As Mortgage Rates Move Above 5%, A New Normal For Home Buyers

The housing market is already up against a number of barriers to recovery. High unemployment keeps millions of people out of the market for homes. Banks are wary to give mortgages to even the most creditworthy buyers. An ongoing increase in foreclosures has kept downward pressure on prices. That might help bring buyers into the market save for the fact that they are concerned that the new house that buy today will be worth less in a year.

Rates for fixed thirty-year mortgages climbed above 5% and may stay higher than that for the foreseeable future. The Fed is likely to end its program to buy mortgage-related securities. The FHA is tightening its lending standards as defaults on current loans weaken its balance sheet.

The most significant enemy to low mortgage rates by the federal government itself. It is in the capital markets raising record sums to cover a growing record national deficit. It is joined in those capital markets by other sovereign nations and corporations like Berkshire Hathaway (BRK.A) and Kraft (KFT) which are issuing debt to cover M&A transactions. These waves of borrowing will raise rates as the competition for money forces borrowers to pay higher interest rates.

The housing recovery has a new enemy. Potential buyers may not be willing to pay high mortgage rates.

Douglas A. McIntyre