Well, I was hoping that the lighter touch from regulators announced late last year would lead to a V-shaped recovery in real estate credit. There has been a slight shift. Closed-end real estate loans held at the banks had been declining at a pace of about 4% annualized since the taper had wound down. And, it looks like this has turned around to a growth rate of about 2% over the past few months. That's a total change in trend of about 6%. But, between QE2 and QE3, mortgages at the banks were growing by 6%, so I would have thought we could reach a growth rate higher than that.
If the turnaround in mortgage credit has a long, slow buildup, the natural recovery of market interest rates will be slow. I think we really need to see mortgage levels growing by 10% or more for several years in order to get homes back to intrinsic values, and to serve as an outlet for all the excess savings that has been left without an investment outlet since 2007.
Home equity lines continue their slow descent, too, which also suggests that we haven't hit any sort of regime change in the credit markets yet. From a speculative point of view, if this is how it's going to play out, I guess the best hope is for the Fed to call off the dogs and leave rates at 0.25% longer than expected, which would cause a pull back in intermediate rates. Once the mortgage market gets its feet under it again, there should be a virtuous cycle of real production growth and credit growth that would cause an acceleration in the recovery, and in the recovery of forward interest rates. Maybe, in 9 months or so, June 2017 Eurodollar contracts could be sold at 98.5, and bought back a year later at 97 or less.
As things are proceeding now, though, until then, I'm afraid the forward interest rate market is just muddy water. If the Fed does go ahead with rate hikes before mortgages gain steam, I think they might be able to push up to 1% or 2% without doing much damage to the short term non-real estate economy. I'm not sure there would be a clear position to take on the way up, and I don't know how confident I would be about the timing of the ride back down that would come if/when they tighten too much.
I would have hoped for a clearer picture to arise by now.