Is A Normal Yield Curve Bad News For The Housing Bubble?
Everyone is trying to figure out why the homebuilder stocks are falling today. Could it be this? “After debating at length whether a rise in short-term bond yields above longer ones signalled recession in the U.S., global investors are now wondering what the unwinding of this situation might bring.”
“Bond bears have been on a rampage in recent sessions, as markets moved to factor in risk of central banks in the euro zone and U.S. raising interest rates further than previously expected.”
“‘It’s not something I would say is overly severe,’ said Klaus Wiener. ‘However, if this were to continue, if we touch 5 percent or more, the fallout for the overall economy will be more severe, and especially in the housing market.’”
“‘To me this whole discussion about the yield curve being inverted was a little bit missing the point. Typically what you got in earlier cycles was the yield curve inverted, yes, but along with that the entire yield curve moved up,’ said Wiener. ‘That’s something we haven’t seen, until three or four days ago.”
“Don’t look now, but the yield curve appears to be twisting back toward its normal positive slope. Now the question becomes: is this good news or bad news?”
“The answer: it all depends on who you are. If you’re looking to take out a fixed-rate mortgage, the recent jump in long-term interest rates to multi-year highs is clearly bad news. It’s also bad news for homebuilders, or anyone looking to sell a home, for that matter.”
Or maybe it’s related to something like this. “The Central Florida division of Avatar properties Inc. posted 306 new home sales in the fourth quarter to end 2005 with 1,352 home sales. That’s down from 1,921 new home sales in 2004.”
“Avatar’s primary housing in Poinciana, a 47,000-acre master-planned community in northwest Osceola and northeast Polk counties, accounted for 407 sales last year.”
Or maybe this, “Whirlpool Corp.’s chief executive said Tuesday the appliance maker hasn’t seen a slowdown in U.S. new-home construction yet, although it expects a modest decline. ‘We do not see a bubble, and think that net net, we’ll still grow our revenues in that segment this year,’ CEO Jeff Fettig told investors.”
FBR is getting hit, too. Input from market folk is appreciated.
Check out the volume on NEW after 1 PM… What’s the news on NEW???
http://finance.yahoo.com/q/bc?s=NEW&t=1d
Check out the PRICE on NEW after 1:00.
The shorts are having a field day.
CTX, KBH getting pounded today too. It’s ON.
The reversion back to normal after so many months of inversion could only mean that wider market forces are taking notice. Because fundamentals must be obeyed for the market to be healthy. If you don’t obey the fundamentals, you’re screwed big time. Fundamentals are called fundamentals for a reason. I am not sure if the reversion back to normal curvature will avert a recession as historically indicated.
“Everyone is trying to figure out why the homebuilder stocks are falling today.”
Because they didn’t fall far enough in the last year.
LOL!!
Mortgage Cos, esp. subprime, are not far behind…
And because stock prices are forward looking…
I honestly think it’s because of that article “The Housing Boom is Over” that hit the AP yesterday. It amazes me that so many Americans don’t believe anything until it hits the mainstream media.
normal yield cure=very bad
How so John. (looking for better understanding here)
“The answer: it all depends on who you are. If you’re looking to take out a fixed-rate mortgage, the recent jump in long-term interest rates to multi-year highs is clearly bad news. It’s also bad news for homebuilders, or anyone looking to sell a home, for that matter.”
Because it means inflation is more likely, and not owning a home worth a fixed that will rise in high inflation (with a fixed rate note requiring fixed payments not tied to inflation). Is a very good bet in a high inflation environment, even if one had to overpay for the asset.
The party’s over. The sooner seller get this into their thick heads the better off they’ll be. Let em hold out. Great. They’ll likely lose that much more.
some posted this in an earlier thread, but seems appropriate here:
someone posted this in an earlier thread, but seems appropriate here:
Your link is white
crap, sorry for the double posts (triple now?) and no link. Here ’tis:
http://tinyurl.com/oryso
Good article. All the scattered economic data appears to be converging. It’s my opinion that the suggestion that new home sales are unrelated or uncorrelated are merely a matter of timing - They lag. The funding for many (MOST) new homes depend on closing out an existing home (and also of course low mortgage rates). Now getting out of existing homes is getting tough to do so expect new home sales to get crushed…
Exactly. New buyers are already priced out and now move-up buyers are locked out.
The party is over…no need to wait till May to proclaim it dead.
If you’re looking to take out a fixed rate mortgage, that means you actually have some money for a down payment. You are way ahead of most of the no-money-down people taking ARMs. And THAT means you can buy in an environment where ARMs are drying up - which is an environment where prices go down. So you are way better off.
You can’t have a situation which is bad for all buyers and bad for sellers, and in this case the new reality is that it’s bad for no-down buyers and bad for sellers, but good for down-payment buyers.
And THAT means you can buy in an environment where ARMs are drying up - which is an environment where prices go down. So you are way better off.
____________________
I’d say one should wait for the environment where ARMs have already dried up — for a long time. If you have a downpayment, you don’t want to get sucked out with the tide. Better to wait for prices to fall to a level where most of the ARMs have already reset and the unqualified borrowers are already in foreclosure (and banks hold lots of REOs). Just MHO.
Inflation pressure is mounting and the global liquidity execess might be reversing its course this year. Housing is the first to go, then it will trigger a domino effect. 18 months from now, Ben will cut rates again for fear of a deeper recession. Wild cards are: 1. An oil crisis due to chaos in the Middle East, somewhat likely 2. Another terrorist attack, which is unlikey. 3. 2008 election.
OT……Ughhhhh! This is an article from CNN Money, “Tycoon in the Making”. http://aolsvc.aol.com/realestate/articles/adp/page1of1e.adp
An “accidental millionaire” making her money in real estate. She started out as a clerk, then legal secretary, now a paralegal making $70K/yr salary. Near the end of the article it does mention how she looks at both the pros and cons of a purchase, so it doesn’t seem as if she is flying by the seat of her pants. But the bigger picture is that she got started in the 80s, not in 2003 (just pulling a yr out of the hat). The problem with this story at this time is that there are people out that who will read it and think they, too, can do that and this is NOT the time to start this kind of scenario. She is also a single Mom which gives it a fairytale angle to it, too. While I certainly don’t begrudge her accomplishments and successes, I wonder what CNNs point was in running this story.
At the end of that article there is another link for stories of other real estate “millionaires”.
BayQT~
A normal yield curve is a good thing, but we’re nowhere close to that and there is no indication it will happen. Rather, the worst of all scenarios is occuring; that is a flat curve which is rising which means that borrowing is getting more expensive and lending is unprofitable.
Rising rates also make alternative investments (read: “cash”) more profitable as one can purchase short duration investment grade paper yielding nearly 6%. As many here can testify, bubble areas won’t give you close to that type of return, plus you have the headache of being a landlord to boot.
hedge,
What short of short duration investments do you recommend? CD’s, High Yield Savings, Treasury Bills, … just looking for suggestions of a good place to build my downpayment while watching from the sidelines…
I’d recommend CD’s until there is greater clarity with the Fed’s action.
HFA,
Isn’t it true if you look back at previous recessions that the curve inverted to 15-20 bps then flattened out again, only to invert like 40-60 bps? I know I am not impressed with the flattening and I still feel it could invert much more with another 2 (maybe 3) rates hikes coming. Either way housing is screwed with either a recession or mucher higher rates.
DAP, I am not sure of the question. A true inversion is usually met with aggressive Fed cutting. The last 2 recessions have seen yield spreads of over 250bp if memory serves correct.
During the inversion of 1998, Greenspan attempted to save the world by cutting rates and printing money thus steepening the curve temporarily to avoid a collapse in Asia and recession here.
Nevertheless the real economy was not doing well by 1999 save for technology and benefiting related sectors. GDP growth in 1999 was mostly attributable to daytraders, stock option millionaires and the Wall Street machine which benefited. Meanwhile credit spreads were widening and defaults rising.
The yield curve can revert to normal in one of two ways:
1) By all rates falling, but short-term rates falling faster than long-term rates OR
2) By all rates rising, but short-term rates rising more slowly than long-term ones.
Scenario 1 is a “bull steepening” of the curve. Scenario 2 is a “bear steepening” if I’ve got my jargon right
I believe the market is anticipating the first scenario, which usually comes at the end of a Fed rate-hiking cycle. But so far, we’re getting scenario 2 … quite possibly the worst of all possible worlds because it signifies (in my view) that inflation fears and other negative forces (worldwide trend toward higher rates) are still with us.
That said, we aren’t even back to a positive curve, just one that’s only inverted by a few basis points rather than 15 (the maximum, as measured by 2-year note yields to 10-year note yields). So it’s tough to say if the overall “flat” or inverted curve is done for.
(Wild cards are: 1. An oil crisis due to chaos in the Middle East, somewhat likely 2. Another terrorist attack, which is unlikey. 3. 2008 election. )
As I told my near-suicidal Democratic friends in 2004 (I’m neither), they should rejoice that they did not win that election. Now Bush will be on the hook for what he has done (the effect of his massive debt) and what he hasn’t done (the housing bubble, the current account deficit, the personal debt crisis, other imbalances). May or may not hit hard enough to effect 2006, but 2008 will be an elephant wipeout.
I agree that the Dems were lucky to not win the ‘04 election. I’m nonpartisan as well, but I also know enough of the economic discussions that the deficit was known and planned. Didn’t surprise anyone and that the Fed would simply monetize the debt for the government. Only a federal government that prints fiat money can do that, so everyone was well aware that after 2001, the only way to prevent a meltdown was to use monetary and fiscal policy.
From an economic historical perspective, this has never happened until now, that fiscal and monetary policy was changed to address an impending recession. Unfortunately, this also makes the outcome unknown.
The elephant already wiped. They ran out of dumb people to believe their lies. The repuke commentors ratings have all but crashed. You can only lie so many times before people just tune you out.
why save -you get SS ,gannymeds and soon FREE Hilarycare
http://biz.yahoo.com/ap/060307/consumer_credit.html?.v=2
As I stated a few days ago, it’s the threat of the JCB raising interest rates, thereby unwinding the JPY/UST carry trade.
Interest rates are crammed together like a coiled up spring. Now even baby steps by the JCB could cause the spring to fully extend, pushing the spread back out to 3% (4-5% short, 7-8% long). More, likely, since the flood of Treasuries would overwhelm an already saturated market.
Amen!
Double Amen!
Agree.
How about the Chinese also making more noise about diversifying from the USD?
This is the elephant in the room that noone is talking about. The Chinese government recently said that it has about 650 Billion too many USD. If you thought our deficit was bad, try financing it on the 10 year an 30 year when noone is buying. If China starts dumping, we will most definitely have a jump at the long end.
Any quick movement on the 10 or 30 year is the signal. Treasuries are just starting to get warmed up, and the bond market is going to be a bloodbath.
If Bernanke cranks up the presses to monetize the debt; hello inflation. Maybe this is the reason for the timely removal of the M3; it’s something that every central banker can see, but doesn’t want anyone to know about.
Destinsm,
Check out the following site for info on bonds.
(www.bankrate.com/brm/frames/hyperlink.asp?link_address=http://www.publicdebt.treas.gov/sav/savwhin4.htm)
I-bonds can be purchased now through Apr 2006 and yield 6.73% plus are state and local tax free. Fed taxes can be deferred until cashed out. No sleepless nights, no sellers fees, no renters, etc.
I wouldn’t be a buyer of I-bonds here.
Clarify; Because of future increases in rates of return ??
A lot has been written about the wield curve inversion and how it predicts a recession. True as far as it goes that there is a connection.
But few point out that another thing happens before the recession starts. The yield curve trend reverses to steepening again. This is the event that one should watch for.
Why does this happen. It has to do with entrepreneurs (read spec builders with construction loans) recognizing that there is something wrong and they need to hurry up and get finished. That drives demand for short term money and creates the inversion. Then as the bust appears the demand for short term money for new projects suddenly shuts off. Hence the reversal.
Some signs of that today. Maybe its real, maybe not
San Diego inventory at record high: 19398
http://www.sandiegorealestatecentral.com/index.aspx
This site’s number is a little more inclusive than ziprealty’s number, but still, it keeps on growing….
Thie normal yield curve is sudden death to Housing market. The sub prime mortgages that fueled the housing market for last few years have disappeared as the rates showed some inversion and then the long rates to move up in order to be in the normal shape. The sub prime borrowers were F$$$ed and hiding in their shitboxed which they got for some insane values.
The long rates increase will nuke any hope for the sellers to sell their house at the prices they bought. To induce serious buyers who would like to buy houses to live and not to invest and who preferred to sit on the side lines since past four years these sellers will have to reduce the prices to 2001 level and adjust for higher long bonds. Unless they do it they are not going to get serious buyers and they might only be getting few suckers who could not resist wife’s pressure.
I am very interested to see how this will unfold in next 2-3 years. Waiting is horrible in a market that is declining in value. And those suckers who had been buying for past 4 years, and I am talking about those so called “investors”, will see their sub prime loan to upside down and hope will screw them more.
Economics 101 rules. Equilibrium prevails
Could not say it any better!!! Sellers who do not understand basic economic concepts in RE should not own property they HAVE to sell.
Yep, That pretty much sums it up.
I set up an email box from which to email FUCKED BORROWERS from Craigslist. Email address housingbubblesobstory@yahoo.com I have congratulated them on their new found fame as a FUCKED BORROWER, and a FLIPPING FLOPPER and wish for their ship to sink fast.
I have a sarcastic sense of humor.
I set up an email for fucked borrowers. housingbubblesobstory@yahoo.com I congratulate a nominee from Ben or SoCalMort’s site for their 15 min of fame and wish for their ship to sink fast as a FUCKED BORROWER.