The Mortgage Corner
The 10-year Treasury bond yield has fallen back to 2.86 percent, which is usually recession territory. And the 30-year conforming fixed rate is 4.125 percent again with a 1-point origination fee. This is unheard of in a fully employed economy currently growing at 3 percent. Longer term rates should be rising at such a time, not falling, as I said last week.
Then are we approaching recession territory? Nobel laureate Robert Shiller, perhaps the most informed behavioral economist following the housing market, has just opined that we are in the third largest housing boom, ever. He won last year’s Nobel Prize in the Economic Sciences because he has taken the trouble to understand Americans’ financial behavior in the housing market.
Only two other housing booms—the housing bubble preceding the Great Recession and that in post WWII 1940’s—lasted longer. Existing-home prices have risen 53 percent since 2012, 40 percent after inflation is factored in, said Professor Shiller.
“Since February 2012, when the price declines associated with the last financial crisis ended, prices for existing homes in the United States have been rising steadily and enormously. According to the S&P/CoreLogic/Case-Shiller National Home Price Index (which I helped to create) as of September, the prices were 53 percent higher than they were at the bottom of the market in 2012.”It’s possible we are at the top of this housing boom, which means at the top of this business cycle, as well, since the financial markets usually follow where housing goes. Housing prices and housing demand are forward-looking indicators, in other words, because home buyers are sensitive to inflation and interest rate trends.
Actually, Professor Shiller maintains most investors are fairly lazy in their research of investments, including housing purchases, which is why we have housing bubbles. That’s because investors tend to listen to good stories or word-of-mouth opinions by others they may or may not trust, rather than do their own research that might tell them the innate value of an investment in greater depth.
Such ‘irrational exuberance’ caused the last housing bubble because homebuyers believed the conventional story that home prices would never decline; and they hadn’t since World War Two.
That’s why homebuyers pushed up housing prices as much as 20 percent per year before the bubble burst in 2018, and housing prices declined for the first time since World War Two!
Dr.Shiller goes through all the possibilities for the current housing boom, including good economic times and the low jobless rate, but I vote for the simplest explanation— low interest rates.
It’s true 30-year conforming fixed mortgage rates were even lower last year at this time; as low as 3.50 percent; but the Fed is no longer buying mortgage-backed securities with their QE program.
They are now selling a portion of their $4 trillion portfolio. This should boost mortgages and other longer term fixed yields; but that isn’t happening as investors prefer to snap up more secure sovereign debt insured by the ‘faith and credit’ of the U.S. government.
Then do we have a housing bubble today? Not yet, as there are far too few homes being built at present. Builders are playing catchup to the lingering results of the Great Recession—too many low-paying jobs, too strict qualification standards by conforming lenders that sell to Fannie Mae and Freddie Mac (those entities still owned by the federal government), and cities that don’t want more homes built in their own backyard.
Harlan Green © 2018
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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