The Problem for Housing in 2010: Rising Mortgage Rates
Indeed, the rate on a 30-year fixed-rate home loan rose above now-psychologically important 5% level last week. The rate has been below that for two months. The Associated Pressreports that the increase has already caused a drop in new-home mortgage and refinancing applications.
Of course, policymakers and economists are keen to see housing sustain at least a very modest recovery in 2010. An improved economy might help that process, and housing prices could bottom early next year. The headwinds that could keep the market in trouble, however, are the huge number of "interest only" mortgages that will reset, causing higher monthly payments, and the ongoing rise in foreclosures (exacerbated by those resetting mortgages).
The Rising Competition for Capital
That interest rates may well go higher in 2010 (and possibly much higher) is, therefore, particularly bad news for housing. Why the dire rate outlook? The hundreds of billions of dollars in bonds that the U.S. government is selling to offset the deficit competes with other entities trying to raise money in the global capital markets. Sovereign treasuries in nations like the U.K. also face the need to raise tens of billions of dollars.
But the supply of capital for lending isn't inexhaustible, even if it has seemed that way. All that demand for capital seems destined to push interest rates higher in the coming year and perhaps way beyond.
Home buyers wouldn't be the only ones to feel the pain, of course. Large corporations have been in the process of issuing and refinancing debt as they take advantage of the recent extremely low interest environment. That boost to their balance sheets will diminish as rates rise.
The competition for capital in 2010 will effect the entire economy, but the mortgage market could well feel it first.
Douglas A. McIntyre is an editor at 24/7 Wall St.