Inflation Worries Cause Mortgage Rates to Rise

Posted by Nick Niesen on October 29th, 2010

Inflation worries, lead by reports of a jump in consumer spending November along with a rise in inflation during the same period, have caused major lending institutions to raise their 30-Year mortgage rates to above 6 percent. The average rate rose to 6.17 percent in some markets, compared with less than 5.96 percent just three weeks ago.

Analysts points to the worry about inflation being a major factor in the rise of long-term bond yields over the past week, which has a direct effect on mortgage rates. Many of the same analysts are also predicting a major slowdown in consumer spending in the months to come as the worry over the housing market and credit markets persist.

Much of the reason that the housing market is in such a slump is due to the fact that sub-prime credit is becoming harder to obtain in many markets. This has led to a glut of housing on the market and is expected to worsen as the credit market continues to further pull back on the reigns of lending to at-risk individuals. Many credit analysts predict that further concerns over inflation and consumer debt will lead to even tighter credit standards being adopted by many of the major lenders.

Following almost five years of heavy activity in the housing market, a severe slump is now underway in all segments of the market. Sales have become weak and home prices have fallen substantially, with the largest decline in home sales in 12 years taking place in November. Home sales were down almost 9% since the same period last year, and an astounding 34.4% compared to 2005.

Further adding to the upwards pressure on mortgage rates are increasing concerns about foreign housing markets. The UK housing market fell for the second straight month in December, with housing prices falling 0.5%. This brought the annual growth rate down to around 4.8% which represents the weakest growth in almost two years. Housing and credit worries lead the Sterling to reach a new record low against the Euro in late December.

There is also growing concern in the UK that the country is also heading for a recession, a similar concern that is echoed in the US. Many analysts do not expect the housing crunch to ease in 2008 and are worried that the credit crisis taking place in the US could also have negative effects on the UK. While the sub-prime market is causing much of the downward pressure on the market in the US, affordability concerns are leading the UK housing market worries.

With the grown concern of the credit crunch in America and abroad, sales are not expected to rebound before 2009. Meanwhile, mortgage issuers are trying to protect their financial assets and take on less risk which is leading to higher mortgage rates, especially for long-term loans. Given the current backlog of housing on the market, it would take 9.3 months to clear the glut from the pipeline according to industry experts.