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The Interest In Interest

When it comes to mortgage interest rates the best possible description of what we have seen for the past few years can be boiled down to a single word: unsustainable.

I repeatedly hear from people who are moaning and yammering about today’s ‘high’ rates. As they point out, rates for 30-year fixed-rate financing are now more than a full percentage point higher than the rates we saw in 2003 when in the summer the mortgage interest levels reached a low of 5.21 percent — a rate not seen since Eisenhower was in office 45 years earlier.

Last week weekly rates for 30-year fixed financing reached 6.41 percent plus .4 points, according to Freddie Mac, the highest rate so far this year.

However, what’s not said, and what should be said, is that today’s allegedly sky-high rates are hardly steep — and also that they may be a relative bargain in the future.

A year ago, for example, mortgage rates were actually higher than today — 6.67 percent according to Freddie Mac. In other words, those who believe the glass is half full can say that rates have declined.

But rates might rise higher still if there’s a belief that the country is growing too fast and is facing inflation. Well, no worries about that. Even tepid growth estimates announced for the first quarter of 2007 turned out to be overblown. We’re not growing at 1.3 percent, but instead at just .6 percent.

According to Commerce Secretary Carlos Gutierrez, definitely a half-full kind of guy, ‘our economy continues to chart a course of growth marked by historically low unemployment and rising wages. Numerous headwinds still haven’t knocked our economy off its 22 straight quarters of growth.’

How about some straight talk? A .6 percent growth rate is essentially no growth, it’s the equivalent of emptying an eye-dropper into the Atlantic Ocean.

Alternatively, what growth we do have is increasingly funded, owned and indebted to foreign investors. In 2006, as one example, our balance of payments from trade with other countries was $857 billion in the red.

This is a remarkable figure, an historic amount of trade debt. What it means is that we are financing massive volumes of imports with borrowed money. Seen another way, 6.44 percent of our $13.3 trillion economy was represented by the trade imbalance in 2006.

If it happens that our overseas lenders no longer want to make loans — or will only make loans at higher rates — then mortgage rates will soar. Lenders will opt for the investments with the best rate of return with a given level of risk and mortgage borrowers will have to compete.

Forget 6 percent and 7 percent interest rates and take a look at past mortgage levels.

Return to the period from 1979 through 1986. Effective annual interest rates each year during this time were above 10 percent according to the Federal Housing Finance Board. The same government body reminds us that effective rates hit an average of 15.31 percent in 1982.

Yikes!

If rates rise there will be two major impacts in real estate.

First, home sales will slow, meaning that even those with no mortgage debt will be effected because homes in many markets will be more difficult to sell as the pool of borrowers gets smaller. A lot of property owners will have to kiss off huge amounts of equity as prices stall and even fall.

Second, those with adjustable-rate mortgages and variable home equity loans will be tearing through their paperwork looking for lifetime loan caps. Many loans with 6 percent interest levels today may well have lifetime caps that are 6 percentage points higher — think of 12 percent mortgage financing.

Can we do something about this situation? We have dug an unbelievable financial hole with our balance-of-payments problems and massive federal deficits — more than $1.5 trillion in the first five years of the Bush Administration compared with surpluses left behind by Clinton — but instead of sending cash and jobs overseas, we can create jobs and wealth inside our borders by embarking on new national priorities such as rebuilding our infrastructure, producing energy efficient cars, creating green energy sources, demanding that U.S. companies pay U.S. taxes and taxing the wealthy and large estates.

As a nation we have done this before with public works programs under Roosevelt, national road construction under Eisenhower and with the space program under Kennedy. We can, if we elect, do it again.

Written for www.RealtyTimescom. Copyright