Interest Rate Report - November

Rates on the Rise

Why all the red colors on the page this month?

Mortgage interest rates have begun a long predicted rise, so we decided to go for a dramatic effect. However, the rise has been gradual, about a half percent since September 8th, and is unlikely to effect home sales dramatically.

However, other factors may have that effect.

Analysis:

We'll have a new Greenspan early next year and his name is Ben Bernanke (pronounced Burr-nank-ee). Though both are excellent economists and theoreticians, Bernanke's approach will be more scholarly and less intuitive.

For us "mere mortals," we probably won't notice a huge difference, especially at first. It is likely that Bernanke will continue to raise short term interest rates for the first few months of his term, just like Greenspan would have. The only "knock" on Greenspan as Fed Chairman (though he is highly regarded), is that when raising interest rates - he didn't know when to stop.

Bernanke takes over in January.

He takes over at an interesting time. Though "core" inflation appears to be
under control, the cost of food, energy, and housing have risen faster than wages. The folks least able to least afford those cost increases are those that spend the most, as a portion of their income, on consumer goods.

Which means slower consumer spending.

Add in rising short-term rates and how that will effect the multitude of adjustable rate loans, and you have a recipe for a hard fall.

Recession.

Which will finally have an impact on housing appreciation.

Since a lot of what has been fueling the economy has been asset (home) appreciation and borrowing against those assets, that adds to the problem.

None of that will be obvious until mid-2006.

When it does become obvious, nothing will probably happen at first because the Fed has to demonstrate "continuity" with Greenspan's practices.

Then the Fed will start to lower short-term rates.

Interest Rate Future

Interest rates will probably continue to climb gradually in the very near future.

However, it might not last for long. As economists, experts, and investors begin to see a potential recession in the future, they will begin to invest in long-term bonds, which should serve to lower the upward pressure on 30 year mortgage rates.