Given that we know the housing market is slowing dramatically and interest rates have been on the rise for a while now, it may be surprising to many that Americans are expected to draw $257 billion out of their homes in 2006, up $13 billion versus 2005 levels, according to Freddie Mac. This likely helps to partly explain why the consumer has yet to fall of a cliff despite housing market woes.
The bearish argument for consumers has been the fact that billions in adjustable rate mortgages are set to begin resetting this year, which will shock the monthly budgets of many people who could only move into the house they wanted with very low teaser mortgage rates. However, it appears that refinance activity is picking up as ARMs are about to readjust. With 30-year fixed rates around 6.5%, hardly an unaffordable rate for most, refinancing adjustible rate mortgages into fixed mortgages are helping to cushion the blow.
Now it's certainly true that even a move from 3% to 6% might prove too much of an increase for some lower end home buyers and speculators, but it is hardly something that seems likely to send the U.S. economy into recession all by itself. I do expect housing to remain weak for a while, given that inventories are hitting multi-year highs. However, unless mortgage rates take a dramatic turn upwards, say to 8 or 9 percent, consumers might be able to hold up a little better than some expect.