Up Next: Interest Rates

It was the great real estate magnate Yogi Goldwyn who asked, if interest rates don't wanna come down, how are you gonna stop em? While the Federal Reserve dreams of a negative Fed Funds rate, mortgage rates are rising.

A Wednesday auction of 10-year Treasury bonds took a beating; but on Thursday an auction of 7-year Treasury bonds was considered a success. In all, the Treasury issued $101 billion of debt this week. Wednesday's flurry of doubt about government debt briefly spiked the interest rate on 10-year Treasurys, which rose from 3.55% to 3.75% before settling back to 3.62%.

The Calculated Risk blog predicted that the spike in Treasurys would lead to a rise in mortgage rates, using the following thumbnail: "[A] Ten Year yield at 3.7% suggests a 30 year mortgage rate of around 5.6%." That has nearly come to pass already: The rate on a 30-year fixed-rate mortgage is around 5.4%.

(It isn't clear to me why 10-year Treasury yields correlate with 30-year mortgage rates. Shouldn't mortgage rates move up or down with the Fed Funds rate, since this is the rate at which lenders can borrow, and they can presumably pass costs or savings on to their borrowers?)

Understanding how bond pricing works is one of the very first things I intend to do as soon as I'm dead, but the broad outlines are clear: The Treasury has been issuing so much debt lately that it has swamped demand. So the price of bonds falls and the interest Treasury has to pay to make its bonds attractive increases. And if that interest rate correlates with mortgage rates, that's another anvil tied to house prices, which are still declining in double-digit percentages. Evidence far and wide indicates local real estate markets are getting hammered by rising mortgage rates.

Why is any of this important? Because it demonstrates the limits of control—even of tools that are supposedly in the hands of policy makers. In a sense, it's slightly miraculous that mortgage yields are as low as they are now, given how much more deadbeating we're aware of than we were a few years ago. But with banks borrowing essentially for free, you could just as easily say mortgage rates are not as miraculously low as they should be. They're also clearly not responsive to policy decisions in any way that can save a dying market.

The policy goal of trying to keep house prices inflated goes back to the Bush Administration. If there's a sitting Real Estate Inflation Czar, maybe it's time for that person to abdicate, declaring the War On Cheaper Housing a failed practice of the previous administration.