Inflation Worries Cause Mortgage Rates to
Rise
Inflation worries, lead by reports of a jump in consumer
spending November along with a rise in inflation during the
same period, have caused major lending institutions to raise
their 30-Year mortgage rates to above 6 percent. The
average rate rose to 6.17 percent in some markets, compared
with less than 5.96 percent just three weeks ago.
Analysts points to the worry about inflation being a
major factor in the rise of long-term bond yields over the
past week, which has a direct effect on mortgage rates.
Many of the same analysts are also predicting a major slowdown
in consumer spending in the months to come as the worry over
the housing market and credit markets persist.
Much of the reason that the housing market is in such a
slump is due to the fact that sub-prime credit is becoming
harder to obtain in many markets. This has led to a glut
of housing on the market and is expected to worsen as the
credit market continues to further pull back on the reigns of
lending to at-risk individuals. Many credit analysts
predict that further concerns over inflation and consumer debt
will lead to even tighter credit standards being adopted by
many of the major lenders.
Following almost five years of heavy activity in the
housing market, a severe slump is now underway in all segments
of the market. Sales have become weak and home prices
have fallen substantially, with the largest decline in home
sales in 12 years taking place in November. Home sales
were down almost 9% since the same period last year, and an
astounding 34.4% compared to 2005.
Further adding to the upwards pressure on mortgage rates
are increasing concerns about foreign housing markets.
The UK housing market fell for the second straight month in
December, with housing prices falling 0.5%. This brought
the annual growth rate down to around 4.8% which represents
the weakest growth in almost two years. Housing
and credit worries lead the Sterling to reach a new record low
against the Euro in late December.
There is also growing concern in the UK that the country
is also heading for a recession, a similar concern that is
echoed in the US. Many analysts do not expect the
housing crunch to ease in 2008 and are worried that the credit
crisis taking place in the US could also have negative effects
on the UK. While the sub-prime market is causing
much of the downward pressure on the market in the US,
affordability concerns are leading the UK housing market
worries.
With the grown concern of the credit crunch in America
and abroad, sales are not expected to rebound before
2009. Meanwhile, mortgage issuers are trying to protect
their financial assets and take on less risk which is leading
to higher mortgage rates, especially for long-term
loans. Given the current backlog of housing on the
market, it would take 9.3 months to clear the glut from the
pipeline according to industry
experts.
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