The Housing “Recovery” Comes To An End

The Mortgage Bankers Association Weekly Mortgage Applications Survey for last week is grim reading. Interest rates in the US are rising, some believe due to the need for the Treasury to consistently be in the market to borrow money to finance the national debt. Loan application volume dropped 16% last week compared to the week before.

The housing recovery is supposed to be well under way, at least according to the government. The Administration’s plans to keep deserving people in their homes by lowering their monthly mortgage payments have been in place for several months. Homeowners who have benefited from the new program are still likely to default. It may be that people do not want to stay in homes which are only worth a fraction of the value of the loans that they secure.

The higher interest rate problem is a double barreled one for the potential homebuyer. Not only does it make his mortgage rate higher; it also is part of a rising cost of money that could push the overall economy back into a deep recession. The tiny economic recovery, if it can be called that, runs to a very large extent on historically low interest rates. As businesses and consumers are faced with paying more for capital, company profits and consumer spending will be undermined just as they are at the advent of a recovery after nearly two difficult years of financial collapse.

Businesses with higher costs of capital are businesses that are more likely to reduce expenses. At most companies those expenses are usually people. The formula is not perfect, but a rising cost of money adds to unemployment. That, in turn, takes tens of thousands of potential homebuyers out of the market each month. People who are out of work or are worried about being out of work are poor candidates for spending a weekend with a realtor.

As long as the Congress and Administration insist on running large deficits they can assume that a recovery in the economy will be sabotaged by the government’s need to raise colossal sums of money in especially short periods of time. The Fed has tried to solve that problem by keeping the rates it charges financial firms low and by buying Treasuries in the open market. As a number of fed experts and economists have pointed out, the Fed cannot buy up all the hundreds of billions of dollars in paper that the Treasury will have to issue to cover the rising deficit.

The fewer US bonds that can sold in Beijing, the higher the cost of buying a house in America will continue can be.

Douglas A. McIntyre