Rising interest rates a real threat to the recovery

When we argued that here, this is what we meant…

Mortgage Rates Rise, Threatening Housing Recovery
By: Dan Weil

Mortgage bond yields have jumped higher over the past two weeks, which means trouble for the housing sector.

That’s because rising interest rates on mortgage bonds send mortgage rates themselves higher. And those higher rates, of course, make homes less affordable.

Given the importance of the housing sector for the economy as a whole right now, one could argue that the rise in mortgage bond yields threatens to derail economic recovery.

Yields on Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds have surged up to 4.64 percent from 3.94 percent May 20.

That has helped push the average rate on a typical 30-year fixed mortgage to a 16-week high of 5.32 percent, according to Bankrate.com.

A JPMorgan Chase report cited by Bloomberg says the recent rise of mortgage rates erased about one-third of the increase in home affordability that was created by The Federal Reserve’s plan to buy up to $1.25 trillion of mortgage securities.

Of course, the rise in mortgage rates is being counteracted in terms of affordability by falling home prices.

The S&P Case/Shiller index shows that home prices in 20 major metropolitan areas fell 18.7 percent in March from a year earlier.

Robert Shiller, one of the index’ namesakes, remains worried about both the housing sector and the economy.

“I’m thinking that unfortunately the world economic situation is precarious now, and I’m worried about this recession,” he tells the Financial Times.