U.S. Lending Rates Increase

The current HSH Associates average of over 2,000 U.S. mortgage lenders shows the 30 year mortgage rate currently at 6.95%, up from 6.25% in January, an increase of over ten percent this year, for those capable of qualifying. The spread between the Fed's overnight rate of 2% and the Mortgage rate of 6.95% is now 495 basis points, a signal that an increase in Fed rates will be hard on the housing market with the average mortgage rate then above 7%.

Mortgage inflation may become the new buzz word because of the difference in what can be earned, compared to what is charged by the local banks. In July of last year the Fed's overnight lending rate stood at 5.25%, with the HSH 30 year mortgage rate at 6.85% at that time. Since then Fed rates have dropped 325 basis points whilst at the same time mortgage rates have actually increased 10 basis points.

The FOMC cuts in interest rates have not managed to reduce mortgage rates, nor have they managed to stimulate the consumer who is still struggling to find access to affordable lending, and as such any increase in Fed rates from here will compound negatively the ability of the U.S. consumer to create economic growth.

Outside of interest rate changes, the market now will be looking at growth valuations, and in particular Gross Domestic Product [GDP], the value of all goods and services produced by an economy. This year's World Bank GDP forecasts are set to come in at 9.4% from China, 1.7% from the Euro-zone, 1.4% from Japan, and 1.1% from the U.S. The growth numbers have been reduced from earlier forecasts in every region for the year, and the U.S. leads the way in the % reductions. The U.S. forecast has been cut by 43%, the Euro-zone 40%, Japan 30%, and China 22%. Therefore the dollar valuations look as though they will be supported by an economy that will lag the other major pair's regional growth.

Disclosure: No position.