On December 14, 2012, it was possible to lock in a 30-year mortgage for 3.4%. I have been telling my GaryNorth.com subscribers to do it. I believed that any rate under 4% was an unprecedented bargain. On February 23, I wrote this:
The new creditor will find that he also has made a mistake. He has locked in a loan at something under 4%, and price inflation is likely to push rates to double, triple, or even quadruple this rate. It depends on how extensive the expansion of money is, and how much the bankers redeposit at the Federal Reserve in the form of excess reserves. In any case, it is highly unlikely that mortgage rates are going to get cut in half in the next three years. It is far more likely they are going to increase.
So, the borrower is a winner. As long as he did not purchase a property that fell in value to below what he borrowed, he is still in pretty good shape. He is in a position to be in much better shape. This is why it is wise to be a borrower of mortgage money rather than a lender of mortgage money.
Today, the rate is 4.5% — a jump of 32%. This is a major rise. It has taken place in the last week.
The Federal Reserve’s QE3 policy has been to subsidize the mortgage market to the tune of $40 billion a a month, or half a trillion dollars a year. That policy began on December 12, 2012. The Federal Open Market Committee announced the change in a press release.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
So, the FOMC announced a policy of buying $40 billion a month in Fannie Mae and Freddie Mac bonds on December 12. Mortgage rates started up within a week. The FOMC adopted this policy in order to “maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” Result: the opposite of the announced goal.
This would indicate that Bernanke and the FOMC did not know what they were doing last December.
I am aware of no evidence that Bernanke and the FOMC lost their sense of reality in December. It was the same old FOMC. Conclusion: the FOMC did not know what it was doing long before December of 2012.
Don’t expect the housing boom to end immediately. Home buyers will see rising rates and think: “I had better buy now, before rates go higher.” Over time, rising mortgage rates will reduce demand, but not in the short run. Rates are still low.
Could rates fall? Of course. A depression would lower rates. But it would also lower housing prices. People don’t buy houses in a depression. There is falling demand for mortgages and more people lending in order to gain safety for their money. Falling demand and rising supply produce falling prices, i.e., mortgage rates.
Is a depression likely? Eventually, it is inevitable. But not in 2013 or 2014. Probably not in this decade.