Higher Treasury Yields Means ``Darker'' U.S. Outlook (Update1) 2008-05-29 13:00 (New York) (Adds home sales in ninth paragraph, prices in 10th.) By Kathleen M. Howley May 29 (Bloomberg) -- Rates for fixed mortgages, the loans used by nine out of 10 U.S. homebuyers, are poised to rise, and may extend a housing slump that's already in its third year. The yield on the 10-year U.S. Treasury note... [more]
Higher Treasury Yields Means ``Darker'' U.S. Outlook (Update1)
2008-05-29 13:00 (New York)
(Adds home sales in ninth paragraph, prices in 10th.)
By Kathleen M. Howley
May 29 (Bloomberg) -- Rates for fixed mortgages, the loans used by nine out of 10 U.S. homebuyers, are poised to rise, and may extend a housing slump that's already in its third year.
The yield on the 10-year U.S. Treasury note increased to the highest level of the year after the government said the world's largest economy grew at a faster pace in the first quarter than it originally estimated. Rates on home loans typically track long-term government debt and may soon follow suit, said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.
``The outlook for housing and for the economy will grow even darker if credit gets costlier,'' said Zandi. ``It will be a weight on home demand and will mean additional cuts in refinancings, which will crimp consumer spending.''
The 10-year note's yield rose 9 basis points, or 0.09 percentage point, to 4.09 percent at 10:31 a.m. in New York, according to BGCantor Market Data. It's the highest since Dec. 28.
The price of the 3.875 percent security maturing in May 2018 dropped 23/32, or $7.19 per $1,000 face amount, to 98 9/32.
The 2008 high in yields came after the Commerce Department said gross domestic product expanded at an annual rate of 0.9 percent from January through March. The government's prior estimate for economic growth, made in an April report, was 0.6 percent for the period.
Banks have a ``built-in buffer'' that may keep the fixed-rate increases to as little as an eighth of a percentage point, even if Treasury yields are higher, said Keith Gumbinger, vice president of HSH Associates, a mortgage research firm in Pompton Plains, New Jersey.
`Extraordinarily Wide' Spread
``Fixed rates may rise, but they won't rise as much as the underlying Treasuries,'' Gumbinger said. ``The spread between government debt and fixed rate mortgages has been extraordinarily wide, and if lenders are interested in making loans some of that will disappear.''
The difference, or spread, between the average U.S. fixed mortgage rate and the 10-year Treasury yield is 1.97 percentage points today, down from the high of 2.82 percentage points on March 17. That was the widest since 1986, as banks that reported $382 billion in asset writedowns and credit losses since last year tried to rebuild their tattered balance sheets, data compiled by Bloomberg shows.
Home Sales Fall
U.S. sales of previously owned homes probably will fall to
5.39 million this year, the third consecutive annual decline, the National Association of Realtors said in a May 15 forecast. That would be a drop of 24 percent from 2005's all-time high of 7.08 million, making it the worst housing recession since the four-year slump that ended in 1982 with a decline of 50 percent.
The median U.S. price for a previously owned home probably will be $213,700 in 2008, down 3.7 percent from 2006's peak of $221,900, according to the Realtors. Measured annually, the price decline that started in 2007 was the first since at least the Great Depression, according to Lawrence Yun, the trade group's chief economist.
Mortgage applications in the U.S. last week dropped to their lowest level in a month, Washington-based Mortgage Bankers Association said yesterday. Its index of applications to purchase a home or refinance a loan fell 4.6 percent to 593.3 from 621.6 the prior week. The group's purchase index increased 0.1 percent and its refinancing gauge dropped 8.9 percent.
So far, fixed home-loan rates have barely budged, according to Freddie Mac, the world's second-largest mortgage buyer. The average U.S. rate for a 30-year fixed mortgage is 6.08 percent this week, up from last week's 5.98 percent, it said in a report today.
The average fixed rate probably will be 6.1 percent this quarter from 5.9 percent in the prior period, the McLean, Virginia- based company said in a May 8 forecast.
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