Posting may well be weak this week. I have plans for tomorrow evening and then Christmas Eve is gift night, then it is Christmas Day and I have no idea what I will be doing as yet. I will have more material after the holiday.
GDP is a Backward Looking Indicator Anyway
I am in the same boat as Kid Dynamite tonight:
I continue to be amazed by the market's non-reaction to these revisions. Initial Q3 GDP was expected to be around +3.2%. When it was reported at 3.5% on October 29th, it set off a 70 point rally in the S&P 500 - from 1040 to 1110. Yeah! Our economic rebound is taking hold! Things are getting better! Green shoots! (imagine those last few quips were written in sarcasm font). On November 24th, the first revision to the report came out, "in line with consensus estimates" at +2.8%, and stocks didn't care. Somehow, the consensus estimates had managed to be lowered to 2.8% without anyone noticing or repricing the market to account for the downward revisions in estimates.
So the news was the shrinking GDP number for the 3rd quarter. Starting at 3.2% the number after all the data was in settled at 2.2%. I always get a laugh when the markets pull this kind of thing. Here is my best summary of the thinking:
"Well we bid up stocks with that print of 3.2% because, well, it was a good number. The first revision was down to 2.8%, and that is hardly any different so we bid up again. Today we find out that we were wrong on all counts, but hey, the 3rd quarter is long gone and that number is a backward looking indicator anyway. Plus imagine how huge the 4th quarter estimate will be! Carry on!"
More on FED Suppressed Mortgage Rates
The impact that the FED sponsored MBS purchase program is having on mortgage rates may well be the most contested issue right now. Estimates vary from no impact on rates to over a 2% suppression. Nobody seems to know for sure. Today there was plenty of coverage so I wanted to take another look.
Richard Green's blog spotlighted a paper written by John Taylor which makes a case that the FED MBS exit will have almost no effect on mortgage rates.
Calculated Risk thinks the MBS exit will have a minimal effect on rates, and once again sticks to his guns about the Spring exit and a bump in rates of 35-50bps.
I will start here because this is important.
If the FED buying MBS like it was going out of style (it has by the way) could only effect a 35bps change in mortgage rates, then it was a spectacular failure. As in MEGA SPECTACULAR. The gain in home sales from a paltry 35bps rate reduction would be minimal and for 1.5 Trillion it would have been criminal. Now I understand that the writers of the posts above have forgotten more about economics than I will ever know. I still think they are very wrong here. You have to ask yourself why the FED thought it so necessary to buy 1.5T of MBS if the markets were more or less working within 35bps of perfect. You will not need charts and no models are required. Give up?
It is because the FED knew (maybe they got the info in a Goldman Sachs conference call?) that real banks would not touch these instruments for anything near a 5-6% mortgage rate. The FHA/Fannie/Freddie black holes were all to glad to buy them all at that level, but whats sticking the taxpayer again between friends?
Higher estimates exist, though they are few in number. From CNBC comes an estimate more in line with my own from Mark Goldman:
"The ending of the Fed program will definitely effect rates," says Mark Goldman, professor of real estate at San Diego State University. "So far, the Fed has not expressed interest in keeping the program going. That could raise rates by some 150-200 basis points."
200bps vs. 35 bps
Extrapolate that out to a mortgage example:
FED Suppressed rate = 5%
Mortgage on a 200k home = $1000
Mortgage on a 400k home = $2000
Mythical Non-Suppressed rate = 5.35%
Mortgage on a 200k home = $1070
Mortgage on a 400k home = $2140
Real Non-Suppressed rate = 7%
Mortgage on a 200k home = $1400
Mortgage on a 400k home = $2800
I think you can see the picture here.
My call is for rates to move up 200bps or MORE after the FED exit. Of course I do not think for one minute this program is going to end in the Spring. I would hope that when the FED extends this program the same writers so quick to give the benefit of the doubt to the FED will change their tune.
Mathew Padilla of the Mortgage Insider offers his take and this observation:
When these programs end we should expect to see mortgage rates rise. Conventional wisdom is they could increase anywhere from 25 to 75 basis points. (There are 100 basis points in one percent.)
The reality is if they rise by more than say 50 to 75 basis points I would expect the Fed to start buying again (and maybe Treasury too).
What if the FED does exit and rates move 35bps or less? I will eat my words and do a full post apology for my totally wrong call.
Have a good night.