Whither interest rates?

Mortgage and Lending
We've seen interest rates rising globally in response to two factors -- increased energy costs and economic growth. Domestically, inflation is being measured as within the margin that we'd like to see, although some economists judge that our key benchmark (the "core" CPI) understates inflation. Typically, monetary policy is to raise interest rates to cool inflation.

The growth in our economy seems to be healthy, though other economic indicators (new home sales, for example) continue to show that Americans aren't convinced that we should be optimistic.

The foreclosure activity with which Colorado led the country for 9 out of the 12 months of 2006 have benefitted us by keeping home values at a "reasonable" level (by contrast, the average home in Santa Barbara County, CA is overvalued by 41.9%.)

The subprime market fiasco is having the effect of significantly reducing capital available for borrowers in that market; with fewer subprime borrowers able to purchase homes, the oversupply in inventory of homes for sale will continue to apply negative pressure to listing prices.

I don't see long-term interest rates decreasing significantly for the rest of the year, and I do see lots of pressure on rates to rise. As long as our economy continues to show even modest signs of growth, my gut tells me to look for rates to rise gently through 2007 (from 6.500% now to an average of 6.875% by 2008.)

My well-read and -published friend Vitaliy Katsenelson observed on his finance weblog Contrarian Edge: "At this point predicting the direction of interest rates is like flipping a coin. The global economy is roaring on all engines - a case for higher interest rates. At the same time, we are walking on a subprime, weaker housing, leveraged-consumer mine field. I am so glad that I am not in the interest rates prediction business."

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