The U.S. hasn't pulled off a strong recovery without a housing rebound since the 1940s. So with mortgage rates rising since March, the Fed is getting worried, says CBS MoneyWatch.com blogger John Keefe.
>> Eric Schurenberg: Hope for this economic recovery are riding on lower interest rates, and the most closely watched, those interest rates are mortgage rates. They've been trending up lately though, which is worrisome. And joining us to talk about how worried we should be is John Keefe, columnist for www.moneywatch.com and author of the Macro View blog. Hi John?
>> John Keefe: Hello, Eric.
>> Eric Schurenberg: So what's been happening with mortgage rates?
>> John Keefe: Well, they've been rising. They failed pretty nicely through the middle of March, but around March 19th, that was the week when they started to trend up. They hit bottom about 4 and three quarters percent, and today they're heading for six, around five and three quarters, and they've been pretty steadily rising.
>> Eric Schurenberg: That's a pretty sharp rise, what happened?
>> John Keefe: Well, mortgage rates, 30 year fixed rate mortgage rates are based on ten year treasury rates. And there is a persistence relationship between the two, and it's been pretty steady. But the problem is been with the ten year rates, they've been rising. Because of fears of inflation, because of the massive stimulus that's been taking place, the bond market has been pricing higher inflation into bonds, and that means higher rates.
>> Eric Schurenberg: What does that mean for the recovery, then?
>> John Keefe: Well, we haven't had a strong recovery, post war, post World War II without a strong housing recovery. And if houses are less affordable, that means people won't be buying them. You know, we need new construction, we need people to buy existing houses, we need to work down the inventory of unsold houses, so that could keep a lit on the recovery.
>> Eric Schurenberg: Well, it seems like we're in a box if the fed puts more money into the market to try to get interest rates down, the bond market will react by raising interest rates, what's the solution?
>> John Keefe: Well, the feds been working on that. There's a program that they've had called credit easing, where the fed has been buying treasury bonds, and buying mortgage bonds to send prices up and therefore keep the rates down. They've got 1.2 trillion capacity in market bonds, and about 300 billion in treasury bonds. They're starting to run out of bullets on the Treasury bond side. So there are some questions about just how low they can keep the rates. They're going to be spreading that out through the rest of 2009 and trying to keep rates down a little bit.
>> Eric Schurenberg: All right. Something to keep an eye on, then. Thank you, John.
>> For www.cbsmoneywatch.com, I'm Eric Schurenberg.
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