Economics

Keeping the Market From Getting Distorted Down

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What's keeping this house up? Strong action by the Obama economic team!

Mr. Mortgage of the Field Check Group comes up with an interesting letter from Unnamed Evil Lender, directing its operations staff to proceed only with mortgages that are already locked, in response to Wednesday's spike in 10-year Treasury bond yields. As Mr. Mortgage explains in a freely spelled post:

Kicked aside could be at least half of their past two month's of unlocked, unfunded originations that may ultimately parish if rates don't come back quickly…or if the borrower can't be coaxed into an 3/1 or 5/1 intermediate-term hybrid ARM, which are now at about the same interest rate level as a 30-year fixed was at the beginning of the week. Shortening duration is now an option where two months ago it was not.

Along with last week's very grim news about the Case-Schiller home price index, this is further evidence that homeowners are not going to be getting any of that ol' much-needed relief from the government anytime soon. Tim Duy's Fed Watch has more:

Indeed, it would seem that rising yields are toxic for debt heavy balance sheets, especially where housing is concerned.  Officials repeatedly point to the importance of supporting housing prices, a policy that would be undermined as rising Treasury yields boost mortgage rates higher.  And while we have seen some stability in recent months in existing homes sales—of which foreclosures and distressed sales are no small part—the recent Case-Shiller data makes clear that housing markets remains under severe pricing pressure.

I believe it was Alan Alda who explained that Oedipus Rex is actually a comedy: Who's the villain who's ruining our city? It's me? Ha! That's funny! Federal Reserve Bank of Dallas President Richard Fisher, apparently not a big Sophocles fan, said yesterday that the steepening yield curve between two-year and 10-year Treasurys suggests "confidence in the economy going forward." That confidence is supposedly derived from an expectation of rising inflation, which would indicate a recovering economy.

But as Jimmy Carter could tell you, there's no law that you can't have inflation and massive interest rates at the same time, and at the moment there's very little evidence of inflation at all. And massive government borrowing that makes it harder to buy or refinance a home is the opposite of the goal of protecting home values through targeted interventions. The last secretary of the Treasury described his policy as heading off "a market failure that would have forced housing values down in a way that was not in the investors' interest, and in a way that the market wasn't intended to work." His protégé the current secretary of the Treasury has not revised that policy, so it's fair to ask: Has all the government action of the past 18 months prevented so much as a penny's worth of decline in the average cost of a house?

The government's War On Cheap Houses is a quagmire! It's time the Obama Administration showed the courage to admit defeat.