Smart Borrower Blog

Interest Rates On The Rise

Jul 25th, 2008 @ 5:14 PM by Alden Smith

I find it odd that with the economy the way it is, with Freddie and Fannie teetering, and the prices of homes dropping lower all that time, that interest rates are steadily increasing. I would like to think that interest rates would drop, but that is not the case. This certainly would help to jump start things, because people would be more apt to buy and able to afford housing. It makes common sense that interest rates being lower than where they stand right now at 6.297% would help to drive interest. I did a little research today, and tried to find some answers to that burning question.

First, it seems that investors are not as crazy about mortgage based securities as they were. That stands to reason. I have no data on what was lost over the subprime fiasco, but can safely bet it is in the billions of dollars. Freddie Mac’s chief economist seems to feel that inflation, continuing weakness in the housing market and the possibility of a rate increase by the Fed is causing the current increase. I have read that if this were true, then rates on inflation protected bonds would also rise. This isn’t the case.

Whatever the reason, these increases are stifling the buying power of the American families looking to buy or refinance a home. Everyone knows that higher interest rates means less buying power, and this would be especially true for those trying to refi out of an ARM into a fixed rate. And if people stay trapped in an ARM due to reset, the already dismal number of foreclosures will only increase. Sure, the government is touting legislation to help the home owner. But with the way governmental wheels turn, there is going to be a lot of people living in a cardboard box down by the river before we see higher ground. With the economy already in trouble due to rising costs of food and the pain at the pump, I see no good way out of this.

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