|Source: St. Louis Fed/Dvolatility Designs|
According to Freddie Mac, the U.S. 30-year fixed-rate mortgage (avg) hit a new record low last week at 3.56%.
"30-year fixed-rate mortgage (FRM) averaged 3.56 percent with an average 0.7 point for the week ending July 12, 2012, down from last week when it averaged 3.62 percent. Last year at this time, the 30-year FRM averaged 4.51 percent."
According to Frank Nothaft, Freddie Mac's chief economist, the low jobs number was responsible for the recent move. Here's a quote:
"Following a lackluster employment report for June, long-term U.S. Treasury bond yields eased somewhat this week allowing fixed mortgage rates to reach yet another record low. Only 80,000 net new jobs were added to the economy last month, not enough to lower the unemployment rate from 8.2 percent. This was the concern of the Federal Reserve's monetary policy meeting held June 19-20. Minutes released from that meeting on July 11, revealed that a few members felt further monetary stimulus was needed to promote satisfactory growth in employment to meet the Committee's goal."
Look at charts of the 30y fixed mortgage rate going back to 1976 and 2007.
|30-Year Fixed-Rate Mortgage Avg (source: St. Louis Fed)|
|30-year fixed rate since 2007 (how low will it go?)|
Compared to the previous 30 years, it definitely seems like a hell of a deal to lock in 3.56% for 30 years. No? But then again, if the U.S. follows Japan's 20+ year deflationary experience from 1990 to now (asset prices and JGB yields peaked in 1990, trended down for 20 years, and are still bouncing around the recent lows), mortgage rates could fall even lower and stay range bound for a while. Check out a chart of Japanese interest rates (official discount rate, long-term prime lending rate, variable housing loan rate, and government housing loan corporation's standard rate) going back to 1995 in The Land Institute of Japan's June 2012 report. It would have been nice to see the trend from 1990-1995 when Japanese housing prices peaked and started to crash.
|source: Land Institute of Japan|
Mortgage rates are priced off of Treasury bond yields (mainly the 10-year Treasury note yield), or "risk free" rates (while that definition lasts), and they've been making new record lows for a variety of reasons: 1) during this period of deleveraging or debt deflation, overlevered sectors like housing continue to be pressured by falling prices and high unemployment; 2) money velocity has been declining (GDP/M2), or the increased money supply hasn't been translating into GDP; 3) The Federal Reserve, through its 'Operation Twist' (maturity extension) program, is "selling or redeeming shorter-term Treasury securities and using the proceeds to buy longer-term Treasury securities"; and 4) Treasury bonds are currently seen as a safe haven during the European sovereign debt and banking crisis.
Regarding the housing market specifically, negative home equity, which is at a 2.5 year low of 23.7% as of April, continues to put negative pressure on housing prices. Here's a chart from CoreLogic's Negative Equity Report released on July 12, 2012.
CoreLogic also said in June that shadow housing inventory fell in April to levels not seen since October 2008.
"CoreLogic® (NYSE: CLGX), a leading provider of information, analytics and business services, reported today that the current residential shadow inventory as of April 2012 fell to 1.5 million units, representing a supply of four months. This was a 14.8 percent drop from April 2011, when shadow inventory stood at 1.8 million units, or a six-months’ supply, which is approximately the same level as the country was experiencing in October 2008."
However, RealtyTrac mentioned in their Midyear 2012 U.S. foreclosure report that banks are ramping up foreclosures again. This comes after the big banks' $25 billion foreclosure settlement, which halted foreclosure activity. Economist Gary Shilling has been warning about this for a while now. During a Bloomberg TV appearance in June, he thought it would send housing prices down another 20%.
"RealtyTrac® (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its Midyear 2012 Foreclosure Market Report, which shows a total of 1,045,801 U.S. properties with foreclosure filings — default notices, auction sale notices and bank repossessions — in the first half of 2012, a 2 percent increase from the previous six months but still down 11 percent from the first half of 2011."
"Overall foreclosure activity was down in the second quarter, driven primarily by a drop in bank repossessions (REOs), but 311,010 properties started the foreclosure process during the quarter, a 9 percent increase from the previous quarter and a 6 percent increase from the second quarter of 2011 — the first year-over-year increase in quarterly foreclosure starts since the fourth quarter of 2009."
Here is a video explanation from RealtyTrac.
Now, here are two interesting forecasts on longer-term Treasury bonds that I've posted recently. One more shorter-term than the other. First, I previously mentioned that Gary Shilling thinks that housing prices will fall by another 20%. Well, he also thinks that deflation will push the 30 year Treasury bond yield down to 2%. But, Robert Prechter, founder of Elliott Wave International, mentioned on RT's Capital Account that yields are finally putting in a bottom after the 30-year bull market in Treasury bonds (bond prices move inversely with yields). And he thinks that interest rates will rise in a deflationary environment because of credit risk (a U.S. fiscal crisis). It could get very interesting soon in interest rate land.