Tighter money spells lower house prices
Interest rates for US fixed home loans have just risen for the second week in a row. That should be getting housing bulls worried.
Interest rates for US 30-year fixed home loans have just risen for the second week in a row. The average rate is now 5%, against 4.92% last week. That may not sound like much of an increase, but the reason behind the rise should have housing bulls everywhere worried.
Last year, the Federal Reserve set out to cut mortgage rates to help struggling US homeowners. It did this by slashing interest rates, printing money and also pledging to buy US bonds backed by home loans. The size of this last part of the stimulus was increased to $1.25 trillion just this March.
Buying these bonds - from the likes of government-backed mortgage agencies Fannie Mae and Freddie Mac - drove prices up and yields down (the yield is the expected annual return as a percentage of the bond's price). That in turn has allowed lenders to lower mortgage rates and still make money.
But here's the rub. Around the world, central banks are starting to fret about how and when to reverse tack. Recent minutes from the Monetary Policy Committee here in the UK for example, showed that no one had argued for extending quantitative easing at its last meeting. Meanwhile, the Australians have already raised rates by 0.25% to head off inflation. In the US, the pace at which mortgage-backed bonds are being bought is set to slow, with the programme due to end completely in the first quarter of 2010.
The signs of what might be coming are ominous even with central bank support for the market, US mortgage applications fell 7.6% in the week ended 16 October, and re-financings were down 17%, according to the Mortgage Bankers Association. How fast these numbers will deteriorate once the Fed slams on the brakes is anyone's guess. But one thing's for sure housing bulls should enjoy the recent summer bounce while it lasts. 2010 isn't looking pretty.