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May 18, 2001
The Fed eased again, but had no effect on mortgage rates... again.
The Fed has cut its rate five separate times since January 3, a half-percent each time, from 6.50% to 4.00%, and mortgage rates are a quarter-percent higher today than they were when the Fed began its rescue-the-economy act.
Thirty-year fixed rate loans under the $275,000 Fannie/Freddie limit are trading at their highs of 2001, just below 7.50%. However, as the Fed drags down the cost of short-term money, spreads are widening between fixed rate loans and hybrid adjustables: on a comparable fee basis, 5/1s are available in the high sixes, and 3/1s below 6.50%.
In another effect of the Fed's now-extraordinary campaign, the "prime" rate has fallen to 7.00%, lower than prevailing fixed-mortgage rates for the first time since 1993.
In the ongoing, recession-or-not debate, the stock market's behavior this week is conclusive.
Not. We are not having a recession, not now, anyway; or if we are, may all future ones be just like this.
The Dow is above 11,200, a 4% gain year-to-date, and the same for the last twelve months. Broader indexes are not quite so perky: the S&P 500 is down 2.4% for 2001, and 10.3% in the last year, while the Wilshire 5000 shows nearly identical losses of 2.3% and 10.4%, respectively. Losses are losses (and the silly damn Nasdaq is off 11.2% for '01 and 38% over a year), but there is nothing reflecting a recession here, nor the kind of negative wealth effect which could create one.
In fact, if all the Fed gets for its latest ease is a wash of cash to stocks, no effect on the real economy, and rising long term rates... well, the Fed may be nearly done. Guessers are still looking for a .25% cut to 3.75% at the Fed's June meeting, but that will depend on early June economic data, and won't do a thing for mortgage rates, anyway.
It's a little early, but reasonable to ask how the economy avoided a recession. Mr. Greenspan did his part, but the economy was in deepest trouble December-January, before Fed easing could help much, or even put a floor under stocks (March set the bottom).
The hunch here leads to the housing market as successful lifeguard. Under scarcity pressure from our rapidly growing population, housing markets continued to appreciate in the face of a near-hit recession. MGIC's 1st quarter report has markets 4:1 improving versus softening.
Imagine if, back there in the dark of January, if home prices had begun to slide along with stocks.
No, better not.
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