NY Times, Fooled, Says Mortgage Rates Elevated

The markets send clear signals about their condition. Last fall Peter Eavis wrote a Dealbook analysis piece that seemed to show that banks and mortgage companies were overcharging for 30-year mortgages. 

But there was another explanation:  Perhaps a 30-year mortgage rate of 2.8% is too low on an absolute level. Perhaps banks refuse to go that low because they predict they will lose large amounts of money when interest rates go back up. If banks lend at 2.8% and short term rates are 4%, they would lose 1.2% just on the interest rate difference alone, not to mention costs of servicing the loan. Short term funding rates obviously aren't 4% now, they are closer to 0.25%.  What if you were making the loan from your own funds, to a stranger who needed to take 30 years to pay it back to you? Would you lend your money at 2.8% for that long? What if you were able to borrow at short term rates and were making 2.8% mortgages to friends, family, and random strangers. Would you feel comfortable making 2.8% loans? Wouldn't you be worried that 0.25% short term rates won’t last forever, especially with oil at $100/barrel?

Rather than ascribing evil motives to lenders, it makes much more sense that the entire mortgage industry is very leery of low rates, and predicts that funding costs will increase in the coming years. Mortgage lenders are signaling higher rates to come. To dive down to extremely low mortgage rates would be going out on a limb, betting aggressively on a long-term moribund economy that never sees inflation or higher, boom-market interest rates again. Short- and long-term rates for Treasury bills, bonds, corporate bonds, mortgages, CDs, savings accounts, and other debt are at record or historic lows, at least for the last several generations. High and growing levels of U.S. Federal debt indicate significant potential for future inflation and higher rates of interest across all debt classes.

This leads rather directly to the conclusion that you should not be buying bonds, investing in long-term CDs, and lending at fixed rates for long periods. As we've written before, large bond investors like PIMCO are in for lean times, and even investors as storied as Bill Gross are having difficulty in coming to terms with the coming shift, as we wrote in August 2012.