Even though the Federal Reserve purchased 80% of the Treasury securities issued in 2009, it could not manage to lower long-term rates. But the Fed can “claim victory” on its other bond-purchase program, the mortgage-backed security (MBS) program that buys debt issued by government-sponsored enterprises (GSE), such as Fannie Mae, Freddie Mac and Ginnie Mae. Mortgage rates indeed have fallen slightly since the Treasury and Fed announced their artificial support in September and November 2008.
However, they had better hurry up and claim victory, because as we will show, mortgage rates now appear to be headed higher. Government actions don’t control the market, as we have repeatedly pointed out. From an Elliott wave perspective, mortgage rates simply needed one more low beneath their early 2009 low to complete a larger Elliott wave pattern. Now that the new low is in place, mortgage rates should head higher, regardless of further government meddling.
This chart (courtesy of thechartstore.com) shows the history of the most popular mortgage product, the 30-year fixed rate mortgage.
Here are the Elliott details:
1. A downward zigzag pattern began in 1981 when rates were at 18.63%.
2. Five waves down completed wave (A) in 1993.
3. Five waves down completed wave (C) at 4.71% in December.
4. Within wave 5 of (C), five waves down are now visible.
5. Now that the zigzag correction is complete, a rally up to the 8.64-65 area is expected.
As rates head higher, there’s little doubt that the Fed or the Treasury will announce another round of MBS purchases in an attempt to force rates back down. But when social mood turns negative once again, as we continue to believe, the losses on the GSEs' portfolios will curtail any public enthusiasm for further support. As losses mount and support for the GSEs decreases, expect the government to announce “new and improved” ways to finance mortgages. The survival of companies such as Fannie Mae will again become front-page news.
But rising mortgage rates, falling home prices, defaults and, ultimately, the depression will squelch the U.S. government’s attempts to solve the real estate crisis. In fact, there are so many government hands in the real estate cookie jar that this industry may be stuck in a downtrend for years after the overall economy bottoms. Remember, the creation of the GSEs was supposed to make housing more affordable, and yet they were a major reason homes became too expensive.
As EWI's president Robert Prechter commented in Conquer the Crash, “It is a principle that meddling in the free market can only disable it.” Indeed.
A chance reading of a book on technical analysis and the Austrian school of economics eventually led Jason Farkas, CMT, to Elliott Wave International. Prior to joining EWI Jason worked for 14 years as a futures, options and equity trader. Jason has been tutored by some of the best investment minds, including legendary trader Dick Diamond. You can read Jason's Weekly Insights regularly in EWI's intensive Currency and Interest Rates Specialty Services.