San Diego Housing Market News and Analysis
Credit Market Report: March 2006
Submitted by Rich Toscano on March 26, 2006 - 9:24pm
This article will address recent mortgage rate movements along with important policy developments by the world's central banks. Executive summary: the credit market sure seems hell-bent on preventing a meaningful spring rally.
The big news in the credit markets last month was the announcement by the Bank of Japan (BOJ for short—Japan's central bank) that they would end their policy of "quantitative easing." A little background: when the BOJ cut rates to 0% and still didn't manage to kick-start inflation, they tried something new. They started printing money like mad and handing it over to banks to use as reserves, presumably to spur lending, which would in turn spur economic activity.
How well that approach did or did not work is a whole other topic and is not relevant to our discussion. The point is that the Japanese were creating huge amounts of money, and much of that money ended up being lent to Americans through avenues described elsewhere on this site. The net effect was to help keep both rates and lending standards nice and low.
Now the BOJ finally appears to be confident enough in the economy to lay off the printing presses. They have announced their intent to start mopping up the excess liquidity and, eventually, to begin raising rates. It may be many months before the first rate rise even takes place, but the point is that the BOJ is finally moving towards relative credit tightness.
The BOJ's move only underscores a general tendency towards worldwide tightening. The US Fed is of course still raising rates, and regulators are starting to discourage banks' more risky lending practices. And now the European Central Bank has jumped on board, raising its own target rate for the second time and waxing concerned that, "A large liquidity build up has developed and we can't ignore it." (The ECB has a much better handle than the Fed on what does and does not comprise "inflation"—but that is also a topic for another article!)
In all likelihood, this tightening of worldwide credit conditions will result in less money to be lent and higher rates at which to lend it. The extent of these effects is of course impossible to predict, but their general nature is not.
Mortgage rates seem already to be reflecting the trend towards tighter credit, as shown in the following charts (per a reader request, I moved the chart timeline back to encompass all of my collected data—I will be doing this for some other data series as well):
Long term rates reached up to touch their late-November highs before backing off a bit, whereas ARM rates continued their inexorable rise. With the global move towards central bank tightening and a continued concern with inflation here in the states, it doesn't seem likely that these rates will fall substantially any time within the next few months—and they may continue to rise.
Last year's spring rally was accompanied by ARM rates at 4.25%—substantially lower than the current 5.41%. At these rates, entry-level buyers simply can't afford housing at current prices, let alone the even higher prices that rally-predictors are hoping for. I've been saying for months that credit conditions bode poorly for the hoped-for springtime rally. Well, nothing has changed this month, except that everything is even more pronounced than before. A long-term trend towards tighter credit appears more certain, and a meaningful housing rally appears even less likely than ever before.
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