Mortgage Rates: Up, No Wait Down

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Once again, the wisdom of crowds doesn’t look so smart. A few months ago the prevailing wisdom was that mortgage rates were headed up. Why? Well, for so many reasons. Government borrowing was going to push up interest rates. The economy was recovering. And of course, we were soon going to be hit by massive inflation (even though the consumer price index recently fell, but whatever no need to look at the real numbers). The New York Times ran an article a month ago on mortgage rates with the title, No Where to Go but Up. Here’s the article’s conclusion:

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

Wrong. Mortgage rates did have somewhere else to go but up: Down.

The Europe debt crisis is causing investors to buy US Treasuries and that in turn is driving down mortgage rates. In fact, mortgage rates are likely to continue to fall throughout the summer. Here’s what the WSJ had to say on the matter this morning:

The housing industry had been bracing for months for a period of rising mortgage rates, triggered by the end of the Federal Reserve’s $1.25 trillion mortgage-securities purchase program. Conventional wisdom held that mortgage rates would rise as the Fed pulled back from propping up the market.

Instead, many in the industry now say rates could drift as low as 4.5% this summer from 4.86% now, instead of rising to 6% as some economists projected, making for significantly lower payments for Americans buying homes or refinancing their mortgages.

So are mortgage rates headed up or down? Considering that unemployment is still near 10% I would guess that mortgage rates and interest rates in general (and for that matter inflation) will continue to fall. But the bigger lesson is this: I don’t know, and neither do you.

—Maybe the folks at AIG were just dumb. The Justice Department decided to drop its investigation against the insurer and its credit default swaps king Cassano.

—Great article from the Wall Street Journal about how the financial reform bill could cause the banks’ bond ratings to plummet. The problem: It won’t happen. Two reasons: First of all it would be politically unpopular and S&P and Moody’s are doing whatever they can to get on Washington’s good side. But more importantly the analysis is based on the fact that financial regulation ends “Too Big To Fail” backing by the government for the biggest banks. Financial reform gives regulators that ability to close down banks when they get into trouble, but that doesn’t mean they actually do it.

—Really, Los Angeles? Our own TIME.com takes a look at the municipal bond market this morning, and finds a lot to be worried about. A number of cities may be considering defaulting on their debt obligations, including Los Angeles. The ramifications of a city of that size not paying back investors in full would be hugely bad.

—And I thought my work environment was hostile. Fortune goes inside the war at the Journal.

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