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Major Jump in Mortgage Rates   May 28th, 2009
The rate I track jumped 0.625% in two days       

 
QUICK OBSERVATIONS

More observations...
 

Rather than follow the average market data at BankRate or other composite/averages, I generally track mortgage rates by simply following the rate reported at Wells Fargo . Rather than an abstract average, this is a real rate that's really available. And, as I've monitored the data over the months, the Wells Fargo rate actually seems to be be consistently lower than the average rate reported at BankRate than others. So I use the Wells Fargo rate as a good, representative benchmark to follow the trends in mortgage rates.

And mortgage rates now seem to be on the move. Big time.

The Wells Fargo 30-year mortgage rate has been wobbling between 4.625% and 4.875% for months. Two days ago, on Tuesday, the rate was still at 4.875%. Yesterday it was at 5.000%. And today it's at 5.500%. That's an increase of 0.625% in under 48 hours!

This is exactly what I was talking about yesterday when I talked about higher interest rates for U.S. Treasuries (caused by President Obama's massive deficit spending) causing mortgage rates, and other interest rates throughout the economy, to increase. And these higher interest rates mean:
  1. The ARMs resetting over the next two years will be subject to higher rather than lower rates, leading to more foreclosures.
  2. More foreclosures will lead to more homes on the market which will lead to further losses in home value which will tend to reduce how much money consumers are willing to spend.
  3. The amount of interest the U.S. Government has to pay to borrow money will increase, so we'll be paying more interest on the national debt which leaves less money available for actual government operation.
  4. Most importantly, higher interest rates in the economy makes it more expensive for businesses to borrow money to expand... which could very well hamper any potential recovery.
It's also what I was writing about back in March regarding the implications of the U.S. Government borrowing so much money and the Federal Reserve "printing" so much money:

True... when the Federal Reserve buys U.S. securities, it drives prices up which forces interest rates down. So it won't be surprising to see mortgage rates drop. For now. But there are two problems:

1. Over the long-term, printing $1.1 trillion is inflationary. So while rates will most likely drop in the near-term, higher inflation will eventually lead to correspondingly higher interest rates.


Exactly as predicted, rates dropped in the short-term but it would appear that we may have turned the corner and are reaching the point where this policy "eventually leads to correspondingly higher interest rates."

It's also in line with what I wrote three weeks ago:

If you've been meaning to refinance your home and haven't done so yet, I really think now is the time to get it done. I can't imagine rates going much lower and, based on pretty simple economics, it seems likely that they're going to start heading up.


Now, of course, rates can be volatile. This might just be an unusual spike and it'll come back down. But in the long-term I believe this is an inevitable preview of things to come. This is the necessary result of such massive deficit spending; and it'll only get worse when the eventual inflation caused by the Federal Reserve printing money compounds the problem.

If this is the moment where interest rates start trending up, I'm honestly surprised it happened this quickly. It was an economic certainty that it would happen but I personally thought it'd take a little longer. I thought there'd be a little more of a lag and there'd be the possibility that a recovery would get significantly underway before it was hit by higher interest rates.

But if interest rates are already heading up this early in the supposed recovery, that does not bode well for a continued recovery.

    Update Noon: Bloomberg is now reporting similar observations as to what I wrote earlier.

    A jump in interest rates on typical new U.S. mortgages to the highest since February may end a 'two-month-old rebound in risk appetite,' according to Credit Suisse Group analysts.

    Rates on 30-year loans climbed 0.37 percentage point to 5.34 percent yesterday, the New York-based analysts, who included Mahesh Swaminathan, wrote in a report today. That's because yields rose on so-called agency home-loan bonds as investors backed away from the debt and U.S. Treasuries sold off, partly because of mortgage-bond hedging that may continue, they said.

    'If not reversed, the spike in mortgage rates has the potential to derail the two-month-old rebound in risk appetite by negatively affecting not just the consumer, but also financial institutions that are relying on elevated mortgage origination for earnings,' they wrote.


    The Wall Street Journal also chimed in:

    Treasury yields and mortgage rates surged Wednesday to their highest levels since November, dealing a blow to the Federal Reserve's efforts to stimulate the economy by keeping borrowing costs low...

    But the winds turned against the Fed in recent days, as investors worry the government's approach could lead to inflation. The government will sell nearly $2 trillion in U.S. Treasury bonds this year to fund its stimulus programs, and investors worry there won't be enough demand for it. Slack demand would send bond prices down and push up the government's cost of raising money.


    I've been writing about the risk of inflation since March and been writing about the probable lack of demand for U.S. Treasuries since February. Now it may all be on the verge of happening and, at the very least, the risks are finally receiving more attention in the mainstream media.

    Update 5/28/2009 1PM: The newswires are now abuzz with stories about the jump in Treasury and mortgage rates. Some stories are trying to dismiss the movement as not overly important, but it seems the majority are starting to ring the same bells I did above--and in the article I wrote yesterday. I personally think May 28th, 2009 will be remembered as the day when the consequence of some of Obama's spending programs began to be more publicly recognized. I'm not sure why the outcomes of these programs weren't obvious to everyone months ago when they were being debated, but the numbers are starting to make reality impossible to ignore.

    Update 5/28/2009 3pm:

    Loan officer Dan Green has been around the mortgage business for six years, but he can't remember watching a move in interest rates like the spike that took place on Wednesday.

    In the space of 90 minutes, he said, rates on a 30-year fixed mortgage jumped about five-eighths of a point...


    Update 5/28/2009 7:45pm: I wrote another article about "articleE-Day - May 28th, 2009 - The day the economy rebelled". Basically, this jump in mortgage rates may very well be a watershed event that marks the limit to which the Federal Reserve can manipulate Treasury and mortgage interest rates. Going forward it seems the Federal Reserve can refrain from further manipulation, or can go into a hyper-manipulation mode. In either case it seems that May 28th is the demarcation date between the initial Fed involvement and whatever comes "next."


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