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Mortgage rates have begun a
decline from the irrational levels of the last month, now approaching
6.00% and says here likely to cross back into the fives.
Part of the decline is due to
deteriorating economic news. The toughest was a surge in new claims for
unemployment insurance, up to 373,000, consistent with recession and
suggesting that next week’s payroll report will show February contraction.
Orders for durable goods tanked 5.3% in January, as have February measures
of consumer confidence. Inflation is worrisome, but a soon-to-blow
commodity bubble will fix that.
A two-part story today,
housing as scapegoat for the failures of others. The real causes of this
credit crunch -- still called “subprime” -- and the recession it has
spawned are the grotesque failure of structured-finance products on the
Street, and failure of oversight by their regulators.
The strange story of
mortgage-rate spike and reversal began with the January fable that
mortgage-backed securities (MBS) issued by Fannie, Freddie, and Ginnie
(the “GSEs”) had become too toxic for investors to hold. That notion made
no sense here: these GSE/MBS are as good as Treasurys, no matter what the
ultimate default rate of mortgages within (Ginnies are guaranteed by the
Treasury, F&F clearly “too big to fail”). The GSE/MBS market is $4.5
trillion, the deepest and most liquid market for anything on the planet
except US Treasurys.
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Yet, traders said throughout
February: “Too many MBS sellers.” The excess on the market was certainly
not new loan production. Now we know who those sellers were: big banks and
Street dealers, capital impaired, dumping the only liquid assets they have
to make room for trash flooding back onto their balance sheets. The
back-wash: the remains of deals they sold but agreed to support if
“something went wrong.”
The February went-wrong:
almost $1 trillion in “auction-rate” securities -- actually good-quality
muni-bonds, but held in short-term rollover structures (note: nothing
whatever to do with housing or “subprime”). When rollover failed in
renewed crunch, an avalanche of illiquid paper hit banks, triggering MBS
sales and higher mortgage rates.
The financial press is having
a wonderful time ginning-up a housing depression, this week shrieking
about new home-price data: “Decline in Home Prices Accelerates” (WSJ),
emphasizing the Case-Shiller index, down 8.9% in ’07.
Case-Shiller is designed to
magnify home-price declines. Mr. Shiller correctly called the stock market
bubble (his book “Irrational Exuberance” appeared on the day of ’00
collapse), and has spent the last several years mis-applying
financial-market principles to real estate, gleefully predicting a 30-40%
national crash in home prices.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
The design flaw: it captures
only sales of homes, obviously heavy with distressed transactions. For the
authentic story and great methodology, visit www.OFHEO.gov and its
All-Transactions House Price Index, which includes repeat appraisals in
refinances, by definition free of distress. By that measure, national home
prices in the 4th quarter rose by .8%. Prices fell in only 11 states, and
in only five of those were declines in excess of one percent. See page 21
of the report for its critique of Case-Shiller.
At the micro level, some spots
are in horrible trouble: of OFHEO’s 291 Metropolitan Statistical Areas, 15
had price declines last year in the 10%-19% range (all CA and FL). And the
national market is decelerating: of 39 states with positive appreciation
in the 4th quarter, 32 had gains of less than 1%.
The key to this unpleasant
situation: housing is sinking because of credit starvation, not the other
way around, housing wrecking credit markets. No matter what it takes, the
supply of credit must be restored to housing and the rest of the economy.
The public policy response is
still frozen, Democrats trying to help families who cannot afford their
homes to stay in them, Mr. Paulson refusing assistance to the financial
system: “I’m not interested in bailing out investors, lenders, and
speculators.”
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