I’m truly dumb to these things so forgive me for asking but are the divergent interest rates a similar puzzle as the drop in oil $ vs supply? I have to read this a couple more times I think 🤔
The odd occurrence of rising mortgage rates and falling treasury yields noted last week appears to have been an aberration. Had it persisted into a longer term trend it would have been quite a puzzle, at it would mark a fairly significant shift in the relationships among various interest rates.
At this point, the far more significant question is what is driving the increasing spread between treasury yields and mortgage rates. Last week the spread on the 30 year mortgage rate was 326bps above the 10 year treasury yield, higher than the previous peak during the 2008-2009 recession of 311bps.
You have to go all the way back to the Volcker Recession of 1980-82 to find a higher spread.
The fact that both previous spread peaks occurred during period of recession suggests that the high spread is itself a sign of market instability, at least in housing markets. Fronting a mortgage for a home buyer in 2022 is seen as overall an increasingly risky proposition. No doubt part of this is due to the reality of a 40% rise in real estate prices without a 40% rise in real personal incomes to match, but regardless of the underlying catalysts, if residential real estate mortgages are commanding greater and greater risk premia, then the housing market itself is headed for collapse--either in a wave of defaults or an evaporation of sales or both.
The oil $ v supply question is not really a puzzle so much as it is an illustration of the narrative once again not reconciling to the facts. As subsequent data demonstrates, oil demand is not where it was claimed to be, and is certainly not in excess of supply.
Perhaps the most worrisome aspect of that is the reality of falling oil demand. Globally, energy is not in demand as it once was--and that is among the strongest signals of global economic contraction imaginable.
Crazy thing is that I had been seriously considering my first home purchase recently. Being compulsive doesn’t help but gambling that much does scare me right now.
While specific financial advice is far beyond the scope of this Substack, I will point out that, since the 2008 GFC, home prices as tracked by the Case Schiller National Home Price Index have risen faster than the inflation rate as measured by the CPI, but less than the rate of growth in the M1 money supply.
Post-pandemic, home prices have risen at a faster rate than historically. This makes for a strong argument that housing is in a bubble, which means home prices are unstable and overvalued.
Be extremely cautious when making a home purchase, and be certain you will be willing and able to stay in any home you purchase for the duration of the mortgage. If housing prices are heading for a correction of ~40%, any home purchase made today is certain to wind up under water in short order.
Thank you!
I’m truly dumb to these things so forgive me for asking but are the divergent interest rates a similar puzzle as the drop in oil $ vs supply? I have to read this a couple more times I think 🤔
The odd occurrence of rising mortgage rates and falling treasury yields noted last week appears to have been an aberration. Had it persisted into a longer term trend it would have been quite a puzzle, at it would mark a fairly significant shift in the relationships among various interest rates.
At this point, the far more significant question is what is driving the increasing spread between treasury yields and mortgage rates. Last week the spread on the 30 year mortgage rate was 326bps above the 10 year treasury yield, higher than the previous peak during the 2008-2009 recession of 311bps.
https://fred.stlouisfed.org/graph/?g=WF02
You have to go all the way back to the Volcker Recession of 1980-82 to find a higher spread.
The fact that both previous spread peaks occurred during period of recession suggests that the high spread is itself a sign of market instability, at least in housing markets. Fronting a mortgage for a home buyer in 2022 is seen as overall an increasingly risky proposition. No doubt part of this is due to the reality of a 40% rise in real estate prices without a 40% rise in real personal incomes to match, but regardless of the underlying catalysts, if residential real estate mortgages are commanding greater and greater risk premia, then the housing market itself is headed for collapse--either in a wave of defaults or an evaporation of sales or both.
The oil $ v supply question is not really a puzzle so much as it is an illustration of the narrative once again not reconciling to the facts. As subsequent data demonstrates, oil demand is not where it was claimed to be, and is certainly not in excess of supply.
Perhaps the most worrisome aspect of that is the reality of falling oil demand. Globally, energy is not in demand as it once was--and that is among the strongest signals of global economic contraction imaginable.
Crazy thing is that I had been seriously considering my first home purchase recently. Being compulsive doesn’t help but gambling that much does scare me right now.
While specific financial advice is far beyond the scope of this Substack, I will point out that, since the 2008 GFC, home prices as tracked by the Case Schiller National Home Price Index have risen faster than the inflation rate as measured by the CPI, but less than the rate of growth in the M1 money supply.
https://fred.stlouisfed.org/graph/?g=WF5x
Post-pandemic, home prices have risen at a faster rate than historically. This makes for a strong argument that housing is in a bubble, which means home prices are unstable and overvalued.
Be extremely cautious when making a home purchase, and be certain you will be willing and able to stay in any home you purchase for the duration of the mortgage. If housing prices are heading for a correction of ~40%, any home purchase made today is certain to wind up under water in short order.
\https://fred.stlouisfed.org/graph/?g=WF5x
Maybe "taming inflation" is simply a cover story for "taking out wef," as Tom Luongo has been suggesting as the real motive for some time.
I've read his ideas in that regard.
It is certainly true that the Fed's rate hikes have been good for the dollar relative to other currencies.