Today's Bubble Follies

"WASHINGTON - Rates on 30-year mortgages jumped to the highest level in 2 1/2 years this week, driven higher by inflation worries in financial markets."

"Stronger than expected gains in the manufacturing and service industries — coupled with higher labor costs — ignited inflation concerns, which led to the rise in mortgage rates this week," said Frank Nothaft, chief economist at Freddie Mac."

He said investors have begun to worry that the Federal Reserve, which has been raising interest rates to combat inflation, may not stop with just one or two more rate hikes but may actually boost rates three more times this year."

"The Freddie Mac survey found sharp increases for all types of mortgages this week.Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing a home mortgage, averaged 6 percent. That was up from 5.89 percent last week and the highest level for 15-year mortgages since they averaged 6.03 percent the week of July 5, 2002."

"One-year adjustable rate mortgages rose to 5.45 percent. That was up from 5.34 percent last week and the highest level for one-year ARMs since they averaged 5.58 percent the week of Sept. 21, 2001."

"Rates on five-year hybrid adjustable rate mortgages rose to 6.03 percent this week, up from 5.97 percent last week. It was the first time this mortgage has been above 6 percent since Freddie Mac began tracking it at the beginning of last year. The mortgages rates do not include add-on fees known as points."

"U.S. mortgage applications rose last week, reflecting an increase in loan refinancing, as interest rates surged to a three-month high, an industry trade group said on Wednesday."

"Analysts say an increasing number of borrowers have been converting their ARMs into new fixed-rate loans as the difference between adjustable and fixed mortgage interest rates narrows."

"The MBA's survey covers about 50 percent of all U.S. retail residential mortgage originations. Respondents include mortgage bankers, commercial banks and thrifts."

"Americans remain largely optimistic that home values will keep rising in the next few years, but some are concerned that they won't be able to keep up with their mortgage payments, according to a Los Angeles Times/Bloomberg poll."

"More than one-quarter of those who have adjustable-rate mortgages say they aren't sure they'll be able to make their monthly payments if their interest rate goes up. These loans have been particularly popular in California and other states with high housing costs."

"In the Times/Bloomberg poll, nearly half of homeowners expected the price of their primary residence to rise 5% to 15% over the next three years. Twenty-five percent expected appreciation of 16% or more in that period. Just 5% predicted no price increase."

"About 1 in 7 homeowners said the mortgage on their home was an adjustable-rate rather than a fixed-rate loan. Adjustable-rate loans typically offer low initial interest rates, making homes affordable for many people who couldn't qualify for fixed-rate mortgages. As market interest rates rise, however, homeowners with adjustable loans face the prospect of sharply higher payments."

“The National Association of Realtors reports that last year an ‘eye-popping 43% of first-time home buyers purchased their homes with no-money-down loans.’ Meanwhile, a foreclosure monitor has announced that nationwide foreclosures jumped 24.5% between the first and fourth quarters last year.”‘

"In California, an estimated 25% of so-called prime mortgages issued in 2005 were adjustable-rate loans, (prime + sup-prime in SF Bay area = 82% and Sonoma County = 69%) 13% nationally, according to data firm LoanPerformance.

Prime borrowers generally have the best credit ratings, but over the last two years even these customers increasingly have taken out adjustable loans that allow them to pay artificially low interest rates for months or years. When these loans eventually adjust higher, many consumer advocates fear, some borrowers won't be able to make their payments."

"Of those who have adjustable-rate loans, the poll found that 21% said they were "not too confident" about making their payments if they adjusted higher.

"Five percent said they were "not at all confident." The rest were "very confident" or "somewhat confident."

"Lillie Oliver, 50, of Alvertville, Ala., said she got an adjustable-rate loan a few years ago when she refinanced her house to pay for improvements. But her loan rate recently jumped a full percentage point, and it could adjust again in six months, she said."

"I'm at the point right now where I can barely make the payments," Oliver said. "If everything keeps going higher, like groceries and everything, I don't know how I am going to make it."

"Jackie Arnold, 41, and her husband used an adjustable-rate loan to buy a home in suburban Atlanta 18 months ago. Now, as interest rates rise, she's worried that the loan may have been a mistake."

"Federal Reserve Bank President William Poole, who is not a voting member of the FOMC this year, said rising inventories of unsold U.S. houses signaled a slowdown may already be underway."

"Poole did say there was some evidence the housing market might be experiencing some sort of slowdown after its strong gains in recent years. But he explained this was already factored into the U.S. central bank's thinking."

"As noted in the minutes of the FOMC meeting held on January 31, 2006, policy-makers are expecting some weakening in housing construction," Poole said.

"The conventional view, which I subscribe to, is that a housing price bubble does not exist on a national average basis, but there may be pockets ... where prices have risen beyond levels that can be justified by economic fundamentals."

"Poole repeated the Fed's long-standing mantra that it was not possible for policy-makers to identify bubbles in advance, an argument they use to justify not intervening to curb price rises in any asset market."

"Given that bubbles always burst -- if there is no burst, then there was no bubble -- clear advance evidence of a bubble can never exist."

"If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place."

"Some economists have forecast a downturn in the housing sector will sap consumer spending, which has been driving U.S. growth since a shallow recession in 2001. They argue that homeowners have extracted equity from now more valuable homes to support spending despite, weak income growth in recent years."