Friday, February 08, 2013
Eating The Snake's Tail
The biggest issue with mortgages has to do with interest rates. Even small increases in the 10 year Treasury seem likely to drop housing affordability dramatically, thus constraining housing prices.
Right now a huge amount of home sales are still cash sales, so I am iffy on the whole housing trajectory. If you are locked into using the Fannie/FHA programs, the higher risk premiums involved are going to accentuate any increases you see related to Treasury rates.
This is a beautiful and intricate problem that calls out for deeper analysis. The alternative - for banks to basically abandon the GSEs and strike out on their own - introduces higher rates due to less pool spreading of risk. Also it means that CBs cannot participate because of the five year rule for balloon payments. Mortgages would become acutely sensitive to changes in future interest rates.
All of which suggests that CBO's forecast on rates and growth is dramatically wrong. Also, of course CBO never deals with recessions. They are not supposed to do so. But realistically, a forecast that implies a 14 year period without a recession is ridiculous.
CBOs real forecast is for 86-87% debt-to-GDP ratios on federal debt held by the public by 2023. To that add another 4% for a recession (which will lower GDP and increase spending). That takes us to 90%.
PS: Current debt held by public as a percentage of GDP:
What does it mean that a lot of home sales are cash? Is that investors, or is it retirees moving from their paid-off house to a condo?
Also, 90% in 2023 seems optimistic. At our current deficit we'll see 70% by next year, a rate of a little less than 10% per year.
As for the cash sales, even PE is going into housing. A lot of time they try to negotiate pre-market sales with banks on REO.