Interest rates: still low, but CR was still right

CR predicted that the spread between the yield on the treasury's 10-year bonds and mortgage interest rates would widen by about 0.3% after the Fed ended its MBS purchasing program, and yes, the spread has widened. This is not because mortgage interest rates have started climbing, as I assumed they would. Apparently there were a lot of us out there pointing to the end of the Fed MBS purchase program and a 0.3% climb in the mortgage interest rates and making a big deal out of it.

Krugman and SeattleBubbleBlog both pointed out how these "the sky is falling" claims were in error. I was making them to convince sellers that they had waited too long if they wanted to sell while the selling was good. But there's a flip side: a lot of buyers seem to think lower interest rates are in their favor, and so the dire warnings that interest rates were headed up were propagated to scare home buyers into acting now.

I have maintained that interest rates are neutral. All buyers are able to get mortgages at the same rate, and so the lower the rate, the more a buyer has to bid in order to win the auction.

Now, my thinking does discount all-cash buyers who don't need loans and who are otherwise unaffected by interest rates. If you're comparing all-cash buyers to mortgage-taking buyers, then low interest rates do offer mortgage takes an advantage: the lower the interest rate, the more principle they can bid for the property. All-cash buyers are somewhat rare, however. As this bubble has deflated, though, there have been a number of reports that all-cash buyers are out in great numbers.

.. anyways, I just wanted to say CR was right.