“Treasuries fell and bill yields rose as Federal Reserve Chairman Ben S. Bernanke indicated the central bank will do whatever it takes to keep the economy out of a recession….Rising gasoline prices, a housing slump and reduced access to credit will probably create “headwinds for the consumer,” Bernanke said in a speech yesterday in Charlotte, North Carolina. He also cited “renewed turbulence” in financial markets.”
Treasuries Fall as Bernanke’s Comments Reduce Bid for Safety [Bloomberg]

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Comments from “Plugged-In” Readers

  1. Posted by Rillion

    Sweet, another interest rate cut is coming, less to pay on my HELOC.

  2. Posted by Amen Corner

    Sweet, another dollar drop is coming, more to pay for my gasoline.

  3. Posted by will_h

    I know we’ve discussed this before, but I still don’t really get it. What’s the link between interest rates and mortgage rates?

  4. Posted by Dude

    From the macro perspective, cutting rates will not stave off a recession (which has already started) and somehow buoy the absurdly bloated home prices we have across the country, especially here in California (see Roubini for details).
    The Fed only has 2-3 levers it can pull. When the only tool you have is a hammer, everything looks like a nail.
    Sure, another rate cut may save some folks $50-$100 per month on payments. But how low do you need to take rates to make houses in Stockton worth $600K again? How low do rates need to go to keep Sacramento flippers paying the 4 mortgages on their vacant underwater McMansions? Or to clear the 3 years of inventory in most Florida cities?

  5. Posted by John

    If people don’t think Fed cutting rates will have much effect on the RE market, why did people blame Fed for the bubble?
    You’d better make it consistant.
    Actually, I think Fed’s low rate in 2005/2006 had a lot to do with the bubble. However, this time, the low rate will create a different bubble instead of helping the RE market.

  6. Posted by Foolio

    So what’s this different bubble?

  7. Posted by anono

    I remember a lot of economists saying before the September rate cut that it would take a 100bp cut to assist the housing market in any meaningful way. Well, if we get a 25pb cut in December we will be there. I don’t think it’s going to help with the folks Dude mentioned, but it may help people who bought in the last few years and have otherwise good credit and income refinance in this tighter lending climate.

  8. Posted by location

    “But how low do you need to take rates to make houses in Stockton worth $600K again?”
    I know this one. The answer is 1%. The rate hit 1% in June of 2003. This caused houses in Stockton to sell for $600k.

  9. Posted by John

    Foolio,
    Everyone will make his own guess. I won’t tell even if I know, and I could be wrong anyway.

  10. Posted by Amen Corner

    “I know this one. The answer is 1%.”
    Not even 1% will do it unless the banks revert to their lending “stamdards” of a few years ago.
    As for blaming the Fed for the bubble, I think that’s a legitimate argument. It was their too prolonged low interest rates that fueled house price inflation and was the catalyst for the loose credit standards that have got us into the current mess.
    So, while lower rates almost certainly will help housing, the effect will be somewhat muted by the fact that we still hgave the lax lending mess to clean up.

  11. Posted by ex SF-er

    Also of note:
    Today (or maybe last night) President Bush and Treasury Secretary Paulson announced a deal similar to what Schwarzenneger did… with some of the bigger banks in the land (Citi, Wells, WaMu)
    freezing all subprime mortgages at their pre-reset rate.
    Just like with Schwarzenneger’s plan though, it is thin on details of HOW to do this, WHO to allow in the program, HOW to pay for it, etc.
    but anyway, as many of us have said… here comes the Federal bailout… (how many tax dollars for this do you think?)

  12. Posted by ex SF-er

    “I know we’ve discussed this before, but I still don’t really get it. What’s the link between interest rates and mortgage rates?”
    Mortgage rates are often based on a benchmark (often the 10 year treasury, or the dollar denominated LIBOR), PLUS a “risk premium”
    Mamy ARMs are linked to the 10 year or the LIBOR.
    Many HELOCs and HELs are linked to the Fed Funds Rate itself, or to LIBOR/10 year treasury
    The Fed Funds Rate (the short term rate that the Fed controls) is not directly related to either LIBOR or the 10 year Treasury, but movements in the Fed Funds Rate can sometimes affect LIBOR and the Treasury… but it’s not a 1:1 ratio.
    In the last decade, it’s been noted that changes in the Fed Funds Rate do NOT affect the 10 year as much as they used to.
    Thus, lowering the Fed Funds Rate CAN help many people if their HELOC/HEL is linked to the Fed Funds Rate.
    Also, lowering the Fed Funds Rate MIGHT lower the 10 year treasury (and many ARMs are linked to this)
    however, the problem is that the mortgages also consist of a “risk premium”. Many people foresee the possibility that the Fed Funds rate will go down, the 10 year treasury (and maybe LIBOR) will also go down but not as much, but the RISK PREMIUM might raise more than the 10 year goes down. if that happens, then mortgage rates will not change very much, or could rise.
    This happened in 2003-2006 in reverse. the Fed Funds Rate went up 4.25%. The 10 Year treasury rate went up less than 2%. And mortgages hardly budged, less than 1% (because the risk premium went down… irrational exuberance of investors)

  13. Posted by dub dub

    @ex-Sf — my guess is they’ll offer the modified terms to folks who would be better-served walking away from the loan anyway (hence the carrot)…

    Doubt it will be a free-for-all (but I’ve been wrong often before)…

  14. Posted by Mole Man

    The rates! They do nothing!

  15. Posted by SFAnalyst

    From what I’ve seen of the proposed bailouts, they amount to little more than “pushing on a string”. The idea seems to be that if FBs aren’t forced to sell at liquidation prices, the market will remain steady.
    It’s not clear to me whether these bailout ideas provide for continued negative amortization or simply interest relief for an extended period. Any wholesale recasting of loans unfavorable to the noteholders would likely have an ugly effect on the willingness of investors to provide mortgage capital in the future.
    The RE bubble wasn’t simply a result of low rates. As many on this blog have commented, it was the profusion of “affordability products” and “liar loans” that made it possible to “own” a million dollar home on $100K of income.
    Old fashioned lending guidelines limited home borrowing to about 3x gross income. Assuming a reasonably affluent gross income of $150,000 and the ability to make a downpayment of $150K, that would get you what around here? Oh yeah…hardly anything. And this imbalance of incomes and home prices isn’t confined to homes in “marginal” locations.
    I don’t see how the bailout plans address the basic problem of affordability and who the next buyer will be. It has the smell of desperation. I hope I’m wrong.

  16. Posted by Foolio

    John,
    Why play coy now, after you raised the issue? After all, you should be shouting it from the rooftops once you’re in.

  17. Posted by Dude

    “If people don’t think Fed cutting rates will have much effect on the RE market, why did people blame Fed for the bubble?”
    Low rates by themselves aren’t the only cause, as Amen Corner points out, it was the lack of credit standards that really did it.
    For about 3-4 years, it was easier to buy in this country than it was to rent. To rent an apartment, a landlord asks for a security deposit (cash down), pay stub (proof of income), and will usually check credit. Then they demand rent be paid in cash every month. Pshaw…why do that when you can buy using a stated income option ARM loan and avoid all that stress?
    Coincidentally, I’m still waiting for the other shoe to drop: corporate defaults have been at historical lows for too long and are now climbing as well (see Roubini’s colleague Edward Altman for details here).

  18. Posted by Jamie

    The number of people who lied on their mortgage applications will become more apparent as people have to go through the paperwork process once again to get dumped into one of the subsidized (or not subsidized by bond holders) classifications.

  19. Posted by fluj

    Indeed, it seems as if a recession is coming, if it isn’t already here. What a shame. Because whoever wins in ’08 is going to inherit a whole lot of blame.

  20. Posted by John

    Foolio,
    Because if I am right, there is a lot to gain. It would be silly for me to share “what’s the next bubble”.
    And my post is that the wealth create bubbles. When one bubble deflates, it is not possible to pump the same bubble again. Whatever the Fed does will simply create a different bubble.
    Just like 2000 after the .com.

  21. Posted by Satchel

    All the Fed and the Treasury are trying to do is to lock people in to a depreciating asset, and keep them paying whatever can literally be squeezed out of them. Because housing is such an emotional issue for so many, and because the concept of opportunity cost is simply lost on most people (as is the distinction between “real” and “nominal” gains), it shouldn’t be too hard to lock them in at least for a while.
    I don’t think that lowering interest rates can reflate what is an absurdly overpriced asset, namely, hoousing in most parts of San Francisco. As just an example, Japan tried this in the early to mid 1990s, lowering rates all the way down to 0% for extended periods. Real estate in Japan (on average) fell 50% (60% in real terms because of slightly deflationary conditions over the period). In Tokyo, where properties were most expensive because Tokyo was special (sound familiar), real declines were approximately 80%.
    I don’t want to get really long-winded here, and truthfully, I don’t have a good feel for whether we will see large nominal price drops or not (depending on whether deflation takes hold), but I am sure that real price drops will be large. I lean towards deflation and large nominal drops, over a number of years (Japan is going on about 17 years).

  22. Posted by huh

    am i missing something in these threads? people are complaining on the one hand that the academy of art should be prohibited from buying more real estate because it’s driving up prices and rental rates in the city, but on the other san francisco real estate is tremendously overvalued and will inevitably drop? aren’t these positions mutually exclusive?
    if you believe real estate is going to fall through the floor, there will be plenty of rental units available in one rincon and the other high rises downtown and aau should be allowed to purchase up as much property as they please.

  23. Posted by Willow

    What this will do is force savers to look at alternatives for their cash holdings. With short term savings rates well below 5%, and a devaluing dollar, those people who made money during the real estate boom, (and yes there are lots of them out there in SF), will have to figure out what to do with their cash. Not sure what that will be.
    The Fed really has no choice but to cut rates. Things are unravelling a lot faster than they anticipated and this is their attempt to create a “choppy” landing rather than a total crash. We’ve gone past that supposed “soft landing” that we heard about 12 months ago.

  24. Posted by Jimmy (Bitter Renter)

    All my neighbors (owners) — some of whom are trying to sell their investment properties — are just waiting for things to bounce back in the spring. They’re convinced that next year will be a better time to buy. Time will tell if they’re correct (I hope not!).
    However the key difference between Japan and California is that Californians LOVE DEBT. Offer a Californian a loan and they will snap it up, spend it and ask for more… and if things get out of hand, they will restructure through bankruptcy and suffer no shame.
    Japanese on the other hand are habitual savers and bankruptcy is considered shameful…. so their culture views debt very differently than ours.

  25. Posted by Alfred Russo

    Jimmy,
    I basically agree with you about Californians loving debt, and the Japanese having much more honor and shame about things like bankruptcy, but you can’t stretch the distinction too far. In the late 80s the Japanese loaded up on debt like no one’s business, especially in real estate. It went so far that 100-year mortgages were being offered in Tokyo (“your grandkids can pay it off…”).
    You;re definitely right that Californians (and Americans generally) will borrow if offered the loan. But after this debt-induced mess, who is going to offer the loan ?? (on attractive terms, that is….ther’ll always be suicide/shakedown offers to lend). That’s the big question, and if you really think about the macro implications, I think you’ve got to come down on the side of deflation as all the bad debt that is out there is literally destroyed.
    Printing money is often offered as a solution. It won’t work (never has anyway in the history of the world up until now, so far as I can tell). Because debt is a time-shifting of benefits (the lender foregoes gratification today for more gratification later/borrower gets gratification today for an obligation to forego more gratification in the future), lenders in the aggregate will always demand a real return. When a government prints money, this return becomes negative, and in any case very difficult to forecast. Hence, interest rates rise dramatically, and lending slows (and often stops entirely), depending on the severity of the money printing episode. I doubt the Fed will resort to this (it is a bank after all, and its assets are largely paper assets) until such time as the pain has become unbearable. Again, 17 CONSECUTIVE years of property prices going down was not enough to make the BOJ print money and hyperinflate. Maybe our experience will be different, but in any event, in keeping with what I said above in an earlier post, expect LARGE real price drops in San Francisco (just a guess, but ranging from 20% in the “best” areas to 80-90% in the worst, all peak to trough estimates).

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