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10/1/2012

With a heightening of uncertainty prevailing around the globe, the positive that surfaced last week was the new historic lows in US mortgage rates…but how good is that news really?

Stock prices began to soften in the US, as the major Equity indexes gave back all their post QE3 announcement gains by weeks’ end.  Continued turbulence in Europe (do we even have to mention that?), roller coaster rides on the economic data front from weak durable goods and GDP to stronger than expected job growth as measured by Initial Claims are taking their toll on investors from all walks.  But the one glimmer of hope the Fed was shooting for came through…..a drop in mortgage rates to historic lows.

The drop on 30 year mortgages to 3.40% was registered despite in a lag in the drop of US 10 and 30 year yields…but that’s OK.  You know the stimulus logic to follow.  Lower rates make houses more affordable and current home owners can possibly get another small shot in the arm by lowering mortgage payments from refinancing.  This latter effect may not register as significant as previous rate drops as many refinancers achieved low 4%s on the last refinance opportunity, hence 3.40% may not be low enough for another refinance stimulus.  Of course, the banking sector gets a shot in the arm from refinancing fees and perhaps the ability to shed some more foreclosure properties.

That’s all well and good, but the question to ask now is….What happens if/when rates need to go higher?  Will the fallout be dramatic and thwart any sustained rebound in housing?  Remember, higher rates not only imply higher costs to initial buyers of homes but also to those looking to sell their homes to move as they undoubtedly will face higher mortgage rates than their current situation.  Perhaps we’re getting ahead of ourselves a bit, so let’s take some good while we can.  Who knows, maybe the US is following the Japanese model….zero rates for decades  !!!  But wait a minute, the Japanese economic model comes with a lost generation of unemployment, near zero net immigration and declining stock prices !  Go figure…

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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