As unemployment continues to fall incrementally and home prices strain to maintain their steady rise, all eyes are on the Fed.
Fed Chairman Ben Bernanke recently caused waves on Wall Street by announcing the Fed would, well, do more of the same to help jack up the economy. According to Bernanke, the Fed will continue its mortgage-backed bond-buying program, currently at the rate of about $85 billion a month, until unemployment reaches 6.5 percent.
So why then did stocks fall and the yield on the 10-year T-note jump to 2.27 percent if the Fed is continuing with the status quo? The tizzy can be attributed to Bernanke’s general optimism about the state of the economy, which, by the way, he alone is managing. The Fed has revised its unemployment projections, stating 6.5 percent unemployment will likely be reached by the end of 2014. If the economy continues down its current path, the Fed could begin ratcheting back its stimulus as soon as later this year.
first tuesday insight
Consider this fair warning of the rising rates to come. Those who have been reading these columns well know it is coming, and with a vengeance. It will kill many escrows which the new rates will not support.
Once Big Daddy Bernanke cuts off access to his bottomless bank account, interest rates will readjust to match the market. This means steadily increasing rates alongside a steadily falling unemployment rate.
Interest rates have been on a long decline for over 30 years, even held artificially low in 2005 during a period of the greatest real estate demand this country has ever seen. The next 30 years or so will be quite the opposite, as we watch rates hike up the cooler side of the mountain alongside a steadily warming U.S. economy. Nothing new or newsworthy in all this — just a basic understanding of what zero-bounded interest rate financial crises are all about.
As rates increase so too does demand for loan assumptions at the erstwhile lower rate. At present, no one cares about the insidious due-on sale clause hardwired into every trust deed in California. But oh how they will once the increased cost of financing stifles deals that can no longer close and kicks prices off the comfy couch they’ve been surfing on.
Keep your eyes on the Fed, but keep an even closer watch on the 10-year T-note — it’s the barometer that measures the pressure imposed by the gathering due-on storm. Ignore all this pricing information at your own peril.
Re: June 19. 2013 Policy Press Release from the Federal Reserve