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Real estate is a local phenomenon.  Every street in the country has its own local real estate market and that's why "national sales data" is useless.

A Cincinnati, Ohio home buyer doesn't (and shouldn't) care about property values in Boynton Beach, Florida.  Cincinnati real estate is entirely different and is driven by its own unique factors.

But we can get even more granular. 

On a neighborhood-by-neighborhood basis, Cincinnati is different.  A buyer in Symmes Township doesn't (and shouldn't) care about property values in Over-the-Rhine. 

Even on a street-by-street level, real estate markets are different.  Avant Lane is very different from Snider Road.

This is the biggest reason why national home sales data is useless to home buyer and home seller -- "national" is as un-specific as you can possibly get.  It's like saying that movies had a terrific year at the box office when that's not entirely true.

Yet, despite it's autonomy, the hyper-local market can be heavily influenced by the global political arena.  This is about as un-local as you can get.

Geopolitics impact real estate markets because mortgage rates are highly susceptible to political turmoil.  Witness the assassination of Pakistan's opposition leader last week.

Here are some quick facts on Pakistan:

1. It has nuclear capabilities
2. It is located on or near several important oil pipelines
3. It is in a state of political unrest

Any instability in Pakistan threatens the economies of a host of other nations.  After the assassination, an investor's risk assessment for the global economy changed in an instant.

And this is how local real estate markets get helped.

The U.S. economy is the world's largest marketplace many time overs and so when investors want safety, they move their money to Wall Street and they tend to buy bonds. 

This is alternatively called "safe haven buying" or "flight-to-quality".

Safe-haven buying includes mortgage bonds, of course, and mortgage bonds set the interest rates offered on home loans.  Therefore, mortgage rates fall as demand for mortgage bonds picks up.

In general, the greater the political uncertainty worldwide, the more downward pressure on mortgage rates.

It's not cool to root for death, plague, or war, but when it happens, mortgage rates tend to benefit.

(Image courtesy: State Department)

Two weeks ago, we discussed how markets may be pricing terror threats into bond markets, or ignoring them altogether.  This was noted after a thwarted terrorist operation in London caused relatively no change in mortgage rates.

Here's some more fodder for the Terrorism Decoupling From Mortgage Bonds hypothesis.

Monday, headlines read that North Korea was shutting down its nuclear reactors and Bloomberg confirms that today.  North Korea is considered a geopolitical threat and its nuclear weapons are rumored to have the range to reach idyllic Madison, Wisconsin.

There was no related reaction in Monday's mortgage markets.

(Author's note: Madison has produced a few weapons of its own, most notably Ron Dayne and Brooks Bollinger, both equally capable of destroying an NFL team's hopes of winning the Super Bowl.)

Related to North Korea's nuclear ambitions, of course, is the constant terror threats of various cells operating across the globe.

Today, papers are screaming about the seriousness of terror threats against the United States.  And still -- in the mortgage markets -- a muted reaction from traders.

The mortgage market action this afternoon is related to Ben Bernanke's non-threatening testimony to Congress.  Markets are interpreting the Fed Chief's comments to mean that the Fed will keep likely leave the Fed Funds Rate at 5.250% for the foreseeable future.

Foreign nations buy U.S.-dollar denominated securities because of their relative stability. 

Mortgage-backed securities are among those securities.

And, for the unindoctrinated, it bears repeating that mortgage-backed bonds are what determine the day's rate for every mortgage product from the 6-month adjustable-rate mortgage all the way out the yield curve to the 50-year fixed mortgage.

Like all bonds, the more demand that there is for the security, the higher the price will be and, therefore, the lower its yield, or rate.

Over the past week or so, there have been whispers that China will be diversifying its portfolio of foreign holdings.  This is a big deal because a major part of China's holdings are our country's mortgage-backed securities.

If the circulating stories are true, then China will be replacing its MBS holdings with gold and with other foreign currencies. That will introduce a steady new supply of bonds, cause MBS prices to drop and mortgage rates to move higher.

North Korea is believed to have tested a nuclear weapon this past weekend and its impact on global diplomacy is palpable.

With bond markets closed yesterday, though, there was no opportunity to see how markets interpreted the risk that North Korea violated the Nuclear Non-Proliferation Treaty.

President Bush threatened the impoverished North Korea with harsh economic sanctions, but the real threat lies in North Korea's history of sharing military technology with other countries.

Normally, we'd expect mortgage rates to drop on news of political instability and threats to the U.S. economy, but rates appear to be leaning higher prior to the market open.

Global instability increases the demand for U.S.-demonimated bonds as a "safe haven".  The fall in mortgage rates today is partly attributed to a potential military coup in Thailand and ongoing riots in Hungary. 

The issue in Hungary is that government officials lied about the economy to the public, in hopes of winning the April elections. 

The Times Online highlights excerpts of the confessions from Hungarian Prime Minister Ferenc Gyurcsany to members of his Socialist Party in May.  It's pretty interesting to see politicians owning up to "mistakes" with such openness.

"I almost died of having to pretend for the past year that we were actually governing. Instead we lied day, night and evening. I don’t want to do this anymore. Either we go ahead and then you have a leader or you have to pick somebody else."

"Look. The thing is, in the short run there is no choice. Janos Veres [the Hungarian Finance Minister] is right. We can muck around a bit longer, but not much. The moment of truth has come swiftly... Reform or failure. There’s nothing else. And when I’m talking about failure, I’m talking about Hungary, the left, and very honestly, about myself."

"There aren’t many choices. There aren’t, because we f***ed up. Not a little, a lot. There is no other country in Europe that has shown such stupidity as we have."

Wow.  That is some serious openness. 

As a casual observer, I can't help but think that investors will think twice before investing in Hungarian business, or the Hungarian forint.

Fewer dollars earmarked for Hungary (and Thailand) equals more dollars likely to end up in U.S. bonds, included mortgage-backed securties. 

Naturally, more demand for mortgage bonds lowers mortgage rates.

Extracts from the Hungarian PM's 'lying' tape
Times Online.com, September 19, 2006
http://www.timesonline.co.uk/article/0,,13509-2365151,00.html

Details are still foggy about what actually happened, but North Korea fired at least 6 missles over the Sea of Japan, including an intercontinental ballistic missle that traveled for 42 seconds before failing, or aborting.

The launchings occured over a period of four hours and has drawn international condemnation the United States, Japan, New Zealand and others.

North Korea's actions can drive mortgage interest rates lower if the traders believe that a threat is imminent.

From the June 20 post:

What if North Korea tests their missile against the wishes of the U.S., Japan, and the UN Security Council?  Well, the answer is that the entire world economy goes on notice that North Korea could really mess things up if it wanted to.  This panics traders on the similar level as a terrorist attack.

Of course, when traders that drive financial markets get jittery, money tend to move from risky investments and into safe-haven securities, such as U.S. treasuries, and gold.

Home shoppers delight.  As the North Korea missle launching reaches a crescendo on TV and in the press, mortgage rates will fall.

Source
6 Missiles Fired by North Korea; Tests Protested
The New York Times, Norimitsu Onishi And David E. Sanger
Wednesday, July 5, 2006; 10:30 PM
http://www.nytimes.com/2006/07/05/world/asia/05missile.html?hp&ex=1152072000&en=fa54ce789c81c127&ei=5094&partner=homepage

Geopolitics crack me up.  Not because the world is a funny place, but because of how geopolitics can make the most prescient economist look like a turd. 

Just when somebody thinks they've have mortgage rates figured out, something goofy happens half way around the world to bring the whole house of cards crumbling down.

Geopolitics is:

• The wild card in a hand of poker
• Terrell Owens on Game Day
• The Sixth Man off the bench 

You just never know what impact it will have until it's too late to adjust.

So, as a story coming out of North Korea gets less press than it should, I wonder if anybody's paying attention.  Maybe you missed it, too.  North Korea is expected to test launch a missile capable of reaching the mainland United States.

Said differently: The communist, dictator nation of North Korea is testing missiles capable of reaching Madison, Wisconsin.

North Korea is not currently producing nuclear weapons, but in 2003, satellite imagery revealed 8,000 plutonium rods moving out of storage.  Could these two stories may be related, but not as of today.

The last time North Korea tested a missile was in 1998.  The test went awry and the missile sailed over nearby neighbor Japan.  Some considered that an Act of War, but North Korea later self-imposed a moratorium on further test flights. 

And now here we are, eight years later, and allegations are that North Korea is not following it own rules. 

Meanwhile, events like this tend to help mortgage rate shoppers because global instability leads to safe haven buying and that tends to drops mortgage rates like Jerry Stackhouse dropped Shaq. 

Let's ask the "What if?" question: What if North Korea tests their missile against the wishes of the U.S., Japan, and the UN Security Council? 

The answer is that the global economy goes on notice that North Korea could really mess things up if it wanted to.  This panics traders and when traders get jittery, money moves from risky investments into safer ones.  This includes most bonds denominated in U.S. dollars, including mortgage bonds.

With more demand for bonds, the price increases and that forces mortgage rates lower.

This is why geopolitics are funny to me.  The world economy is always on shaky ground and as soon as you think it's predictable, some random event changes the course.  In January, it was Iran that had resumed nuclear research; this time, it's missile testing in North Korea.

So, if you haven't locked your mortgage rate, or are currently home shopping, the more coverage of the North Korea story, the better off you should be.  And, hey.  It's completely cool to cheer for it -- I won't think you're evil or anything. 

Just don't be rooting on Bird Flu, okay?  That's just wrong.

Source
Rice Warns North Korea on Missle Test
The Washington Post, Anne Gearan
Monday, June 19, 2006; 10:30 PM

http://www.washingtonpost.com/wp-dyn/content/article/2006/06/19/AR2006061901554.html

North Korea warns against 'act of war'
CNN.com, Andrea Koppel and Elise Labott
Wednesday, January 22, 2003 Posted: 11:32 PM EST

http://www.cnn.com/2003/WORLD/asiapcf/east/01/22/koreas.un/index.html

CIA -- The World Factbook -- Korea, North
CIA.gov
Last updated: June 13, 2006

http://www.cia.gov/cia/publications/factbook/geos/kn.html