Derailing the housing recovery

Rate of 30 year fixed mortgages, 1993, 2013, monthly

The media is pushing lots of happy news about a so-called “housing recovery”, claims to which I’ve previously expressed my scepticism. Specifically, we know much of the recent activity in housing is being driven not by the traditional purchasers of homes, but by hedge funds and private equity vehicles who are acquiring large portfolios of houses and sharply reduced prices to rent.

Beyond this though, there most definitely are individuals purchasing homes and by doing so acquiring mortgages. But over the past two weeks we’ve seen sharp increases in mortgage rates so what is the outlook going forward?

The chart above presents the rate on 30 Year Fixed Rate Mortgages in in The United States mortgage rates for the period June 1993 to June 2013, captured weekly with vertical grey bars indicating recessions. The recent increase in mortgage rates is obvious at the right, but lets go a little bit deeper.

Looking at the period before The Great Recession began in December 2007, we see the long run rate the 30 Year Fixed Rate Mortgages averaged 7.00%. Since The Great Recession ended in June 2009 the rate on 30 Year Fixed Rate Mortgages has averaged 4.28%.

In other words, the recent rise in mortgage rates – up 33% in the past eight weeks alone – is just the start, and there is lots of room to the upside. Keep in mind The Fed is currently purchasing $85B a month of Treasuries and Mortgage Backed Securities, in an effort lower interest rates. What happens to rates once the purchases are reduced if not stopped completely? Obviously they will increase. What is not clear however, if increases in mortgage rates will lead to lower house prices. However the linkage between unemployment and house prices is well defined; high unemployment leads directly to lower home prices.

Which will, of course, derail the housing recovery. If there was one. Which there isn’t.

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