Is The Fed Losing Control Of Long-Term Interest Rates?

dollar ben bernankeThere are very few segments of the U.S. economy that are more heavily affected by interest rates than the real estate market is.  When mortgage rates reached all-time low levels late last year, it fueled a little “mini-bubble” in housing which was greatly celebrated by the mainstream media.  Unfortunately, the tide is now turning.  Interest rates are starting to move up steadily, even though the Federal Reserve has been trying very hard to keep that from happening.  A few weeks ago, when Federal Reserve Chairman Ben Bernanke suggested that the Fed may start to “taper” the rate of quantitative easing eventually, the bond market had a conniption and the yield on 10 year U.S. Treasuries shot up dramatically.  In an attempt to calm the market, the Fed stopped all talk of a “taper” and that helped settle things down for a brief period of time.  But now the yield on 10 year U.S. Treasuries is starting to rise aggressively again.  Today it closed at 2.71 percent, and many analysts believe that it will go much higher.  This is important for the housing market, because mortgage rates tend to follow the yield on 10 year U.S. Treasuries.  And if mortgage rates keep rising like this, another great real estate crash is inevitable.

This wasn’t supposed to happen.  Federal Reserve Chairman Ben Bernanke said that he could use quantitative easing to control long-term interest rates.  He assured us that he could force mortgage rates down for an extended period of time and that this would lead to a housing recovery.

But now the Fed is losing control of long-term interest rates.  If this continues, either the Federal Reserve will have to substantially increase the rate of quantitative easing or else watch mortgage rates rise to absolutely crippling levels.

Three months ago, the average rate on a 30 year mortgage was 3.35 percent.  It has shot up more than a full point since then…

Mortgage buyer Freddie Mac said Thursday that the average on the 30-year loan rose to 4.39% from 4.31% last week. Rates are a full percentage point higher than in early May.

And as the chart below shows, mortgage rates have a lot more room to go up…

30-Year Fixed Rate Mortgage Average in the United States

As mortgage rates go up, so do monthly payments.

And monthly payments are already beginning to soar.  Just check out this chart.

So what happens if mortgage rates eventually return to “normal” levels?

Well, it would be absolutely devastating to the housing market.  As mortgage rates rise, less people will be able to afford to buy homes at current prices. 

Pages: 1 2 3

Leave a Reply

Your email address will not be published. Required fields are marked *