Are higher mortgage rates coming in September?

If there the debt limit is not raised what will happen to U.S. mortgages rates?

One estimate comes from the Center for American Progress. It tells us that "Mortgage interest rates will rise more than U.S. Treasury rates. An increase in the 10-year Treasury rate by half a percentage point--which is likely if the debt limit isn't raised--could translate into a jump in the mortgage rate equal to 0.66 percentage points, increasing mortgage rates by close to 14 percent from their current levels to their highest levels since 2008."

According to the Center there's more:

  1. Once increased, mortgage loan rates are likely to remain high for some time. "Shocks to Treasury rates typically translate into mortgage rates rising and staying high. The housing market would consequently not get a reprieve once the federal government has to delay debt payments--even if the debt ceiling is eventually raised."
  2. New home sales would fall by as many as 32,000 units. This is important given the huge fall-off in new home construction.
  3. Existing home sales could fall by as many as 130,000 units. This, too, is important given that we sell far fewer existing homes than we once did.
  4. Home prices will fall. The reason? Fewer sales reflect less buyer demand, less buyer demand means fewer bids and less pressure to push up values in most markets.

Trends in mortgage rates

While the Center's report looks toward the future, it might be interesting to consider looking toward the past and the mortgages that are now in place.

For a number of years the general direction of mortgage rates has been down. Rates, however, cannot stay down forever, there must be some point where rates hit a floor and then begin to rise.

It's difficult to know how low rates can go. For instance, "T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates," according to Forbes magazine (See: "A Brief History of Stock Fads," Sept. 14, 1992),

Right now, banks are able to borrow at zero percent interest. Unless we're going to venture into the negative rates seen during the Depression, we just can't go any lower.

Alternatively, mortgage quotes can go higher. A lot higher.

How about the 14 percent plus mortgage rates seen in 1984? If we see the return of such extreme mortgage quotes now the country would be bankrupt.

The concern about the Center's estimated mortgage rate increase is not that they are wrong but that they are too conservative, that in fact rates could go higher.

Mortgage rates to rise drastically?

The Center estimate is derived from a 0.50 percent increase in Treasury bonds and then a somewhat larger rise in mortgage levels. There is sense to this, as the Center explains, but what about other factors?

For instance, if the U.S. government defaults on bonds owned by foreign investors will those investors suddenly require not just interest to hold our debt but also insurance?

Will the U.S. dollar continue as the reference currency for the world?

Will we quickly face an unprecedented level of inflation--something sure to drive up interest rates?

For those with fixed-rate mortgages the higher rates will be someone else's problem. But everyone will be impacted by slower home sales, reduced property taxes that lead to fewer public services and lower home prices. Everyone will pay more for bread.

So is a mortgage-rate hike of 0.66 percent reasonable if the government defaults on its loans? We should be so lucky.

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