Sunday, March 25, 2012

Mortgage Rates Start to Climb

FRED Graph

Is this the start of the big move in interest rates?  I thinks so.

Fed money printing will result in price inflation. The Chinese have stopped buying Treasury securities. The Social Security trust fund, which until very recently was a net buyer of 25% of all Treasury debt issued, has become a net seller. And the amount of money the Treasury must raise is massive.

Take a careful look at this chart. In 2007, when conditions weren't nearly as dire for the interest rate market as now, rates were over 6.0%. Now things are worse.

The decline in rates was a result of a flight away from investments and a desire to hold cash as a result of the collapse of  asset inflation because of the Great Recession which was the result of a brief slowdown in Fed money printing. Asset prices are climbing again. The Fed is printing again and interest rates will climb again.


  1. With regards to home prices specifically, won't a significant rise in interest rates likely mean a decrease in the average actual sale price of homes since people tend to "buy a monthly payment"? I would also think the shock of moving away from ridiculously low rates would drive down demand. A 6% interest rate would seem astronomical to the public in the short run. So, if one is thinking of selling a home, they should move quickly, but if one has significant cash they would be better served to wait until prices drop as a result of interest rate increases.

  2. Question:
    As one who lived through the Volker years back in the 80's:
    Paul V. (in a heroic move) jacked up interest rates to wring out the system. Jimmy Carter let him do it! (best move he ever made). The resulting recession (proper cleansing) cost Carter re-election.

    But the HIGH interest rates also made dollars much more valuable for foreigners. It also crashed the price of gold vs the buck.

    So, my question is, in light of the coming skyrocketing interest rates, should I sell my gold???

    Anyone? Bueller???

  3. Mr. Wenzel,

    Could you give us an idea of the timeline on which you expect rates to increase?

    1/4 point a quarter?

    1/2 point a quarter?

    1 point in the next year?

  4. I agree with Anon. Unless the FED can somehow buy even more US treasuries to keep the 10 year around 2%, home prices fall even more. That of course leads to even more stress on banks that have yet to recover from 2008.

    Then again, I don't know how far the FED is willing to take this. If they are willing to buy unlimited amounts of Treasury debt, then maybe they can keep housing rates low but at cost of (even more) inflation.

    I think the FED's plan was to cause another housing boom, with people jumping to buy at prices 50% below 5 years ago and 4.5% mortgage rates. It's too early to say whether that will succeed or fail. But I doubt people will jump so hard int real estate so close to the previous boom.

  5. Robert,

    There is no chance of any significant move in interest rates over the next 12 months. With the FED as the only buyer and the existing debt which must be rolled over and the on going deficits at 1.5 trillion+ over the next 10 years hiow can rates possibly move?

    The existing debt with rates at all time lows is manageable. If rates were to move to 6%, the debt service would run around 1.2 trillion annually. That's about a 40% of the current tax revenues.

    Home sales would plummet. New taxes would never cover the new deficits. Unemployment would move higher. All this right before an election?

    Not a chance Robert.


  6. Anon@11:17,

    There will not be a 1 point increase in the next year.

    Capn Mike,

    You must have forgot that during the Volcker years the debt and deficits were very small and could be managed with high interest rates.

    Todays debt which is rolled over and the trillion dollar annual deficits can not be managed with 6% rates, never mind double digit rates.


    1. Aaaaaah!!

      Excellent point.

      So.... U.S. defaults??

    2. Continued QE from the FED. Bernanke will never allow deflation. They will continue to use Operation Twist for the long end of the curve and of course if they will "sterilize" any QE.

      You tell me. Does the U.S. Default?

      I have been asking this question of Robert for 2+years on this blog and he has never given me a straight answer. How can interest rates be raised with the existing debt and trillion dollar annual deficits?

      Raising taxes can not cover the deficits. VAT tax on top of the existing income tax (because the existing tax would never be removed with an added VAT tax) would never cover the annual shortfalls or the implosion of the economy.

      Help me out Mike. How can politicians and the FED solve this math problem?


  7. If they raise interest rates our economy implodes. The difference this time, as opposed to when Carter was POTUS, is that we have a significantly diminished manufacturing base in today's America. Our debt is significantly higher. Our debt obligations are significantly higher.

    Higher interest rates mean the debt cannot be serviced without massive cuts to current spending.

    I see no will in government to curb spending.

    They won't cut until it's far far too late. And since deflation cannot be tolerated, we are headed for inflation the likes of which the typical American can hardly imagine.

  8. I can't see how even Fed easy money can lift the prices of homes in the lower price ranges.
    Sure, the rich(er) People with access to Fed easy money will drive up the cost of housing on the high end, but how does Fed easy money work its way to the lower income brackets?

    Its hard to imagine wages keeping up with inflation.

    I suppose some rich speculators will try and bid on income rental housing which would drive up the cost of these lower priced homes a bit, however; rents, unlike mortgages, are capped by wages. So where's the incentive for Richie Rich to bid up the prices of used homes?

    A Person can try and rent out an apartment in the Midwest for a million Dollars all they want, but for the most part, the wages would never support the asking rent,... well, unless a used Chevy truck costs a million Dollars too.

    So, rising interest rates are going to cause housing prices in the lower price ranges to tank, imho. Where the dividing line is, is a good question, I think.

  9. Because house prices are at a record high many people (probably including yourself) are now thinking of their mortgages in the long term as well as the upfront rate. For this reason it is worth knowing what current customers are paying. It is highly unlikely that when you come to the end of your fixed or discount rate period you will be on the same standard variable rate as current customers. But you can use the information to see how the lender compares against others in the market.get more info on mortgage experts