Thursday, June 4, 2009

Higher mortgage rates are not a threat

Here's where 30-year fixed rate mortgages stand today, according to BanxQuote. Yes, they have moved up, but not by much, and they are still very close to all-time lows. They were a whole lot higher in 1999 and 2000 and the housing market was booming, as was the economy. Indeed, it is precisely when the housing market and the economy are booming that interest rates tend to be high. High interest rates are the result of a strong economy (and often a tight Fed); they don't drive the economy. Well, high rates do sometimes kill the economy, but usually that happens only after an extended period of Fed tightening, which makes money scarce—that's what kills the economy. Today that is simply not a problem.

If mortgage rates move higher it will be because there is a lot of demand for mortgages, which in turn will happen if the housing market recovers. Higher interest rates are not something to worry about right now. They are something to hope for, truth be told.

2 comments:

Kieran McCarthy said...

Interest rates can be higher because investors are selling long-dated treasuries, even when there is slack housing demand. Premature monetary tightening and fiscal conservatism killed many a rally in Japan from 1991-present. It could well happen here, too.

Scott Grannis said...

To me it seems clear that interest rates are rising because a) deflation fears are vanishing, b) there is more confidence in the economy, and c) the risk of higher inflation is rising. That causes investors to be less eager to buy all the bonds the government is selling and it causes homebuyers to be more eager to borrow money to buy a home. All of that adds up to upward pressure on bond yields.

The Fed hasn't even begun to tighten, and they will have to withdraw around $1 trillion from the economy before you could say they are maybe tight enough to threaten the economy. That is a LOOONNNNGGGGG way off. Trying to draw parallels to Japan is a waste of time I think. We've never seen anything like this before, anywhere.