Wednesday December 10, 2008 - 16:52:22 GMT
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Forex News: US Mortgage data and the US Yield curve tell the problem with housing
Credit crunch in the housing sector is alive and well. Today, the Mortgage Bankers Association announced their weekly results of their mortgage survey. The report showed a decline in mortgage applications (-7.1%). This was on the back of the record 112% increase last week.
Also with the report is the average mortgage rate for the current week. Last week the average rate for 30 year mortgages declined to 5.45% from 5.47% the week before. Meanwhile the 30 year US treasury yield declined to 3.12% from 3.44%. As a result, the spread between 30 year bond yields and 30 year mortgages rose to 233 basis points. This is near the all time high.
As a guide the spread was between 160 and 200 basis points from June 2008 to September 2008.
What does this say? If the spread was more normal, say 180 basis points, the mortgage rates should be 53 basis points lower (somewhere around 5%).
However, because of the reluctance of banks to extend funds for mortgages, the mortgage rates remain high. As a result, the stimulus from the lower yields on treasuries are not flowing through to the housing market.
Why? The banks are probably looking at the supply of homes on the market which stand at 10.2 month supply, twice the supply in 2000/2001 (see chart above). They are looking at the current demand for housing which is now below 2000-2001 levels (see chart below).
Finally, they are looking at the median sale price of homes and see that the price is at $183,000 while the Median Sale Price in 2000-2001 was $145,000.
With supply higher, demand lower and prices still higher, something has to give. The banks are saying prices are likely to come down. Therefore, they remain reluctant to lend.
Meanwhile, the Fed and Treasury are trying to attack the problem by lowering mortgage rates. Unfortunately, they have little control at the moment. If rates could come down, housing would be more affordable, those who can refinance will have an economic benefit and hopefullly the combination would stimulate the economy and make house supply less (and demand higher).
So far, they have not been able to do it. If they fail, home prices will do the talking and this in turn will increase foreclosures. and continue to put pressure on banks capital. The downward cycle would continue.
The economy remains on a knifes edge. Demand for housing needs to increase and sop up some of the supply. Mortgage rates need to make another sharp move down, one way or another. How that happens is currently not known. However, you can be sure, the powers that be, would rather see rates come down, then home prices.
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