Mortgage Rates Heading Near 7% -> Housing Rebound Imminent

I know that headline sounds like a joke, but this is what the pundits want you to believe. The banks are ok because housing is going to be fine, just let the government interfere a bit more and they can fix that problem as well. With their normal efficiency. Sorry - not going to happen - we have a long way to go, median prices need to fall a long way [Dec 6: What Should Median Home Prices be Today?] Remember the truth -> any "pickup in sales" you see in the hardest hit states are dominated by foreclosures - which are pricing way below the "market". Only when sellers come to grips that they won't be getting their dream prices, and find willing buyers in scale will there be "market clearing" prices and non foreclosure homes be trading in large volumes (note if you live in natural resource states which never had huge run ups in values like Texas or Wyoming this conversation mostly does not apply to you) ;)

And, the higher mortgage rates go - the more expensive it gets (i.e. you can afford less home). So prices must fall even further as the monthly mortgage payment covers less principal and less interest. We've been spoiled by historically low rates in the "Easy Al (Greenspan) era" - even at 7% rates would be quite low by historical nature. But we've been addicted to the 5% (6% in the 'worst of times') era.

But please, go buy bank stocks because the housing market is shaping up for a rebound - it's imminent in fact (6 months out - or are the guys who told us Spring 2008 now pushing for Spring 2009? I don't know - eventually if they keep guessing they are going to "nail" the call)

• Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market. Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.
• The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates.
  
• The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.
• Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market. The federal government has proposed a rescue, and has urged Congress to approve it quickly.
• But bond investors, worried that the companies may not be as big a support to the market as they have been, are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets.
• “When we get to rate levels like this, the market just shuts down,” Mr. Barnes said. (in the early to mid 80s these levels would of seemed like an absolute gift, but we've been conditioned on Uncle Alan Greenspan monopoly money so it seems like purgatory to pay high 6%! The horror!) While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. (and bingo was his name-o)
• Inflation, which tends to send bond prices down and bond rates up, is another concern (this was my first concern as outlined in [Jun 12: Higher Inflation Expectations? Higher Mortgage Rates Coming] but hey let's throw in the nationalization of Fannie and Freddie on top of it)

I don't write about this subject that much anymore because the "recovery" is so far off it is just wasting time and space to go into it each week. Just remember, incomes need to fall into some relation with home prices. The era of buying $350K homes on $45K salary is over. [Apr 26: Bankrate.com - Average Joe Still Can't Afford a Home] If you are a newer reader - stare at the chart in this entry I wrote in April, about how out of whack home prices have gotten in relation to the previous 100 years. Reversion to the mean - it's cool.

This whole epedemic is courtesy of your "no regulation needed, consumers don't need protections and will figure it out, securitization is a cool thing" era. So as prices come back in line, by (market) force, which the government cannot socialize as it is trying to do with everything else - all these underlying assets these banks (the current golden children of the stock market) hold will continue to blow up. And this is why this is "not" the bottom. Nor will it be next kitchen sink quarter. Nor the one after that. Nor the one after that. Or the one after that. (short of national moratoriums on foreclosures - folks don't count it out - it's not a free market anymore) They are all oversold rallies to be sold/shorted. And if interest rates peak over 7% and/or go to 8%? Well then I am being an optimist and keep layering on kitchen sink quarters for another 4-6 quarters past end of 2009. Our banking system will be much smaller by the time we get "there". (translation IndyMac is just the start - it's been 'forgotten' quickly by the Kool Aid drinkers)

[Jul 10: Foreclosure Activity Map]