Along with Interest Rates, Mortgage Rates on the Rise

Chart of the Week for November 11-November 17, 2005

As has been reported ad nauseum, interest rates are on the rise and have been since the Fed began tightening about eighteen months ago. Although there is no direct effect of increasing Fed funds target rates on mortgage rates, the data shows the latter have risen as well. A wide variety of mortgages are available, and many of these mortgage products are structured so that buyers can afford more house than could be purchased using conventional (aka 30-year fixed-rate mortgage) financing. Interest-only and adjustable rate mortgages have been very popular as median home prices have risen dramatically over the past few years. These and other non-conventional mortgages include interest rate resets.

Through rate resets, the lender has the ability to change the rate of interest the borrower pays, bringing it more in line with current market conditions. These resets can present a problem for consumers if, after the reset, monthly mortgage payments become too large a financial burden for the homeowner. And that financial burden will have a ripple effect in the economy when ARMs reset and some homeowners can't pay the bill. The general increase in consumer debt is a pocket of weakness in the economy that policy makers are focused on as they deliberate future inflation-fighting actions.

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