Mortgage rates go up again

[W2R]

I can't predict what the bottom of housing prices will look like. With so much theoretical wealth tied up in their primary residence, those who don't need to sell often take their houses off the market until it "comes back". Rather than a steep decline that marks to market housing prices with real incomes, prices may stagnate until real incomes catch up, essentially allowing inflation to catch up to the house price. On the other hand, in markets that were all fluff, and with a lot of lian loans and pay option ARMs, we would expect to even see an overcorrection as the flood of foreclosures and fire sales overwhelms the local market. That is already happening (and will continue to happen) in the worst four states for housing right now (CA, AZ, NV, FL).

That is so true. Sellers have to be able to pay off their mortgage when they sell. If the sales price is significantly lower than their mortgage, they arent' going to get enough out of the house to pay off their mortgage and they are stuck. Moving could mean coming up with tens or hundreds of thousands of dollars that most people don't have just around the house in the cookie jar. So, they can't sell at a loss and are stuck between Scylla and Charybdis. What a mess.

 

[Radiophilejapan]

Any thoughts on whether there will be a corresponding increase in CD interest rates?

I think not, unfortunately. Mortgage rates are long term, and CD's typically short.
Long term rates have been going up as an indication of market fear of future inflation as a result of the government's economic rescue package.
In the short term, the rates will only go up with higher demand for credit for comsumption. My wife has been doing her part but it needs a collective effort.
I'm waiting for the right time to buy CD's also. Around mid next year is my SWAG.

 

[LOL!]

Locally, rates with 20% down, 30 year fixed are 4.75% with no points and a $1650 fee (credit union). Lets say our theoretical couple who earn $120k combined put 20% down on a $500k house today, and end up with a P&I payment of 2086.50 and a total PITI of about $2900/mo. In five years they want to sell the house and move out of state. Assuming prices, taxes, and wages have remained unchanged in that time (possible), but the interest rate the new buyer can obtain is now 7.5%. To this new buyer who can still only qualify for the same monthly payment as the original buyer, and who puts 20% down, the house would have to be priced at $375k to make any sense to the buyer. The seller would have to either find someone willing to pay more for the house or drop their price. The increase in interest rates, in the absence of a corresponding increase in real incomes, would essentially wipe out all of the seller's equity, and in this hypothetical case the seller could possibly be underwater five years out.

Excellent synopsis! Home values are really affected by what the monthly payment will be. Interest rates go down: house prices go up. Interest rates go up: house prices go down.

 

[bsmup]

Another brutal day today for the long end of the curve.

 

[REWahoo]

Another brutal day today for the long end of the curve.

Translation please...

 

[ziggy29]

Translation please...

The yield curve steepened sharply again today. Mortgage rates spiked again while short term rates on savings are as pathetic as ever.

 

[bsmup]

The Chinese (and others) don't trust our ability to pay back our 10 year bonds (or any long term bond) so they are selling them and getting into anything less than 1 year duration.

Bernanke has done all he can on the short end by lowering the feds fund rate to 0%. Bernanke is trying to keep rates low on the long end by buying long term bonds. But too many people want out of the long end and Bernanke can't possibly buy up the entire market.

Demand for long term debt is going down as the trust in the ability to pay back the principle erodes. Interest rates go up. The ability for homeowners to refi, for businesses to obtain new financing and for the government to borrow goes kaput.

 

[Radiophilejapan]

The Chinese (and others) don't trust our ability to pay back our 10 year bonds (or any long term bond) so they are selling them and getting into anything less than 1 year duration.

IMHO the Chinese (and everyone else) is concerned about future inflation and devaluation of US$ more than any possibility of default by the US Treasury. With 3/4 Trillion US$ of Treasury bonds, they are a substantial part of the bond vigilantes, but they can't dump the bonds to punish the Treasury. Instead, they resort to verbal warnings, including a potential threat of moving to other forms of foreign reserves. They won't to do it anytime soon as their economy depends a lot on the US market and they can't afford the yuan appreciating over the US$.

 

[ziggy29]

The Chinese (and others) don't trust our ability to pay back our 10 year bonds (or any long term bond) so they are selling them and getting into anything less than 1 year duration.

For better or for worse (probably both), the fates of the U.S. and Chinese economies are intertwined. Right now we need their credit and they need our demand for their goods.

Even if the Chinese lose some faith in the long term prospects of the dollar and the U.S. debt, the bottom line is that if they tried to make a major move out of dollars and out of longer Treasuries, they could well be contributing to a serious economic problem that would KILL their export industry (and possibly fuel a backlash against Chinese goods).

I wouldn't be surprised if they make some modest adjustments to their holdings and continue to "warn" the U.S. about the debt and the spending, but in the end, if China used the "economic nuclear option" in terms of their holdings in dollar-denominated debt it would be the financial version of mutual assured destruction. And I suspect they are rational enough to realize that.

 

[clifp]

For better or for worse (probably both), the fates of the U.S. and Chinese economies are intertwined. Right now we need their credit and they need our demand for their goods.

...

I wouldn't be surprised if they make some modest adjustments to their holdings and continue to "warn" the U.S. about the debt and the spending, but in the end, if China used the "economic nuclear option" in terms of their holdings in dollar-denominated debt it would be the financial version of mutual assured destruction. And I suspect they are rational enough to realize that.

It just struck me that we have a case of role reversal here. The US is playing the role of economic North Korea, doing stuff that our trading partners hate. But all options stink for China and the other countries that hold our debt. So all they can do is issue increasingly sharp criticisms, threaten us with meaningless sanctions, while gritting their teeth and buying our debt.

It is fun to be the bad boy, knowing that if daddy or mommy spanks you, it truly is going to hurt them a lot more than it hurts you.

 

[bsmup]

Up, up and away!

 

[semtex]

For better or for worse (probably both), the fates of the U.S. and Chinese economies are intertwined. Right now we need their credit and they need our demand for their goods.

This Chinese need our demand for their goods thing always puzzles me. Why?

Basically Chinese give us credit to buy their goods, why they have to do that? Or put in another way, why they have to that in dollor?

 

[ziggy29]

This Chinese need our demand for their goods thing always puzzles me. Why?

The reason China is flush with all this cash is because their economy is driven by exported manufactured goods. The continued health of their economy is likely very dependent on continued exports. In order to have a market, you have to have customers with money to buy your goods. Dumping Treasuries and trashing the dollar would be a good way to lose your best customer.

Did you see that up to 50% of Chinese toy manufacturing plants were closed at the depth of the recession early this year? And the shocks we've experienced which led to that is nothing compared to what would happen if China stopped buying dollars and Treasuries.

 

[semtex]

ziggy29, Chinese is an exported oriented economy, which is a fairy created by media. Recently, the "economist" article finally admits some fact, import/export only influences about 9% of chinese population.

here is basic fact, nearly all manufacture products, or consumption, china is number one, except electric and oil. Why US's GDP is 14T and china is only 4.5T.

Now china is biggest car markets, why we say china is a export oriented country?

 

[bsmup]

Do I hear 6?