Thursday, October 16, 2008

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'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!


ZMonet said...

While the image of someone sitting in their unaffordable house eating ramen and baked potatoes does pull at the heart strings, I wonder how much of this is really going on. I think part of the problem in this country right now is that people don't know how to pull back on spending. They feel they have an entitlement to eat what they want and do what they want. Restraint is just not a strength of the American citizen right now. We have become a nation of instant gratification, whether it be "love" or money that we don't even begin to understand true fundamentals anymore. This need for everything now and a total lack of self-reliance has me concerned that crime will get out of control if we go through a real downward plunge. During the Depression I've read crime didn't go up that much, but will people be able to stop themselves from taking what they feel they need when they can't get in any other way?

Jeff, thanks for the reminder not to be a pig yesterday as I sold out of QID after making a 20+% profit in a couple days. I could of made a little more if I had held through until the end of the trading day, but taking gains when you can get them in this market is a must.

I'm seeing rates of 6.125% (6.170% APR) on 30 year fixed mortgages as of right now. I think part of the issue with these lower rates, and why housing will continue down at a rapid pace, is that you can only get lower rates if you have a credit score over 750 and you're putting 20-30% down.

bonnie said...

Hey, Jeff
That bailout really calmed the markets as promised, didn't it? See how it is helping Main Street? How come you, me, and every other American could see this and Paulsen didn't?
See my blog for the details.
Did you see the blog I saw today about the pay option ARM resets on the horizon? The next crashing wave in the housing sector. The government will probably get concerned about it in 2012.

Jeff said...


Well said. Instant gratification is a great way to describe everything.

I totally agree with you on crime. THe average savings in this country is zero! If things get bad and people lose their jobs, they son't be able to last more than a week before needing help.

I am glad you made some money on your QID. This is definately not a buy and hold market. The volatility can take away gains in a heartbeat.

Jeff said...

Hi Bonnie

Nice blog!

Is that the Credit Swiss reset chart? Thats going to be ugly. All of those 5 year arms are the next wave of hits for the banks.

Today was an interesting day in the markets. I am sea sick from the whipsaws!

I am throwing a post up tonight.

ZMonet said...

In looking at some of the headlines from 1929, this short article struck me. Replace "Rockefeller" with "Buffet". The market certainly didn't go up post October 29, 1929. I kind of feel that Buffet is just doing this to try and help the American brand. Isn't that what Buffet does now, sells his name for money?

Stocks Up in Strong Rally; Rockefellers Big Buyers; Exchanges Close 2-1/2 Days

Revived by spontaneous investment buying and declarations of large extra cash dividends by leading companies, and free of the delirium that has recently gripped share owners, the stock market yesterday received a fresh start and scored a record comeback. Volume on the Stock Exchange totaled 10,727,320 shares, the third largest day on record.

The high spot of the day from a stock market viewpoint was the statement by John D. Rockefeller that there was no need to destroy values and that he and his son, John D. Rockefeller Jr., had been heavy buyers of stocks for investment in the last few days, and would continue to buy at present prices...

-- New York Herald Tribune, October 31, 1929

Jeff said...

Haha Zmon

Check out my new post. I thought the same thing.