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Declining Home Prices, Rising Mortgage Rates

courtesy of WSJ

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The Fed's effort to bail out the credit crisis and Housing crash has run into an odd problem: Despite cutting rates 225 basis points since September, mortgage rates have actually gone up:

"The Fed's efforts so far to soften the blow of the housing slump with lower interest rates appear to be having a muted effect. Since September, the Fed has reduced its target for short-term interest rates by 2.25 percentage points to 3%. But some mortgage rates are actually rising, and those that are falling haven't fallen that much.

The average interest rate on a standard 30-year fixed-rate mortgage was 6.38% yesterday, little changed from September but up from 5.61% in late January, according to HSH Associates, a mortgage-data publisher in Pompton Plains, N.J. Interest rates on so-called jumbo mortgages -- those larger than $417,000 -- were at 7.35%, also close to their September levels.

Rates on adjustable mortgages have come down, but not by as much as the Fed has cut the rates it influences. A three-year ARM, for instance, carried a 5.43% interest rate yesterday, down from 6.29% in mid-September. Still, lower short-term rates should help millions of homeowners who took out ARMs with low teaser rates that are set to jump higher.

There are two reasons mortgage rates haven't responded more to the Fed's rate cuts. One is that long-term Treasury yields, which are the benchmark for most mortgage rates, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar. The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans."

We closed on our current home March 2007. 30 year, prime, conforming mortgage. Rate: 6.125%. And, we keep getting refi offers from Chase and Citibank -- for 6.25 - 6.50%. (No thanks!)

Well, the Fed may not have impacted the mortgage arena much, but at least (as forewarned), they have had a significant impact on prices: rampant inflation . . .

UPDATE: February 28, 2008 9:42am

Bank Rate notes:

Bankrate: Fixed Mortgage Rates at 4-Month High

With the Federal Reserve expected to cut interest rates again at their meeting in March, rates for things like adjustable rate mortgages that are tied to short- term benchmarks have been moving lower. But concerns about inflation and continued turmoil in credit markets has pushed long-term interest rates, and especially fixed mortgage rates, higher.

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Previously:
Screaming Hot Producer Prices   http://bigpicture.typepad.com/comments/2008/02/screaming-hot-p.html
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Source:
Decline in Home Prices Accelerates
Fed's Efforts Have Only Muted Effect On Mortgage Rates
KELLY EVANS, SERENA NG and RUTH SIMON
WSJ, February 27, 2008; Page A1
http://online.wsj.com/article/SB120403496764693703.html

Wednesday, February 27, 2008 | 06:23 AM | Permalink | Comments (24) | TrackBack (0)
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Comments

This isn't odd as far as recent history goes. Long rates didn't rise after the Greenspan Fed started raising overnight rates in 2004, why should one think they should fall now? Especially given that slowdowns in housing, CRE and retail etc. are driving credit risk up.

One reason for this is that other countries that have targeted their monetary policies at currency "pegs" (moving or otherwise) have not only imported US monetary policy but exported some effects of that policy right back to the US.

Posted by: ross | Feb 27, 2008 7:42:48 AM