Higher Interest Rates Spur Economic Concerns

Until recently, interest rates had been dropping to record lows, spurring refinancings and raising hopes that prospective buyers might jump back into the beleaguered housing market. But rates have begun to creep back up, raising concerns that any economic recovery would stall.

For Rob Nunziata, the past few months have been a little disorienting. Nunziata is president of FBC Mortgage, a Florida mortgage lender. And with mortgage rates coming down, he's been getting more business than he can handle. He's actually had to hire people.

"Actually, the last couple of months have reminded me of [2004] — late '03 and '04 — when there was a big [refinancing] boom," he says. "That energy is sort of back in the market, where you're getting so many phone calls a day it's hard to actually call the customers back."

Rising Mortgage Rates

But in recent weeks, the tide has begun to shift again. Mortgage rates have come back up.

"Yesterday was really a horrible day for mortgage rates," says Nunziata. "We saw ... the 10-year bond shot up, I think, the most it's moved in a couple years."

The 10-year Treasury note is the one a lot of lenders use as a benchmark when they set mortgage rates. And since last week, it's gone from about 4.75 percent to over 5 percent. In a way, this is a good thing.

Last fall, investors were so scared about the economic meltdown that they put a lot of money into Treasuries, which are traditionally seen as a safe haven in perilous times. Now, investors are less scared. So they're taking out their money and putting it into other kinds of investments like stocks and corporate bonds.

"They're beginning to take on a little more risk. That's a good sign," says Allan Meltzer, a professor of political economy at Carnegie Mellon University. But Meltzer also sees the rise in rates as a harbinger of long-term economic trouble. He says the government has vastly increased its spending in its effort to get the economy going.

Inflation Worries

"We have a massive amount of stimulus," he says. "Nothing like this has ever occurred in the United States, maybe anywhere else, ever."

And Meltzer says with so much money flooding into the financial system, investors are beginning to worry about inflation. That fear is pushing up interest rates. He says they're not going up every day. In fact, rates were down a bit on Thursday.

"Bond markets are full of nervous and anxious buyers. So there will be some days when rates will come down and some days when rates will go up, but the trajectory will be higher," he adds.

Bolstering The Housing Market

This upward trajectory will greatly complicate the attempts by the Treasury Department and the Federal Reserve to breathe some life into the housing market. Housing has been at the center of the economy's troubles.

A big rise in rates could end the housing recovery before it's actually begun. And that's a big concern to Nunziata: "We've seen such a pickup in refinance transactions that it's become a big part of our business. And, obviously, as the rates go up that percentage of our business is going to slow down."

Longer term, the Obama administration is trying to ease investor fears about the future. Treasury Secretary Timothy Geithner is headed soon to China — a big purchaser of Treasury securities. He's expected to say the U.S. government will move quickly to get its debt under control once the economy has fully recovered.

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