Mortgage interest rates rose yesterday largely in response to the release of Fed Minutes – and they are now at levels not seen since 2000.
Here are a few interesting observations.
Nobody Quoted 30-Year/Fannie Mae Rates In The Early 2000s – So Rates Were Effectively Much Lower In 2000.
One reason California lenders rarely quoted Fannie Mae rates was that the maximum Fannie Mae loan was only $252,700, which even then, with much lower home prices overall, was only enough to finance a dilapidated garden shack (on a good day).
BUT – more importantly, there were far better financing options available with much lower rates. For example, there were 7-year Adjustable Rate Mortgages (ARMs) that required only good credit, asset verifications, and 20% to 25% down.
Those loans were much easier to obtain and the rates were 1.5% to 2.0% lower than anything Fannie Mae offered. And no, they were not “subprime,” as the loans had an extremely low default rate.
Why Low-Rate, Easy-To-Get ARMs Are Not Available Today
There are two reasons why those ARMs are no longer around.
- The Yield Curve is inverted, meaning short-term rates are higher than long-term rates because investors expect long-term rates to fall. Inverted yield curves primarily refer to Treasuries (government debt), but they spill over to mortgages too. ARMs are obviously less attractive if they have higher rates than fixed rates; and
- The government got involved. In an extremely successful effort to convince the world that the 2008 mortgage meltdown was not a result of bad government policy (too low of rates; Fannie Mae creating an artificial market for subprime loans; affordable housing goals; etc.), the government instead convinced the world that we needed more mortgage regulation and they effectively took over the industry. They did so with Dodd-Frank rules, the CFPB, and the effective takeover of Fannie and Freddie. So – because of regulations, it is very difficult for anyone to offer low-rate, easy-to-obtain mortgages – even if the borrowers are highly qualified with a very low risk of default.
What Did The Fed Say To Push Up Rates Yesterday?
The Fed Minutes said the usual: (1) they do not think we will have a recession; (2) they still think inflation is a serious concern; and (3) they think the labor markets are too strong.
In response to the Fed, many analysts said… sigh…
Inverted yield curves, record credit card debt, lag effects of interest rate increases, China teetering on collapse, a clear trend of falling prices, and weak economic signals worldwide make a recession seem all but inevitable.
In addition, analysts like to remind the Fed that layoffs only start AFTER we are in a recession – so focusing on the labor market now is misleading.
World’s Largest Asset Class Collapsing!
The above subheading is the tile of this George Gammon video. He is corroborating my blog from yesterday about China’s collapse, but he adds some very interesting numbers.
China’s residential property market is $62 TRILLION and it is collapsing right now due to excess inventory, excess debt and massive over-valuations. In contrast, the U.S. property market is only $34 trillion – and it blew up the entire world in 2008.
So… this is just one more reason to think the Fed is wrong (again).
10 Year Treasuries Hit Highs Not Seen Since 2008 – But Mortgage Rates Were Lower! (Why?)
The last time 10 Year Treasuries saw yields this high was in 2008, but mortgage rates were much lower then relative to the 10 Year Treasury than they are now.
The reason is because the “spread” between 10 Year Treasury yields and mortgage rates was much smaller, as I explained in this blog: 10 Year Treasury Yields vs. Mortgage Rates.
