Don sent in the link to this commentary on the mortgage market in the US and [the economy in] Canada. Dave Rosenberg points out that there are some strange things happening in the spread between treasury bond yields and mortgage rates.
Once again, this Houdini recovery has involved a situation where mortgage rates have plunged and yet Treasury bond yields have been rising — 30-year fixed rate mortgages have fallen to 4.93% and are sitting are record-tight spreads over long Treasury bonds (see Chart 7). Historically, the average spread is 150bps and this differential is now 20bps. This is remarkable and our concern is that investors who may be exposed to mortgages are at serious risk because there is a considerable chance that these rates will be moving higher over the intermediate term — notwithstanding continued support from Uncle Sam’s pocketbook.
Investors must be reminded time and again that mortgages are callable, Treasuries are not; and we are now in a situation where net of fees, which average 70bps, anyone buying mortgage paper today is receiving a rate that is less than what the borrower is paying, How nutty is that?
He also comments specifically on the health of the Canadian housing economy:
All of a sudden, the Canadian economic data are coming a tad below expectations, including the 0.4% MoM advance in December retail sales, which just came up short from recouping the 0.5% decline the month before (revised from down 0.3%). Excluding autos, sales are running at a 2.1 % annual rate over the past three months, which can only be described as tepid in view of all the rampant monetary and fiscal stimulus percolating through the system.
Not only that, but the supply response in the Canadian housing market is beginning to, at the margin, alter the inventory balance. The number of new listings surged 4.0% in January and has risen sharply now in three of the past four months. After outpacing new listings over 90% of the time between January and October of 2009, sales has now lagged in each of the past two months and this has taken the sales-to-listing ratio down to 0.614x from 0.634x in December and the nearby October high of 0.683x (and now stands at its lowest level in eight months). Pricing is sure to follow suit. Better buying opportunities lie ahead for the fence-sitters, in our view.
David Rosenberg is the Chief Economist and Strategist at wealth management firm Gluskin Sheff. Read the rest at Mish’s Global Economic Analysis.
