Monday, June 15, 2009
As we all know, the longer end of the Treasury yield curve has steepened markedly. Market participants became less gloomy about the economic outlook, and suddenly inflation angst took over. (It could also have to do with the Congressional Budget Office's upward revised budget projections released late in May, but that is another story.)
Mortgage rates in QE countries - the US and the UK - are rising behind government bond yields.
The chart illustrates fixed mortgage rates in the UK and the US. Both the UK and the US saw a drop in mortgage rates amid new quantitative easing policies (buying government bonds directly). However, both countries are likewise seeing rates rise amid less-horrible economic news, and a more benign outlook.
In some sense, it is good that the markets are pricing in inflation on an economic recovery. However, for potential homebuyers, they just lost potential homebuying power, with US mortgage rates rising an average of 50 basis from May's average to June's month to date average (see the date here). On Friday, Treasuries closed 9 basis down to 3.81%. And I imagine that the market got a little ahead of itself: Treasury yields at the longer end of the curve will fall.
However, the rising cost of borrowing to potential homebuyers is troubling, given the state of the housing market. The good news: markets are "healthy" enough to internalize the impact of rising mortgage rates. The bad news: prices will likely fall further on rising mortgage rates in order to stabilize affordability. The borrowing cost is the primary determinant of the "price of a home" rather than the actual price of the asset. If mortgage rates remain elevated, the term of the housing recovery likely gets pushed out.