Saturday, May 21, 2005

Real estate rates stay low as economy improves

New data show GDP growth approaching 4%

The recent rise in rates has reversed, and then some. The 10-year T-note was sub-4.15 percent Friday, flirting with a break below 4 percent, and 30-year fixed-rate mortgages can be found as low as 5.625 percent without fees.

Nobody with good sense knows for sure why long-term rates have broken down (of course, that "good sense" qualifier dismisses a majority of those trading bonds).

For sure, long-term rates have decoupled from economic fundamentals. Rates have been falling for six weeks on the theory that the economy is slowing down, but the newest data says no, not hardly. April retail sales doubled the forecast, and first-quarter GDP growth will soon be revised from 3.1 percent and shaky to close to 4 percent.

In another decoupling, bonds used to improve when oil prices rose, on the theory that high prices would slow the economy, or resulting inflation would force the Fed to slow it down. Oil is down to $48/bbl today, and accumulating inventory and reduced consumption in the United States and China portend a further price decline.

The consensus Fed forecast is still the same: another .25 percent on June 30 and Aug. 9, and a stop at 3.5 percent. Doesn't make good sense to me: the long-rate rally is adding stimulus that the Fed is trying to remove. Why would the Fed stop short?

Read the entire Lou Barnes article at Inman News


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