Okay, let’s face the fact that the jobs reports and the reports from Ford and General Motors that came out today were ugly. Not just ugly, downright nasty.
In normal economic times, that sort of bad economic news would send people fleeing stocks and going into the bond market. That would in turn send bonds and Treasuries up and the rates down.
But that didn’t happen. Just looking at one indicator – the 10 year Treasuries, the yield went up by .09% today. What’s up with that?
A couple of things are keeping mortgage rates higher than what the economic fundamentals would justify:
- The amount of money the government is spending on bailouts. The Federal deficit is truly skyrocketing because of all of the bailouts, buyins, rescues, TARPS, etc. that are happening. That money needs to be financed somewhere because we don’t have the money sitting in the “bank. When the markets get flooded with additional loan demand, the “buyers” of the debt can demand a higher rate on their money. That pushes rates up.
- The concern that foreigners are not going to be able to continue to buy our debt. This is not an economic downturn that is only happening in the United States, it’s truly an international downturn. If, due to concerns about the amount of US debt or due to economic downturns in other areas, foreigners either stop or slow down the amount of US debt that they buy, that will reduce demand and push rates higher.
- The Bank of England cut rates by 1.5% this week (in their version of the Fed Funds rate). We can’t do that. Why? Because we’re already at 1.0%. So the options that the Fed has going forward are more limited than we’d like to see them.
I truly believe that if this was a “normal” economic downturn, we’d see mortgage rates at least .75% lower than we have them. I also believe that short of a major Federal “buyout” of mortgage backed securities (a topic for another post), we aren’t going to see rates substantially lower than we have them now. I also believe that it’s going to be very hard for the government to “maneuver” interest rates far enough down so that they can become an “attraction” to get additional people off the fence and in to the buying market.
To paraphrase the well known broadcaster, “And that’s the way I see it……”
Tom at the Real Estate Bloggers says:
Great post, Tom.
Here is a scary question, what happens if buyers do not show up for our debt to mortgage rates? Could we be seeing the next Carter administration with a weak foreign policy, loss of confidence in the dollar, and skyrocketing interest rates?
That is my fear, but I would love to hear your point of view on it.
November 8, 2008 — 9:31 am
Thomas Johnson says:
Add in 10%+ unemployment for 2009.
The new administration will still be blaming the Bush administration in 2012. This will be a long tough road.
For me, there is no more “fasten seatbelts” rhetoric-we are not riding anymore. GM and Ford are effectively BK and out of gas. I am thinking more in terms of Bataan death march. We have been surrounded and taken prisoner by our own actions. The good news is there were survivors who lived to fight another day.
There, I said it.
November 8, 2008 — 1:26 pm
Robert Kerr says:
Could we be seeing the next Carter administration with a weak foreign policy, loss of confidence in the dollar, and skyrocketing interest rates?
Given where we are now, it would be a miracle if we manage to avoid a repeat of the 1970s.
In all the Jimmy Carter references, don’t forget what people and what policies brought us to this point. This isn’t Carter’s nor the Democrats’ collapse.
George W. Bush, Greenspan, Bernanke, Paulson, and the Republicans on Capitol Hill who helped steer this economy aground own this one.
November 8, 2008 — 2:26 pm
J Boyer Harding NJ says:
Here we go already with the carter comparisons. They are out of place just yet.
November 8, 2008 — 6:33 pm
Tom Vanderwell says:
I refuse to participate in the blame games because I think the evidence says that every party involved has an amount of blame in creating the mess.
I do think that unless the next administration surprises me (and I hope they do) we’re going to have a tough road ahead of us.
Tom
November 9, 2008 — 6:58 pm
Tom says:
I also do not want to play the blame game. For the record I am conservative financially and a social libertarian.
But I also recognize and believe that those who do not understand history are bound to repeat it.
Bush may be a Republican but he was not a fiscal conservative. The combination of a liberal Congress and a weak economic President has created this mess.
What fear I have is that we gave the big spenders the keys to the castle as opposed to giving them to tightwads.
I hope I am wrong…
November 9, 2008 — 7:30 pm
Tom Vanderwell says:
I am firmly in favor of discussing and analyzing so we can learn and deal with and avoid this again. I just don’t feel that saying it’s all Bush’s fault or it’s all the mortgage lenders fault, or it’s all _______ does anyone any good.
We have a mess, let’s figure out how to deal with it, figure out how to resolve/work thru/survive it and then make sure it doesn’t happen again.
That’s becoming a more and more important professional goal in my life.
Tom
November 9, 2008 — 7:47 pm