A Very Sharp Rise In Mortgage Rates May Damage Housing Recovery

Print Email

It is not clear whether there is a housing recovery underway in the US. Home sales have, in some cases, picked up. Most of the activity has been due to low mortgage ratesm which have been below 5%, and new homeowner credits created by the government of as much as $8,000.

There is evidence that foreclosures and defaults, which are still rising, could drive home prices down further than they dropped in 2009. “Interest rate” only loans will begin to default in 2010. There are $71 billion of these that will reset in the next year that will push up the monthly payments on the mortgages.

The most biggest enemy to the housing market may be a sharp increase in the interest rates on 30-year mortgages.

Freddie Mac (NYSE:FRE) expects home loan interest rates to move above 6% next year, according to The Washington Post.  That would be 20% higher than current rates. Morgan Stanley has an even higher estimate of 8%.

Rates may be pushed higher because the Fed plans to cut back its purchase of mortgage-backed securities. The Fed’s action could be offset by the government’s willingness to put up more money to cover losses at Fannie Mae and Freddie Mac which originate or guarantee most residential mortgages in the US.

But, ultimately mortgage rates will to be determined by the overall movement in interest rates and that trend is likely to be higher. The Treasury will have to step up borrowing in 2010 to cover increases in the deficit. That borrowing is already affecting short-term rates and that is likely to continue as the global capital markets  are faced with rising demand by sovereign nations to increase their debt loads.

Mortgage rates are going up in 2010. The housing market will be hurt by this, but no one can say for certain whether the devastation will be as bad as in 2009.

Douglas A. McIntyre