Ten-year Treasuries veered into the danger zone on Friday as yields broke through the crucial 3 percent barrier signaling a slowdown in housing sales due to higher mortgage rates. Fixed rate mortgages are expected to edge higher even though the rate on the 30-year loan increased to 4.48 percent just days earlier. The Fed's announcement to scale back on its $85 billion per month asset purchases has triggered a selloff in long-term Treasuries that will further constrain lending, shrink the pool of potential homebuyers, and turn a mild slowdown to a protracted slump.
Keep in mind, that the Fed is already buying nearly all of the newly issued mortgage-backed securities (MBS), but even that radical market intervention is having no noticeable impact on interest rates. Take a look at this from the Wall Street Journal:
"The Fed bought about 90% of new, eligible mortgage-bond issuance in November, up from roughly two-thirds of such bonds earlier this year...
"The Fed's reach has been enhanced by its practice of reinvesting the proceeds of its maturing mortgage bonds in its $1.48 trillion portfolio, adding another $15 billion to $20 billion in new monthly mortgage-bond purchases.
"The Fed has increased its holdings by $553 billion over the past year. It is on pace to add another $220 billion in purchases in 2014, according to estimates from Credit Suisse." ("The Fed's Mortgage Role Expands," Wall Street Journal)
There is no market for MBS except for the Fed.
On top of that, the Fed is reinvesting the money it takes in on maturing MBS to buy more of this unsellable garbage which adds another $15 or $20 billion to the monthly total.
"15 billion here, $20 billion there. Pretty soon, you're talking real money."
And all of this is being piled on to the Fed's bloated $4 trillion balance sheet. (which no one has any idea of what to do with.)
The purpose of the policy is push down long-term interest rates, which it doesn't do. In fact, as we pointed out earlier, rates are rising while conditions in the housing market are going from bad to worse. For example, existing home sales tanked for the third month in a row in November to a seasonally adjusted annual rate of 4.9 million. November's sales pace was the slowest in more than a year, which means that higher rates and rising prices are scaring off potential buyers. There are also signs that institutional investors, which represented 50% or more of previous sales, are cutting back on their purchases due to the deteriorating rate environment. Take a look at this brief summary by housing analyst Mark Hanson:
"Las Vegas housing demand has crashed. ...This is not hyperbole. 'Crashed' is absolutely the appropriate word to use here given sales are suddenly the weakest levels since Armageddon 2009. I mean come on...sales at the same pace as when the stock market was in the midst of one of the greatest plunges in history speaks loudly...at least to me...
"Like Sacramento, Phoenix, regions in the Inland Empire, and a dozen other 'hot' real estate markets around the nation...when the stimulus go-go juice ran out this market hit a literal 'brick wall' the size of 2007..." ("Las Vegas Housing Demand Has Crashed While Supply Surging," Mark Hanson via zero hedge)
When Hanson talks about "stimulus go-go juice," he's referring to the Fed's rate stimulus which evaporated in June when Bernanke announced his intention to "taper" his asset purchases (QE). That led to a frenzied month of bond trading which pushed up yields on long-term USTs more than 100 basis points. The higher rates have put a damper on sales while mortgage applications have plunged to a 13-year low. For all practical purposes, the recovery is kaput.
Here's an update from Phoenix which had been "red hot" for more than a year:
"The Phoenix-area housing market is quietly ending the year, with a drop in demand and activity... Demand is rapidly dropping, and the supply of homes available for sale is quickly rising...
"First-time home buyers, especially those under 30, are showing little interest in getting into the market...