A slump in permits means that new home closings will continue to be in a slump for the next nine months. No one at the time realized how far subprime mortgages reached into the stock market and the overall economy.Īt that time, most economists thought that as long as the Federal Reserve dropped interest rates by summer, the housing decline would reverse itself. This means that permits are a leading indicator of new home closes. New home permits are issued about six months before construction finishes and the mortgage closes. This leading economic indicator came in at 1.57 million. Slowing demand for housing reduced new home permits 28 percent from the year before. November 2006: New Home Permits Fall 28 Percent The ten-year note yielded 5.07 percent, less than the three-month bill at 5.11 percent. On July 17, 2006, the yield curve seriously inverted. It fluctuated over the next six months, sending mixed signals.īy June 2006, the fed funds rate was 5.25 percent, pushing up short-term rates. The yield on the ten-year Treasury note had fallen to 4.39 percent.īy January 31, 2006, the two-year bill yield rose to 4.54 percent, outpacing the seven-year’s 4.49 percent yield. The two-year Treasury bill returned 4.41 percent, but the yield on the seven-year note had fallen to 4.36 percent. Their timing was perfect.īy December 30, 2005, the inversion was worse. They wanted a higher return on the two-year bill than on the seven-year note to compensate for the difficult investing environment they expected would occur in 2007. Why? They believed that a recession could occur in two years. This meant that investors were investing more heavily in the long term. The seven-year Treasury note yielded just 4.39 percent. The Fed was raising the fed funds rate, pushing the two-year Treasury bill yield to 4.40 percent, but yields on longer-term bonds weren't rising as fast. That meant the yield on long-term Treasury notes was falling faster than on short-term notes.īy December 22, 2005, the yield curve for U.S. Right after Rajan's announcement, investors started buying more Treasurys, pushing yields down, but they were buying more long-term Treasurys, maturing between three to 20 years, than short-term bills, with terms ranging from one month to two years. Their only option was to default. As rates rose, demand slackened. By March 2005, new home sales peaked at 1,431,000. As a result, these homeowners couldn't pay their mortgages nor sell their homes for a profit. At the same time, interest rates rose along with the fed funds rate. When home prices fells, many found their homes were no longer worth what they paid for them. Many homeowners who couldn't afford conventional mortgages took interest-only loans as they provided lower monthly payments. In 2006, the new Fed Chair Ben Bernanke raised the rate four times, hitting 5.25 percent by June 2006.ĭisastrously, this raised monthly payments for those who had interest-only and other subprime loans based on the fed funds rate. It raised it eight times in 2005, rising two full points to 4.25 percent by December 2005. The Fed raised the fed funds rate six times, reaching 2.25 percent by December 2004. The Federal Reserve Chairman Alan Greenspan started raising interest rates to cool off the overheated market. June 2004-June 2006: Fed Raised Interest Ratesīy June 2004, housing prices were skyrocketing.
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