After a pause early this week, long-term rates have resumed a quick run to the highest levels since last summer. Mortgages have departed 6.5 percent for higher ground, taken by the 10-year T-note almost reaching 5 percent at one point this morning, up from 4.6 percent trading only three weeks ago.
This sharp rise is overdue for a pause, but sometimes sharp is right. Several forces acting in concert have caused this one, and it could easily have another .25 percent to go, quickly. In rough order of magnitude, the orchestra: a red-hot global economy is pulling rates up everywhere; the Fed has no tilt to ease; the U.S. economy is not in pre-recession condition (yet); global markets are floating on a biblical ocean of cash; and inflation is still on a troublesome edge.
The rate rise resumed today on news that May payrolls exceeded already-strong expectations, up by 157,000 jobs, unemployment still a dead-low 4.5 percent; and the purchasing managers’ index of manufacturing continued its recovery, up to 55 from near stall only 60 days ago.
This economic optimism is fully justified by conditions overseas, but the pleasure here is a tad overdone. Several studies of the job markets find suspicious weakness, especially among small businesses — the heart of employment and not included in the big payroll survey. April personal income fell .1 percent after a big gain in March, but fell is fell, and the national savings rate in April was an unprecedented negative 1.3 percent … a lot of borrowing and asset liquidation is supporting domestic “strength.”
The newest housing data are a bit old, from the first quarter, but are exactly the good news/bad news mix expected here: home prices are not falling nationally, but Bubble Zone markets are several years from resolution, facing steadily rising foreclosures. The Case/Shiller index described a 1.4 percent decline in home prices versus last year (the Shiller of “Irrational Exuberance” fame, for more than a year forecasting a 30 percent drop in home prices), and the OFHEO House Price Index (the best of the bunch, worth study at www.ofheo.gov) had a .5 percent gain in prices from the fourth quarter ’06 to the first of ’07, and plus 4.5 percent year-over-year. Across these two studies, “flat” is the statistically significant word for prices, but flat is enough to leave low-equity households — 15 percent of the mortgaged nation — badly exposed to economic shock and ill-advised loans.
Speaking of economic shocks … damage from the rate rise underway will do traditional harm to the pool of buyers, and can tip over a teetering outlook for housing. The magnifier: ARM borrowers have had an easy escape from 7.75 percent resets to 6.25 percent refis for the last nine months, and that hatch is closing.
In normal times, in a U.S.-centric world, a rate rise like this would tend to be self-limiting: go high enough, do enough economic damage, and then reverse.
Those normal times should be seen as historical, past, not to return with the same reliable force. Every day there is a scare piece about American dependency on foreign credit, most Tales of The West involving Japan or China suddenly deciding to sell their dollar IOUs. The real risk over time, as the non-U.S. world economy takes off: the world will be less dependent on U.S. consumers to make an export living, and U.S. interest rates will begin to follow international norm, even in not-so-hot times.
Every other nation on earth is long-accustomed to having to follow the norm, no matter how good their domestic business happens to be (OK, not Switzerland). The shoe is not so much on the other foot now (that’s the thought that leads to all the disastrous dollar-asset-dumping scare stories) as on everyone’s feet.
That’s a prescription for a less-stable world (no outsize anchor), but one with wildly better prospects for growth. We’re coming out of a time of artificially low long-term rates, suppressed by global money recycled here, and how housing takes the hit will be central to the next stage of a globalized America.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
