It’s Interest Rates, Stupid
Can rising interest rates, due to the massive Obama deficits, undo any benefits of the “stimulus”?
To put things into perspective, at the end of April, Ten Year U.S. Treasury Bond rates were at about 3%. They are now trading just below 4%. With this, mortgage rates have gone from just below 5%, to about 6%.
The short term effect will mean a very bloody month of June for real estate. Between long waits and exploding interest rates, I expect millions of loans to blow up as locks expire. This will be clear in both mortgages closed, which will plummet, and in real estate prices, which will take a massive hit this month.
In the more intermediate term, I expect the benchmark ten year U.S. Treasury bond to hit 5% before the end of the summer, if not sooner, unless the President announces he is reversing course on some of this spending. The bond offering today is only the beginning and this bond offering is saying the same thing they’ve all said recently. The bond market is telling the president that borrowing trillions will be very expensive.
The ramifications for the entire economy will be massive. A ten year U.S. Treasury bond at 5% means mortgage rates at 7%. That means the average borrower would pay about $400 a month more on a $200,000 mortgage over their lows at 5%. That would trigger further declines in real estate values, increases in defaults, and of course increases in foreclosures.
This would also translate into higher rates on car loans, student loans, business loans, and frankly all other loans. Raising borrowing costs somewhere around 2% means whatever jobs will be “saved or created” by the stimulus, will be overwhelmed by the lost jobs that higher borrowing costs will mean.
If the Republicans have any political savvy, they will coordinate a full attack on Obama’s economic policies as soon as the Treasury hits 5%. By then, there will be no getting around what his policies have created. About two in three people on their own home or property (condo, two unit, etc) Even if they aren’t now buying, selling or refinancing, a homeowner is acutely aware of what higher mortgage rates mean to them. Many homeowners are aware of what property values are doing in their own areas. As they see property values falling, they will be able to make the connection from that to rising mortgage rates.
Furthermore, the move of the treasury from 3% to 4% is a business story. Once it moves to 5% it is a news story. The public will be engaged. Furthermore, it is a simple story to tell. The president borrowed money we don’t have. That raised all borrowing costs. Now your car loan, student loan, home loan, and business loan are more expensive.
Subscribe to blog feed.
June 10th, 2009 at 3:23 pm
Sotomayer belongs to a discrimatory group:
http://news.yahoo.com/s/ap/20090610/ap_on_go_co/us_republicans_sotomayor
This should be another disqualifier for the Supreme Court.
June 10th, 2009 at 3:43 pm
This shooter is a total distraction\victory for the left.
HuffPost: trumpets MIAC report about right-wing militia types predicting it.
The guy supposedly tried a to kidnap a Federal Reserve official in the 80′s.
So Paul’s bill got its 209th cosponsor today, but this guy won’t be helping him get those last 10 votes.
June 10th, 2009 at 4:46 pm
In a rarity Invalid,I agree with you.
June 10th, 2009 at 4:58 pm
They will use this shooting as an excuse to regulate the internet and talk radio.
June 10th, 2009 at 6:26 pm
Let’s not pretend that the left wing doesn’t have their own wackos who have murdered as well:
http://thebulletin.us/articles/2009/04/22/top_stories/doc49eebca59bdb3868756314.txt
June 10th, 2009 at 6:38 pm
Note that our friend former RINO Arlen Spector with his connections managed to post the low bail amount. So now we can tie Arlen with a murderer.
June 10th, 2009 at 10:28 pm
Good analysis Poli!
June 11th, 2009 at 7:07 am
Agree with the main point that this screws the real estate market, but big price drops won’t happen immediately. There will be plenty of blown escrows, but actual price declines will be long and drawn out.
June 11th, 2009 at 7:15 am
More from the trenches of the mortgage market here.
June 11th, 2009 at 7:45 am
Interest rates are a real driver of much more than just the real estate market. But it is a bit myopic to say a spike in the 10 year is what will kill prices for RE. Prices have been going down for the last 18 months or more, and there is a tremendous, unprecedented overhang in terms of inventory, including distressed (REO, shortsales and foreclosure sales) inventory. That is true at low rates, and at higher rates it just means they sell for lower.
5% ten-year is not at all without precedent, btw. In fact, much of the post-war era had a 10 year yielding greater than 5%. The 10 year was above 5% from 1966 through 1998 – that is 32 years, and then again from 1999 through 2001 and it flirted with 5% for some of the earlier part of this decade.
We’ll see what this spike means.
June 11th, 2009 at 10:17 am
Obama said that when you are headed over a cliff, it’s time to change direction. Instead of changing direction, all he did was step on the gas.
When looking at what’s going on in Washington, it seems obvious that the whole federal government has finished with the koolaid and moved on to 100 proof moonshine. It seems that Emperor Obama has set the stage and given his approval for Congress to spend as recklessly as they want. And that they are doing with a passion. Hey, what’s a hundred billion when you are already in the hole to the tune of close to 12 trillion dollars? We have gone way past the slippery slope of moral hazard and are now headed for the ravine. I can see no hope that this will abate until we either default or the dollar becomes worthless.
Now the Asians are not stupid. They know that their economies are still quite dependent on the American consumer, so they will continue to provide the cocaine to keep us on the line for the time being. But it is becoming obvious that the price for the dope is going up. They will want more and more interest to account for the added risk as our debt gets more and more out of control. There will come a point where the risk is too great and the interest is too high. At that point, you may as well take the U.S. economy out and shoot it. It seems to me that we are reaching that point at breakneck speed and accelerating. Lord help us.