Mortgage Rates continue to Surge

Good Afternoon

I am actually happy to see an up day in the market! At the rate the market was going, the whole nation would have needed Prozac by the end of the week. Expect large moves up or down with the VIX this high. I expect this volatility to be around for awhile so get used to it!

Things were pretty quiet today on the news front. Interest rates continue to surge:

We are starting to creep up to dangerous levels here folks. If we get above 7%, the housing market is going to implode. Thanks for the bailouts Mr. Paulson! You have somehow found another way to further hurt the taxpayers as you continue to bailout your banking buddies.

In fact, last week was the largest weekly rise in mortgage rates in 21 years!:

"NEW YORK, Oct 16, 2008 /PRNewswire-FirstCall via COMTEX/ -- Mortgage rates soared this week, with the average 30-year fixed mortgage rate jumping more than one-half percentage point to 6.74 percent. According to Bankrate.com's weekly national survey, the average 30-year fixed mortgage has an average of 0.42 discount and origination points.

The average 15-year fixed rate mortgage climbed to 6.40 percent, while the average jumbo 30-year fixed rate rose to 7.87 percent. Adjustable mortgage rates were sharply higher also, with the average 1-year ARM now 6.32 percent and the average 5/1 ARM skyrocketing to 6.61 percent.

Mortgage rates posted the biggest one week increase since April 1987, soaring as credit fears reached a fever pitch. In addition, yields on benchmark 10-year Treasury notes climbed as investors worried about the additional supply of government debt resulting from billions of dollars in various rescue packages. Mortgage rates move in relation to Treasury yields, but at a spread -- or markup -- over the risk-free government debt. The intensifying credit crunch and the government guarantees on bank debt drove up the spread between mortgage bonds and benchmark Treasuries. But since Treasury yields climbed from 3.5 percent to over 4 percent over the previous week, mortgage borrowers had two factors working against them.

This sharp increase in mortgage rates over the past week has a direct impact on a homebuyer's affordability. At last week's rate of 6.20 percent, a $200,000 loan carried a monthly payment of $1,224.94. This week, with the average rate at 6.74 percent, the monthly payment on a $200,000 loan is $1,295.87."

My take:

Thanks to Paulson and his cronies, it now costs you an additional $70 a month this week to buy a $200,000 house versus last week.

If you got a mortgage on $600k bubble McMansion today, it now costs you an additional $210 a month than it did last Thursday.

Of course, we all know that no one could qualify for a loan on that same McMansion last week. This rise in rates just widens the affordability gap.

This reality is giving homebuilders a heart attack.

"Oct. 16 (Bloomberg) -- Confidence among U.S. homebuilders slid in October to the lowest level since record-keeping began in 1985, a sign the crisis in credit markets may deepen the worst housing recession in a generation.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 14, less than forecast, from 17 in September, the Washington-based association said today. A reading less than 50 means most respondents view conditions as poor."

Final take:

14 on an index that considers anything under 50 to be poor. How pathetic. Maybe the homebuilders need that Prozac right now!

Remember folks, the housing crisis is what got us into this mess. Its also represents the largest portion of debt that is held on our banks balance sheets. If housing continues to deteriorate, the banks balance sheets will as well.

My concern here is as housing prices continue to come down, more and more buyers are going to decide to walk away from their homes. Many are already deeply underwater, and there will be a tipping point where a homeowner realizes his house may never be worth what he paid for it. When this realization hits, many are going to walk away.

Think about it, if a homeowner is eating baked potatoes every night for dinner so he can pay his mortgage, why wouldn't he/she decide to say "**** it" and walk. This is what I would do. Many financial planners are going to advising their clients to do the same thing.

Why be a debt slave and live like a homeless person to pay back a 30 year mortgage on an asset that's going to lose money? Most struggling homeowners have bigger things to worry about. Whats more important: Sending your kids to college or paying back a 30 year bubble loan on a worthless investment?

Don't get me wrong, is it nice to own your own house and raise a family? Of course, but not when it ruins the quality of you and your families life. Many of these debt slaves will never be able to pay for their daughters wedding if they decide to pay off these home loans.

Bottom Line:

If mortgage rates keep rising and homeowners continue to get deeper and deeper underwater, J6P is going to rethink his decision on paying the mortgage. This will result in another leg down in the stock market.

The nice thing about walking away if you are a homebuyer is you are sticking it to the pigs on Wall St who got you into this mess in the first place!