www.thepowerhour.com/news/items_disappearfirst.htm

Was bemused by the number of things on the list my wife already had that are on this list when I found it on this site.

Cheers Hamish

jerry_lee's picture
jerry_lee
Status: Martenson Brigade Member (Offline)
Joined: Sep 24 2008
Posts: 126
Re: List of what to buy??

Hamish

Thanks so much!! That's a great list. I never would have thought of diapers, since our kids our grown. But, if they move in with us and IF there are grandchildren...diapers would be pretty important. They might make good barter items if we don't need them. The quote about toilet paper being like gold is 'priceless', too. Might be one of the best investments on the planet right now!

BTW when I was in Scotland a few years ago I purchased a Highland Cow puppet. I asked the sales clerk to suggest a good Scottish name and she came up with Hamish. Hamish the Highland cow!

Thanks again!   Jerry Lee

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: List of what to buy??
jerry_lee wrote:

Didn't I see a list of items Chris has recommended a person purchase. I know he stated in a recent report that he was buying his clothes for 10 years during the after Christmas sales. Can someone help me find this list... or another helpful list.

Anyone doing this should ensure thry buy smaller sizes......  because we will all be losing weight in the future! 

jerry_lee's picture
jerry_lee
Status: Martenson Brigade Member (Offline)
Joined: Sep 24 2008
Posts: 126
Re: List of what to buy??
Damnthematrix wrote:
jerry_lee wrote:

Didn't I see a list of items Chris has recommended a person purchase. I know he stated in a recent report that he was buying his clothes for 10 years during the after Christmas sales. Can someone help me find this list... or another helpful list.

Anyone doing this should ensure thry buy smaller sizes......  because we will all be losing weight in the future! 

GOOD POINT!

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