Friday, 12 June 2009

US housing index is weighed down by spike in mortgage rates

The Housing Index (HGX) is one of the "heaviest" looking of the broad sector indices and undoubtedly the recent surge in long term rates and MBS rates is weighing on this market.

The Ichimoku chart reveals the manner in which price action is now entering the green cloud to the right of the chart and the potential for downside follow through if the price drops out of the cloud. Also worth noting is the manner in which the piercing of the pink cloud from below in early April (and annotated with the arrow) was a good buy signal for this index.

Anecdotally the following quote from a Bloomberg article captures the core issue for the mortgage refi market.

“The homeowner can’t handle this,” said Scott Simon, the head of mortgage-bond investing at Pacific Investment Management Co., whose Newport Beach, California-based firm is the world’s largest fixed-income manager.

Higher rates are “really hurting the refi wave,” Buchta said in a telephone interview. “And rising rates are definitely going to hurt home prices. Consumers figure out the payment they can afford and from that figure out how much house they can buy.”

An increase of 0.5 percentage point in loan rates translates into about 5 percent “less buying power,” he said.
It's becoming more obvious to a number of analysts that the Fed is losing control of long term rates, and this point was made quite forcefully by Michael Shedlock in his daily blog column:
Fed Is Out Of Control

What now Big Ben? You've already blown over a third of your $1.25 trillion commitment and all you have to show for it is more garbage on your balance sheet and a locked up refi market.

One thing is clear, Ben Bernanke and the Fed have lost control of the mortgage market (not that the Fed was ever in control in the first place). They weren't. It was all an illusion.

For now, the stock market is shrugging this off. If rates stay above 5.5% for long, don't expect that to last. And it may not last anyway.

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