Bond Market Selloff Makes Mortgage Rates Rise

A global sell-off of American Debt would be a disaster for the United States in general and the housing market in particular. Could it happen?

Irvine Home Address … 5152 Yearling Ave Irvine, CA 92604

Resale Home Price …… $545,000

Delivered from the blast

The last of a line of lasts

The pale princess of a palace cracked

And now the kingdom comes

Crashing down undone

Smashing Pumpkins — The Beginning is the End is the Beginning

A sharp sell-off in the bond market has caused a sudden rise in mortgage interest rates. This kind of market action happens occasionally, and it may signify nothing; however, there are forces at work that may signal and end to super low mortgage interest rates.

Mortgage applications are down and rates are up

November 17, 2010 | 1:00 pm

Applications for mortgages fell last week as interest rates jumped — both bad signs for the housing market as it struggles to gain momentum in a lackluster sales environment.

The Mortgage Bankers Assn. said Wednesday that its market composite index, which measures the weekly volume of home loan applications, fell 14.4% on a seasonally adjusted basis last week compared with the week before.

Applications for mortgage refinances fell 16.5% and purchase applications fell 5%, the group said.

Reports of low sales volumes are mirrored in the mortgage volumes. You know rates have been low a long time when the refinance business is slow as well. Usually low interest rates spur refinances, but everyone who could refi has, and there are few qualified customers for loan products.

Mortgage rates were up, as a sell-off in the bond market pushed up longer-term interest rates across the board. The average rate for a 30-year fixed-rate mortgage jumped to 4.46% from 4.28%, with points increasing to 1.13 from 1.04 for loans that would cover 80% of the value of a home.

The average rate for a 15-year fixed-rate mortgage increased to 3.87% from 3.64%, with points falling to 0.91 from 1.08.

Michael Fratantoni, the bankers assocation's vice president of research and economics, said the increase in rates was due to stronger economic data and rising concern over the Federal Reserve’s "quantitative easing" program, under which the Fed plans to buy $600 billion worth of Treasury bonds by mid-2011.

— Alejandro Lazo

Those rates are both very low. I hope interest rates stay low over the next year so I can take advantage of it to buy inexpensive cashflow properties. If rates go up while the sales volume is weak, prices may drop beneath the current trading range and take a step down.

The story within the story is the happenings in the bond market that caused this sudden spike in mortgage interest rates.

BOB RUBIN: "US In Terribly Dangerous Territory," Bond Market May Be Headed For "Implosion"

Aaron Task Nov. 17, 2010, 11:24 AM

Warning of the risk of an "implosion" in the bond market, former Treasury Secretary Robert Rubin says the soaring federal budget deficit and the Fed's quantitative easing are putting the U.S. in "terribly dangerous territory."

Speaking at an event at The Pierre Hotel in New York City honoring Sen. Kent Conrad (D-N.D.), Rubin joined the growing number of current and former officials (foreign and domestic) to criticize QE2. The Fed's plan to buy $600 billion of Treasuries "has a lot of risk," he said, calling the international reaction "horrendous."

This statement sounds more like political posturing rather than sound financial analysis. It depends on what you believe about quantitative easing.

To recover from its concurrent financial bubbles in stocks and real estate, Japan has been printing money for decades, yet its government can continue to borrow at very low rates. If you believe that Bernanke is combatting deflation in the United States by reprinting the money vaporized by losses from real estate loans, then there is no real danger of a huge sell-off of American debt by foreign countries. Everything is okay.

However, if you believe expanding the government debt and printing money will be punished by the foreign debt markets by a massive sell-off, then (1) the bond market will implode, (2) interest rates will double or triple in a short period of time, (3) and we will have a major economic crisis — worse than 2008.

Rubin, who issued a similar warning about the bond market at The FT's "Future of Finance" conference in October, said Congress' vote on raising the deficit ceiling next spring could be the "trigger" for a rout in the Treasury market. Several Republican and Tea Party candidates vowed to not increase the government's debt ceiling unless Democrats agree to sharp cuts in spending that may not be politically tenable.

A Congressional standoff on the debt ceiling could spook international investors, Rubin said, alluding to a market event similar to the Dow's 778-point plunge on Sept. 29, 2008, when the House initially voted no on TARP.

While most pundits worry about the potential for China to dump its Treasury holdings, the former non-executive chairman of Citigroup said a financial version of the Cold War concept of Mutual Assured Destruction will likely prevent them from doing so. But he is worried about selling by the government's of Singapore, Hong Kong and Malaysia. "They could say ‘the Chinese are stuck but we're not,'" Rubin predicts.

Rubin's comments came during a panel discussion that also featured Sen. Conrad, chair of the Senate Budget Committee, former Nebraska Senator Bob Kerrey and former U.S. Comptroller General David Walker. The panel was moderated by former Commerce Secretary Pete Peterson, the senior chairman and co-founder of The Blackstone Group as well as founder of the Concord Coalition.

Aaron Task is the host of Tech Ticker. You can follow him on Twitter at @atask or email him at altask@yahoocom

Do you think there is any real danger of a massive global sell-off of American debt?

Another long-term owner goes Ponzi

The stability of our housing market depends on borrowers making their loan payments. When borrowers start going Ponzi — borrowing more money to pay debt — it is only a matter of time before delinquency leads to foreclosure and the collapse of pricing.

  • The owner of today's featured property paid $220,000 on 12/30/1994. The owner used a $198,000 first mortgage and a $22,000 down payment.
  • On 8/23/1999, he refinanced with a $232,000 first mortgage. From that point on, he had his original investment out of the deal, and any remaining borrowing was free money.
  • On 12/20/2001 he refinanced the first mortgage for $260,700.
  • On 6/7/2004 he opened a HELOC for $150,000.
  • On 2/6/2006 he obtained a $417,000 first mortgage.
  • On 2/13/2007 he opened a $200,000 HELOC.
  • Total property debt is $617,000.
  • Total mortgage equity withdrawal is $419,000.

After owning a property for 16 years, he is about to go through foreclosure due to excessive borrowing. What else is there to say?

Irvine Home Address … 5152 Yearling Ave Irvine, CA 92604

Resale Home Price … $545,000

Home Purchase Price … $220,000

Home Purchase Date …. 12/30/1994

Net Gain (Loss) ………. $292,300

Percent Change ………. 132.9%

Annual Appreciation … 5.8%

Cost of Ownership


$545,000 ………. Asking Price

$109,000 ………. 20% Down Conventional

4.55% …………… Mortgage Interest Rate

$436,000 ………. 30-Year Mortgage

$107,138 ………. Income Requirement

$2,222 ………. Monthly Mortgage Payment

$472 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$91 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees


$2,785 ………. Monthly Cash Outlays

-$372 ………. Tax Savings (% of Interest and Property Tax)

-$569 ………. Equity Hidden in Payment

$185 ………. Lost Income to Down Payment (net of taxes)

$68 ………. Maintenance and Replacement Reserves


$2,097 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$5,450 ………. Furnishing and Move In @1%

$5,450 ………. Closing Costs @1%

$4,360 ………… Interest Points @1% of Loan

$109,000 ………. Down Payment


$124,260 ………. Total Cash Costs

$32,100 ………… Emergency Cash Reserves


$156,360 ………. Total Savings Needed

Property Details for 5152 Yearling Ave Irvine, CA 92604


Beds: : 4

Baths: : 4

Sq. Ft.: : 1808


Lot Size: : 5,227 Sq. Ft.

Property Type:: Residential, Detached

Stories:: 2

Year Built: : 1971

Community: : Irvine

County: : Orange

MLS#: : 100044467

On Redfin: : 118 days


This is a short sale. Subject to lender approval. Property will be sold as is 4 bed rooms 3 baths in good condition includes pool, well maintained. good size lot. Buyer to verify all condition, dimensions n infor before COE. Great family neighborhood. Close to shopping centers schools and freeway. Includes award winning schools Fax all offers. School district is irvine district.

34 thoughts on “Bond Market Selloff Makes Mortgage Rates Rise

  1. winstongator

    Your MBAA link is a week old and the new data shows purchase apps at their highest level in almost 6 months

    Bob Rubin??? The guy behind deregulation, who worked to stifle Brooksley Born (who wanted to regulate credit-default swaps and other derivatives). Board member of Citi and general cheerleader for Wall St. There are few less qualified to be instructing us as to what is or is not in our general best interests.

    The thing that would happen before our interest rates rose considerably – more than the quarter point mortgage rates have risen – is the the dollar would weaken. China is committed to a strong dollar policy, so if US gov debt were being dumped by some foreign country, China would more than buy it up. It’s not a sustainable situation, but it is where we’re at today. A weaker dollar would accurately reflect our trade situation, help exports, hurt imports, and work to bring our trade back into balance.

    1. awgee

      China is, on a net basis, selling US treasuries. China is selling more US treasuries than they are buying. I sent IR a graph with this info and more showing which coutries are buying US debt because I do not know how to post a graph here. Maybe he will post the graph.

      1. matt138

        the FED just became the world’s largest holder of treasuries a couple days ago.

        i think that’s big news.

        the FED, in theory, could be the last buyer, buy all treasuries from China, Japan, etc and give us one big loan mod.

        Repercussions on value of US dollar and interest rates?

        1. Chuck Ponzi

          Debt monetization, we have arrived.

          We stubbed our toe on the Japan syndrome. Deflation’s a bitch.


    2. tazman

      China is NOT committed to a “strong dollar policy” it is committed to a “strong renmenbi (yuan) policy.” This is evident when you realize that they have not revalued the renmenbi (it trades at a fixed 8 renmenbi/dollar) even though the dollar has declined and the Chinese are under tremendous pressure to devalue the renmenbi…perhaps some basic fact checking would strengthen your arguments…

      1. CapitalismWorks

        Wrong. All currencies trade in pairs. China’s peg to the dollar at a value ~30-40% below FMV is a WEAK yuan policy.

  2. Anonymous

    If those abroad sell US treasuries, they still need to Park their money somewhere. Where to park it? In Asia with the Korean thing going on? In Europe with the Greece, Ireland, and maybe Portual and Spain thing going on? Buy gold at sky high prices?
    Buying some US asset (Treasuries, stocks, or real-estate) doesn’t look so bad by comparison.

  3. awgee

    China, Russia quit dollar
    By Su Qiang and Li Xiaokun (China Daily)
    Updated: 2010-11-24 08:02

    St. Petersburg, Russia – China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

    Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

    “About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.

    1. Gemina13

      They don’t have much choice. China’s facing its own real estate bubble and the very real prospect of rising inflation. Russia’s commodity-based economy isn’t so hot either. Either they try to keep their currency from rising, or they watch their economies implode.

  4. Soylent Green Is People

    Once clear direction in the market is found (not peaks and valley as we’re seeing today) base mortgage rates will again come down to the lows seen in mid October. The Fed isn’t going to let mortgage rates rise and kill off any meaningful recovery. Those who do refinance are putting most of their monthly savings into the bank or paying off debt. People aren’t spending it as we did in the past, but at some point those savings and that monthly cash will translate into spending.

    Will be interesting to see what the real numbers are for Black Friday and the remainder of Christmas. Unfortunately CNBC and their ilk will compare 2009 (terrible) to 2010, when we really should average spending over time to see if we are spending more or simply treading water. My guess is that we’re treading water. Most of the economic news today (Durable Goods, etc) was absolutely terrible. Sure, consumer confidence was higher what with the election going the way it did, and Unemployment appears to be improved (lot’s of seasonal hiring skewing the numbers) but overall most of the future looking economic news has been less than stellar which translates into stable rates. My guess is a 4.5ish ceiling and a 4.0% floor for some time to come.

    My .02c

    Soylent Green Is People.

    1. Planet Reality

      Once QE2 gets into full swing rates will go lower and head into the 3s. Note, I’m the only one here who called the low 4s correctly.

      1. awgee

        Yes, you have been telling us that for a long time now and it seems to be the only thing you can point to that you were right about. Even a broken watch is correct twice per day.

        1. Planet Reality

          Don’t get you panties all up in a wad just because you aren’t part of the 30% who continue to get salary increases.

          1. wheresthebeef

            Planet Realty, maybe these folks who “own” the featured house today are part of that 30%. Afterall, Irvine is the upper crust of society.

            Bwahaahaha, keep believing yourself on all this nonsense.

          2. awgee

            PR – On another thread, you said that you were going to sell your gold soon. Or at least that is what my not so perfect memory thinks you said.

            Would be comfortable telling us when you do sell your gold?

          3. Swiller

            Wow PR is hated more than me, and I’m an evil defaulter who is personally responsible for all of your personal pain.

      2. matt138

        after calling high 3s, you’ll be calling mid 3s, then low 3s… ad nauseum.

        the keynesian fix is short-term, childish, and full of unintended consequence.

        Short-term you might be right. Long-term you will be wrong.

          1. Perspective

            For the record, I’m not a Keynesian – just thought that quote was perfect for the “longterm” comment. 🙂

    2. norcal

      Hello Soylent. I’m surprised that you even watch CNBC, given that you’re such a regular commentator on Calculated Risk – which will likely give the long-term trends and comparisons you recommend.

      BTW, I enjoy your Bank Failure haikus on CR.

      1. Soylent Green Is People

        Thanks for the kind words. Quite a bit of kabuki theater going on in the banking sector. May as well join the fun with a bit of Japanese poetry, eh?

        I only watch CNBC with the sound off. The scrolls are sometimes better reading than those on Bloomberg, although I often consider Jim Cramer a contraindicator of what’s going on. When JC says it’s a great day to buy X, make sure to bet against it.

  5. Perspective

    I think the new buzz-word in 2011 will be “frugality fatigue.” You’re starting to hear it now. Those people fortunate enough not to have suffered income disruption over the past few years have been spending much less, but it gets progressively harder to resist upgrading the TV, laptop, or car.

    1. irvine_home_owner

      Hey… it’s not gonna matter after 2012 (if you’re Mayan)… you might as well spend it while you have it.

      1. matt138

        “frugality fatigue” is bull.

        the bailout suckers rallies in stocks and real estate will end and price declines will resume.

        if the powers that be choose to put a floor on RE and stock prices via infinite stimulus printing, we will see asset prices stabilize and the price of everything else rise substantially.

        the true measure of value is pricing things in a fixed basket of commodities. that will indicate a true bottom in asset prices.

        We are nowhere near the bottom.

    2. jed clampett

      “it gets progressively harder to resist upgrading the TV, laptop, or car.”

      no it don’t ; the picture box is working fine as is the horseless carriage

    3. Gemina13

      Unless, of course, you can’t afford it, your rent, your groceries, and your utilities–and you’re renting.

      “Frugality fatigue” doesn’t take into account that circumstances can, and sometimes do, change quickly for people who either are, or merely think they are, well-off. I don’t see anything in the way of job creation happening in 2011 that would even give that media meme roller skates, let alone wings.

  6. norcal

    IR, I’m surprised you didn’t grade this home-debtor an F. What more would s/he have to do to earn that grade?

  7. Gemina13

    I’ve been away for a while (things got crazier than usual), but I had to come back to see what latest insanity had made it to this blog.

    This house is a total fricking nightmare. 🙂 It’s also a great example of how people went nuts at the thought of “free” money.

    My brother is a contractor. Recently he did some work for a couple who live in Scottsdale, in a home they bought back in 2006, just off the peak. The last inspection revealed that, among other things, the previous owners had taken out the insulation from several of the rooms, taped the drywall back, and repainted so nothing showed–the inspector only noticed it because he kept hearing a sound like wind blowing through a window. The house they bought for $360K has cost them an additional $80K in repairs–and the house itself has lost value to the point where they’re almost 50% underwater. They can’t refinance. They’re stuck.

    Luckily they have the money to pay for it, but they told my brother that if they didn’t have the funds, they wouldn’t have bothered with any repairs–they’d have focused on shoveling cash towards the mortgage to get it off their backs.

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