Mortgage rates have room to move lower | Chappaqua NY Homes for sale

Financial markets are surprisingly stable, especially credit markets. Following the Fed’s September QE3 announcement of open-ended intent to buy mortgage-backed securities, the 10-year Treasury note was left to the mercy of markets.

Since then, 10-year Treasurys have not traded above 1.75 percent or below 1.5 percent. Meanwhile, 30-fixed mortgages have broken as low as 3.25 percent.

In “normal” times, mortgage rates track the ups and downs in 10-year Treasury yields fairly well. There’s a “spread” between 10-year Treasurys and mortgage-backed securities — bond-like investments that fund most mortgage loans — that relects, in part, investor perceptions that Treasurys are safer investments than MBS. The “spreads” we’re seeing now between yields on 10-year Treasury notes and MBS are lower and tighter at any time since “normality” went out the window in 2007.

I had thought that 3 percent was probably the lowest mortgage rates could go, but if the Fed buys MBS for long enough to work off presently infinite refinance demand (which will last many months, maybe through the end of 2013), retail mortgage prices can fall below that barrier just by more compression of “spread.”

Today, the main thing holding rates above 3 percent is the profiteering of big banks, increasing their margins as the Fed tries to shrink them. The worst of the piracy: jacking margins on refis of underwater households. I would say, “Shame,” but to no effect on bank boards and executive suites ethically unreformed through this whole process. All the new rules in the world cannot substitute for a sense of citizenship.

While we enjoy new, super-historical lows, more in prospect, consider the causes …

U.S. data is as unchanged as can be, on a 1.5 percent-2 percent GDP slope but fragile. The September small-business survey by the National Federation of Independent Businesses downshifted by an undetectable 0.1 percent. The trade picture was a bit more cautionary, both imports and exports contracting; imports slide when U.S. demand fades, and exports dim when the outside world fizzles.

The strongest positive here is housing, but its improvement is far oversold in media commentary. Most economic punditry comes from financial markets, which had housing wrong all the way down, and can be counted upon to have it wrong on the way up. Housing industry analysts tend to perpetual optimism, correct only by accident.

The finance guys cannot process the differences between their markets and housing: Their securities are uniform and move all together, while our houses are no-two-the-same, and any concerted market movement is at the neighborhood level.

Terms of credit affect stock and bond markets, but nothing like housing. Imagine if you wanted to sell a share of Apple today, and had a willing buyer at $630 but the NASDQ exchange required an independent appraisal of the stock, made you wait two weeks, and then capped the price at $500 based on “sound underwriting.”

Housing now enjoys very gradual improvement, especially in states whose foreclosure-by-trustee has speeded the process. However, the “recovery” that finance types see propelling the entire economy is still over the horizon.

“Mortgage equity withdrawal” is a measure of net contribution of housing to personal income, during the bubble adding as much as 10 percent per year(!). Since 2008, MEW has subtracted about 3 percent annually from personal income, and still does — no mere headwind, but hail in the face.

The greatest risks are overseas, quantifiable in some ways, but timing unknown. Greece lies prostrate in depression, its national debt still 160 percent of GDP requiring another restructuring transfusion.

That debt is now held by European governments, the ECB and the IMF, none of which can face the need to write off the two-thirds necessary to allow the Greek economy to function. Thus the next transfusion will be just enough to buy time, not for Greece itself, but the utterly corrupt European leadership.

That leadership had a signal week on other grounds. France-based EADS and U.K.-based BAE were close to merger, $90 billion in combined aerospace and defense sales, the merger a benefit to both, enabling competition with the likes of Boeing.

Any big merger in Europe requires multigovernmental approval, and Germany insisted on a Munich headquarters for the new company and expansion of German operations. All media concur: On Wednesday Angela Merkel personally pulled the plug on the merger, and Germany did not attempt any form of denial. “One Europe” the euro objective? Sure.

The global balance is delicate, but the economic/political weakness in Europe, China and emergings still strongly favors the U.S., if only by removing any threat of inflation, which is the prerequisite for continuing QE3 and super-low rates here.