A great graphic from today’s Wall Street Journal illustrating a fact that we’ve harped on around here for a while – that despite the recent flurry of Fed Cuts, mortgage rates have mostly moved in the opposite direction, and the housing market woes continue unabated:
There are two reasons mortgage rates haven’t responded more to the Fed’s rate cuts. One is that long-term Treasury yields, which are the benchmark for most mortgage rates, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar. The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans."
If you’ll remember, back in 2005, the Greenspan Fed was similarly vexed by their inability to influence mortgage and other long term rates (the infamous ‘conundrum’ speech.)
Back then, despite hiking rates (17 times by the time they were done) in an attempt to cool an overheated housing market, rates stayed low, and lenders did nothing but create ever looser credit standards in an attempt to continue the party. The ensuing hangover is what the Bernanke Fed is trying to cure (hair of the dog, anyone?) with rate cuts.
So now Fed faces precisely the opposite problem: They are cutting rates, hoping to prevent a housing and general economic meltdown, yet rates are beginning to rise, and credit standards for all types of loans – from credit cards, to mortgages, to auto loans – are getting tighter.
Somwhere in this there is a lesson for economists and future Fed Chairman, who should have at the very least a keen sense of the irony in all this.
Decline in Home Prices Accelerates [WSJ]