FALLING OIL PRICES BRING DOWN MORTGAGE RATES

Inflation outlook improves

Long-term interest rates are sitting on a six-month low, the 10-year T-note at 4.75 percent and low-fee 30-year mortgages at 6.5 percent. The reasons that these rates are so low are not the widely advertised pre-recession or housing collapse.

The biggest recent help to long rates is the authentic collapse in commodity prices: oil is $62.70 this morning, natural gas $4.85 (10 bucks below last winter), wholesale gasoline $1.53 (which should put retail at $2.20 or less within two months), and gold is in freefall at $573 (down from $730 in May).

Aside from improving the inflation outlook, the big drop in energy costs will relieve household budgets. As is, consumption has not faltered much: August retail sales were forecast to decline and instead rose.

Probably the largest force pushing down on long-term rates is the solution to the Greenspan Conundrum. Federal Reserve Chair Ben Bernanke has been correct: a global savings glut is the only sensible reason for long-term Treasurys to be trading .5 percent below the Fed's cost of money, and with no spread to inflation. Unless we see an actual economic stumble, today's yield curve inversion is as false a recession signal as last winter's.

Housing is slowing, no question, its past stimulus fading to nil, but housing trouble will not exert drag unless waves of foreclosures result in a price spiral. The newest foreclosure and loan-delinquency data do not support the scare headlines, and there is widespread misunderstanding about the process of a housing slowdown.

RealtyTrac, which lately has gotten most of the ink, shouted this week that the number of homes in any stage of foreclosure had jumped 24 percent from July and 53 percent from last year.

Hang on to your door handle. Foreclosure.com, tracking only completed foreclosures, says foreclosures fell 6.7 percent in August, only 7.3 percent higher than last year.

Who is right -- or most descriptive? The Mortgage Bankers Association's study of 42 million loans confirms Foreclosure.com's picture: current-quarter delinquent payments and foreclosures are unchanged from last spring. To understand why a rapid slowdown is sales is not causing widespread distress, it's necessary to think through the mechanics of a slowing housing market.

At the end of a boom, for-sale signs blooming like dandelions, sellers still assume a continuation of prior appreciation and set their prices well above the last sales. The first wave of "price declines" is a reduction in expectation, not in actual prior-price-paid value, and it often takes a year or more to squash those expectations.

True declines in price follow. It is perfectly normal for those who bought in the last year of a boom, just before the forest of signs, not to be able to sell at the price they paid, markets going negative 5 percent to 10 percent cumulative over the next few years.

No great harm ensues (except to the unluckiest families, and the ones who bought with the smallest down payments) because all of the people who bought before the last-year price pop feel no pain but psychological. If my Miami condo rose 137 percent since 2001 (www.ofheo.gov), is it a disaster to lose 10 percent in 2007, or to take a while to sell in 2008 or 2010? Cumulative appreciation is the reason for the divergence between foreclosures in process and completed ones: if you have a bunch of equity, you can sell or maneuver your way out of foreclosure.

Here in Colorado, our housing boom coincided with the technology boom, '98-'01, and prices have been largely flat since. It took three years of flat prices before our foreclosure problem appeared: as always (except for times of big job losses), it takes a while for flat prices to expose the over-leveraged households.

Even now, the leading cause of our foreclosures is a spurt of idiotic subdivision of land in four counties north and east of Denver. Never underestimate old-fashioned roads to perdition.

--September 15, 2006

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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By Lou Barnes

Inman News