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March 14, 2003
After ten days at record lows, mortgage rates rose fast and hard yesterday, back near 5.75% for the lowest-fee 30-year loans.
The rate rise had nothing to do with the economy. Rates moved higher in a general reversal of war-panic trades that swept across all financial markets: oil, gold, and bonds down in price; stocks, dollar, and rates up. For months, frightened money had ratcheted up the price of every war-safe asset, and finally there was no more money frightened enough to pay ridiculous prices. No buyers, sellers rule.
Leaving the money politics of war for a moment, mortgage rates got an extra push upward from excessive demand for refinancing, a recurrent theme. The mortgage market has in the last two weeks perfectly replayed each of the stair-steps down in rates since January, 2001. In each one, rates overshot the sustainable market level by a quarter percent or so, which unleashed a wave of refinances too big for the bond market to absorb, followed quickly by a rebound in rates.
A "sustainable market level" is one just low enough to work off the highest layer of existing-mortgage rates. It has taken two to five months to work off each layer; then, demand satisfied, the market could fall to a new plateau. Each drop in the last two-and-a-half years has been triggered by a new awareness that the economy had failed to recover, or by increased fear of war, or the two working together.
From October '02 (synchronous with the Dow bottom at 7286) through last month, the plateau was 5.875% to 6.125% as the market worked off all old loans with rates above 7.00%. In late February, increasing war fear and a sagging economy pushed rates to 5.75%, then 5.625%, then 5.50% last Friday, and 5.625% again until yesterday. Rates below 5.75% are too rich, low enough to re-refinance all the loans refinanced from January '01 to May '02, maybe two trillion dollars' worth, and a tad too much for the bond market to absorb all at once.
After we re-do all the 6.75%-7.00% demand at 5.75% (another two or three months' work), a further decline is still a fair bet. The economy is on the edge of trouble: February retail sales fell by three times the forecast; core producer prices fell .5% last month, and deflation is still in the wind; the Fed meets Tuesday, but is largely out of the game, and hasn't impressed anyone while on the field; and a global recession is a rising probability.
Given the conclusion of one of the great diplomatic fiascoes of all time, I assume we will be at war within ten days. Ghoulish rate-locking opportunities: the moment the US advises UN inspectors to skedaddle, and the outbreak of war itself. Expect a very short air/missile assault, maybe a single night, followed by an airmobile/land blitz to Baghdad. Handicapping that race will be the next trading opportunity, followed by gauging the degree of opposition in built-up areas.
Aside from going to war while actively opposed by most of the world, my greatest concern is civilian overconfidence in the military outcome. (If the Bushawks are so blind to the world, what else have they missed? And, no quibbling about the extent of support: if you can't get votes from Cameroon, Angola, Guinea, Chile, Mexico, or Pakistan, you're on your own.) By all accounts, the Iraqi army is a shadow of its 1991 self; however, in 1991 it was exposed, physically and morally, in the desert after a failed and foolish invasion of another nation. This time, it will be defending home ground, and a Chicago-sized city. Victory will not be measured by captured territory or surrendering tens of thousands, but by video on Al Jazeera.
We might get lucky, in some marvelous Iraqi response to old-fashioned American know-how, dazzling the world, exposing France and Russia as feckless and corrupt.
I would gratefully trade the refi boom for that run of luck.
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