Rising Rates Squeezing Consumers

The low interest rates that have fueled the economy may be about to end.

Yields on the 10-year Treasury note — a benchmark that influences many long-term interest rates, including home mortgages — jumped sharply on Tuesday and are up significantly in the last month. The fallout is likely to be widespread, and felt most immediately by homeowners and people looking to buy a house.

Economists said homeowners trying to refinance their adjustable rate mortgages before they reset to higher levels are already feeling pinched. The national average for the 30-year fixed-rate mortgage jumped to 6.74 percent yesterday. At the beginning of the year, the average was 6.18 percent, according to Freddie Mac, a big buyer of mortgages.

This could be disastrous news to a housing market that is already battered by the subprime mortgage collapse. Many people who have these so called subprime loans will be looking to refinance to save their homes. Higher rates will make that even more difficult and will push foreclosures ever higher.

The recent rate move came as something of a surprise to Wall Street. It is the result, traders say, of heavy selling by foreign investors, who may be growing concerned about inflation, and holders of mortgage securities hoping to reduce the risks associated with higher rates.

Could it be that foreign investors are finally seeing that the U.S. economy is built on a house of cards that is teetering?

RealtyTrac, an online provider of foreclosure data, reported Tuesday that foreclosures in May were up 90 percent from the period a year earlier. Although RealtyTrac’s figures may overstate matters somewhat by reflecting loans in each step of the foreclosure process, the total foreclosures of 176,137 in May were sobering.

For struggling homeowners, the rise in rates could not come at a worse time. “In prior foreclosure waves, we had a drop in interest rates that allowed workouts to be done at lower interest rate levels,” said Louis S. Barnes II, a partner at Boulder West Financial Services, a mortgage banking firm in Lafayette, Colo. “Today rates are substantially higher than when a lot of these loans were created.”

This will eventually be flet in all areas of the economy. Couple this with higher energy costs and consumer spending will have to slow. Will it slow enough to tip the anemica economy into recession? I believe it will and take any Republican chances of holding the White House with it.