Mortgage rates moved above 5% last week and many economists expect the number to rise above 6% by the end of the year. “It certainly will make it harder for people to buy homes,” said Dean Baker, an economist and co-director of the Center for Economic and Policy Research.

The Fed stopped buying mortgage-backed securities last month. The purchases were meant to keep mortgage rates down. Another force in home buying has been government incentives of as much as $8,000 to home buyers. Those incentives are due to expire.

Interest rates could rise rapidly enough this year so that the 6% mortgage rate number could be the

low-end of the range in the second half.

Commodities prices, especially oil and gold are moving up rapidly and gold is close to its all-time high. Oil has broken above its $70 to $80 range and analysts at Goldman Sachs and Morgan Stanley expect crude to trade above $100 next year. Recovery of the economies in the developed world may be more substantial than was expected as manufacturing activity has picked up in the US and Europe. Figures for second quarter GDP will confirm if  companies are replacing depleted inventories and if sales and earnings at large public companies are continuing to improve.

China’s economy may expand by better than 10% this year. Its demand for crude and iron oil has picked up significantly during the last month. Manufacturing activity in the People’s Republic is also up sharply based on the government’s last two reports on the sector. “The Purchasing Managers’ Index (PMI) for China’s manufacturing sector stood at 55.1 percent in March, up 3.1 percentage points from last month, the China Federation of Logistics and Purchasing (CFLP) said Thursday”, according to China Daily.

An acceleration in the upward price in commodities would certainly make the Fed consider whether it has to tighten by raising rates to undermine a sudden reappearance of inflation. Under those circumstances, home loan mortgage rates would almost certainly rise in concert with the Fed rates

The housing market is hardly in a recovery despite the $75 billion Homeowner Stability Initiative which was introduced by the President early last year. Banks, led by Bank of America, have started the process of modifying mortgage principals in the hope that this will adjust payments enough to allow homeowners to keep their properties. But, over 11 million home mortgages are underwater, and no one believes that any meaningful number of those mortgages can be modified this year.

Property values also continue to fall in most of the hard hit regions including Las Vegas, California, and Florida. These same geographic areas need to raise property taxes to cover municipal and state budget shortfalls.

Home prices are already under pressure because of employment, defaults, and tax issues. Higher mortgage rates will prevent any chance of the housing situation improving this year, and probably next.

Douglas A. McIntyre

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