The Economy And The Housing Market

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Although we currently have an administration in Washington that is determined to micro-manage the economy the data is already proving that it’s just not possible.  Markets are stronger than governments and going against the market is like building cities below sea level in the path of hurricanes. The water always gets in. (In fact, the Dutch have recently decided to relinquish many of their low lying areas to the sea.) For instance, there are numerous examples of governments attempting to manipulate their currencies but in the end George Soros and the markets always win.

So it is with mortgage rates. The government attempted to drive down mortgage rates and other interest rates by buying all manner of bonds, and for a while it worked. However, recently the levies are starting to leak. Check out what has happened to 30 year mortgage rates in the last couple of weeks:

Mortgage Rate Trends

You can see the same pattern in the interest rate on the 10 year government bond:

10 Year Interest Rate

For a while the interest rate on these government bonds was driven down as investors sought safety, but not any more.

There are a few things going on here and not many of them are good for the housing market. First, the US just has too much debt – too much personal debt, too much government debt, and too much financial leverage – and our creditors have taken note. There is even talk of a downgrade of the credit rating of the US government. All this translates into a higher risk premium for US debt and that means higher interest rates.

The second issue is that in creating huge amounts of money in order to manipulate the market the US government has created inflation fears. Consequently, the dollar has taken a nose dive and with it the price of oil and other commodities have taken off. To get an idea of what is going on with the dollar just look at this chart of the dollar priced in Euros:

Dollar vs. Euro

Inflationary fears and a weaker dollar (two sides of the same coin) mean that investors need higher interest rates to hold US dollar denominated investments.

So I think higher mortgage rates are going to be the reality – and they’re currently no higher than they’ve been on average over the last 5 years and they are significantly lower than they have been in the past 20 years. So there is still plenty of upside (or downside depending upon your perspective) in mortgage rates. And if inflation really materializes watch out.

There is one potential silver lining in all this – and one can’t help but wonder if this isn’t actually the government’s secret intention. If inflation takes off then we can all pay back our debt with cheaper dollars down the road. The debt stays constant but we all eventually start making more money, even though the money is worth less. It’s one way to work ourselves out of debt.

Of course, for those of us that don’t have a lot of debt and in fact have lent money, it’s not so good. But eventually, in an inflationary environment, housing prices take off and that will bail out a lot of people who are upside down on their mortgages – unless of course interest rates are so high that no one can afford to buy these higher priced homes, in which case maybe home prices don’t go quite that high. I guess we’ll just have to wait and see how all these forces net out. I’m betting that the force of the government will prove to be nil in this equation.

Gary Lucido

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